ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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."
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 and industrial, 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 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 digital 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, investment management, asset custody and general consultation and planning services.
Executive Overview
We believe we delivered solid financial performance while managing and mitigating risks that arose in 2024.
•We recorded net income of $53.4 million, or $1.97 per diluted common share in 2024, compared to $58.7 million, or $2.17 per diluted common share in 2023. Net income in 2024 included a provision for credit losses of $9.8 million, compared to a credit to the provision of $15.7 million in 2023.
•Results in 2024 were impacted by a pre-tax loss on sales of investment securities of $9.9 million related to an investment securities portfolio repositioning ("Repositioning Loss") and pre-tax expenses related to our evaluation and assessment of a strategic opportunity of $3.1 million ("Strategic Expense").
•Excluding the Repositioning Loss and Strategic Expense, non-GAAP adjusted net income was $63.4 million, or $2.34 per diluted common share in 2024. (See Tables 3-8 for reconciliations of the adjusted non-GAAP financial measures.)
•We recorded return on average assets ("ROA") and return on average shareholders' equity ("ROE") ratios of 0.72% and 10.25%, respectively, in 2024, compared to ROA and ROE ratios of 0.78% and 12.38%, respectively, in 2023. Excluding the Repositioning Loss and Strategic Expense, adjusted ROA and ROE ratios (non-GAAP) was 0.86% and 12.10%, respectively, in 2024, compared to adjusted ROA and ROE ratios (non-GAAP) of 0.78% and 12.24%, respectively, in 2023. (See Table 7 - Adjusted Return on Average Assets and Adjusted Return on Average Shareholders' Equity for a reconciliation of the non-GAAP adjusted ROA and ROE.)
•Asset quality remains strong as our nonperforming assets totaled $11.0 million, or 0.15% of total assets at December 31, 2024, compared to $7.0 million, or 0.09% of total assets at December 31, 2023.
•Our loan portfolio declined by $106.1 million, or 2.0% in 2024, primarily due to run-off of our consumer loan portfolio of $120.0 million.
•Total deposits declined by $203.6 million, or 3.0% in 2024, primarily due to the run-off of high-cost government time deposits of $271.5 million. Our core deposit portfolio grew by $54.0 million, or 0.9%.
•Our capital position and consistent profitability allowed us to pay cash dividends of $1.04 per share in 2024. In addition, in 2024 we repurchased an aggregate of 49,960 shares of common stock under our share repurchase program at an aggregate cost of $0.9 million, or an average of $18.92 per share.
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Business Environment
The majority of our operations are concentrated in the State of Hawaii. As a result, our performance is significantly influenced by the strength of the real estate markets, the tourism industry, and the economic environment and environmental conditions 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.
According to the latest available statistics from the Hawaii Tourism Authority ("HTA"), a total of 9.69 million visitors arrived to the Hawaiian Islands in the year ended December 31, 2024, mainly from the U.S. Mainland. This was a modest 0.3% increase from the 9.66 million visitors in the year ended December 31, 2023, and represents a recovery of approximately 93.3% from the 10.4 million visitors during the pre-pandemic and record year in 2019. Japanese visitor arrivals in the year ended December 31, 2024 continued to increase modestly; however, were only at around 45.7% of pre-pandemic 2019, or around 51.8% in the month of December 2024 compared to December 2019. Sixteen months after the August 8, 2023 wildfires, visitors to Maui were up 15.3% in December 2024 compared to December 2023, but still down 17.3% from pre-pandemic December 2019. The unemployment rate for the Island of Maui was 8.4% in September 2023 and has since improved to 3.4% in December 2024.
The HTA also reported that total spending by visitors was $20.68 billion in the year ended December 31, 2024, which declined by approximately 0.2% from the $20.73 billion in the year ended December 31, 2023, and increased by approximately 16.7% from $17.72 billion in pre-pandemic 2019. According to a recent report by the State of Hawaii's Department of Business, Economic Development and Tourism ("DBEDT"), total visitor arrivals are expected to increase to approximately 9.9 million in 2025 and visitor spending is expected to be approximately $21.46 billion in 2025.
The Department of Labor and Industrial Relations reported that Hawaii's seasonally adjusted annual unemployment rate was 3.0% in the month of December 2024, which fell below the national seasonally adjusted unemployment rate of 4.1%. DBEDT projects Hawaii's seasonally adjusted annual unemployment rate to be around 2.7% in 2025.
Hawaii's economy is measured by the growth of real personal income and real gross state product. DBEDT is expected to report real personal income grew by approximately 2.8% but real gross state product grew by approximately 1.6% for 2024. DBEDT projects real personal income to grow by 1.6% and real gross state product to grow by 2.0% for 2025.
Real estate lending is one of the primary focuses 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 Hawaii housing market continues to experience solid prices, increased sales activity, strong demand and low inventory. According to the Honolulu Board of Realtors, the median price for a single-family home on Oahu was $1,100,000 for the year ended December 31, 2024, representing an increase of 4.8% from the median resale price of $1,050,000 for the year ended December 31, 2023. The median resale price for condominiums on Oahu was $515,000 for the year ended December 31, 2024, representing an increase of 1.3% from the median resale price of $508,500 for the year ended December 31, 2023. Oahu unit sales volume increased by 9.1% for single-family homes, and decreased by 2.5% for condominiums in 2024 from 2023.
If the residential and commercial real estate markets we have exposure to deteriorate, our results of operations could 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 concentration risk within our portfolio, could have a significant negative impact on our asset quality and credit losses.
Changes in monetary policy, including changes in interest rates, could influence: (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, among other things.
In an effort to rein in inflation, the FRB aggressively increased interest rates since the first quarter of 2022 when the Federal Funds Rate target range was 0.00% to 0.25%. Since then, the FRB has raised the Federal Funds Rate by more than five percentage points, up to a 22-year high, 5.25% to 5.50%. The Federal Funds Rate remained at that level until September 2024. At the September 2024 Federal Open Market Committee ("FOMC") meeting, the FOMC lowered interest rates by 50 bps to 4.75% to 5.00%, as they gained greater confidence that inflation is moving sustainably towards its 2% target. In November and December 2024, the FOMC lowered interest rates by an additional 25 bps each to a target range of 4.25% to 4.50% at the end of 2024.
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In addition to the impacts from changes in monetary policy, other economic conditions may impact financial results in future periods. Loan demand, deposit growth, provision for credit losses, asset quality, noninterest income and noninterest expense are all affected by changes in economic conditions. Inflationary concerns, labor shortages, changes to the political and regulatory environment, including geopolitical conflicts, supply chain disruptions and the possibility of future bank failures, could adversely impact the economy, which could negatively impact our financial results as well as our customers’ creditworthiness. In light of these potential issues, we continue to monitor our liquidity. Refer to "Part II, Item 7 - Liquidity Risk and Borrowing Arrangements" for discussion.
Recent Industry Developments
Beginning in March 2023, the banking industry experienced significant volatility as a result of high-profile regional bank failures, which resulted in industry-wide concerns related to liquidity, deposit outflows, unrealized or unrecognized losses on investment securities and weaker consumer confidence in the banking industry. As a result, the Company took a number of preemptive actions during the first half of 2023, which included pro-active outreach to clients and other liquidity contingency planning actions, such as maximizing funding sources and increased liquidity monitoring in response to these developments.
The industry volatility stabilized in 2024 and we believe the Company’s balance sheet and liquidity position remained solid. The Company had $380.9 million in cash on its balance sheet and approximately $2.49 billion in total other liquidity sources, including available borrowing capacity and unpledged investment securities as of December 31, 2024. Total available sources of liquidity as a percentage of uninsured and uncollateralized deposits was approximately 113% as of December 31, 2024. We believe the Company's deposit portfolio is diversified and long-tenured and approximately 62% of total deposits were FDIC-insured or collateralized as of December 31, 2024.
The Company’s capital remained strong with the leverage, tier 1 risk-based capital, total risk-based capital, and common equity tier 1 capital ratios of 9.3%, 13.2%, 15.4%, and 12.3%, respectively, as of December 31, 2024, all exceeding "well-capitalized" regulatory standards.
Banking-as-a-Service ("BaaS") Initiative
In January 2022, the Company announced the launch of a new BaaS initiative with the goal of expanding the Company both in and beyond Hawaii by investing in or collaborating with fintech companies. In the first quarter of 2022, the Company made a $2.0 million minority equity investment in Swell Financial, Inc. ("Swell"), a new fintech company. During the fourth quarter of 2022, Swell launched a consumer banking application that combined checking, credit and more into one integrated account, and the Bank served as the bank sponsor. As a result of a variety of adverse factors affecting Swell’s business and its strategy, the portfolio of Swell Cash and Credit accounts, which were immaterial, were closed in June 2023 and the Bank is no longer serving as the bank sponsor of Swell.
