HONOLULU, October 29, 2009 – Central Pacific Financial Corp. (NYSE: CPF), parent company of Central Pacific Bank, today reported an adjusted net loss for the third quarter of 2009 of ($71.7) million, or ($2.54) per diluted share. The net loss has been adjusted to exclude a non-cash goodwill impairment charge of $50.0 million and a non-cash charge related to the establishment of a valuation allowance against the Company’s net deferred tax assets totaling $61.4 million. Including these non-cash charges, the Company recognized a current quarter net loss of ($183.1) million, or ($6.38) per diluted share, compared to net income of $3.0 million, or $0.11 per diluted share, reported in the third quarter of 2008 and a net loss of ($34.4) million, or ($1.27) per diluted share, reported in the second quarter of 2009.
The goodwill impairment charge had no impact on the Company’s regulatory capital, tangible equity, or cash flows and was directly attributable to the current quarter decline in the Company’s market capitalization. At September 30, 2009, the Company’s remaining goodwill totaled $102.7 million, all of which was assigned to its Hawaii Market reporting unit. Additionally, in accordance with generally accepted accounting principles, the Company established a valuation allowance against its net deferred tax assets as a result of its recent net operating losses.
As previously announced, on October 22, 2009, the Company’s shareholders voted in favor of increasing its authorized common shares from 100,000,000 to 185,000,000. The authorization of additional shares provides increased flexibility to the Company’s capital raising efforts. In addition to the potential issuance of additional common shares, the Company is also evaluating all measures to improve its capital position. As part of its capital raising efforts, the Company has also retained the services of a third-party consultant to provide an independent review of its loan portfolio.
“Our quarterly results continue to be adversely impacted by increased credit costs resulting from further deterioration in the Hawaii and California commercial real estate markets and the resultant decline in property values in those sectors,” said Ronald K. Migita, Chairman, President, and Chief Executive Officer. “We continue to expect these challenging economic conditions to persist over the coming quarters and to result in further credit deterioration. As we navigate through this difficult period, we intend to accelerate the reduction of our credit risk by pursuing loan sales, including potential bulk sales. At the same time, we are pursuing all measures to increase our capital levels, while maintaining strong liquidity.”
Third Quarter Highlights
| § | Improved loan-to-deposit ratio from 93.0% at June 30, 2009 to 89.6% at September 30, 2009. |
| § | Originated $334.9 million in residential mortgage loans in Hawaii during the current quarter and $1.5 billion year-to-date, up 24.0% over the year-ago period. Substantially all of these loans were sold in the secondary market, primarily to Fannie Mae and Freddie Mac. |
| § | Recognized total credit costs of $145.1 million comprised of a provision for loan and lease losses of $142.5 million and foreclosed asset expense of $5.5 million, partially offset by a decrease to the reserve for unfunded commitments of $2.9 million. |
| § | Increased allowance for loan and lease losses, as a percentage of total loans and leases, to 5.93% at September 30, 2009 from 4.50% at June 30, 2009. |
| § | Maintained tier 1 risk-based capital, total risk-based capital, and leverage capital ratios as of September 30, 2009 of 10.94%, 12.24%, and 8.11%, respectively. The Company also reported a tangible common equity ratio of 3.57% at September 30, 2009. |
Earnings Highlights
Net interest income for the third quarter of 2009 was $43.5 million, compared to $50.6 million in the year-ago quarter and $46.1 million in the second quarter of 2009. The net interest margin for the current quarter was 3.56%, compared to 4.07% in the year-ago quarter and 3.77% in the second quarter of 2009. The sequential-quarter decrease in net interest income was primarily attributable to higher reversals of interest on nonaccrual loans totaling $0.6 million and lower interest income due to lower loan yields. Excluding the effects of interest reversals on nonaccrual loans, the net interest margin was 3.72% for the current quarter, compared to 4.10% in the year-ago quarter and 3.89% in the second quarter of 2009.
The provision for loan and lease losses in the third quarter of 2009 was $142.5 million, compared to $22.9 million in the year-ago quarter and $74.3 million in the second quarter of 2009. The sequential-quarter increase was primarily attributable to continued deterioration in the Hawaii and California commercial real estate portfolios due to further declines in property values and ongoing pressure on many of the Company’s commercial real estate borrowers.
