CENTRAL PACIFIC FINANCIAL CORP. RETURNS TO PROFITABILITY IN
THIRD QUARTER 2008 WITH NET INCOME OF $3.0 MILLION
HONOLULU, October 31, 2008 – Central Pacific Financial Corp. (NYSE: CPF), parent company of Central Pacific Bank, today reported net income for the third quarter of 2008 of $3.0 million, or $0.11 per diluted share, compared to $9.1 million, or $0.30 per diluted share, reported in the third quarter of 2007 and a net loss of ($146.3) million, or ($5.10) per diluted share, reported in the second quarter of 2008. As previously announced, the current quarter’s results reflect total credit costs of $23.0 million compared to credit costs of $21.6 million during the third quarter of 2007 and $116.1 million in the second quarter of 2008. The net loss for the second quarter of 2008 also included a non-cash goodwill impairment charge of $94.3 million compared to no charge in the current quarter.
“As we previously announced, we returned to profitability in the third quarter of 2008 with net income of $3.0 million, or $0.11 per diluted share,” stated Ronald K. Migita, Chairman, President, and Chief Executive Officer. “Reinforced by our third quarter profit, the fundamentals of our bank have strengthened and we are confident that we will be able to continue to navigate through the challenging economic conditions facing all financial institutions. We continue to focus on investing in our core Hawaii franchise and strengthening our asset quality.”
Third Quarter Highlights
| § | Quarterly net income of $3.0 million, or $0.11 per diluted share. |
| § | Improved the Company’s credit risk profile by reducing its exposure to the California residential construction market through the previously announced sale of assets in July 2008 with a carrying amount of $44.2 million. |
| § | Allowance for loan and lease losses as a percentage of total loans and leases increased to 2.46% at September 30, 2008 from 2.11% at June 30, 2008. |
| § | Total credit costs of $23.0 million comprised of a provision for loan and lease losses of $22.9 million, write-downs of loans held for sale of $0.1 million and foreclosed asset expense of $0.1 million, offset by a decrease to the reserve for unfunded commitments of $0.1 million. |
| § | Maintained “well-capitalized” regulatory designation at September 30, 2008 with Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios of 10.13%, 11.39%, and 8.66%, respectively. |
Earnings Highlights
Net interest income for the third quarter of 2008 was $50.6 million, compared to $52.8 million in the year-ago quarter and $51.4 million in the second quarter of 2008. The net interest margin for the current quarter was 4.07%, compared to 4.29% in the year-ago quarter and 3.97% in the second quarter of 2008. The year-over-year compression was primarily attributable to the reversal of interest of $0.4 million related to certain nonaccrual loans and lower interest income due to a decrease in loan yields. The sequential quarter increase was primarily attributable to lower reversals of interest related to certain nonaccrual loans totaling $1.7 million. Excluding the effects of the $0.4 million reversal of interest on nonaccrual loans, net interest income was $50.9 million and the net interest margin was 4.10% for the current quarter.
The provision for loan and lease losses in the third quarter of 2008 was $22.9 million, compared to $21.2 million in the year-ago quarter and $87.8 million in the second quarter of 2008. The sequential quarter decrease reflects the Company’s strategy of reducing its exposure to the California residential construction market. As previously announced, the Company sold assets with exposure to this sector in July 2008 in an effort to strengthen the Company’s asset quality. The Company had previously written these assets down to their sales prices in the second quarter of 2008, resulting in no impact on earnings during the current quarter.
Other operating income totaled $11.7 million for the third quarter of 2008, compared to $11.8 million in the year-ago quarter and $11.9 million in the second quarter of 2008. The decrease from the year-ago quarter was primarily due to lower income from bank-owned life insurance totaling $1.0 million, offset by increased gains on sales of residential loans totaling $0.7 million. The sequential-quarter decrease was primarily due to lower gains on sales of residential loans totaling $0.4 million.