As discussed in Note 6 - Investments in Unconsolidated Entities in the accompanying notes to the consolidated financial statements in this report, the Company entered into a transaction with Swell in the third quarter of 2023 whereby Swell repurchased the Company’s entire preferred and common stock equity investment in exchange for $0.5 million in cash, certain intellectual property rights and a platform usage fee agreement related to products that may be launched by Swell or its affiliates in the future (not to exceed $1.5 million in value). During the fourth quarter of 2024, the Company determined that the carrying value of the intangible assets would not be recoverable. As a result, the Company recorded impairment of $1.3 million on the intangible assets. The carrying value of the intangible assets was zero as of December 31, 2024.
The Company does not have any other active BaaS initiatives, but continues to evaluate potential future BaaS opportunities.
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.
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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 discussed the development and selection of the critical accounting policy and estimate noted below with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the accompanying disclosures. The significant accounting policy which we believe to be the most critical in preparing our consolidated financial statements is the determination of the allowance for credit losses on loans.
Allowance for Credit Losses on Loans
Management considers the policies related to the allowance for credit losses ("ACL") on loans as the most critical to the financial statement presentation. The total ACL on loans includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326, "Financial Instruments – Credit Losses". The ACL is established through provisioning of current expected credit losses as a charge to current earnings. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed while allowance is credited if subsequent recoveries are made. The amount maintained in the ACL reflects management’s continuing evaluation of the estimated credit losses expected to be recognized over the life of the loans in our loan portfolio at the balance sheet date. Allowance for credit losses is measured on a collective basis when similar risk characteristics exist. We stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculate the net amount expected to be collected over the life of the loans to estimate the expected credit losses in the loan portfolio. The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements in this report for further discussion of the risk factors considered by management in establishing the ACL.
Overview of Results of Operations
2024 vs. 2023 Comparison
In 2024, we recognized net income of $53.4 million, or fully diluted earnings per share ("EPS") of $1.97, compared to net income of $58.7 million, or EPS of $2.17, in 2023. Our ROA and ROE for 2024 was 0.72% and 10.25%, respectively, compared to 0.78% and 12.38%, respectively, in 2023.
We recorded a provision for credit losses of $9.8 million in 2024, compared to a provision of $15.7 million in 2023. The lower provision for credit losses was primarily due to improvements in the economic forecast and movements in loan balances by segment, combined with an overall loan balance decline during the year.
Net interest income increased by $1.7 million from 2023 to 2024, primarily driven by higher average yields earned on loans and investment securities, partially offset by higher average rates paid on interest-bearing deposits.
Other operating income decreased by $7.9 million from 2023 to 2024. The decrease in other operating income was primarily due to a loss on sale of investment securities of $9.9 million related to an investment portfolio repositioning completed in the fourth quarter of 2024, compared to a loss of $2.1 million primarily due to an investment portfolio repositioning completed in 2023. In addition, the Company recognized a gain on sale of a real estate office property of $5.1 million in 2023. These decreases were partially offset by higher other service charges and fees of $2.0 million and higher income from bank-owned life insurance of $1.7 million, The higher income from bank-owned life insurance was primarily attributable to stock market volatility and higher death benefit income, and was partially offset by higher deferred compensation expense included in salaries and employee benefits and other expenses in other operating expense. See Table 9 - Components of Other Operating Income for more information.
Other operating expense increased by $8.4 million from 2023 to 2024. The increase was primarily due to higher salaries and employee benefits of $3.9 million, expenses related to our evaluation and assessment of a strategic opportunity in 2024 of $3.1 million, and higher directors' deferred compensation plan expenses of $1.2 million. These increases were partially offset by a non-recurring charge of $2.3 million related to the early termination of a branch lease in 2023. Significant fluctuations in directors' deferred compensation plan expenses are primarily due to volatility in the equity markets. See Table 10 - Components of Other Operating Expense for more information.
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2023 vs. 2022 Comparison
In 2023, we recognized net income of $58.7 million, or EPS of $2.17, compared to net income of $73.9 million, or EPS of $2.68, in 2022. Our ROA and ROE for 2023 was 0.78% and 12.38%, respectively, compared to 1.01% and 15.47%, respectively, in 2022.
We recorded a provision for credit losses of $15.7 million in 2023, compared to a credit of $1.3 million in 2022. The increase in the provision for credit losses reflects higher charge-offs of our U.S. Mainland unsecured consumer loan portfolio, and the outlook for continued pressure on the national consumer segment.
Net interest income decreased by $5.6 million from 2022 to 2023, primarily driven by higher average balances and average rates paid on interest-bearing deposits and long-term debt, partially offset by higher average balances and average yields earned on loans and interest-bearing deposits in other financial institutions.
Other operating income decreased by $1.3 million from 2022 to 2023. The decrease in other operating income was primarily due to the gain on sale of Visa Class B common stock of $8.5 million recorded in 2022, combined with a loss on sale of investment securities of $2.1 million recorded in 2023 primarily due to an investment securities portfolio repositioning completed in the fourth quarter of 2023, and lower mortgage banking income primarily attributable to lower origination activity due to the significant rise in market interest rates which began in 2022. These negative variances were partially offset by a gain on sale of a real estate office property of $5.1 million completed in the fourth quarter of 2023, higher income from bank-owned life insurance and higher other service charges and fees. See Table 9 - Components of Other Operating Income for more information.
Other operating expense decreased by $1.8 million from 2022 to 2023. The decrease in other operating expense was primarily due to lower salaries and employee benefits expense and lower pension plan and Supplemental Executive Retirement Plans ("SERP") expense (included in other) attributable to a non-recurring non-cash charge of $4.9 million related to the termination and settlement of the Company's defined benefit retirement plan during the second quarter of 2022, partially offset by higher computer software expense, a non-recurring charge of $2.3 million related to the early termination of a lease, higher FDIC insurance assessment, higher directors' deferred compensation plan expense and higher net occupancy expense. See Table 10 - Components of Other Operating Expense for more information.
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 annualized and 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%. Table 2 - Analysis of Changes in Net Interest Income (Taxable-Equivalent) 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 rate.
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Table 1. Average Balances, Interest Income and Expense, Yields, and Rates (Taxable-Equivalent)
Assets
Interest-earning assets:
Investment securities, excluding valuation allowance:
Liabilities and Equity
Interest-bearing liabilities:
Federal funds purchased and securities sold 1 5.57 — — — — — — —
Non-controlling interest — — 16
(1) At amortized cost.
(2) Includes nonaccrual loans.
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Table 2. Analysis of Changes in Net Interest Income (Taxable-Equivalent)
Increase (Decrease)Due to Change In: Increase (Decrease)Due to Change In:
(Dollars in thousands) Volume Rate NetChange Volume Rate NetChange
Interest-earning assets
Investment securities, excluding valuation allowance:
Interest-bearing liabilities
The banking and financial services industry in the State of Hawaii is highly competitive. Net interest income is our primary source of earnings and is derived primarily from the difference between the interest income we earn on loans and investment securities, and the interest expense we pay on deposits and borrowings.
Net interest income (expressed on a taxable-equivalent basis) totaled $212.4 million in 2024, which increased by $1.6 million, or 0.8%, from $210.8 million in 2023, which decreased by $5.6 million, or 2.6%, from net interest income of $216.4 million recognized in 2022. The increase in net interest income in 2024 was primarily due to increases in the average yield earned on interest-earning assets, partially offset by increases in average rates paid on interest-bearing deposits. The increase was partially offset by decreases in the average loans and investment securities balances.
The average yield earned on our interest-earning assets in the year ended December 31, 2024 increased by 39 basis points ("bps") from the year ended December 31, 2023. The increase in the average yield earned on interest-earning assets in 2024 was primarily attributable to the increases in average yields earned on loans and investment securities of 40 bps and 33 bps, respectively.
The average rate paid on our interest-bearing liabilities in the year ended December 31, 2024 increased by 44 bps from the year ended December 31, 2023. The increase in the average rate paid on our interest-bearing liabilities in 2024 was primarily due to increases in average rates paid on interest-bearing deposits and long-term debt of 49 bps and 70 bps, respectively, attributable to the significant increase in market interest rates which began in 2022.
In the fourth quarter of 2024, the Company sold $106.5 million in available-for-sale investment securities as part of an investment portfolio repositioning strategy. The Company received $96.6 million in gross proceeds and reinvested the proceeds in $101.6 million in higher yield investment securities with a weighted average yield of 4.9% and a weighted average life of 4.1 years. The investment securities sold had a weighted average yield of 2.2% and a weighted average life of 3.6 years. There were
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no gross realized gains on the sales of the investment securities. Gross realized losses on the sales of the investment securities were $9.9 million. The specific identification method was used as the basis for determining the cost of all securities sold.
In the fourth quarter of 2023, the Company sold $30.0 million in available-for-sale investment securities as part of an investment portfolio repositioning strategy. The Company received $28.1 million in gross proceeds and reinvested the proceeds in $28.3 million in higher yield investment securities with a weighted average yield of 5.68% and a weighted average duration of 2.5 years. The investment securities sold had a weighted average yield of 3.25% and a weighted average duration of 3.4 years. There were no gross realized gains on the sales of the investment securities. Gross realized losses on the sales of the investment securities were $1.9 million. The specific identification method was used as the basis for determining the cost of all securities sold.