Other operating income totaled $15.4 million for the third quarter of 2009, compared to $11.7 million in the year-ago quarter and $14.6 million in the second 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 $1.2 million, (2) higher gains on sales of loans totaling $1.3 million and (3) higher income from bank-owned life insurance totaling $0.7 million. The sequential-quarter increase was primarily due to: (1) an other-than-temporary impairment (“OTTI”) charge totaling $2.6 million recognized in the previous quarter and (2) higher unrealized gains on outstanding interest rate locks during the current quarter totaling $1.0 million, partially offset by: (1) lower gains on sales of loans totaling $1.5 million and (2) lower non-cash gains related to the ineffective portion of a cash flow hedge totaling $1.0 million.
Other operating expense for the third quarter of 2009 (which included the aforementioned $50.0 million non-cash goodwill impairment charge) totaled $89.5 million, compared to $37.5 million in the year-ago quarter and $45.8 million in the second quarter of 2009. The increase from the year-ago quarter was primarily due to: (1) the $50.0 million non-cash goodwill impairment charge, (2) higher foreclosed asset expense totaling $5.4 million and (3) higher FDIC insurance expense totaling $1.3 million, partially offset by: (1) lower reserves for unfunded commitments totaling $2.7 million and (2) lower salaries and employee benefits totaling $1.0 million. The sequential-quarter increase was primarily due to: (1) the $50.0 million goodwill impairment charge and (2) higher foreclosed asset expense totaling $3.2 million, partially offset by: (1) lower reserves for unfunded commitments totaling $5.3 million, (2) lower FDIC insurance expense totaling $2.2 million, (3) lower salaries and employee benefits totaling $1.1 million, and (4) lower write-downs on loans held for sale totaling $0.9 million.
The efficiency ratio for the third quarter of 2009 was 55.82% (excluding the non-cash goodwill impairment charge of $50.0 million and foreclosed asset expense of $5.5 million), compared with 57.71% in the year-ago quarter (excluding the loss on sale of commercial real estate loans totaling $0.2 million, foreclosed asset expense of $0.1 million and the write-down of assets totaling $0.1 million) and 65.64% (excluding foreclosed asset expense of $2.3 million and the write-down of assets totaling $0.9 million) in the second quarter of 2009. 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 income tax expense of $10.0 million. This includes the aforementioned non-cash charge related to the establishment of a valuation allowance against the Company’s net deferred tax assets totaling $61.4 million. The effective tax rate for the third quarter of 2009 was also impacted by the non-cash goodwill impairment charge of $50.0 million.
Balance Sheet Highlights
Total assets at September 30, 2009 were $5.2 billion, compared to $5.5 billion at both September 30, 2008 and June 30, 2009.
Total loans and leases at September 30, 2009 were $3.5 billion, compared to $4.1 billion and $3.7 billion at September 30, 2008 and June 30, 2009, respectively. The current quarter decrease was primarily due to a decrease in the mainland loan portfolio totaling $88.0 million and a decrease in the Hawaii construction and commercial real estate portfolio totaling $57.7 million.
Total deposits at September 30, 2009 were $3.9 billion, compared to $3.8 billion and $4.0 billion at September 30, 2008 and June 30, 2009, respectively. Core deposits of $3.1 billion at September 30, 2009 increased by $435.6 million from a year ago and decreased by $36.4 million from June 30, 2009. Noninterest-bearing demand deposits increased during the current quarter by $24.0 million, while interest-bearing demand deposits, savings and money market deposits, and time deposits decreased during the current quarter by $0.8 million, $4.4 million, and $124.5 million, respectively.
Total shareholders’ equity was $436.6 million at September 30, 2009, compared to $510.1 million and $615.0 million at September 30, 2008 and June 30, 2009, respectively.
Asset Quality
Nonperforming assets as of September 30, 2009 totaled $418.5 million, or 8.09%, of total assets, compared to $261.2 million, or 4.73%, of total assets at June 30, 2009. The sequential-quarter increase reflects further deterioration in the Hawaii and Mainland commercial real estate portfolios, which included net additions of $53.8 million in Mainland commercial mortgage loans, $38.9 million in Hawaii commercial construction loans, $38.8 million in Hawaii residential construction loans, and $33.8 million in Mainland commercial construction loans.
