SECOND QUARTER 2009 RESULTS
Capital Ratios Above ‘Well-Capitalized’ Regulatory Levels
Postpones Stock Offering; Will Seek Authorization of Additional Common Shares
HONOLULU, July 29, 2009 – Central Pacific Financial Corp. (NYSE: CPF), parent company of Central Pacific Bank, today reported a net loss for the second quarter of 2009 of $34.4 million, or $1.27 per diluted share, compared to a net loss of $146.3 million, or $5.10 per diluted share, reported in the second quarter of 2008 and net income of $2.6 million, or $0.03 per diluted share, reported in the first quarter of 2009. The second quarter results reflect total credit costs of $79.9 million, compared to $116.1 million in the year-ago quarter and $29.6 million in the first quarter of 2009. The net loss for the second quarter of 2008 included a non-cash goodwill impairment charge of $94.3 million compared to no charge in the current quarter. The net loss, net loss per diluted share and total credit costs for the second quarter of 2009 were all within the ranges previously announced.
“As we previously announced, our second quarter results were impacted by higher credit costs resulting from the weak economy and further deterioration in the Hawaii and California commercial real estate markets,” said Ronald K. Migita, Chairman, President, and Chief Executive Officer. “As we continue to navigate through these turbulent times, although we remain focused on reducing credit risk, our customers will continue to receive the high level of quality service and innovative products they have come to expect from us.”
The Company also reported that it is postponing its previously announced stock offering. The Company was unable to raise the additional capital it targeted given the number of its authorized but unissued common shares combined with the current price level of its common stock. The Company plans to increase its number of authorized common shares, subject to shareholder approval, which will provide the Company with increased flexibility as it proceeds with its capital raising efforts.
At June 30, 2009, the Company’s capital ratios continue to exceed the amounts required for a regulatory designation of ‘well-capitalized’ with Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios of 13.28%, 14.57%, and 10.61%, respectively.
“The current market conditions prevented us from completing our capital raising objectives at this time,” said Migita. “While we remain ‘well-capitalized’ for regulatory purposes, we continue to believe that proactively raising additional capital is appropriate and prudent.”
Second Quarter Highlights
| § | Increased core deposits by $201.7 million, or 6.8%. |
| § | Originated $558.4 million in residential mortgage loans in Hawaii, up 14.7% from the quarter ended June 30, 2008, and up 35.1% year-to-date for the six months ended June 30, 2008. These loans were sold in the secondary market, primarily to Fannie Mae and Freddie Mac. |
| § | Increased allowance for loan and lease losses, as a percentage of total loans and leases, to 4.50% at June 30, 2009 from 3.20% at March 31, 2009. |
| § | Recognized total credit costs of $79.9 million comprised of a provision for loan and lease losses of $74.3 million, an increase to the reserve for unfunded commitments of $2.4 million, foreclosed asset expense of $2.3 million and write-downs of loans held for sale of $0.9 million. |
| § | Lowered loan-to-deposit ratio from 95.4% at March 31, 2009 to 93.0% at June 30, 2009. |
| § | Maintained capital levels required to be “well-capitalized” for regulatory purposes at June 30, 2009, with Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios of 13.28%, 14.57%, and 10.61%, respectively. The Company also reported a tangible common equity ratio of 5.76% at June 30, 2009. |
Earnings Highlights
Net interest income for the second quarter of 2009 was $46.1 million, compared to $51.4 million in the year-ago quarter and $46.5 million in the first quarter of 2009. The net interest margin for the current quarter was 3.77%, compared to 3.97% in the year-ago quarter and 3.82% in the first quarter of 2009. The sequential-quarter decrease was primarily attributable to higher reversals of interest on nonaccrual loans totaling $0.5 million and lower interest income due to lower loan yields. Excluding the effects of interest reversals on nonaccrual loans, the net interest margin was 3.89% for the current quarter, compared to 4.13% in the year-ago quarter and 3.90% in the first quarter of 2009.
The provision for loan and lease losses in the second quarter of 2009 was $74.3 million, compared to $87.8 million in the year-ago quarter and $26.8 million in the first quarter of 2009. The sequential-quarter increase was directly attributable to the challenging economic environment and further deterioration in the Hawaii and California commercial real estate markets.