In the first quarter of 2022, the Company entered into a forward starting interest rate swap on certain municipal debt securities with a notional amount of $115.5 million. The swap became effective on March 31, 2024. The Company pays the counterparty a fixed rate of 2.095% and receives a floating rate based on the Federal Funds effective rate. This transaction has a maturity date of March 31, 2029.
Interest Income
Interest income expressed on a taxable-equivalent basis of $306.8 million in 2024 increased by $23.3 million, or 8.2%, from the $283.4 million earned in 2023, which increased by $49.9 million, or 21.4%, from the $233.5 million earned in 2022.
The increase in taxable-equivalent interest income in 2024 from 2023 was primarily due to an increase in the average yields earned on loans and investment securities of 40 bps and 33 bps, resulting in higher interest income of approximately $21.5 million and $4.9 million, respectively. The increase in the average yield earned on investment securities was partially attributable to income of $2.6 million from the aforementioned interest rate swap that became effective on March 31, 2024. In addition, increases in the average balance and average yield earned on interest-bearing deposits in other financial institutions resulted in higher interest income of approximately $4.4 million. These increases were partially offset by decreases in the average loans and investment securities balances of $150.5 million and $39.1 million, respectively, resulting in lower interest income of approximately $6.6 million and $0.8 million, respectively.
The increase in taxable-equivalent interest income in 2023 from 2022 was primarily due to increases in the average yield earned on loans of 64 bps and the average loans balance of $210.0 million, resulting in higher interest income of approximately $35.1 million and $7.9 million, respectively. In addition, the average yields earned on interest-bearing deposits in other financial institutions and investment securities increased by 442 bps and 15 bps, respectively, resulting in higher interest income of approximately $5.9 million and $2.3 million, respectively. These increases were partially offset by a decrease in the average investment securities balance of $98.9 million, resulting in lower interest income of approximately $2.0 million.
Interest Expense
In 2024, interest expense was $94.4 million which represented an increase of $21.7 million, or 29.9%, compared to interest expense of $72.7 million in 2023, which was an increase of $55.6 million, or 325.1%, compared to $17.1 million in 2022.
Due to the high interest rate environment, the average rate paid on interest-bearing deposits of 1.79% in 2024 increased by 47 bps from 2023, resulting in an increase in interest expense of approximately $23.3 million. Increases in the average balance and average rate paid on long-term debt of $7.3 million and 1 bps, respectively, resulted in a total increase in interest expense of approximately $0.4 million.
The average rate paid on interest-bearing deposits of 1.32% in 2023 increased by 107 bps from 2022, resulting in an increase in interest expense of approximately $48.0 million. The average interest-bearing deposit balance in 2023 increased by $379.1 million from 2022, resulting in an increase in interest expense of approximately $3.8 million. Increases in the average balance and average rate paid on long-term debt of $43.2 million and 114 bps, respectively, resulted in a total increase in interest expense of approximately $3.7 million in 2023 from 2022.
Net Interest Margin
Our net interest margin was 3.01%, 2.94% and 3.09% in 2024, 2023 and 2022, respectively. The increase in our net interest margin in 2024 from 2023 was primarily due to the increases in the average yields earned on loans and investment securities, partially offset by increases in the average rates paid on interest-bearing deposits and long-term debt.
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The decrease in our net interest margin in 2023 from 2022 was primarily due to the increases in the average rate paid on interest-bearing deposits and long-term debt, which outpaced the increases in average yields earned on loans, interest-bearing deposits in other financial institutions and investment securities.
Non-GAAP Financial Measures
To supplement our consolidated financial information, the Company uses certain non-GAAP financial measures, which are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures. The Company believes these non-GAAP financial measures provide useful information to investors and others, which excludes transactions that are not meaningful in comparison to our past operating performance or not reflective of ongoing financial results. The Company believes that these measures offer a supplemental measure for period-to-period comparisons and can be used to evaluate our historical and prospective financial performance. These non-GAAP financial measures may not be comparable to similarly entitled measures reported by other companies.
The following reconciling adjustments from GAAP or reported financial measures to non-GAAP adjusted financial measures are limited to:
(i) pre-tax loss on sales of investment securities related to an investment portfolio repositioning of $9.9 million and $1.9 million in the fourth quarter of 2024 and fourth quarter of 2023, respectively,
(ii) pre-tax expenses related to the evaluation and assessment of a strategic opportunity of $3.1 million in the third quarter of 2024,
(iii) pre-tax gain on sale of a real estate office property of $5.1 million in the fourth quarter of 2023,
(iv) pre-tax branch lease termination expense of $2.3 million in the fourth quarter of 2023,
(v) pre-tax gain on sale of Visa Class B stock of $8.5 million in the second quarter of 2022, and
(vi) pre-tax loss on the termination and settlement of the Company's defined benefit pension plan of $4.9 million in the second quarter of 2022.
Management does not consider these transactions to be representative of the Company's core operating performance. The income tax effect was calculated assuming a 23% effective tax rate.
Table 3. Non-GAAP Financial Measures
Financial Measures:
Diluted earnings per share $ 1.97 $ 0.37 $ 2.34
Return on average shareholders' equity 10.25 % 1.85 % 12.10 %
As of December 31:
Tangible common equity ratio (non-GAAP) 7.21 % 0.12 % 7.33 %
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Financial Measures:
Diluted earnings per share $ 2.17 $ (0.03) $ 2.14
Return on average assets 0.78 % — % 0.78 %
Return on average shareholders' equity 12.38 % (0.14) % 12.24 %
As of December 31:
Tangible common equity ratio (non-GAAP) 6.57 % — % 6.57 %
Financial Measures:
Diluted earnings per share $ 2.68 $ (0.10) $ 2.58
Return on average assets 1.01 % (0.04) % 0.97 %
Return on average shareholders' equity 15.47 % (0.51) % 14.96 %
As of December 31:
Tangible common equity ratio (non-GAAP) 6.09 % (0.03) % 6.06 %
The following table presents a reconciliation of the Company's adjusted net income and adjusted diluted EPS, which excludes the aforementioned reconciling adjustments, for the periods presented:
Table 4. Adjusted Net Income and Diluted Earnings per Share
Year Ended December 31,
(dollars in thousands, except per share data)
Less: Pre-tax net gain on sale of a real estate office property — (5,128) —
Less: Pre-tax gain on sale of Visa Class B stock — — (8,506)
Add: Pre-tax expenses related to a strategic opportunity 3,068 — —
Add: Pre-tax branch lease termination expense — 2,274 —
Add: Pre-tax loss on termination of defined benefit pension plan — — 4,884
Total adjustments, net of tax (non-GAAP) 10,011 (705) (2,789)
Add: Total adjustments, net of tax (non-GAAP) 0.37 (0.03) (0.10)
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The Company believes that Pre-Provision Net Revenue ("PPNR"), a non-GAAP financial measure, is useful as a tool to help evaluate the ability to provide for credit costs through operations. The following table sets forth a reconciliation of the Company's PPNR and adjusted PPNR, which excludes the aforementioned reconciling adjustments, for the periods presented:
Table 5. Adjusted Pre-Provision Net Revenue
Year Ended December 31,
Add: Total pre-tax adjustments (non-GAAP) 13,002 (915) (3,622)
A key measure of operating efficiency tracked by the Company is the efficiency ratio, which is calculated by dividing total other operating expenses by total pre-provision revenue (net interest income plus total other operating income). The Company believes that the efficiency ratio, a non-GAAP financial measure, provides useful supplemental information that is important to a proper understanding of its business results and operating efficiency. The Company's 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. The following table sets forth a reconciliation to our efficiency ratio and adjusted efficiency ratio, which excludes the aforementioned reconciling adjustments, for the periods presented:
Table 6. Adjusted Efficiency Ratio
Year Ended December 31,
Less: Pre-tax expenses related to a strategic opportunity (3,068) — —
Less: Pre-tax branch lease termination expense — (2,274) —
Less: Pre-tax loss on termination of defined benefit pension plan — — (4,884)
Less: Pre-tax net gain on sale of a real estate office property — (5,128) —
Less: Pre-tax gain on sale of Visa Class B stock — — (8,506)
Total other operating income adjustments (non-GAAP) 9,934 (3,189) (8,506)
Less: Total pre-tax adjustments (non-GAAP) (3.81) (0.09) 0.18
The Company's efficiency ratio increased to 68.91% in 2024, compared to 63.95% in 2023 and 63.00% in 2022. The increase in our efficiency ratio in 2024 compared to 2023, was primarily driven by the aforementioned increases in other operating expense, combined with a decrease in other operating income, offset by an increase in net interest income.
