CENTRAL PACIFIC FINANCIAL CORP. REPORTS
FOURTH QUARTER 2008 PROFIT OF $3.1 MILLION
HONOLULU, January 29, 2009 – Central Pacific Financial Corp. (NYSE: CPF), parent company of Central Pacific Bank, today reported net income for the fourth quarter of 2008 of $3.1 million, or $0.11 per diluted share, compared to a net loss of ($44.5) million, or ($1.51) per diluted share, reported in the fourth quarter of 2007 and net income of $3.0 million, or $0.11 per diluted share, reported in the third quarter of 2008. The net loss for the fourth quarter of 2007 included an after-tax non-cash goodwill impairment charge of $48.0 million.
As previously announced, the Company issued $135.0 million in senior preferred stock earlier this month in connection with the Company’s participation in the U.S. Treasury’s Capital Purchase Program. The preferred stock carries an annual dividend of 5.0% during the first five years. Related warrants to purchase approximately 1.6 million shares of the Company’s common stock were also issued to the U.S. Treasury.
“We are pleased to have posted another profitable quarter,” stated Ronald K. Migita, Chairman, President, and Chief Executive Officer. “While these are challenging economic times, the fundamentals of Central Pacific Bank are improving and we continue to invest in our core Hawaii franchise. We also remain focused on managing our credit risk. Furthermore, our participation in the Capital Purchase Program provides us with additional resources for our lending activities to support our commercial and retail customers in Hawaii. We are one of the largest financial institutions in Hawaii with over $4 billion in loans outstanding and have relationships with thousands of businesses and consumers that rely on us to meet their financial needs.”
Fourth Quarter Highlights
| § | Quarterly net income of $3.1 million, or $0.11 per diluted share. |
| § | Allowance for loan and lease losses increased by almost $20.0 million and the allowance for loan and lease losses, as a percentage of total loans and leases, stands at 2.97% at December 31, 2008, up from 2.46% at September 30, 2008. |
| § | Total credit costs of $30.0 million comprised of a provision for loan and lease losses of $26.7 million, write-downs of loans held for sale of $1.3 million, foreclosed asset expense of $0.7 million and an increase to the reserve for unfunded commitments of $1.3 million. |
| § | Deposits increased by $134.5 million, or 3.6%, from September 30, 2008. |
| § | Prior to the Company’s participation in the Capital Purchase Program in January 2009, maintained “well-capitalized” regulatory designation at December 31, 2008, with Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios of 10.44%, 11.71%, and 8.82%, respectively. |
Earnings Highlights
Net interest income for the fourth quarter of 2008 was $49.1 million, compared to $52.5 million in the year-ago quarter and $50.6 million in the third quarter of 2008. The net interest margin for the current quarter was 4.03%, compared to 4.15% in the year-ago quarter and 4.07% in the third quarter of 2008. The year-over-year and sequential quarter compression was attributable to lower interest income primarily due to a decrease in loan yields.
The provision for loan and lease losses in the fourth quarter of 2008 was $26.7 million, compared to $28.2 million in the year-ago quarter and $22.9 million in the third quarter of 2008. The sequential quarter increase was attributable to the current challenging economic conditions and the continued softening of the California and Hawaii real estate markets.
Other operating income totaled $16.9 million for the fourth quarter of 2008, compared to $11.4 million in the year-ago quarter and $11.7 million in the third quarter of 2008. The increase from the year-ago quarter was primarily due to higher unrealized gains on outstanding interest rate locks on residential mortgage loans totaling $2.2 million, higher non-cash gains related to the ineffective portion of a cash flow hedge totaling $2.0 million, and a $1.7 million loss recognized in the year-ago quarter in connection with an investment portfolio repositioning. The sequential-quarter increase was primarily due to higher unrealized gains on outstanding interest rate locks on residential mortgage loans totaling $2.6 million, higher non-cash gains related to the ineffective portion of a cash flow hedge totaling $1.9 million, and higher income from bank-owned life insurance totaling $0.4 million.
