CENTRAL PACIFIC FINANCIAL CORP. REPORTS
SECOND QUARTER 2010 RESULTS
HONOLULU, July 30, 2010 – Central Pacific Financial Corp. (NYSE: CPF), parent company of Central Pacific Bank, today reported a net loss for the second quarter of 2010 of $16.1 million, or $0.60 per diluted share, compared to a net loss of $34.4 million, or $1.27 per diluted share in the second quarter of 2009 and a net loss of $160.2 million, or $5.36 per diluted share in the first quarter of 2010. The net loss in the first quarter of 2010 included a non-cash goodwill impairment charge of $102.7 million.
Second Quarter Highlights
| § | Significantly reduced the Company’s net loss to $16.1 million, compared to a net loss of $160.2 million in the first quarter of 2010 and a net loss of $34.4 million in the second quarter of 2009. |
| § | Credit costs decreased to $21.8 million, from $66.5 million in the first quarter of 2010 and from $79.9 million in the second quarter of 2009. Total credit costs include the provision for loan and lease losses, foreclosed asset expense, write-downs of loans held for sale, and changes to the reserve for unfunded commitments. |
| § | Reduced nonperforming assets to $467.2 million at June 30, 2010 from $493.8 million at March 31, 2010. |
| § | Increased the Company’s allowance for loan and lease losses, as a percentage of total loans and leases, to 7.69% at June 30, 2010 from 7.44% at March 31, 2010. |
| § | Recognized net charge-offs of $30.1 million, compared to net charge-offs of $52.5 million in the first quarter of 2010 and $30.5 million in the second quarter of 2009. |
| § | Loans and leases totaled $2.6 billion at June 30, 2010, down $218.8 million from March 31, 2010. |
| § | Continued to improve the Company’s liquidity position with cash and cash equivalents totaling $916.7 million at June 30, 2010, compared to $865.4 million at March 31, 2010. The Company lowered its loan to deposit ratio to 81.8% at June 30, 2010, from 85.3% at March 31, 2010. |
| § | Improved tier 1 risk-based capital, total risk-based capital, and leverage capital ratios as of June 30, 2010 to 9.08%, 10.41%, and 6.07%, respectively, compared to 8.99%, 10.32%, and 5.78%, respectively, as of March 31, 2010. |
| § | Received regulatory approvals for the appointment of John C. Dean as Executive Chairman of the Board of Central Pacific Financial Corp. and Central Pacific Bank from the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB), and Hawaii State Division of Financial Institutions (DFI). |
“We are on track with our recovery plan targets and are encouraged by the progressive improvements in our overall financial results during the past few quarters,” said Mr. Dean. “While economic conditions remain challenging, we are confident that the steps we are taking to improve our asset quality will well position us as we continue implementing our recovery plan. Strengthening our capital base remains a top priority for us and we continue to explore all alternatives to achieve this objective.”
Earnings Highlights
Net interest income was $29.2 million, compared to $46.1 million in the year-ago quarter and $35.1 million in the first quarter of 2010. Net interest income was negatively impacted by the reversal of interest on certain nonaccrual loans totaling $0.5 million during the second quarter of 2010, compared to $1.4 million in the year-ago quarter and $1.6 million in the first quarter of 2010. The net interest margin was 2.90%, compared to 3.77% in the year-ago quarter and 3.20% in the first quarter of 2010. The sequential-quarter and year-over-year margin compression was the result of lower yields on interest earning assets attributable to the continued reduction in the Company’s commercial real estate loan portfolio and its ongoing efforts to maximize balance sheet liquidity by maintaining elevated lev els of cash and cash equivalents. Excluding the effects of interest reversals on nonaccrual loans, the net interest margin was 2.95% for the current quarter, compared to 3.89% in the year-ago quarter and 3.34% in the first quarter of 2010. As previously announced, the Company sold investment securities totaling $439.4 million during the latter part of March 2010. The sale of these securities contributed to the current quarter decrease in net interest income and the net interest margin.