Loans delinquent for 90 days or more still accruing interest increased to $27.7 million at September 30, 2009, from $4.4 million at June 30, 2009. In addition, loans delinquent for 30 days or more still accruing interest increased to $53.7 million at September 30, 2009, from $21.1 million at June 30, 2009.
Net loan charge-offs in the third quarter of 2009 totaled $103.7 million, compared to $8.7 million in the year-ago quarter and $30.5 million in the second quarter of 2009.
The allowance for loan and lease losses as a percentage of total loans and leases was 5.93% at September 30, 2009, compared to 4.50% at June 30, 2009. The increase was attributable to the decrease in the loan portfolio and the $142.5 million provision for loan and lease losses, offset by net loan charge-offs totaling $103.7 million.
Hawaii Construction and Commercial Real Estate Loans
At September 30, 2009, the Hawaii construction and commercial real estate loan portfolio totaled $1.1 billion and Hawaii construction and commercial real estate loans held for sale totaled $14.5 million. The Company’s total exposure to this sector decreased by $43.2 million from June 30, 2009.
Hawaii construction and commercial real estate loans represented 31.8% and 31.4% of total loans and leases at September 30, 2009 and June 30, 2009, respectively. Of the $1.1 billion balance in the Hawaii construction and commercial real estate portfolio, the allowance for loan and lease losses established for these loans was $84.1 million at September 30, 2009, or 7.64%, of the total outstanding balance.
Nonperforming assets related to this sector totaled $176.4 million at September 30, 2009, or 3.41%, of total assets. This balance was comprised of 32 loans totaling $161.9 million at September 30, 2009 and two loans held for sale to the same borrower totaling $14.5 million. Nonperforming assets related to this sector totaled $87.5 million at June 30, 2009.
Mainland Construction and Commercial Real Estate Loans
At September 30, 2009, mainland construction and commercial real estate loans totaled $865.8 million, mainland construction and commercial real estate loans held for sale totaled $6.9 million, and mainland construction and commercial real estate foreclosed properties totaled $20.5 million. The portfolio balance consisted of $594.6 million in California and $271.2 million in other Western states. The Company’s total exposure to this sector decreased by $77.8 million from June 30, 2009.
Mainland construction and commercial real estate loans represented 25.0% and 25.9% of total loans and leases at September 30, 2009 and June 30, 2009, respectively. Of the $865.8 million balance in the mainland construction and commercial real estate portfolio, the allowance for loan and lease losses established for these loans was $83.1 million at September 30, 2009, or 9.6%, of the total outstanding balance.
Nonperforming assets related to this sector totaled $213.5 million at September 30, 2009, or 4.13%, of total assets. This balance was comprised of 44 loans totaling $186.1 million, two loans held for sale totaling $6.9 million, and seven foreclosed properties totaling $20.5 million. Nonperforming assets related to this sector totaled $142.8 million at June 30, 2009.
Capital Levels
The Company’s Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios were 10.94%, 12.24%, and 8.11%, respectively, at September 30, 2009. At June 30, 2009, these capital ratios were 13.28%, 14.57%, and 10.61%, respectively. The tangible common equity ratio was 3.57% at September 30, 2009, as compared to 5.76% at June 30, 2009.
Regulatory Matters
In addition to reporting its third quarter results, the Company also announced that it expects Central Pacific Bank to consent to a formal enforcement action with the Federal Deposit Insurance Corporation (the “FDIC”) and the Hawaii Department of Financial Institutions. We anticipate that the enforcement action will require, among other things, directives to strengthen capital, improve asset quality, and maintain liquidity that are consistent with near-term strategies which the Company is currently pursuing. The Company intends to work toward full compliance with the enforcement action and has already initiated a number of measures to this end. The Company will continue to provide a full range of products and services to its customers and all customer deposits remain fully insured to the highest limits set by the FDIC.
Non-GAAP Financial Measures
This press release contains certain references to financial measures that have been adjusted to exclude certain expenses and other specified items. These financial measures differ from comparable measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“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 be 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 November 30, 2009 by dialing 1-877-344-7529 (passcode: 434638) and on the Company's website.
About Central Pacific Financial Corp.
Central Pacific Financial Corp. is a Hawaii-based bank holding company with $5.2 billion in assets. Central Pacific Bank, its primary subsidiary, operates 37 branches and more than 100 ATMs throughout Hawaii. For additional information, please visit the Company’s website at http://www.centralpacificbank.com.