Other operating expense for the fourth quarter of 2008 was $43.6 million, compared to $35.2 million in the year-ago quarter (excluding the aforementioned non-cash goodwill impairment charge of $48.0 million) and $37.5 million in the third quarter of 2008. The increase from the year-ago quarter was primarily due to the recognition of a non-cash mortgage servicing rights impairment charge totaling $3.4 million, the recognition of a counterparty loss on a financing transaction totaling $2.8 million, higher legal and professional fees totaling $1.4 million, higher write-downs of loans held for sale totaling $1.3 million, higher FDIC insurance expense totaling $1.2 million, higher foreclosed asset expense totaling $0.7 million, and higher net occupancy expense totaling $0.7 million, offset by lower reserves for unfunded commitments totaling $3.5 million. The sequential-quarter increase in other operating expense was primarily due to the same reasons as the increase from the year-ago quarter, except for a partial offset of salaries and benefits totaling $4.1 million primarily due to lower incentive compensation expense and higher reserves for unfunded commitments totaling $1.4 million.
The Company’s efficiency ratio for the fourth quarter of 2008 was 57.11% (excluding foreclosed asset expense of $0.7 million, the write down of assets of $1.3 million, and the loss on a financing transaction of $2.8 million), compared with 51.44% in the year-ago quarter (excluding the non-cash goodwill impairment charge of $48.0 million) and 57.71% (excluding foreclosed asset expense of $0.1 million, the write-down of assets of $0.1 million, and a loss on the sale of commercial real estate loans of $0.2 million) in the third quarter of 2008. The variance from the year-ago quarter was primarily attributable to the fluctuations in other operating expenses described above.
During the current quarter, the Company recognized an income tax benefit of $7.4 million on a pre-tax loss of ($4.3) million compared to the recognition of an income tax benefit of $1.1 million on pre-tax income of $1.9 million during the third quarter of 2008. The Company’s effective tax rate for the current quarter was impacted by the recognition of federal and state tax credits related to solar leases with an after-tax benefit totaling $4.0 million.
Balance Sheet Highlights
Total assets of $5.4 billion at December 31, 2008 reflected a decrease of $248.0 million, or 4.4%, from a year ago and a decrease of $71.9 million, or 1.3%, from September 30, 2008.
Total loans and leases of $4.0 billion at December 31, 2008 reflected a decrease of $111.4 million, or 2.7%, from a year ago and a decrease of $50.0 million, or 1.2%, from September 30, 2008. The decrease during the current quarter was primarily due to a decrease in the Mainland loan portfolio of $46.8 million.
Total deposits of $3.9 billion at December 31, 2008 reflected a decrease of $91.2 million, or 2.3%, from a year ago and an increase of $134.5 million, or 3.6%, from September 30, 2008. Noninterest bearing demand, interest bearing demand and time deposits increased during the current quarter by $30.2 million, $14.4 million, and $99.8 million, respectively, while savings and money market deposits decreased by $9.8 million.
Shareholders’ equity was $526.3 million at December 31, 2008, compared to $674.4 million and $510.1 million at December 31, 2007 and September 30, 2008, respectively. This does not include the proceeds from our issuance of senior preferred stock to the U.S. Treasury in January 2009.
Asset Quality
The Company’s nonperforming assets as of December 31, 2008 totaled $143.8 million, or 2.65%, of total assets, compared to $132.6 million, or 2.41%, of total assets at September 30, 2008. The sequential-quarter increase was primarily attributable to the addition of a California commercial construction loan totaling $10.4 million and a California residential construction loan totaling $9.8 million. Offsetting this increase was a partial charge-off of a Hawaii residential construction loan totaling $2.7 million, a write-down of a California residential construction loan classified as held for sale totaling $1.3 million, and a refinancing of a California residential construction loan held for sale totaling $1.4 million.
Net loan charge-offs in the fourth quarter of 2008 totaled $7.0 million, compared to net loan charge-offs of $8.7 million in the year-ago quarter and $8.7 million in the third quarter of 2008. Loan charge-offs were attributable to the loans described above.
Loans delinquent for 90 days or more still accruing interest totaled $1.1 million at December 31, 2008, compared to $0.9 million a year ago and $0.6 million at September 30, 2008.
The allowance for loan and lease losses as a percentage of total loans and leases was 2.97% at December 31, 2008, compared to 2.22% a year ago and 2.46% at September 30, 2008. The increase was attributable to the $26.7 million provision for loan and lease losses for the current quarter, offset by the aforementioned net loan charge-offs totaling $7.0 million.
California Residential Construction Exposure
At December 31, 2008, the Company’s exposure to the California residential construction market totaled $71.0 million. This amount consisted of $55.6 million in the loan portfolio, $10.5 million classified as held for sale and two foreclosed properties totaling $4.9 million. At September 30, 2008, the Company’s total exposure to this sector was $95.4 million, which 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. The current quarter decline in this portfolio was primarily driven by loan repayments.