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The following table presents a calculation of our adjusted ROA and adjusted ROE for the periods presented:
Table 7. Adjusted Return on Average Assets and Adjusted Return on Average Shareholders' Equity
Year Ended December 31,
Add: Total adjustments, net of tax (non-GAAP) 3,093 (176) (2,092)
ROA (GAAP net income divided by average assets) 0.72 % 0.78 % 1.01 %
Add: Total adjustments, net of tax (non-GAAP) 0.14 — (0.04)
Year Ended December 31,
Add: Total adjustments, net of tax (non-GAAP) 3,093 (176) (2,092)
Add: Total adjustments, net of tax (non-GAAP) 1.85 (0.14) (0.51)
The following table presents a calculation of our tangible common equity ("TCE") ratio and adjusted TCE ratio as of the dates presented:
Table 8. Adjusted Tangible Common Equity Ratio
December 31,
Less: Intangible assets — (1,461)
Add: Total adjustments, net of tax (non-GAAP) 10,011 (705)
Less: Intangible assets — (1,461)
Add: Total adjustments, net of tax (non-GAAP) 10,011 (705)
TCE ratio (non-GAAP) (TCE to tangible assets) 7.21 % 6.57 %
Add: Total adjustments, net of tax (non-GAAP) 0.12 —
Adjusted TCE ratio (non-GAAP) 7.33 % 6.57 %
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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 presented.
Table 9. Components of Other Operating Income
Dollar Change Percent Change
Mortgage banking income:
Other:
Net unrealized losses on loans held for sale (78) — — (78) — N.M. (*) N.M. (*)
Ratio of total other operating income to average assets 0.52 % 0.62 % 0.65 %
(*) Not meaningful ("N.M.")
Total other operating income of $38.7 million in 2024 decreased by $7.9 million, or 17.0%, from the $46.7 million earned in 2023, which decreased by $1.3 million, or 2.6%, from the $47.9 million earned in 2022.
The decrease in other operating income in 2024 from 2023 was primarily due to a loss on sale of investment securities of $9.9 million related to an investment portfolio repositioning completed in the fourth quarter of 2024, compared to a loss on sale of investment securities of $2.1 million primarily due to an investment portfolio repositioning completed in the fourth quarter of 2023 and a gain on sale of a real estate office property of $5.1 million completed in the fourth quarter of 2023. These decreases were partially offset by higher other service charges and fees of $2.0 million and higher income from bank-owned life insurance ("BOLI") of $1.7 million. Significant variances in income from BOLI are primarily attributable to volatility in the equity markets and higher death benefit income. The Company has certain company-owned life insurance policies (included in income from BOLI) used to hedge its deferred compensation plans, which are tied to the equity markets and had gains in 2024 and 2023, therefore, the Company has also recognized offsetting increases in deferred compensation expense in other operating expenses in 2024 and 2023.
The decrease in other operating income in 2023 from 2022 was primarily due to a non-recurring $8.5 million gain on sale of Class B common stock of Visa, Inc. ("Visa") recorded in the second quarter of 2022. Due to transfer restrictions on the Visa Class B common stock and the lack of a readily determinable fair value, the investment was carried at the Company's zero cost basis, therefore the entire net proceeds from the sale of $8.5 million were recorded as a gain on sale of investment securities. These decreases were also due to an investment portfolio repositioning completed in the fourth quarter of 2023 resulting in a
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$1.9 million loss on the sales of investment securities. In addition, the Company recorded lower mortgage banking income of $1.2 million. The lower mortgage banking income was primarily attributable to lower originations and fewer loans sold as a result of the significant increases in market interest rates which began in 2022. The Company's Home Loans Division recorded $307.7 million and $266.6 million in loan originations in 2024 and 2023, respectively, and down from $568.2 million in loan originations in 2022. The lower amortization of mortgage servicing rights (included in mortgage banking income) was primarily attributable to the continued increases in market interest rates. These decreases were partially offset by a $5.1 million gain on sale of real estate office property, higher income from BOLI of $3.0 million and higher other service charges and fees.
Other Operating Expense
The following table sets forth components of other operating expense and the total as a percentage of average assets for each of the periods presented.
Table 10. Components of Other Operating Expense
Dollar Change Percent Change
Other:
Foreclosed assets — — 1 — (1) N.M. (*) (100.0)
Strategic expenses 3,068 — — 3,068 — N.M. (*) N.M. (*)
Branch consolidation costs — — 612 — (612) N.M. (*) (100.0)
Ratio of total other operating expense to average assets 2.34 % 2.19 % 2.26 %
(*) Not meaningful ("N.M.")
Total other operating expense of $172.6 million in 2024 increased by $8.4 million, or 5.1%, from total operating expense of $164.1 million in 2023, which decreased by $1.8 million, or 1.1%, compared to 2022.
The increase in total other operating expense in 2024, compared to 2023, was primarily due to expenses related to a strategic opportunity in 2024 of $3.1 million, higher salaries and employee benefits of $3.9 million, amortization and impairment of
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intangible assets of $1.4 million, and higher directors' deferred compensation plan expenses of $1.2 million. These increases were partially offset by a non-recurring charge of $2.3 million related to the early termination of a branch lease in 2023. Significant fluctuations in directors' deferred compensation plan expenses are primarily due to volatility in the equity markets.
The decrease in total other operating expense in 2023, compared to 2022, was primarily due to lower salaries and employee benefits of $6.7 million and a non-recurring non-cash charge of $4.9 million related to the termination and settlement of the Company's defined benefit retirement plan during the second quarter of 2022. These decreases were partially offset by a non-recurring charge of $2.3 million related to the early termination of a branch lease, higher computer software expense of $2.9 million, FDIC insurance assessment of $1.8 million, directors' deferred compensation plan expenses of $1.4 million and net occupancy expense of $1.2 million.
Income Taxes
In 2024, the Company recorded income tax expense of $14.6 million, compared to $18.2 million in 2023, and $24.8 million in 2022. Our effective tax rate was 21.5% in 2024 compared to 23.6% in 2023 and 25.2% in 2022.
The decrease in income tax expense in 2024 from 2023 was primarily due to lower pre-tax income. The decrease in the effective tax rate in 2024 from 2023 was primarily attributable to higher tax-exempt income from BOLI as a percentage of pre-tax income, combined with additional tax credits recognized and tax return to provision adjustments in 2024.
The decrease in income tax expense in 2023 from 2022 was primarily due to lower pre-tax income. The decrease in the effective tax rate in 2023 from 2022 was primarily attributable to higher tax-exempt income from BOLI as a percentage of pretax income.
As of December 31, 2024, the valuation allowance on our net deferred tax assets ("DTA") totaled $3.1 million, which 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. Net of this valuation allowance, the Company's net DTA totaled $17.8 million as of December 31, 2024, compared to a net DTA of $29.5 million as of December 31, 2023, and is included in other assets in the Company's consolidated balance sheets.
On August 16, 2022, the Inflation Reduction Act ("IRA") of 2022 was signed into law to implement new tax provisions and provide various incentives and tax credits. The IRA created a 15% corporate alternative minimum tax and an excise tax of 1% on stock repurchases from publicly traded U.S. corporations, among other changes. As of December 31, 2024, the Company determined that neither this Act nor changes to income tax laws or regulations in other jurisdictions had a significant impact on income tax expense. As of December 31, 2024, the Company estimates that it will not owe any excise tax on the Company's stock repurchases in 2024. As a result the Company has not accrued any excise tax on the Company's stock repurchases.
Financial Condition
Total assets of $7.47 billion at December 31, 2024 decreased by $170.7 million, or 2.2%, from the $7.64 billion at December 31, 2023, and total liabilities of $6.93 billion at December 31, 2024 decreased by $205.3 million, or 2.9%, from the $7.14 billion at December 31, 2023. The decrease in total assets and total liabilities in 2024 was primarily due to a decline in loans and deposits in 2024.
Loan Portfolio
Our lending activities are focused on commercial and industrial 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 home-buyers and individuals. Our strategy for generating commercial loans has traditionally relied upon teams of commercial real estate and commercial banking officers 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 creditworthiness 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 repayment source, as well as alternate sources of repayment. All loans should be
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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 were determined to most highly correlate with probability of repayment. Those attributes include, but are not limited to the following: (i) credit score, (ii) credit limit amount, and (iii) debt-to-income ratio.
Loans totaled $5.33 billion at December 31, 2024, which decreased by $106.1 million, or 2.0%, from the $5.44 billion at December 31, 2023, which decreased by $116.5 million, or 2.1%, from the $5.56 billion held at December 31, 2022. The decrease in total loans included net decreases in the following loan portfolios: consumer of $120.0 million, or 19.0%, home equity of $59.5 million, or 8.1%, construction of $40.3 million, or 21.7%, and residential mortgage of $35.3 million, or 1.8%. These decreases were offset by net increases in commercial mortgage of $117.8 million, or 8.5% and commercial and industrial of $31.2 million, or 5.4%. The decrease in our consumer loan portfolio in 2024 was largely due to run-off in our U.S. mainland purchased consumer loans. In 2024, we did not foreclose on any loans. In addition, we recorded loan charge-offs of $20.2 million.
