CENTRAL PACIFIC FINANCIAL CORP. REPORTS
THIRD QUARTER 2010 RESULTS
Finalizing Terms of Investments With Lead Investors
HONOLULU, November 2, 2010 – Central Pacific Financial Corp. (NYSE: CPF), parent company of Central Pacific Bank, today reported a net loss for the third quarter of 2010 of $72.5 million, or $2.46 per diluted share, compared to a net loss of $183.1 million, or $6.38 per diluted share in the third quarter of 2009 and a net loss of $16.1 million, or $0.60 per diluted share in the second quarter of 2010. The net loss for the third quarter of 2009 included a non-cash goodwill impairment charge of $50.0 million and a non-cash charge of $61.4 million related to the establishment of a valuation allowance against the Company’s net deferred tax assets.
The net loss for the third quarter of 2010 included a provision for loan and lease losses of $79.9 million, compared to $20.4 million in the second quarter of 2010 and $142.5 million in the third quarter of 2009. The current quarter’s provision reflects an increase to the Company’s allowance for loan and lease losses related to its commercial and residential mortgage portfolios at September 30, 2010.
The Company also announced that it has been working with a private equity investor and believes it is close to agreeing with the investor on the material terms for an investment of approximately $98 million of a contemplated $325 million capital raise and is in the process of seeking to finalize an agreement for such an investment by the end of the week. The Company is also in negotiations with another private equity investor for an investment of a similar amount. There is no assurance that either or both such contemplated investment agreements will be agreed upon or executed, or that if executed, the conditions to such investments will be satisfied. Those conditions are expected to include, among others, investments by additional investors for the balance of the $325 million capital raise, exchange of the TARP preferred sto ck for common stock on terms agreeable to the investors and agreed upon by the U.S. Department of Treasury, regulatory approvals, receipt of NYSE waiver of its listing rule requiring shareholder approval of the capital raise (or, in the event that the NYSE does not provide such waiver, receipt of shareholder approval of the capital raise) and other conditions. The $98 million investment would represent 24.9% of the common equity interests of the Company (assuming the exchange of the TARP preferred stock on terms consistent with such agreement). The company also plans to conduct a $20 million share rights offering after the closing of the capital raise that will allow existing shareholders or their transferees to purchase common shares at the same purchase price as the other investors.
Third Quarter Highlights
| § | Completed the sale of Mainland commercial real estate and construction loans in September, 2010 with an aggregate book value of $124.1 million, of which $41.2 million were nonperforming at the time of the sale. In conjunction with the sale, the Company received net proceeds of $110.8 million, which represented a discount of approximately 10.7% compared to the aggregate book value of the loans sold. |
| § | Reduced nonperforming assets by $94.5 million to $372.7 million at September 30, 2010 from $467.2 million at June 30, 2010. |
| § | Recognized total credit costs of $76.2 million, compared to $21.8 million in the second quarter of 2010 and $145.1 million in the third quarter of 2009. Total credit costs include the provision for loan and lease losses as discussed above, foreclosed asset expense, write-downs of loans held for sale, and changes to the reserve for unfunded commitments. |
| § | Significantly increased the allowance for loan and lease losses at September 30, 2010 to 9.19% as a percentage of total loans and leases from 7.69% at June 30, 2010, and to 58.39% as a percentage of nonperforming assets from 43.23% at June 30, 2010. |
| § | Effected a reduction in total loans and leases from $2.6 billion at June 30, 2010 to $2.4 billion at September 30, 2010. |
| § | Continued to improve the Company’s liquidity position with cash and cash equivalents totaling $924.4 million at September 30, 2010, compared to $916.7 million at June 30, 2010. The Company lowered its loan to deposit ratio to 74.3% at September 30, 2010, from 81.8% at June 30, 2010. |
| § | Had tier 1 risk-based capital, total risk-based capital, and leverage capital ratios as of September 30, 2010 of 7.23%, 8.57%, and 4.39%, respectively, compared to 9.08%, 10.41%, and 6.07%, respectively, as of June 30, 2010. |
| § | Appointed Larry Rodriguez as Executive Vice President and Chief Financial Officer on August 26, 2010. Rodriguez has over 40 years of experience in the financial services industry, served as Managing Partner of Ernst & Young, LLP’s Hawaii office, and has been a consultant to the Company since January 2010. |
“We continue to make progress on our recovery plan milestones and are working to reduce our credit risk exposure and improve our asset quality, notwithstanding the additional allowance for loan and lease losses recorded this quarter,” said John C. Dean, Executive Chairman of the Board. “Our recovery plan, particularly our efforts to raise capital to meet the capital ratios required by our consent order, is our top priority and those efforts remain on track.”