Other operating income totaled $14.6 million for the second quarter of 2009, compared to $11.9 million in the year-ago quarter and $15.7 million in the first quarter of 2009. The increase from the year-ago quarter was primarily due to: (1) higher non-cash gains related to the ineffective portion of a cash flow hedge totaling $2.6 million, (2) higher gains on sales of loans totaling $2.3 million and (3) higher income from bank-owned life insurance totaling $0.7 million, partially offset by an other-than-temporary impairment (OTTI) charge totaling $2.6 million. The sequential-quarter decrease was primarily due to: (1) the OTTI charge totaling $2.6 million and (2) $3.6 million gain related to the sale of a parcel of land in the first quarter of 2009, partially offset by: (1) the non-cash gain related to the ineffective portion of a cash flow hedge, (2) lower unrealized losses on outstanding interest rate locks totaling $0.9 million, (3) higher gains on sales of loans totaling $0.5 million, (4) higher income from bank-owned life insurance totaling $0.4 million and (5) higher service charges on deposit accounts totaling $0.4 million. The OTTI charge, attributable to three non-agency collateralized mortgage obligations, was a result of the Company’s assessment that a portion of the principal and interest payments due on these securities may not be collected as a result of credit weakness in the underlying collateral.
Other operating expense for the second quarter of 2009 was $45.8 million, compared to $160.3 million in the year-ago quarter and $37.7 million in the first quarter of 2009. The decrease from the year-ago quarter was primarily due to: (1) the aforementioned non-cash goodwill impairment charge recorded in the year-ago quarter totaling $94.3 million, (2) lower credit related charges (which includes write-downs of loans held for sale, foreclosed asset expense, and losses on sales of loans) totaling $24.9 million and (3) lower salaries and employee benefits totaling $1.0 million, partially offset by higher FDIC insurance expense totaling $4.8 million. The sequential-quarter increase was primarily due to: (1) higher FDIC insurance expense totaling $3.2 million, (2) higher credit related charges totaling $2.6 million and (3) higher salaries and employee benefits totaling $1.4 million. The current quarter increase in FDIC insurance expense was primarily due to a special assessment charge imposed on all FDIC-insured institutions totaling $2.5 million, or five basis points of Central Pacific Bank’s total assets minus Tier 1 capital as of June 30, 2009.
The efficiency ratio for the second quarter of 2009 was 65.64% (excluding foreclosed asset expense of $2.3 million and write-downs of loans held for sale of $0.9 million), compared with 58.37% in the year-ago quarter (excluding the non-cash goodwill impairment charge totaling $94.3 million, write-downs of loans held for sale totaling $22.4 million, foreclosed asset expense of $4.0 million, and loss on sale of commercial real estate loans totaling $1.7 million) and 57.85% (excluding foreclosed asset expense of $0.1 million and write-downs of loans held for sale of $0.4 million) in the first quarter of 2009. The variance from the year-ago quarter was primarily attributable to the fluctuations in other operating expenses described above. Excluding the impact of the aforementioned FDIC special assessment charge, the current quarter’s efficiency ratio was 61.75%.
During the current quarter, the Company recognized an income tax benefit of $25.0 million on a pre-tax net loss of $59.5 million. Comparatively, during the first quarter of 2009, the Company recognized an income tax benefit of $4.9 million on a pre-tax net loss of $2.3 million during the first quarter of 2009. The effective tax rate for the first quarter of 2009 was impacted by the settlement of a state tax contingency resulting in an income tax benefit totaling $2.2 million.
Balance Sheet Highlights
Total assets of $5.5 billion at June 30, 2009, decreased $125.1 million, or 2.2%, from a year ago and increased $93.7 million, or 1.7%, from March 31, 2009.
Total loans and leases of $3.7 billion at June 30, 2009, decreased $389.4 million, or 9.5%, from a year ago and decreased $130.4 million, or 3.4%, from March 31, 2009. The current quarter decrease was primarily due to a decrease in the Hawaii construction and commercial real estate portfolio totaling $40.2 million and a decrease in the mainland loan portfolio totaling $61.7 million.
Total deposits of $4.0 billion at June 30, 2009 reflected an increase of $45.9 million, or 1.2%, from a year ago and a decrease of $36.0 million, or 0.9%, from March 31, 2009. Core deposits of $3.2 billion at June 30, 2009 grew by $201.7 million, or 6.8%, from March 31, 2009. Noninterest-bearing demand, interest-bearing demand and savings and money market deposits increased during the current quarter by $11.7 million, $36.2 million, and $138.4 million, respectively, while time deposits decreased by $222.3 million. The decrease in time deposits was directly attributable to a large customer converting $225.7 million of time deposits into repurchase agreements during the quarter. This conversion was done at the Company’s request and the Company considers these repurchase agreements analogous to time deposits.