The following table sets forth information regarding outstanding loans, net of deferred (fees) costs, by category as of the dates indicated.
Table 11. Loans by Categories
Real estate:
The following table sets forth the geographic distribution of our loan portfolio, net of deferred (fees) costs, and related ACL as of the dates indicated.
Table 12. Loans by Geographic Distribution
(Dollars in thousands) Hawaii U.S. Mainland Total Hawaii U.S. Mainland Total
Real estate:
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Commercial and Industrial
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 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 2024, our commercial and industrial loan portfolio increased by $31.2 million, which was attributable to an increase in the Hawaii portfolio of $8.4 million and an increase in the U.S. Mainland portfolio of $22.8 million. Our commercial and industrial loan portfolio increased by $29.2 million in 2023.
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 2024, our construction loan portfolio decreased by $40.3 million. Our construction loan portfolio increased by $18.8 million in 2023. 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 $102.2 million at December 31, 2024, compared to $100.9 million in the prior year, while remaining interest reserves was $9.7 million, or 9.5% of the outstanding principal balance of loans with interest reserves at December 31, 2024, compared to $10.2 million, or 10.1% of the outstanding principal balance of loans with interest reserves at December 31, 2023.
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.
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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 13. Mortgage Loan Portfolio Composition
(Dollars in thousands) Amount Percent Amount Percent
Residential:
Commercial:
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 origination size of approximately $0.7 million, marketable collateral and a stable Hawaii residential real estate market, credit losses on residential mortgage loans have historically been minimal. 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, 2024 totaled $1.89 billion, decreasing by $35.3 million, or 1.8%, from the $1.93 billion held at year-end 2023, which decreased by $13.2 million, or 0.7%, from the $1.94 billion held at year-end 2022. The decrease in closed-end residential mortgage loan balances in 2024 was primarily due to lower origination activity primarily attributable to the high interest rate environment which began in 2022.
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Residential mortgage loans held for sale at December 31, 2024 totaled $5.7 million, an increase of $3.9 million, or 218.4%, from the December 31, 2023 balance of $1.8 million, which increased by $0.7 million, or 60.9%, from the December 31, 2022 balance of $1.1 million. We did not securitize any residential mortgage loans in 2024, 2023 and 2022.
Home Equity
Home equity lines of credit ("HELOCs"), which typically carry floating or fixed interest rates, 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. 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.
HELOC balances as of December 31, 2024 totaled $677.0 million, decreasing by $59.5 million, or 8.1%, from the $736.5 million held at December 31, 2023, which decreased by $2.9 million, or 0.4%, from the $739.4 million held at December 31, 2022.
Commercial Mortgage
Real estate mortgage loans secured by commercial properties 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, 2024 totaled $1.50 billion, increasing by $117.8 million, or 8.5%, from the $1.38 billion held at December 31, 2023, which increased by $19.8 million, or 1.5%, from the $1.36 billion held at December 31, 2022. The increase in commercial mortgage balances in 2024 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 14. Consumer Loan Portfolio Composition
(Dollars in thousands) Amount Percent Amount Percent
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 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 manage 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 $510.5 million at December 31, 2024, decreasing by $120.0 million, or 19.0%, from December 31, 2023 of $630.5 million, which decreased by $168.2 million, or 21.1%, compared to the $798.8 million held at December 31, 2022.
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At December 31, 2024, automobile loans, primarily indirect dealer loans and loans purchased from third-party originators, comprised 47.5% of consumer loans outstanding. Total automobile loans of $242.6 million at December 31, 2024 decreased by $40.3 million, or 14.3%, from December 31, 2023 of $283.0 million, which decreased by $85.3 million, or 23.2%, from $368.3 million at December 31, 2022.
In 2024, we purchased $49.4 million in U.S. Mainland automobile loans, which included a $1.9 million premium over the $47.6 million outstanding balance. In 2023, we purchased U.S. Mainland automobile loans totaling $15.7 million, which included a $0.6 million premium over the $15.2 million outstanding balance. In 2022, we purchased U.S. Mainland automobile loans totaling $106.2 million, which included a $4.7 million premium over the $101.5 million outstanding balance.
Purchased unsecured consumer and home improvement loans of $138.2 million at December 31, 2024 decreased by $75.2 million, or 35.2%, from December 31, 2023 of $213.4 million, which decreased by $101.5 million, or 32.2%, from $314.9 million at December 31, 2022.
In 2024, we did not purchase any U.S. Mainland unsecured consumer loans. In 2023, we purchased $3.9 million in U.S. Mainland unsecured consumer loans under forward flow purchase agreements at par, with outstanding balances totaling $3.9 million. In 2022, we purchased U.S. Mainland unsecured consumer loans under forward flow purchase agreements with outstanding balances totaling $229.3 million for $217.2 million, reflecting a net discount of $12.1 million.
Other revolving credit plans loans include extensions of credit to individuals and totaled $94.2 million at December 31, 2024, which decreased by $6.0 million, or 6.0%, from December 31, 2023 of $100.3 million, which increased by $19.9 million, or 24.8%, from $80.4 million at December 31, 2022.
Other consumer loans of $35.5 million at December 31, 2024 increased by $1.6 million, or 4.7%, from December 31, 2023 of $33.9 million, which decreased by $1.3 million, or 3.8%, from $35.2 million at December 31, 2022.
Concentrations of Credit Risk
As of December 31, 2024, approximately $4.22 billion, or 79.0% of loans outstanding were secured by real estate, including construction loans, residential mortgage loans, home equity loans, and commercial mortgage loans. As of December 31, 2023, approximately $4.23 billion, or 77.8% of loans outstanding were secured by real estate, 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, 86.0% of our loan portfolio was concentrated in the Hawaii market while 14.0% was concentrated in the U.S. Mainland as of December 31, 2024. As of December 31, 2023, 85.2% and 14.8% of our loan portfolio was concentrated in the Hawaii market and U.S. Mainland, respectively.
Our foreign credit exposure as of December 31, 2024 and December 31, 2023 was minimal and did not exceed 1% of total assets.
Maturities and Sensitivities of Loans to Changes in Interest Rates
At December 31, 2024, commercial and industrial loans were 44.5% fixed-rate and 55.5% variable-rate. Real estate construction loans were 33.4% fixed-rate and 66.6% variable-rate. Residential mortgage loans were 80.5% fixed-rate and 19.5% variable-rate. Home equity lines and loans were 13.4% fixed-rate and 86.6% variable-rate. Commercial mortgage loans were 54.0% fixed-rate and 46.0% variable-rate. Consumer loans were 82.3% fixed-rate and 17.7% 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
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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.
The following table sets forth the maturity distribution and sensitivities of the loan portfolio to changes in interest rates at December 31, 2024. Maturities are based on contractual maturity dates and do not factor in principal amortization. This differs from the assumptions used in the net interest income sensitivity analysis included in Table 25 - Net Interest Income Sensitivity.
Table 15. Maturity Distribution and Sensitivities of Loans to Changes in Interest Rates
Maturing
(Dollars in thousands)
Commercial and industrial:
Construction:
Residential mortgage:
Home equity:
Commercial mortgage:
Consumer:
All loans:
Provision and Allowance for Credit Losses for Loans
As described above under the "Critical Accounting Policies and Use of Estimates" section, the provision for credit losses ("Provision") for loans is determined by management's ongoing evaluation of the loan portfolio and our assessment of the ability of the ACL for loans to cover expected credit losses for loans. Our methodology for determining the adequacy of the ACL and Provision for loans takes into account many factors, including the level and trend of nonperforming and potential
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problem loans, net charge-off experience, current repayment by borrowers, prepayment assumptions, 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 ACL at an appropriate level as of a given balance sheet date to absorb management's best estimate of expected credit losses in its loan portfolios that will likely be realized over the expected life of our loan portfolio. This is based upon management's comprehensive analysis of the risk profiles particular to the respective loan portfolios. Analysis of the appropriateness of the ACL for loans is performed quarterly to coincide with financial disclosure to the public and to the regulatory agencies and is governed by a Board of Directors-approved policy and methodology.
The following table sets forth certain information with respect to the ACL for loans as of the dates or for the periods presented.
Table 16. Allowance for Credit Losses for Loans
Year Ended December 31,
Allowance for Credit Losses ("ACL") for Loans
Charge-offs:
Real estate:
Residential mortgage 383 — —
Recoveries:
Real estate:
Construction — 1 76
Ratios:
Net loan charge-offs to average loans outstanding 0.29 % 0.27 % 0.09 %
Our ACL for loans at December 31, 2024 totaled $59.2 million, which decreased by $4.8 million, or 7.4%, from $63.9 million at December 31, 2023, which increased by $0.2 million, or 0.3%, from $63.7 million at December 31, 2022. When expressed as a percentage of total loans, our ACL for loans was 1.11%, 1.18%, and 1.15% as of December 31, 2024, 2023 and 2022, respectively.
