CENTRAL PACIFIC FINANCIAL CORP. REPORTS SECOND QUARTER 2008 RESULTS
Announces Bulk Sale of California Residential Construction Loans
Maintained “Well-Capitalized” Regulatory Designation
HONOLULU, July 31, 2008 – Central Pacific Financial Corp. (NYSE: CPF), parent company of Central Pacific Bank, today reported a net operating loss for the second quarter of 2008 of $52.0 million, or ($1.81) per diluted share. The net operating loss includes pre-tax credit costs directly related to the Company’s mainland loan portfolio of $112.0 million, or ($2.35) per diluted share on an after-tax basis. The net operating loss does not include a non-cash goodwill impairment charge of $94.3 million. Including the goodwill impairment charge, the Company recognized a current quarter net loss of $146.3 million, or ($5.10) per diluted share, compared to net income of $21.0 million, or $0.68 per diluted share, reported in the second quarter of 2007 and net income of $1.7 million, or $0.06 per diluted share, reported in the first quarter of 2008.
Last quarter, the Company announced plans to reduce its exposure to the troubled California residential construction market. In July 2008, the Company sold assets with a combined carrying amount of $44.2 million at June 30, 2008. At June 30, 2008, the Company had written these assets down to their sale price.
The goodwill impairment charge had no impact on the Company’s cash flows, tangible equity, or regulatory capital and was the result of the Company writing off the remaining balance of goodwill allocated to its commercial real estate reporting unit due to the continued deterioration in the California residential construction market and the resultant decline in the Company’s market capitalization and asset values with exposure to this sector. All goodwill related to the mainland operations has been written off and the remaining goodwill on the Company’s books at June 30, 2008 was attributable to its Hawaii operations.
“Our operations in Hawaii continue to be solid with strong operating fundamentals and we remain encouraged by the long-term outlook for our core franchise,” said Clint Arnoldus, President and Chief Executive Officer. “However, our quarterly results reflect the challenging economic environment that we, along with financial institutions across the country, continue to experience. As promised last quarter, we have taken steps to reduce our exposure to problem loans in the weak California residential construction market and enhance our risk management. We continue to address the impact of this market on our loan portfolio and are focused on reducing our credit risk and strengthening our capital ratios to better position the Company through this economic cycle.”
Dean Hirata, Vice Chairman and Chief Financial Officer added, “The July sale of assets totaling $44.2 million has significantly reduced the amount of nonperforming California residential construction loans in our portfolio. As we wrote these assets down to the sales price in the second quarter, we will not incur any additional losses related to these assets in the third quarter. We believe our success in reducing our exposure to the troubled California housing market, our continued scrutiny of portfolio risk, and our focus on our core Hawaii operations will position the bank for improved financial performance over the long term.”
Second Quarter Highlights
| § | Maintained “well-capitalized” regulatory designation at June 30, 2008 with Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios of 9.83%, 11.09%, and 8.21%, respectively. |
| § | Net revenues for the second quarter of 2008 were $65.4 million (excluding the effects of the reversal of interest of $2.1 million related to certain nonaccrual loans), an increase of 1.5% compared to net revenues of $64.4 million in the second quarter of 2007. |
| § | Opened a record number of deposit accounts resulting from the success of deposit campaigns. |
| § | Allowance for loan and lease losses as a percentage of total loans and leases increased to 2.11% at June 30, 2008 from 1.31% at June 30, 2007. |
| § | Credit costs of $116.1 million were comprised of a provision for loan and lease losses of $87.8 million, write-downs of loans held for sale of $22.4 million, foreclosed asset expense of $4.0 million and an increase to the reserve for unfunded commitments of $1.9 million. Of this amount, $112.0 million, or 96.5%, was directly attributable to the mainland loan portfolio. |
| § | Recorded a non-cash goodwill impairment charge of $94.3 million to write-off the remaining balance of goodwill associated with the Company’s mainland operations. |
Other Significant Events
| § | Improved the Company’s credit risk profile by significantly reducing its exposure to the California residential construction market through the sale of assets in July 2008 with a carrying amount of $44.2 million at June 30, 2008. |
Earnings Highlights
Net interest income for the second quarter of 2008 was $51.4 million, compared to $52.9 million in the year-ago quarter and $50.9 million in the first quarter of 2008. The net interest margin for the current quarter was 3.97%, compared to 4.36% in the year-ago quarter and 3.99% in the first quarter of 2008. The year-over-year and sequential-quarter compression was primarily attributable to the reversal of interest of $2.1 million related to certain nonaccrual loans and lower interest income due to a decrease in loan yields. Excluding the effects of the $2.1 million reversal of interest on nonaccrual loans, net interest income was $53.4 million and the net interest margin was 4.13% for the current quarter.