California residential construction loans held in the portfolio represented 1.4% and 1.9% of total loans and leases at December 31, 2008 and September 30, 2008, respectively. Of the remaining $55.6 million balance in the California residential construction portfolio, the allowance for loan and lease losses established for these loans was $13.9 million at December 31, 2008, or 25.0%, of the total outstanding loan balance.
Nonperforming assets related to this sector totaled $54.2 million at December 31, 2008, or 1.00%, of total assets. This balance was comprised of nonaccrual portfolio loans totaling $38.8 million, nonaccrual loans held for sale totaling $10.5 million, and other real estate owned totaling $4.9 million.
Mainland Commercial Real Estate and Construction Exposure
At December 31, 2008, the Company’s exposure to the Mainland commercial real estate and construction market was $975.6 million, which consisted of $969.6 million in the loan portfolio and one foreclosed property totaling $6.0 million. The $969.6 million balance in the Mainland commercial real estate and construction portfolio consisted of $688.0 million in California and $281.6 million in other Western states. At September 30, 2008, the Company’s total exposure to this sector was $998.4 million, which consisted of $992.4 million in the loan portfolio and one foreclosed property totaling $6.0 million.
Mainland commercial and construction loans held in the portfolio represented 24.1% and 24.3% of total loans and leases at December 31, 2008 and September 30, 2008, respectively. Of the $969.6 million balance in the Mainland commercial real estate and construction portfolio, the allowance for loan and lease losses established for these loans was $50.3 million at December 31, 2008, or 5.2%, of the total outstanding balance. Of the $688.0 million balance in the California commercial real estate and construction portfolio, the allowance for loan and lease losses established for these loans was $35.9 million at December 31, 2008, or 5.2%, of the total outstanding balance.
Nonperforming assets related to this sector totaled $54.6 million at December 31, 2008, or 1.01%, of total assets. This balance was comprised of 12 loans totaling $48.6 million and one foreclosed property totaling $6.0 million.
Hawaii Residential Construction and Commercial Real Estate Exposure
At December 31, 2008, the Company’s Hawaii residential construction and commercial real estate loan portfolio totaled $1.2 billion. There were no Hawaii residential construction or commercial real estate loans classified as held for sale. The Company’s total exposure to this sector was virtually unchanged from September 30, 2008.
Hawaii residential construction and commercial real estate loans held in the portfolio represented 30.9% and 30.2% of total loans and leases at December 31, 2008 and September 30, 2008, respectively. Of the $1.2 billion balance in the Hawaii residential construction and commercial real estate portfolio, the allowance for loan and lease losses established for these loans was $22.0 million at December 31, 2008, or 1.8%, of the total outstanding balance.
Nonperforming assets related to this sector were comprised of nine loans totaling $25.3 million at December 31, 2008, or 0.47%, of total assets.
Capital Levels and Suspension of Quarterly Cash Dividend
At December 31, 2008, the Company maintained its “well-capitalized” regulatory designation with Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios of 10.44%, 11.71%, and 8.82%, respectively.
On January 9, 2009, in connection with its participation in the Capital Purchase Program, the Company issued $135.0 million in senior preferred stock, with related warrants to purchase approximately 1.6 million shares of the Company’s common stock, to the U.S. Treasury. Pursuant to its participation in the Capital Purchase Program, the Company’s proforma Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios as of December 31, 2008 would have been 13.46%, 14.73%, and 11.37%, respectively.
In addition to reporting its operating results for the fourth quarter of 2008, the Company also announced that effective immediately, its Board of Directors elected to suspend the payment of cash dividends.
“Given these difficult market conditions and our participation in the U.S. Treasury’s Capital Purchase Program, we believe suspending the payment of cash dividends is a prudent measure that will enable us to preserve capital and better meet the needs of our customers,” Migita stated. “While our ‘well-capitalized’ position was further strengthened by our participation in the Capital Purchase Program, we believe this decision is in the best long term interest of the Company and its shareholders. As the economic environment stabilizes, we will reassess our capital levels and the payment of future cash dividends.”
Conference Call and Slide Presentation
The Company’s management will host a conference call today at 1:00 p.m. Eastern Time (8:00 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 March 2, 2009 by dialing 1-877-344-7529 (passcode 427082) 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 $5.4 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.