During 2024, we recognized a Provision of $9.8 million, which included a Provision for loans of $11.0 million, offset by a credit to the Provision for off-balance sheet credit exposures of $1.1 million. During 2023, we recognized a Provision of $15.7 million, which included a Provision for loans of $15.2 million and a Provision for off-balance sheet credit exposures of
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$0.5 million. During 2022, we recognized a credit to the Provision of $1.3 million, which included a credit to the Provision for off-balance sheet credit exposures of $1.6 million, offset by a Provision for loans of $0.3 million.
The decrease in our ACL for loans as a percentage of total loans from December 31, 2023 to December 31, 2024 and the decrease in the Provision in 2024 reflects improvements in the economic forecast while maintaining adequate coverage for our loan portfolio.
Our ACL for loans as a percentage of our nonaccrual loans decreased to 537% at December 31, 2024 from 912% at December 31, 2023, which decreased from 1,214% at December 31, 2022.
Overall, the Company maintained strong credit quality as represented by nonperforming assets of $11.0 million, $7.0 million, and $5.3 million at December 31, 2024, 2023 and 2022, respectively. Net charge-offs were $15.7 million, $15.0 million, and $4.6 million, respectively, for the years ended December 31, 2024, 2023 and 2022.
The following table sets forth the allocation of the ACL by loan category as of the dates indicated. Our practice is to make specific allocations on individually evaluated loans and general allocations to each loan category based on management's risk assessment and estimated loss rate.
Table 17. Allocation of Allowance for Credit Losses for Loans
Real estate:
In accordance with GAAP, loans held for sale and other real estate assets are not included in our assessment of the ACL.
Nonperforming Assets, Accruing Loans Delinquent for 90 Days or More, Restructured Loans Still Accruing Interest
The following table sets forth nonperforming assets ("NPAs"), accruing loans delinquent for 90 days or more and restructured loans still accruing interest as of the dates indicated.
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Table 18. Nonperforming Assets, Past Due and Restructured Loans
Nonaccrual loans (1)
Commercial and industrial $ 414 $ 432
Real estate:
Commercial mortgage — 77
Other real estate owned ("OREO")
Total other real estate owned ("OREO") — —
Total nonperforming assets ("NPAs") 11,018 7,008
Accruing loans delinquent for 90 days or more
Real estate:
Residential mortgage 323 —
Total accruing loans delinquent for 90 days or more 774 1,312
Total NPAs and accruing loans delinquent for 90 days or more $ 11,792 $ 8,320
Ratios:
Ratio of nonaccrual loans to total loans 0.21 % 0.13 %
Ratio of classified assets and OREO to tier 1 capital and ACL 3.17 3.41
Year-to-date changes in NPAs:
Balance at beginning of year $ 7,008 $ 5,251
Reductions:
Return to accrual status (650) (570)
Charge-offs, valuation and other adjustments (4,981) (3,753)
Nonperforming assets, which includes nonaccrual loans, nonperforming loans classified as held for sale, if any, and other real estate owned, totaled $11.0 million, or 0.15% of total assets at December 31, 2024, compared to $7.0 million, or 0.09% of total assets at December 31, 2023. Nonperforming assets at December 31, 2024 were comprised entirely of nonaccrual loans totaling $11.0 million, none of which were loans classified as held for sale. The majority of the nonaccrual loans are in the residential mortgage category which are well-collateralized with strong loan-to-value ratios.
The increase in nonperforming assets in 2024 was attributable to $11.6 million in gross additions, offset by $2.0 million in repayments, $0.7 million in loans returned to accrual status and $5.0 million in charge-offs, valuation and other adjustments.
Net changes to nonperforming assets by category during 2024 included net increases in residential mortgage loans of $4.1 million and home equity loans of $0.1 million, partially offset by net decreases in commercial and industrial, commercial mortgage, and consumer loans of less than $0.1 million each.
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Loans delinquent for 90 days or more still accruing interest totaled $0.8 million at December 31, 2024, compared to $1.3 million at December 31, 2023.
During the year ended December 31, 2024 and 2023, the Company has not modified any loans for borrowers experiencing financial difficulty that were determined to be material under management's judgement for further disclosure.
Criticized loans at December 31, 2024 declined by $17.2 million from December 31, 2023 to $32.8 million, or 0.6% of the total loan portfolio. Special mention loans declined by $16.2 million to $8.6 million, or 0.2% of the total loan portfolio. Classified loans declined by $1.0 million to $24.2 million, or 0.5% of the total loan portfolio.
The Company's ratio of classified assets and other real estate owned to tier 1 capital and the ACL decreased from 3.41% at December 31, 2023 to 3.17% at December 31, 2024.
Investment Portfolio
The following table sets forth the amounts and distribution of investment securities held as of the dates indicated.
Table 19. Distribution of Investment Securities
Debt securities:
Collateralized loan obligations — 31,140 31,140 — — —
Mortgage-backed securities:
Investment securities totaled $1.33 billion at December 31, 2024, which increased by $55.0 million, or 4.3%, from the $1.28 billion held at December 31, 2023, which decreased by $57.1 million, or 4.3%, from the $1.34 billion at year-end 2022.
The increase in the investment securities portfolio reflects purchases of investment securities of $253.6 million, amortization of unrealized losses on investment securities transferred to held-to-maturity of $7.2 million, and a market valuation increase on the AFS portfolio of $1.6 million, partially offset by the sale of investment securities with a book value of $106.5 million, principal runoff, maturities and calls totaling $99.1 million, and amortization and accretion of premiums and discounts of $1.8 million.
In the fourth quarter of 2024, the Company executed an investment portfolio repositioning of its AFS investment securities portfolio. The Company sold 24 lower-yielding AFS investment securities with a book value of $106.5 million and received proceeds of $96.6 million, which resulted in gross realized losses of $9.9 million. No gross gains were realized on the sale. The securities sold had a weighted average yield of 2.1% and a weighted average duration of 3.6 years. With the proceeds, the Company purchased higher-yielding AFS investment securities totaling $101.6 million with a weighted average yield of 4.9% and a weighted average duration of 4.1 years. The Company estimates the transaction will result in a prospective annual increase to net interest income of $2.7 million and net interest margin of 4 bps beginning in 2025. The earn-back period is estimated to be approximately 3.5 years.
In December 2023, the Company executed an investment portfolio repositioning of its AFS investment securities portfolio. The Company sold 17 AFS investment securities with a book value of $30.0 million, weighted average yield of 3.25%, weighted average duration of 3.4 years, and received proceeds of $28.1 million, which resulted in gross realized losses of $1.9 million.
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No gross gains were realized on the sale. With the proceeds, the Company purchased higher yielding AFS investment securities totaling $28.3 million with a weighted average yield of 5.68% and a weighted average duration of 2.5 years.
The fluctuations in market valuation on the AFS portfolio continues to be driven by changes in market interest rates. To mitigate the potential future impact to capital through AOCI, in 2022, the Company transferred 81 investment securities that were classified as AFS to HTM. The investment securities had an amortized cost basis of $762.7 million and a fair market value of $673.2 million. On the dates of transfer, these securities had total net unrealized losses of $89.5 million. There was no impact to net income as a result of the reclassifications.
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, 2024.
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Table 20. Maturity Distribution of Investment Portfolio
Portfolio Type and Maturity Grouping CarryingValue WeightedAverageYield (1)
(Dollars in thousands)
Held-to-maturity portfolio:
Debt securities - States and political subdivisions:
Total debt securities - States and political subdivisions 42,016 2.26
Total residential mortgage-backed securities - U.S. GSEs 554,914 1.89
Total held-to-maturity portfolio $ 596,930 1.92 %
Available-for-sale portfolio:
Debt securities - States and political subdivisions:
After one but within five years 9,714 3.39
After five but within ten years 13,891 3.84
Total debt securities - States and political subdivisions 116,833 2.70
After one but within five years 27,152 4.37
After five but within ten years 51,234 3.88
Debt securities - Collateralized loan obligations:
Total debt securities - Collateralized loan obligations 31,140 6.07
Residential mortgage-backed securities - U.S. GSEs:
After one but within five years 468 2.05
After five but within ten years 165 2.90
Total residential mortgage-backed securities - U.S. GSEs 414,471 2.90
Total residential mortgage-backed securities - Non-GSEs 16,926 4.36
Commercial mortgage-backed securities - U.S. GSEs and agencies:
After one but within five years 3,014 2.64
After five but within ten years 12,469 4.78
Total commercial mortgage-backed securities - U.S. GSEs and agencies 67,161 2.72
Commercial mortgage-backed securities - Non-GSEs:
Total commercial mortgage-backed securities - Non-GSEs 9,927 4.76
Total available-for-sale portfolio $ 737,658 3.18 %
(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%.