The provision for loan and lease losses in the second quarter of 2008 was $87.8 million, compared to $1.0 million in the year-ago quarter and $34.3 million in the first quarter of 2008. The current quarter increase was directly attributable to significant deterioration in the Company’s California housing and residential construction loans as collateral values in this sector continued to fall. As previously mentioned, the Company significantly reduced its exposure to the California residential construction market in July 2008 by selling many of these assets and the credit costs experienced in the current quarter reflected those sales prices.
Other operating income totaled $11.9 million for the second quarter of 2008, compared to $11.5 million in the year-ago quarter and $14.3 million in the first quarter of 2008. The increase from the year-ago quarter was primarily due to increased gains on sales of residential loans totaling $0.8 million, offset by lower income from bank-owned life insurance totaling $0.3 million. The sequential-quarter decrease was primarily due to lower income from bank-owned life insurance totaling $1.0 million, and the receipt of $0.9 million in cash proceeds from the partial redemption of the Company’s equity interest in Visa, Inc. during the first quarter of 2008.
Other operating expense for the second quarter of 2008 excluding the aforementioned $94.3 million goodwill impairment charge was $66.0 million, compared to $31.3 million in the year-ago quarter and $31.5 million in the first quarter of 2008. The increase from the year-ago quarter was primarily due to write-downs of certain loans held for sale totaling $22.4 million, foreclosed asset expense totaling $4.0 million, higher salaries and employee benefits totaling $1.8 million, loss on sale of commercial real estate loans totaling $1.7 million and higher reserves for unfunded commitments totaling $1.6 million. The sequential-quarter increase in other operating expense was primarily due to the aforementioned write-downs of certain loans held for sale totaling $22.4 million, higher reserves for unfunded commitments totaling $6.5 million, loss on sale of commercial real estate loans totaling $1.7 million, higher write-downs of foreclosed properties totaling $1.4 million and higher salaries and employee benefits totaling $1.3 million.
The Company’s efficiency ratio for the second quarter of 2008 was 58.37% (excluding the non-cash goodwill impairment charge of $94.3 million, foreclosed asset expense of $4.0 million, loss on sale of commercial real estate loans of $1.7 million, and write down of assets of $22.4 million), compared with 47.03% in the year-ago quarter and 42.81% in the first quarter of 2008. The current quarter variance from the year-ago and sequential quarters was primarily attributable to the fluctuations in operating expenses described above.
During the current quarter, the Company recognized an income tax benefit of $38.5 million on a pre-tax net loss of $184.8 compared to the recognition of an income tax benefit of $2.3 million on a pre-tax net loss of $0.6 million during the first quarter of 2008. The Company’s effective tax rate for the current quarter was impacted by the disproportionate recognition of federal and state tax credits, the generation of tax-exempt income and the non-cash goodwill impairment charge, which is not deductible for tax purposes.
Balance Sheet Highlights
Total assets of $5.7 billion at June 30, 2008 reflect an increase of $86.8 million, or 1.6%, from a year ago and a decrease of $149.7 million, or 2.6%, from March 31, 2008.
Total loans and leases of $4.1 billion at June 30, 2008 reflect an increase of $140.9 million, or 3.6%, from a year ago and a decrease of $98.6 million, or 2.4%, from March 31, 2008. The current quarter decrease was primarily attributable to the transfer of 13 mainland construction loans totaling $46.4 million to the held for sale category and partial charge-offs of 18 mainland construction loans totaling $73.3 million, offset by net loan growth of $21.1 million. Overall, the Hawaii loan portfolio grew by $23.1 million during the current quarter, while the mainland loan portfolio decreased by $121.7 million primarily due to the aforementioned charge-offs totaling $73.3 million and transfer of loans to the held for sale category totaling $46.4 million.
Total deposits of $3.9 billion at June 30, 2008 reflect an increase of $5.8 million, or 0.1%, from a year ago and an increase of $140.6 million, or 3.7%, from March 31, 2008. Noninterest bearing demand, interest bearing demand, savings and money market and time deposits increased in the current quarter by $17.8 million, $13.6 million, $39.5 million and $69.8 million, respectively.