The provision for loan and lease losses was $20.4 million, compared to $74.3 million in the year-ago quarter and $58.8 million in the first quarter of 2010. The decrease was primarily attributable to slower negative credit migration, reduced exposure to the construction and development sectors in Hawaii and California, and minimal changes experienced during the quarter in recognized property values securing many of the Company’s real estate loans.
Other operating income totaled $12.7 million, compared to $14.6 million in the year-ago quarter and $12.8 million in the first quarter of 2010. The decrease from the year-ago quarter was primarily due to: (1) lower gains on sales of residential mortgage loans of $3.2 million, (2) a non-cash gain related to the ineffective portion of a cash flow hedge of $2.3 million recorded in the second quarter of 2009, and (3) lower service charges on deposit accounts of $1.0 million, partially offset by: (1) an other-than-temporary impairment charge of $2.6 million recorded in the second quarter of 2009, and (2) higher unrealized gains on outstanding interest rate locks of $1.7 million. The sequential-quarter decrease was primarily due to: (1) gains on sales of investment securities of $0.8 million record ed in the first quarter of 2010 and (2) lower gains on sales of residential loans of $0.6 million, partially offset by (1) higher income from bank-owned life insurance of $0.7 million primarily due to the receipt of death benefit proceeds and (2) higher unrealized gains on outstanding interest rate locks of $0.7 million.
Other operating expense totaled $37.6 million, compared to $45.8 million in the year-ago quarter and $149.2 million in the first quarter of 2010. The decrease from the year-ago quarter reflects: (1) lower credit related charges (which includes write-downs of loans held for sale, foreclosed asset expense, and changes in the reserve for unfunded commitments) totaling $4.3 million, (2) lower salaries and employee benefits of $3.3 million, and (3) lower FDIC insurance expense of $1.8 million. These decreases were partially offset by higher legal and professional services of $2.6 million. The decrease in FDIC insurance expense was due to a special assessment charge imposed on all FDIC-insured institutions during the second quarter of 2009 totaling $2.5 million. The sequential-quarter de crease was primarily due to: (1) the $102.7 million non-cash goodwill impairment charge recorded in the first quarter of 2010 and (2) lower credit related charges of $6.4 million.
The efficiency ratio was 86.5% (excluding foreclosed asset expense of $0.4 million and the write-down of loans held for sale of $0.2 million), compared with 65.6% in the year-ago quarter (excluding foreclosed asset expense of $2.3 million and the write-down of loans held for sale totaling $0.9 million) and 83.6% (excluding the $102.7 million non-cash goodwill impairment charge, foreclosed asset expense of $5.5 million, and the write-down of loans held for sale of $0.8 million) in the first quarter of 2010. Despite the current quarter decrease in operating expense described above, the efficiency ratio remains at elevated levels due to lower net interest income of $16.9 million and $5.9 million, compared to the year-ago and sequential quarters, respectively.
The Company continues to recognize a full valuation allowance against its net deferred tax assets, which resulted in no income tax benefit being recognized during the second quarter of 2010.
Balance Sheet Highlights
Total assets at June 30, 2010 were $4.3 billion, compared to $5.5 billion and $4.4 billion at June 30, 2009 and March 31, 2010, respectively.
Total loans and leases at June 30, 2010 were $2.6 billion, compared to $3.7 billion and $2.8 billion at June 30, 2009 and March 31, 2010, respectively. The current quarter decrease was primarily due to a decrease in the mainland loan portfolio totaling $53.7 million and a decrease in the Hawaii construction and commercial mortgage loan portfolio totaling $106.6 million. The decreases in these portfolios reflect $11.4 million in loan sales, transfers to loans held for sale totaling $8.7 million, transfers to other real estate owned totaling $5.4 million, as well as paydowns and net charge-offs totaling $134.8 million.
Total deposits at June 30, 2010 were $3.2 billion, compared to $4.0 billion at June 30, 2009 and $3.3 billion at March 31, 2010. Core deposits, which include demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled $2.8 billion at June 30, 2010 and decreased by $388.8 million from a year ago and $82.2 million from March 31, 2010. Noninterest-bearing demand deposits, interest-bearing demand deposits, savings and money market deposits, and time deposits decreased during the second quarter by $5.9 million, $39.7 million, $26.5 million, and $54.3 million, respectively.