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The weighted-average yield of the investment portfolio was 2.62% as of December 31, 2024, which increased by 40 bps from 2.22% as of December 31, 2023.
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 through digital channels, 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 $250,000. Time deposits in amounts of $250,000 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.
Table 21. Deposits by Categories
The Company's deposit portfolio is diversified and long-tenured as it is built upon a business model based on long-term customer relationships. Approximately 53% of deposit customers have been banking with the Company for more than 10 years.
Total deposits of $6.64 billion at December 31, 2024 decreased by $203.6 million, or 3.0%, from total deposits of $6.85 billion at December 31, 2023. Total deposits at December 31, 2023 increased by $111.4 million, or 1.7%, over the year-end 2022 balance of $6.74 billion. The decrease in deposits in 2024 reflects net decreases in government time deposits of $271.5 million, other time deposits up to $250,000 totaling $50.5 million, and noninterest-bearing demand deposits of $24.4 million. The net decreases were partially offset by increases in savings and money market deposits of $119.4 million, other time deposits greater than $250,000 (excluding government time deposits) of $13.9 million, and interest-bearing demand deposits of $9.5 million. The Company did not have any wholesale, brokered or listing service deposits.
Core deposits, which the Company defines as demand deposits, savings and money market deposits, and time deposits up to $250,000, totaled $6.04 billion at December 31, 2024 and increased by $54.01 million, or 0.9%, from December 31, 2023, which decreased by $0.09 billion or 1.5% from December 31, 2022. Core deposits as a percentage of total deposits was 90.9% at December 31, 2024, compared to 87.4% at December 31, 2023 and 90.2% at December 31, 2022.
As an FDIC-insured institution, our deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Company reported estimated uninsured deposits of $2.82 billion, or approximately 42% of total deposits in its FDIC Call Report as of December 31, 2024, compared to the reported $2.91 billion, or approximately 42% of total deposits as of December 31, 2023. The Company had fully collateralized deposits of approximately $282.3 million and $536.3 million as of December 31, 2024 and December 31, 2023, respectively. The Company's uninsured deposits, excluding fully collateralized deposits, were approximately $2.54 billion, or approximately 38% of total deposits, and $2.37 billion, or approximately 35% of total deposits, as of December 31, 2024 and December 31, 2023, respectively.
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The table below sets forth the contractual maturities of our time deposits greater than the FDIC insurance limit of $250,000 as of December 31, 2024.
Table 22. Contractual Maturities of Time Deposits Greater Than $250,000
(Dollars in thousands)
Remaining maturity:
Over three months through twelve months 275,259
Over one year through three years 12,497
Over three years 500
For additional information regarding the contractual maturities of our time deposits, See Note 9 - 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 periods presented.
Table 23. Average Balances and Average Rates Paid on Deposits
Year Ended December 31,
Average balances are computed using daily average balances. The average rate on time deposits increased by 52 bps in 2024, and savings and money market deposit rates increased by 64 bps. The average rate paid on interest-bearing deposits increased 47 bps to 1.79% in 2024 from 1.32% in 2023, which increased from 0.25% in 2022. The average rate paid on all deposits increased 36 bps to 1.30% in 2024 from 0.94% in 2023, which increased from 0.17% in 2022.
Based on the Federal Open Market Committee's recent statements, the Company anticipates interest rates will decline modestly in 2025, but interest rates could be impacted by changes in the market environment including levels of inflation experienced during the year. However, the Company expects overall deposit rates to decline at a slower rate in 2025 as time deposits continue to mature and reprice. 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.
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Contractual Obligations
The following table sets forth our material contractual obligations (excluding deposit liabilities) as of December 31, 2024.
Table 24. Contractual Obligations
Payments Due By Period
(Dollars in thousands) Less Than One Year Greater Than One Year Total
Components of short-term borrowings and long-term debt are discussed in Note 10 - Short-Term Borrowings and Long-Term Debt to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data." SERP obligations include obligations under our Supplemental Executive Retirement Plans, which are discussed in Note 14 - Retirement Benefits 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 15 - 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 and other unconsolidated entities.
Contractual obligations in Table 24 - 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 20 - 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, the anticipated performance of our business, and the level of risk and regulatory capital requirements. 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, including the ability to declare cash dividends or repurchase our securities.
Common and Preferred Equity
Shareholders' equity totaled $538.4 million at December 31, 2024, an increase of $34.6 million, or 6.9%, from the $503.8 million at December 31, 2023, which increased by $50.9 million, or 11.2%, from December 31, 2022. The increase in shareholders' equity from December 31, 2023 to December 31, 2024 was primarily attributable to net income of $53.4 million and other comprehensive income of $8.2 million, partially offset by cash dividends paid of $28.1 million and the repurchase of 49,960 shares of common stock for a total cost of $0.9 million. During 2024, the Company repurchased approximately 0.2% of its common stock outstanding at December 31, 2023.
The increase in shareholders' equity from December 31, 2022 to December 31, 2023 was primarily attributable to net income of $58.7 million and other comprehensive income of $21.4 million, partially offset by cash dividends paid of $28.1 million, and the repurchase of 130,010 shares of our common stock for a total cost of $2.6 million, under our stock repurchase program. During 2023, the Company repurchased approximately 0.5% of its common stock outstanding at December 31, 2022.
When expressed as a percentage of total assets, shareholders' equity was 7.2% at December 31, 2024, compared to 6.6% at December 31, 2023 and 6.1% at December 31, 2022. The increase in the ratio of shareholders' equity to total assets from 2023
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to 2024 was primarily attributable to lower unrealized losses on available-for-sale investment securities recorded in accumulated other comprehensive income as of December 31, 2024 compared to December 31, 2023, and lower repurchases of common stock under the stock repurchase program during the year ended December 31, 2024. The increase in our ratio of shareholders' equity to total assets from 2022 to 2023 was primarily attributable to lower unrealized losses on available-for-sale investment securities recorded in accumulated other comprehensive loss during the year ended December 31, 2023 due to market volatility and the interest rate environment.
Book value per share was $19.89, $18.63, and $16.76 at year-end 2024, 2023 and 2022, respectively. The increase in book value per share from 2023 was primarily attributable to the increase in shareholders' equity from December 31, 2023 to December 31, 2024, as described above.
Trust Preferred Securities
As of December 31, 2024, 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.
On July 3, 2023, after the cessation of the LIBOR benchmark rate on June 30, 2023, the Company amended its Trust IV and Trust V debt agreements to replace the LIBOR-based reference rate with an adjusted CME Term Secured Overnight Financing Rate ("SOFR") plus a tenor spread adjustment. Accounting Standards Codification ("ASC") 848 allows us to account for the modification as a continuation of the existing contract without additional analysis. The $30.0 million in floating rate trust preferred securities of Trust IV bear an interest rate of three-month CME Term SOFR plus a tenor spread adjustment of 0.26% plus 2.45% and the $20.0 million in floating rate trust preferred securities of Trust V bear an interest rate of three-month CME Term SOFR plus a tenor spread adjustment of 0.26% plus 1.87%.
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 was not required.
Subordinated Notes
On October 20, 2020, the Company completed a $55.0 million private placement of ten-year fixed-to-floating rate subordinated notes, which was used to support regulatory capital ratios and for general corporate purposes. The Company exchanged the privately placed notes for registered notes with the same terms and in the same aggregate principal amount at the end of the fourth quarter of 2020. The notes bear a fixed interest rate of 4.75% for the first five years through November 1, 2025 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. The notes are redeemable at our option on any interest payment date on or after November 1, 2025. The subordinated notes totaled $54.8 million as of December 31, 2024, and includes $0.2 million in debt issuance costs, which are being amortized over the expected life.
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 and subordinated notes.
CPF relies on the Bank to pay dividends to it to fund its obligations. In order to meet its ongoing obligations, on a stand-alone basis, CPF had an available cash balance of approximately $23.0 million as of December 31, 2024.
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. The Bank had Statutory Retained Earnings of $196.8 million and $169.1 million, as of December 31, 2024 and 2023, respectively.
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
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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 2023, the Company’s Board of Directors approved a new authorization to repurchase up to $25 million of its common stock from time to time in the open market or in privately negotiated transactions (the "2023 Repurchase Plan"), pursuant to a newly authorized share repurchase program. The 2023 Repurchase Plan replaced and superseded in its entirety the share repurchase plan previously approved by the Board of Directors. The Company's 2023 Repurchase Plan was subject to a one-year expiration. Following the regional bank failures occurring in March 2023, the Company significantly reduced its volume of share repurchases to strengthen capital and liquidity considering the elevated market risks.
In 2023, 130,010 shares of common stock, at a cost of $2.6 million, were repurchased under the Company's share repurchase programs. A total of $23.4 million remained available for repurchase under the 2023 Repurchase Plan at December 31, 2023.