Earnings Highlights
Net interest income was $27.4 million, compared to $43.5 million in the year-ago quarter and $29.2 million in the second quarter of 2010. The net interest margin was 2.74%, compared to 3.56% in the year-ago quarter and 2.90% in the second quarter of 2010. The Company’s net interest margin continues to be negatively impacted by its ongoing efforts to maximize balance sheet liquidity by maintaining elevated levels of cash and cash equivalents and further reductions in its commercial real estate loan portfolio. Net interest income reflects the reversal of interest on certain nonaccrual loans totaling $0.9 million during the current quarter, compared to $2.0 million in the year-ago quarter and $0.5 million in the second quarter of 2010. Excluding the effects of interest reversals on nonaccr ual loans, the net interest margin was 2.82% for the current quarter, compared to 3.72% in the year-ago quarter and 2.95% in the second quarter of 2010.
Other operating income totaled $11.7 million, compared to $15.4 million in the year-ago quarter and $12.7 million in the second quarter of 2010. The decrease from the year-ago quarter was primarily due to: (1) a non-cash gain related to the ineffective portion of a cash flow hedge of $1.3 million recorded in the third quarter of 2009, (2) lower service charges on deposit accounts of $1.3 million, (3) lower gains on sales of residential mortgage loans of $1.0 million, and (4) lower income from bank-owned life insurance of $0.5 million, partially offset by (5) higher loan servicing fees of $0.7 million. The sequential-quarter decrease was primarily due to: (1) lower unrealized gains on outstanding interest rate locks of $1.0 million and (2) lower income from bank-owned life insurance of $0.8 mi llion, partially offset by (3) higher gains on sales of residential mortgage loans of $0.7 million.
Other operating expense totaled $31.7 million, compared to $89.5 million in the year-ago quarter and $37.6 million in the second quarter of 2010. The decrease from the year-ago quarter reflects: (1) the $50.0 million non-cash goodwill impairment charge recorded in the third quarter of 2009, (2) 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 $6.3 million, and (3) lower salaries and employee benefits of $2.2 million. The sequential-quarter decrease was primarily due to lower credit related charges of $4.9 million and lower legal and professional services of $2.1 million.
The efficiency ratio was 81.7% (excluding foreclosed asset income of $1.0 million), compared to 55.8% in the year-ago quarter (excluding the $50.0 million non-cash goodwill impairment charge and foreclosed asset expense of $5.5 million) and 86.5% (excluding foreclosed asset expense of $0.4 million and the write-down of loans held for sale of $0.2 million) in the second quarter of 2010.
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 third quarter of 2010.
Balance Sheet Highlights
Total assets at September 30, 2010 were $4.2 billion, compared to $5.2 billion and $4.3 billion at September 30, 2009 and June 30, 2010, respectively.
Total loans and leases at September 30, 2010 were $2.4 billion, compared to $3.5 billion and $2.6 billion at September 30, 2009 and June 30, 2010, respectively. The current quarter decrease was primarily due to decreases in the Mainland loan portfolio of $198.0 million and the Hawaii construction and commercial mortgage loan portfolios of $67.7 million. The decrease in the Mainland loan portfolio reflects the current quarter sale of Mainland commercial real estate and construction loans with an aggregate book value of $124.1 million as described above.
Total deposits at September 30, 2010 were $3.2 billion, compared to $3.9 billion at September 30, 2009 and $3.2 billion at June 30, 2010. Core deposits, which include demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled $2.8 billion at September 30, 2010. This represents a decrease of $342.0 million from a year ago and an increase of $10.2 million from June 30, 2010. Significant changes included decreases in noninterest-bearing demand deposits and time deposits during the quarter of $15.9 million and $58.5 million, respectively, while interest-bearing demand deposits and savings and money market deposits increased during the third quarter by $40.6 million and $12.6 million, respectively.