Other operating expense for the third quarter of 2008 was $37.5 million, compared to $31.6 million in the year-ago quarter and $66.0 million in the second quarter of 2008 (excluding the aforementioned non-cash goodwill impairment charge of $94.3 million). The increase from the year-ago quarter was primarily due to higher FDIC insurance expense totaling $1.4 million, higher salaries and employee benefits totaling $1.3 million, higher legal and professional fees totaling $1.0 million, higher net occupancy expense totaling $0.6 million and higher expenses attributable to the maintenance of certain mainland properties totaling $0.9 million. The sequential-quarter decrease in other operating expense was primarily due to lower write-downs of loans held for sale totaling $22.3 million, lower write-downs of foreclosed properties totaling $3.9 million, lower reserves for unfunded commitments totaling $2.0 million, lower losses on sales of commercial real estate loans totaling $1.5 million, and lower salaries and employee benefits totaling $1.1 million, offset by higher FDIC insurance expense totaling $1.3 million.
The Company’s efficiency ratio for the third quarter of 2008 was 57.71% (excluding foreclosed asset expense of $0.1 million, loss on sale of commercial real estate loans of $0.2 million, and the write down of assets of $0.1 million), compared with 47.27% in the year-ago quarter and 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) in the second 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 $1.1 million on pre-tax income of $1.9 million compared to the recognition of an income tax benefit of $38.5 million on a pre-tax loss of ($184.8) million during the second quarter of 2008. The Company’s recognition of an income tax benefit despite having pre-tax income in the current quarter was the result of federal and state tax credits and the generation of tax-exempt income.
Balance Sheet Highlights
Total assets of $5.5 billion at September 30, 2008 reflect a decrease of $143.3 million, or 2.5%, from a year ago and a decrease of $146.0 million, or 2.6%, from June 30, 2008.
Total loans and leases of $4.1 billion at September 30, 2008 reflect an increase of $7.7 million, or 0.2%, from a year ago and an increase of $2.3 million, or 0.1%, from June 30, 2008. Overall, the Hawaii loan portfolio grew by $15.3 million during the current quarter, while the mainland loan portfolio decreased by $13.0 million.
Total deposits of $3.8 billion at September 30, 2008 reflect a decrease of $165.2 million, or 4.2%, from a year ago and a decrease of $143.6 million, or 3.7%, from June 30, 2008. Noninterest bearing demand, interest bearing demand and savings and money market deposits decreased during the current quarter by $53.0 million, $13.4 million and $84.1 million, respectively, while time deposits increased by $7.0 million. The decrease in the Company’s deposits is consistent with other financial institutions in Hawaii and is partly related to the softening of the local economy. Specifically, the slowing of Hawaii’s real estate market contributed to a decrease in the Company’s escrow deposits. In addition, some foreign customers have moved their deposits due to concerns about the overall United States economy. Despite the sequential quarter decrease in deposit balances, new account openings increased by 30% for the nine months ended September 30, 2008 compared to the year ago period.
Shareholders’ equity was $510.1 million at September 30, 2008 compared to $507.1 million and $744.0 million at June 30, 2008 and September 30, 2007, respectively.
Asset Quality
The Company’s nonperforming assets as of September 30, 2008 totaled $132.6 million, or 2.41%, of total assets, compared to $145.9 million, or 2.58%, of total assets at June 30, 2008. The sequential-quarter decrease in the Company’s nonperforming assets was attributable to the aforementioned sale of assets totaling $44.2 million, a partial charge-off of one California residential construction loan totaling $6.8 million and a full charge-off of one California residential construction loan totaling $0.7 million. Partially offsetting this decrease was the addition of eight California commercial real estate and construction loans to three borrowers totaling $29.0 million, two California residential construction loans to the same borrower totaling $2.1 million, three Hawaii residential construction loans to two borrowers totaling $5.4 million, and one Hawaii commercial real estate loan totaling $1.4 million.
Net loan charge-offs in the third quarter of 2008 totaled $8.7 million, compared to net loan charge-offs of $0.1 million in the year-ago quarter and $73.9 million in the second quarter of 2008. As previously mentioned, loan charge-offs in the current quarter included charge-offs of two California residential construction loans totaling $7.5 million.