Shareholders’ equity at June 30, 2008 was $507.1 million.
Asset Quality
The Company’s nonperforming assets as of June 30, 2008, March 31, 2008, and proforma June 30, 2008 amounts following the completion of the aforementioned sale of assets with exposure to the California residential construction sector was as follows:
| Nonperforming Assets (In Millions) | | March 31, 2008 | | | June 30, 2008 | | | June 30, 2008 Proforma Upon Completion of Loan Sale | |
| Nonperforming loans including loans held for sale | | $ | 116.8 | | | $ | 142.4 | | | $ | 100.2 | |
| Other real estate owned | | | 2.0 | | | | 3.5 | | | | 1.5 | |
| Total nonperforming assets | | $ | 118.8 | | | $ | 145.9 | | | $ | 101.7 | |
| | | | | | | | | | | | | |
| Nonperforming assets as a % of total assets | | | 2.05 | % | | | 2.58 | % | | | 1.81 | % |
The sequential-quarter increase in the Company’s nonperforming assets was primarily attributable to the addition of eight California residential construction loans totaling $41.5 million and five California commercial real estate loans totaling $16.9 million. The increase also included loans to two Hawaii commercial real estate borrowers totaling $27.3 million. This was partially offset by partial charge-offs of six California residential construction loans totaling $23.3 million, partial charge-offs of two Washington construction loans totaling $2.5 million, write-downs of California residential construction loans classified as held for sale totaling $22.4 million, and write-downs of foreclosed properties totaling $3.9 million.
Net loan charge-offs in the second quarter of 2008 totaled $73.9 million, compared to net loan charge-offs of $0.2 million in the year-ago quarter and $54.2 million in the first quarter of 2008. Loan charge-offs in the second quarter of 2008 included partial charge-offs of 14 California residential construction loans totaling $65.0 million, two California commercial construction loans totaling $5.8 million and two Washington construction loans totaling $2.5 million.
Loans delinquent for 90 days or more still accruing interest totaled $0.5 million at June 30, 2008, an increase of 53.9% from a year ago and a decrease of 4.5% from March 31, 2008.
The allowance for loan and lease losses as a percentage of total loans and leases was 2.11% at June 30, 2008, compared to 1.31% a year ago and 1.73% at March 31, 2008. The current quarter increase was attributable to the $87.8 million provision for loan and lease losses recorded during the current quarter, offset by the aforementioned net loan charge-offs totaling $73.9 million.
Reduced California Residential Construction Exposure
At June 30, 2008, the Company’s exposure to the California residential construction market totaled $143.9 million, before the bulk loan sale in July 2008. This amount consisted of $87.2 million in the loan portfolio, $53.2 million classified as held for sale and two foreclosed properties totaling $3.5 million. At March 31, 2008, the Company’s total exposure to this sector was $247.8 million, which consisted of $197.9 million in the loan portfolio, $47.9 million classified as held for sale and one foreclosed property totaling $2.0 million.
California residential construction loans held in the portfolio represented 2.1% and 4.7% of total loans and leases at June 30, 2008 and March 31, 2008, respectively. Of the remaining $87.2 million balance in the California residential construction portfolio, the specific allowance for loan and lease losses established for these loans was $22.4 million at June 30, 2008, or 25.7%, of the total outstanding loan balance.
After completion of the July 2008 bulk loan sale, the Company’s remaining exposure to the California residential construction sector was $102.1 million, which consisted of $87.2 million in the loan portfolio, $13.4 million classified as held for sale and one foreclosed property totaling $1.5 million.
Nonperforming assets related to this sector was $97.9 million at June 30, 2008, or 1.73% of total assets, before the bulk loan sale. This balance was comprised of nonaccrual portfolio loans totaling $41.2 million, nonaccrual loans held for sale totaling $53.2 million, and other real estate owned totaling $3.5 million. Following the sale, nonperforming assets related to this sector was reduced to $56.1 million, or 1.00% of total assets.
Commercial Real Estate and Commercial Construction Exposure
Hawaii
At June 30, 2008, the Company’s Hawaii commercial real estate and construction loan portfolio totaled $1.2 billion. There were no Hawaii commercial real estate or construction loans classified as held for sale.
Hawaii commercial real estate and construction loans held in the portfolio represented 30.0% of total loans and leases at June 30, 2008.
