CENTRAL PACIFIC FINANCIAL CORP. REPORTS
FOURTH QUARTER 2010 RESULTS
Significantly Reduces Quarterly Net Loss
HONOLULU, January 28, 2011 – Central Pacific Financial Corp. (NYSE: CPF), parent company of Central Pacific Bank, today reported a net loss for the fourth quarter of 2010 of $2.1 million, or $0.14 per diluted share, compared to a net loss of $98.8 million, or $3.33 per diluted share in the fourth quarter of 2009 and a net loss of $72.5 million, or $2.46 per diluted share in the third quarter of 2010.
During the past three months, the Company completed a number of key milestones as it pursued its previously announced plans to raise $325.0 million of new capital through a private placement offering. The Company entered into definitive agreements in November 2010 (which were amended in December 2010) with affiliates of each of The Carlyle Group and Anchorage Capital Group, L.L.C (collectively, the “lead investors”) pursuant to which each lead investor agreed to invest approximately $98.6 million in common stock of the Company at a purchase price of $0.50 per share. In December 2010, the Company entered into separate subscription agreements with additional investors, including certain directors and officers of the Company and their affiliates, pursuant to which the additional investors have agreed to invest an aggregate of approximately $127.8 million in common stock of the Company, which together with the investments of the lead investors, would aggregate to the $325.0 million of new capital that the Company is seeking, at a purchase price of $0.50 per share. Also in December 2010, the United States Department of the Treasury (the “Treasury”) agreed, subject to execution of the definitive exchange agreement, to exchange its CPF preferred stock and accrued and unpaid dividends thereon into shares of CPF common stock having an aggregate value of approximately $55.8 million, with the number of shares determined based on the same per share purchase price as paid by the investors in the private placement. The Company and the Treasury also agreed to amend the warrant to purchase shares of common stock issued to the Treasury in connection with the Treasury’s investment in the preferred stock to, among other things, reduce the exercise price to the same per share purchase price as paid by the investors in the private placement. The closings of the capital raise and the exchange are conditional upon one another, along with the effectiveness of the planned 1-for-20 reverse stock split of the Company’s common stock, the receipt of requisite regulatory approvals and other customary closing conditions. Upon completion of the capital raise, the Company’s regulatory capital ratios will exceed the minimum levels required by the Consent Order with the Federal Deposit Insurance Corporation and Hawaii Division of Financial Institutions. The share and per share amounts included in this release are presented without giving effect to the reverse stock split.
As previously announced and as part of the recapitalization, the Company intends to commence a rights offering following the closing of the private placement and exchange whereby shareholders of record as of the close of business on the trading day immediately preceding the closing date will receive transferable rights to purchase newly issued shares of the Company’s common stock at a purchase price of $0.50 per share. The rights will provide for the purchase of up to $20.0 million of the Company’s common stock by holders of such rights.
Significant Highlights and Fourth Quarter Results
| § | Achieved a number of key milestones as it moved toward the completion of its previously announced recapitalization plans, which is expected to close within the next month. |
| § | Reduced the Company’s quarterly net loss to $2.1 million, or $0.14 per diluted share, compared to a net loss of $72.5 million, or $2.46 per diluted share in the third quarter of 2010. |
| § | Recognized total credit costs of $4.6 million, compared to $76.2 million in the third quarter of 2010. Total credit costs during the fourth quarter of 2010 included a provision for loan and lease losses of $0.4 million, foreclosed asset expense of $4.2 million, and write-downs of loans held for sale of $0.5 million, partially offset by a decrease to the reserve for unfunded commitments of $0.5 million. Total credit costs for the third quarter of 2010 included a provision for loan and lease losses of $79.9 million, partially offset by a gain on the sale of foreclosed properties of $1.0 million and a decrease to the reserve for unfunded commitments of $2.7 million. |
| § | Reduced nonperforming assets by $69.9 million to $302.8 million at December 31, 2010 from $372.7 million at September 30, 2010. |
| § | Had an allowance for loan and lease losses, as a percentage of total loans and leases, of 8.89% at December 31, 2010, compared to 9.19% at September 30, 2010. In addition, the Company increased its allowance for loan and lease losses, as a percentage of nonperforming assets, to 63.69% at December 31, 2010 from 58.39% at September 30, 2010. |
| § | Increased the Company’s reserve for repurchased residential mortgage loans to $5.0 million at December 31, 2010 from $1.1 million at September 30, 2010. |
| § | In December 2010, paid down long-term borrowings at the Federal Home Loan Bank of Seattle totaling $106.0 million with a weighted average interest rate of 4.78%. Prepaying these long-term borrowings resulted in the recognition of a one-time loss on the early extinguishment of debt totaling $5.7 million. |
| § | Reduced total loans and leases from $2.4 billion at September 30, 2010 to $2.2 billion at December 31, 2010. |
| § | Maintained cash and cash equivalents totaling $790.7 million at December 31, 2010, compared to $924.4 million at September 30, 2010. The Company also lowered its loan-to-deposit ratio to 69.2% at December 31, 2010, from 74.3% at September 30, 2010. |
| § | In November 2010, recognized a gain of $7.7 million upon completion of the previously announced sale of Kaimuki Plaza. |
| § | Improved the Company’s tier 1 risk-based capital, total risk-based capital, and leverage capital ratios as of December 31, 2010 to 7.64%, 8.98%, and 4.42%, respectively, from 7.23%, 8.57%, and 4.39%, respectively, as of September 30, 2010. |
| § | Continued to support home ownership in Hawaii by originating residential mortgage loans totaling $364.7 million during the quarter and $1.2 billion during the year. |
| § | Recognized by the U.S. Small Business Administration as the SBA Lender of the Year in Category II for 2010. |
“We are encouraged by our improved financial results, including significant reductions in credit costs, nonperforming assets, and our overall credit risk exposure,” said John C. Dean, Executive Chairman of the Board. “We anticipate closing our recapitalization transaction within the next month assuming all closing conditions are met, including the receipt of the requisite regulatory approvals.”