Loans delinquent for 90 days or more still accruing interest totaled $0.6 million at September 30, 2008, compared to $0.9 million a year ago and $0.5 million at June 30, 2008.
The allowance for loan and lease losses as a percentage of total loans and leases was 2.46% at September 30, 2008, compared to 1.78% a year ago and 2.11% at June 30, 2008. The current quarter increase was attributable to the $22.9 million provision for loan and lease losses recorded during the current quarter, offset by the aforementioned net loan charge-offs totaling $8.7 million.
Reduced California Residential Construction Exposure
At September 30, 2008, the Company’s exposure to the California residential construction market totaled $95.4 million. This amount consisted of $76.7 million in the loan portfolio, $13.1 million classified as held for sale and two foreclosed properties totaling $5.6 million. At June 30, 2008, the Company’s total exposure to this sector was $143.9 million, which 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.
California residential construction loans held in the portfolio represented 1.9% and 2.1% of total loans and leases at September 30, 2008 and June 30, 2008, respectively. Of the remaining $76.7 million balance in the California residential construction portfolio, the allowance for loan and lease losses established for these loans was $23.6 million at September 30, 2008, or 30.8%, of the total outstanding loan balance.
Nonperforming assets related to this sector totaled $51.5 million at September 30, 2008, or 0.94%, of total assets. This balance was comprised of nonaccrual portfolio loans totaling $32.8 million, nonaccrual loans held for sale totaling $13.1 million, and other real estate owned totaling $5.6 million.
Commercial Real Estate and Commercial Construction Exposure
Hawaii
At September 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 30.2% of total loans and leases at September 30, 2008.
Nonperforming assets related to this sector were comprised of eight loans totaling $27.3 million at September 30, 2008, or 0.50%, 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 $14.6 million at September 30, 2008, or 1.2%, of the total outstanding balance.
Mainland
At September 30, 2008, the Company’s exposure to the Mainland commercial real estate and construction market was $998.4 million, which consisted of $992.4 million in the loan portfolio and one foreclosed property totaling $6.0 million. The $992.4 million balance in the Mainland commercial real estate and construction portfolio, which excludes the aforementioned California residential construction portfolio, consisted of $713.8 million in California and $278.6 million in other Western states.
Commercial real estate and construction loans held in the mainland portfolio represented 24.3% of total loans and leases at September 30, 2008.
Nonperforming assets related to this sector were $45.6 million at September 30, 2008, or 0.83%, of total assets. This balance was comprised of twelve loans totaling $39.6 million and one foreclosed property totaling $6.0 million.
Of the $992.4 million balance in the Mainland commercial real estate and construction portfolio, the allowance for loan and lease losses established for these loans was $33.2 million at September 30, 2008, or 3.4%, of the total outstanding balance. Of the $713.8 million balance in the California commercial real estate and construction portfolio, the allowance for loan and lease losses established for these loans was $23.6 million at September 30, 2008, or 3.3%, of the total outstanding balance.
Capital Levels and Fourth Quarter Cash Dividend
At September 30, 2008, the Company maintained its “well-capitalized” regulatory designation with Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios of 10.13%, 11.39%, and 8.66%, respectively.
In addition to reporting its operating results for the third quarter of 2008, the Company also announced that its Board of Directors has declared a fourth quarter cash dividend of $0.10 per common share payable on December 19, 2008 to shareholders of record as of November 21, 2008.
“Given the uncertainty in the economy and the significant challenges facing the entire financial services industry, our consistent position has been to closely evaluate our capital levels,” stated Migita.
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 December 1, 2008 by dialing 1-877-344-7529 (passcode 424445) 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 $5.5 billion in assets. Central Pacific Bank, its primary subsidiary, operates 39 branches and more than 95 ATMs throughout Hawaii. For additional information, please visit the Company’s website at http://www.centralpacificbank.com.