Nonperforming assets related to this sector was comprised of seven loans totaling $21.9 million at June 30, 2008, or 0.39% of total assets.
Of the $1.2 billion balance in the Hawaii commercial real estate and construction portfolio, the allowance for loan and lease losses established for these loans was $10.9 million at June 30, 2008, or 0.9%, of the total outstanding balance.
Mainland
At June 30, 2008, the Company’s exposure to the Mainland commercial real estate and construction market was $996.9 million. This amount, which excludes the aforementioned California residential construction portfolio, consisted of $714.6 million in California and $282.3 million in other Western states.
Commercial real estate and construction loans held in the mainland portfolio represented 24.4% of total loans and leases at June 30, 2008.
Nonperforming assets related to this sector was comprised of five loans totaling $16.9 million at June 30, 2008, or 0.30% of total assets.
Of the $996.9 million balance in the Mainland commercial real estate and construction portfolio, the allowance for loan and lease losses established for these loans was $27.6 million at June 30, 2008, or 2.8%, of the total outstanding balance. Of the $714.6 million balance in the California commercial real estate and construction portfolio, the allowance for loan and lease losses established for these loans was $19.3 million at June 30, 2008, or 2.7%, of the total outstanding balance.
Capital Levels and Third Quarter Cash Dividend
The Company and the Bank remain well-capitalized for regulatory purposes.
“Despite the deterioration in the California residential construction market and its negative impact on our financial performance over the last four quarters, our key regulatory capital ratios remain strong,” Arnoldus stated. “At June 30, 2008, our Tier 1 capital ratio was 9.83%, our total capital ratio was 11.09% and our leverage ratio was 8.21%; all of which are better than the ‘well capitalized’ regulatory measures of 6%, 10% and 5%, respectively.”
In addition to reporting its operating results for the second quarter of 2008, the Company also reported that its Board of Directors has declared a third quarter cash dividend of $0.10 per common share payable on September 19, 2008 to shareholders of record as of August 15, 2008.
“The reduction in our quarterly cash dividend was an extremely difficult decision as we realize the importance of the dividend to our shareholders,” said Arnoldus. “However, given the significant challenges facing the entire financial services industry, we believe a partial dividend reduction is a prudent means of preserving and building capital. Our Board of Directors believes that this decision is in the best long-term interest of our shareholders as it better positions the bank in the current economic environment and leads to greater creation of long-term shareholder value. When the economic environment stabilizes and our profitability is restored, we will take a fresh look at our dividend.”
Arnoldus concluded, “Our management and Board of Directors continue to closely evaluate our capital levels given the uncertainty in the economy and the capital markets. We intend to maintain our ‘well capitalized’ position for regulatory purposes and believe it is vital to remain in a position to do so in order to meet our customers’ financial needs.”
Non-GAAP Financial Measures
This press release contains certain references to financial measures identified as being stated on an operating basis or which adjust for or exclude certain nonrecurring items, which are adjustments from comparable measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These financial measures, as used herein, differ from financial measures reported under GAAP in that they exclude unusual or non-recurring charges, losses, credits or gains. This press release identifies the specific items excluded from the comparable GAAP financial measure in the calculation of each non-GAAP financial measure. Management believes that financial presentations excluding the impact of these items provide useful supplemental information that is important to a proper understanding of the Company’s core business results by investors. These presentations should not viewed as a substitute for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures presented by other companies.
Conference Call and Slide Presentation
The Company’s management will host a conference call today at 1:00 p.m. Eastern Time (7:00 a.m. Hawaii Time) to discuss the quarterly results. Individuals are encouraged to listen to the live webcast of the presentation as well as view a slide presentation by visiting the investor relations page of the Company's website at http://investor.centralpacificbank.com. Alternatively, investors may download the slide presentation from the "Presentations" tab of the investor relations page and participate in the live call by dialing 1-800-860-2442. A playback of the call will be available through September 1, 2008 by dialing 1-877-344-7529 (passcode 421612) and on the Company's website.
About Central Pacific Financial Corp.
Central Pacific Financial Corp. is one of the largest financial institutions in Hawaii with more than $5.6 billion in assets. Central Pacific Bank, its primary subsidiary, operates 39 branches and 98 ATMs throughout Hawaii. For additional information, please visit the Company’s website at http://www.centralpacificbank.com.