In January 2024, the Company’s Board of Directors approved a new authorization to repurchase of up to $20 million of its common stock from time to time in the open market or in privately negotiated transactions (the "2024 Repurchase Plan"), pursuant to a newly authorized share repurchase program. The 2024 Repurchase Plan replaced and superseded in its entirety the 2023 Repurchase Plan. In 2024, 49,960 shares of common stock, at a cost of $0.9 million, were repurchased under the Company's 2024 Repurchase Plan.
In January 2025, the Company’s Board of Directors approved a new authorization to repurchase of up to $30 million of its common stock from time to time in the open market or in privately negotiated transactions (the "2025 Repurchase Plan"), pursuant to a newly authorized share repurchase program. The 2025 Repurchase Plan replaces and supersedes in its entirety the 2024 Repurchase Plan.
The Company will continue to monitor the environment, capital needs, and assess risk and return as part of its ongoing capital management decisions on future share repurchases, and there can be no assurance that the Company will repurchase shares of its common stock in the future.
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 by major area is categorized 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 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
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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 Director of Compliance is responsible for developing and executing a comprehensive compliance training program. The Director of Compliance, 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 Board Risk 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 Director of Compliance reviews formal complaints to determine if a significant compliance risk exists and communicates those findings to our Board Risk 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 risk 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 ("ALCO") utilizes detailed and dynamic earnings and capital simulations that analyzes various interest rate scenarios and balance sheet forecasts. Earnings are typically measured by estimated changes in net interest income under different rate scenarios. Capital impact is measured through an Economic Value of Equity ("EVE") analysis which monitors the impact of the
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durations of rate sensitive assets and liabilities. The EVE analysis simulates the cash flows for all on- and off- balance sheet instruments under different rate scenarios which are then discounted to determine a present value for each scenario. The net present value of our assets and liabilities represent the EVE for each scenario. The EVE results for each scenario are then compared to the base scenario to determine the Company’s sensitivities to longer term rate exposures. The results of the analyses are shared with the Board of Directors and informs strategic actions to mitigate and optimize our risk position and profitability. Adverse interest rate risk exposures are managed through the shortening or lengthening of the duration of assets and liabilities.
The ALCO simulation model used to measure and manage interest rate risk exposures includes both dynamic and static balance sheet and rate scenarios. The dynamic model scenarios provide an enhanced view that enables management and the Board of Directors to have a realistic view of the expected impact to earnings and capital from forecasted non-parallel movements in interest rates as well as balance sheet changes. On the other hand, static rate scenarios are a measurement of embedded interest rate risk in the balance sheet as of a point in time and incorporate various hypothetical interest rate scenarios that may include gradual or immediate parallel rate changes. The static scenarios have the benefit of comparability over time, as well as against other financial institutions, but are not intended to represent management’s forecast. Both dynamic and static model simulations include the use of a number of key modeling assumptions including prepayment speeds, pricing spreads of assets and liabilities, deposit decay rates and the timing and magnitude of deposit rate changes in relation to changes in the overall level of interest rates. The assumptions are typically based on analyses of institution specific actual historical data and trends. Market information is also incorporated where relevant and appropriate. Assumptions are periodically reviewed and updated by ALCO. During periods of increased market volatility, assumptions will be reviewed more frequently. While management believes the assumptions are reasonable, actual behaviors and results may likely differ.
The following table reflects our static net interest income sensitivity analysis as of December 31, 2024. The simulations estimate net interest income assuming no balance sheet growth under a flat interest rate scenario. The net interest income sensitivity is measured as the change in net interest income in alternate interest rate scenarios as a percentage of the flat rate scenario. The alternate rate scenarios assume rates move up or down 100 to 300 bps in either a gradual (defined as the stated change over a 12-month period in equal increments) or an instantaneous, parallel fashion. The net interest income sensitivity table shows that the Company’s balance sheet is relatively well-matched against movements in interest rates and within our ALCO Policy risk limits that have been approved by the Board of Directors.
Table 25. Net Interest Income Sensitivity
Estimated Net Interest Income Sensitivity
Rate Change Gradual Instantaneous
Liquidity Risk and Borrowing Arrangements
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.
The Company performs regular liquidity stress testing under a variety of scenarios to ensure that liquidity is adequate under certain potential liquidity stress events. Further, forecasts of Company cashflows are updated and analyzed periodically and more frequently during periods of elevated liquidity risk.
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. A significant portion of our deposits are granular, long-tenured, and relationship-based. In addition to core deposit funding, we also have access to a variety of other short-term and long-term funding sources, which
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include proceeds from maturities of our loans and investment securities, as well as secondary funding sources available to meet our liquidity needs such as the FHLB, secured repurchase agreements and the Federal Reserve discount window.
Our loan-to-deposit ratio at December 31, 2024 was 80.3% compared to 79.4% at December 31, 2023. The Company had cash on its balance sheet of $380.9 million and total other liquidity sources, including available borrowing capacity and unpledged investment securities of approximately $2.49 billion as of December 31, 2024. Total available sources of liquidity as a percentage of uninsured and uncollateralized deposits was approximately 113%. Refer to Note 10 - Short-Term Borrowings and Long-Term Debt in the accompanying notes to the consolidated financial statements in this report for information on the Company's borrowing arrangements.
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, interest rate swaps and options, and risk participation agreements. These instruments and the related off-balance sheet exposures are discussed in detail in Note 20 - 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 may be adversely impacted, as may 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.
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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 21 - Fair Value of Financial Assets and Financial Liabilities to the Consolidated Financial Statements under "Part II, Item 8. Financial Statements and Supplementary Data."
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 173) 76
Consolidated Balance Sheets 78
Consolidated Statements of Income 79
Consolidated Statements of Comprehensive Income (Loss) 80
Consolidated Statements of Changes in Equity 81
Consolidated Statements of Cash Flows 82
Note 1 - Summary of Significant Accounting Policies 83
Note 2 - Investment Securities 94
Note 3 - Loans and Credit Quality 99
Note 5 - Premises and Equipment 106
Note 6 - Investments in Unconsolidated Entities 106
Note 7 - Mortgage Servicing Rights 107
Note 8 - Derivatives 108
Note 9 - Deposits 111
Note 10 - Short-Term Borrowings and Long-Term Debt 111
Note 12 - Revenue from Contracts with Customers 114
Note 13 - Share-Based Compensation 116
Note 14 - Retirement Benefits 118
Note 15 - Operating Leases 119
Note 16 - Income Taxes 121
Note 17 - Accumulated Other Comprehensive Income (Loss) 123
Note 18 - Earnings Per Share 126
Note 19 - Contingent Liabilities and Other Commitments 127
Note 20 - Financial Instruments with Off-Balance Sheet Risk 127
Note 21 - Fair Value of Financial Assets and Financial Liabilities 129
Note 22 - Segment Information 135
Note 23 - Parent Company and Regulatory Restrictions 135
Note 24 - Subsequent Events 140
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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, 2024 and 2023, the related consolidated statements of income, comprehensive income (loss), changes in equity, and cash flows for each of the years in the three‐year period ended December 31, 2024, 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, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024 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, 2024, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
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.
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.
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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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates 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 Credit Losses on Loans –Development and Application of Reasonable and Supportable Forecasts - Refer to Notes 1 and 4 to the Financial Statements
The allowance for credit losses on loans is an accounting estimate of expected credit losses over the estimated life of the Company’s loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. The allowance for credit losses on loans was $59,182,000 as of December 31, 2024.
The allowance for credit losses on loans under the current expected credit loss methodology required by ASC 326, Financial Instruments – Credit Losses, is based on relevant available information about the collectability of cash flows, from internal and external sources, including historical information relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. The economic forecast used in the current expected credit loss methodology includes Hawaii specific economic indicators. The Company performed a loss driver analysis to determine relevant economic indicators with a strong correlation to the historical loss experience used as the basis for the expected credit loss estimate. Significant management judgements are required in the development and application of reasonable and supportable forecasts.
We identified the development and application of the reasonable and supportable forecasts used in the allowance for credit losses on loans as a critical audit matter because of the significant auditor judgment and audit effort needed to evaluate the judgments made by management, including the need to involve more experienced audit personnel and valuation specialists.
The primary procedures we performed to address this critical audit matter included:
•Testing the effectiveness of controls over the development and application of reasonable and supportable forecasts, including controls addressing:
◦The conceptual design of the reasonable and supportable forecast methodology,
◦Significant judgments and assumptions in the reasonable and supportable forecasts methodology, including the selection and application of economic variables,
◦The application of the reasonable and supportable forecasts,
◦The relevance and reliability of the underlying data.
•Substantively testing management’s process for the development and application of reasonable and supportable forecasts, including:
◦Evaluation of the conceptual design of the reasonable and supportable forecast methodology,
◦Evaluation of significant judgments and assumptions in the reasonable and supportable forecasts methodology, including the selection and application of economic variables,
◦Testing the application of the reasonable and supportable forecasts,
◦The relevance and reliability of the underlying data.
/s/ Crowe LLP
We have served as the Company's auditor since 2018.