Total shareholders’ equity was $156.5 million at June 30, 2010, compared to $615.0 million and $172.1 million at June 30, 2009 and March 31, 2010, respectively.
Asset Quality
Nonperforming assets at June 30, 2010 totaled $467.2 million, or 10.92% of total assets, compared to $493.8 million, or 11.14%, of total assets at March 31, 2010. The sequential-quarter decrease reflects paydowns, net charge-offs and write-downs, and sales of nonperforming assets totaling $23.7 million, $16.9 million, and $14.6 million, respectively. Partially offsetting these reductions were additions of $14.4 million in Hawaii residential mortgage loans, $10.0 million in Hawaii construction loans, $3.2 million in Hawaii commercial mortgage loans, and $1.0 million in Hawaii commercial loans and leases.
Loans delinquent for 90 days or more still accruing interest decreased from $7.0 million at March 31, 2010, to $1.9 million at June 30, 2010. In addition, loans delinquent for 30 days or more still accruing interest decreased from $29.7 million at March 31, 2010 to $12.9 million at June 30, 2010.
Net loan charge-offs in the second quarter of 2010 totaled $30.1 million, compared to $30.5 million in the year-ago quarter and $52.5 million in the first quarter of 2010.
The allowance for loan and lease losses as a percentage of total loans and leases increased to 7.69% at June 30, 2010 from 7.44% at March 31, 2010. The increase was attributable to the $218.8 million decrease in the loan portfolio and the $20.4 million provision for loan and lease losses, offset by net loan charge-offs totaling $30.1 million as described above. Despite the sequential-quarter decreases in nonperforming assets, provision for loan and lease losses, delinquencies, and net loan charge-offs, the Company increased its allowance for loan and lease losses as a percentage of total loans and leases to appropriately reserve for the credit risk associated with its remaining exposure to the commercial real estate markets in Hawaii and California.
Construction and Development Loans
At June 30, 2010, the construction and development loan portfolio (excluding owner-occupied loans) totaled $589.9 million, or 22.5%, of the total loan portfolio. Of this amount, $386.5 million were located in Hawaii and $203.4 million were located on the Mainland. This portfolio decreased by $148.5 million from March 31, 2010 and by $482.7 million from June 30, 2009.
The allowance for loan and lease losses established for these loans was $90.4 million at June 30, 2010, or 15.3%, of the total outstanding balance. Of this amount, $59.0 million related to construction and development loans in Hawaii and $31.4 million related to construction and development loans on the Mainland.
Nonperforming construction and development assets in Hawaii totaled $254.5 million at June 30, 2010, or 5.9%, of total assets. At June 30, 2010, this balance was comprised of portfolio loans totaling $227.9 million, loans held for sale totaling $23.4 million and foreclosed properties totaling $3.2 million. Nonperforming assets related to this sector totaled $278.5 million at March 31, 2010.
Nonperforming construction and development assets on the Mainland totaled $117.3 million at June 30, 2010, or 2.7%, of total assets. At June 30, 2010, this balance was comprised of portfolio loans totaling $87.1 million and foreclosed properties totaling $30.2 million. Nonperforming assets related to this sector totaled $123.9 million at March 31, 2010.
Capital Levels
At June 30, 2010, the Company’s Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios were 9.08%, 10.41%, and 6.07%, respectively, compared to 8.99%, 10.32%, and 5.78%, respectively, at March 31, 2010.
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 inves tors. 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
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 by visiting the investor relations page of the Company's website at http://investor.centralpacificbank.com. Alternatively, investors may participate in the live call by dialing 1-877-317-6789. A playback of the call will be available through August 31, 2010 by dialing 1-877-344-7529 (passcode: 442515) and on the Company's website.
About Central Pacific Financial Corp.
Central Pacific Financial Corp. is a Hawaii-based bank holding company with $4.3 billion in assets. Central Pacific Bank, its primary subsidiary, operates 35 branches, over 120 ATMs, and a residential mortgage subsidiary in the state of Hawaii. For additional information, please visit the Company’s website at http://www.centralpacificbank.com.