Total shareholders’ equity was $80.5 million at September 30, 2010, compared to $436.6 million and $156.5 million at September 30, 2009 and June 30, 2010, respectively.
Asset Quality
Nonperforming assets at September 30, 2010 totaled $372.7 million, or 8.93% of total assets, compared to $467.2 million, or 10.92%, of total assets at June 30, 2010. The sequential-quarter decrease reflects sales of nonperforming assets (including the aforementioned sale of Mainland commercial real estate and construction loans) of $63.4 million, paydowns of $51.9 million, and charge-offs and write-downs totaling $43.0 million. Partially offsetting these reductions were additions of $19.1 million in Hawaii construction loans, $9.2 million in Hawaii residential mortgage loans, $1.6 million in Hawaii commercial loans, $1.4 million in Hawaii commercial mortgage loans, $16.6 million in Mainland construction loans, and $15.9 million in Mainland commercial mortgage loans.
Loans delinquent for 90 days or more still accruing interest decreased from $1.9 million at June 30, 2010 to $1.1 million at September 30, 2010. However, loans delinquent for 30 days or more still accruing interest increased from $12.9 million at June 30, 2010 to $23.3 million at September 30, 2010.
Net loan charge-offs in the third quarter of 2010 totaled $64.3 million, compared to $103.7 million in the year-ago quarter and $30.1 million in the second quarter of 2010. Significant current quarter amounts included net charge-offs of Mainland commercial construction loans totaling $22.2 million, Mainland commercial mortgage loans totaling $15.2 million, Hawaii residential construction loans totaling $13.0 million, and Hawaii commercial construction loans totaling $11.3 million. Of the current quarter net charge-off amount, $22.7 million related to loans included in the sale of Mainland commercial mortgage and construction loans referred to above.
The allowance for loan and lease losses, as a percentage of total loans and leases, increased to 9.19% at September 30, 2010 from 7.69% at June 30, 2010.
Construction and Development Loans
At September 30, 2010, the construction and development loan portfolio (excluding owner-occupied loans) totaled $454.5 million, or 19.2%, of the total loan portfolio. Of this amount, $331.0 million were located in Hawaii and $123.5 million were located on the Mainland. This portfolio decreased by $135.4 million from June 30, 2010 and by $523.6 million from September 30, 2009.
The allowance for loan and lease losses established for these loans was $87.5 million at September 30, 2010, or 19.2%, of the total outstanding balance, compared to $90.4 million, or 15.3%, of the total outstanding balance at June 30, 2010. Of this amount, $65.3 million related to construction and development loans in Hawaii and $22.2 million related to construction and development loans on the Mainland.
Nonperforming construction and development assets in Hawaii totaled $201.2 million at September 30, 2010, or 4.8%, of total assets. At September 30, 2010, this balance was comprised of portfolio loans totaling $183.9 million and foreclosed properties totaling $17.3 million. Nonperforming assets related to this sector totaled $254.5 million at June 30, 2010.
Nonperforming construction and development assets on the Mainland totaled $89.9 million at September 30, 2010, or 2.2%, of total assets. At September 30, 2010, this balance was comprised of portfolio loans totaling $60.0 million and foreclosed properties totaling $29.9 million. Nonperforming assets related to this sector totaled $117.3 million at June 30, 2010.
Capital Levels
At September 30, 2010, the Company’s Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios were 7.23%, 8.57%, and 4.39%, respectively, compared to 9.08%, 10.41%, and 6.07%, respectively, at June 30, 2010. The declines in the Company’s capital ratios are largely the result of the previously mentioned increase in the allowance for loan and lease losses.
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 December 1, 2010 by dialing 1-877-344-7529 (passcode: 445138) and on the Company's website.
About Central Pacific Financial Corp.
Central Pacific Financial Corp. is a Hawaii-based bank holding company with $4.2 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.