Total equity was $625.1 million at June 30, 2009, compared to $517.2 million and $667.4 million at June 30, 2008 and March 31, 2009, respectively. The increase from a year-ago was primarily attributable to the issuance of senior preferred stock totaling $135.0 million in connection with the Company’s participation in the U.S. Treasury’s Capital Purchase Program in January 2009.
Asset Quality
Nonperforming assets as of June 30, 2009 totaled $261.2 million, or 4.73%, of total assets, compared to $159.9 million, or 2.94%, of total assets at March 31, 2009. As previously announced, the sequential-quarter increase reflects further deterioration in the Hawaii and California commercial real estate markets and was primarily attributable to the addition of four Hawaii residential construction loans totaling $36.4 million, five Hawaii commercial construction loans totaling $30.3 million and four California commercial construction loans totaling $25.1 million.
While nonperforming assets increased during the quarter, loans delinquent for 90 days or more still accruing interest fell to $4.4 million at June 30, 2009 from $20.3 million at March 31, 2009. In addition, loans delinquent for 30 days or more still accruing interest dropped significantly to $21.1 million at June 30, 2009 from $107.9 million at March 31, 2009.
Net loan charge-offs in the second quarter of 2009 totaled $30.5 million, compared to $73.9 million in the year-ago quarter and $24.3 million in the first quarter of 2009.
The allowance for loan and lease losses as a percentage of total loans and leases was 4.50% at June 30, 2009, compared to 3.20% at March 31, 2009. The increase was attributable to the decrease in the loan portfolio and the $74.3 million provision for loan and lease losses, offset by net loan charge-offs totaling $30.5 million.
Total nonperforming assets, loans delinquent for 30 days or more still accruing interest, net loan charge-offs and the allowance for loan and lease losses as a percentage of total loans and leases were all within the ranges previously announced.
Hawaii Construction and Commercial Real Estate Loans
At June 30, 2009, the Hawaii construction and commercial real estate loan portfolio totaled $1.2 billion. This loan portfolio decreased by $40.2 million from March 31, 2009.
Hawaii construction and commercial real estate loans represented 31.4% of total loans and leases at both June 30, 2009 and March 31, 2009. Of the $1.2 billion balance in the Hawaii construction and commercial real estate portfolio, the allowance for loan and lease losses established for these loans was $58.7 million at June 30, 2009, or 5.07%, of the total outstanding balance.
Nonperforming assets related to this sector were comprised of 16 loans totaling $87.5 million at June 30, 2009, or 1.58%, of total assets. Nonperforming assets related to this sector totaled $23.1 million at March 31, 2009.
Mainland Construction and Commercial Real Estate Loans
At June 30, 2009, mainland construction and commercial real estate loans totaled $953.8 million and mainland construction and commercial real estate foreclosed properties totaled $17.3 million. The portfolio balance consisted of $649.5 million in California and $304.3 million in other Western states. The Company’s total exposure to this sector decreased by $65.3 million from March 31, 2009.
Mainland construction and commercial real estate loans represented 25.9% and 26.6% of total loans and leases at June 30, 2009 and March 31, 2009, respectively. Of the $953.8 million balance in the mainland construction and commercial real estate portfolio, the allowance for loan and lease losses established for these loans was $73.4 million at June 30, 2009, or 7.70%, of the total outstanding balance.
Nonperforming assets related to this sector totaled $142.8 million at June 30, 2009, or 2.58%, of total assets. This balance was comprised of 27 loans totaling $125.5 million and four foreclosed properties totaling $17.3 million. Nonperforming assets related to this sector totaled $114.6 million at March 31, 2009.
Capital Levels
The Company continues to exceed the capital levels required to be “well-capitalized” for regulatory purposes with Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios of 13.28%, 14.57%, and 10.61%, respectively, at June 30, 2009. At March 31, 2009, these capital ratios were 13.93%, 15.20%, and 11.31%, respectively. The tangible common equity ratio was 5.76% at June 30, 2009 as compared to 6.66% at March 31, 2009.
Conference Call and Slide Presentation
The Company’s management will host a conference call on Thursday, July 30, 2009, 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 August 31, 2009 by dialing 1-877-344-7529 (passcode: 432312) 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 100 ATMs throughout Hawaii. For additional information, please visit the Company’s website at http://www.centralpacificbank.com.