Earnings Highlights
Net interest income was $27.0 million, compared to $38.5 million in the year-ago quarter and $27.4 million in the third quarter of 2010. The net interest margin was 2.76%, compared to 3.30% in the year-ago quarter and 2.74% in the third quarter of 2010. The Company’s net interest margin continues to be negatively impacted by its ongoing efforts to maintain elevated levels of cash and cash equivalents to meet any liquidity needs. Net interest income reflects the reversal of interest on certain nonaccrual loans totaling $0.5 million during the current quarter, compared to $1.9 million in the year-ago quarter and $0.9 million in the third quarter of 2010. Excluding the effects of interest reversals on nonaccrual l oans, the net interest margin was 2.81% for the current quarter, compared to 3.46% in the year-ago quarter and 2.82% in the third quarter of 2010. In December 2010, the Company prepaid certain long-term borrowings outstanding with the Federal Home Loan Bank of Seattle totaling $106.0 million with a weighted average interest rate of 4.78%. The prepayment of these borrowings resulted in the recognition of a one-time loss on the early extinguishment of debt totaling $5.7 million.
The provision for loan and lease losses was $0.4 million, compared to $79.9 million in the third quarter of 2010 and $105.2 million in the fourth quarter of 2009. The decrease was primarily due to an overall improvement in the Company’s credit risk profile as evidenced by declines in nonperforming assets and net charge-offs during the quarter, which is described more fully below, and reduced exposure to certain troubled real estate markets both in Hawaii and on the Mainland.
Other operating income totaled $19.9 million, compared to $11.7 million in both the year-ago quarter and the third quarter of 2010. The increase from the year-ago quarter was primarily due to: (1) the recognition of a $7.7 million gain on the sale of Kaimuki Plaza, (2) higher gains on sales of residential mortgage loans of $1.2 million, and (3) higher unrealized gains on outstanding interest rate locks of $1.2 million, partially offset by lower service charges on deposit accounts of $1.1 million. The sequential-quarter increase was primarily due to: (1) the aforementioned $7.7 million gain on the sale of Kaimuki Plaza and (2) higher gains on sales of residential mortgage loans of $1.1 million.
Other operating expense totaled $48.6 million, compared to $43.9 million in the year-ago quarter and $31.7 million in the third quarter of 2010. The increase from the year-ago quarter reflects: (1) the recognition of a one-time loss totaling $5.7 million attributable to the early extinguishment of certain long-term borrowings at the Federal Home Loan Bank of Seattle totaling $106.0 million and (2) an increase to the reserve for repurchased residential mortgage loans of $5.4 million, partially offset by (1) lower salaries and employee benefits of $2.9 million and (2) lower legal and professional services of $2.0 million. The sequential-quarter increase was primarily due to (1) higher credit related charges of $7.9 million, (2) t he $5.7 million loss on the early extinguishment of debt, and (3) a higher increase to the reserve for repurchased residential mortgage loans of $4.6 million, partially offset by lower salaries and employee benefits of $1.4 million.
The efficiency ratio was 79.8% (excluding the loss on early extinguishment of debt of $5.7 million, foreclosed asset expense of $4.1 million and write-downs of loans held for sale totaling $0.5 million), compared to 77.0% in the year-ago quarter (excluding foreclosed asset expense of $0.7 million and write-downs of loans held for sale of $3.6 million) and 81.7% (excluding foreclosed asset income of $1.0 million) in the third 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 fourth quarter of 2010.
Balance Sheet Highlights
Total assets at December 31, 2010 were $3.9 billion, compared to $4.9 billion and $4.2 billion at December 31, 2009 and September 30, 2010, respectively.
Total loans and leases at December 31, 2010 were $2.2 billion, compared to $3.0 billion and $2.4 billion at December 31, 2009 and September 30, 2010, respectively. The current quarter decrease was primarily due to decreases in the Mainland loan portfolio of $24.1 million and the Hawaii construction and commercial mortgage loan portfolios of $161.6 million.
Total deposits at December 31, 2010 were $3.1 billion, compared to $3.6 billion at December 31, 2009 and $3.2 billion at September 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 December 31, 2010. This represents a decrease of $155.0 million from a year ago and a decrease of $5.5 million from September 30, 2010. Significant changes included decreases in time deposits during the quarter of $97.4 million, while non-interest bearing demand deposits, interest-bearing demand deposits and savings and money market deposits increased during the fourth quarter by $21.7 million, $7.7 million and $13.6 million, respectively.
Total shareholders’ equity was $66.1 million at December 31, 2010, compared to $336.0 million and $80.5 million at December 31, 2009 and September 30, 2010, respectively.
Asset Quality
Nonperforming assets at December 31, 2010 totaled $302.8 million, or 7.69% of total assets, compared to $372.7 million, or 8.93% of total assets at September 30, 2010. The sequential-quarter decrease reflects net decreases in the Hawaii construction and development, Hawaii commercial mortgage, Mainland construction and development and Mainland commercial mortgage, portfolios totaling $42.1 million, $1.8 million, $17.8 million, and $15.3 million, respectively, partially offset by a net increase in the Hawaii residential mortgage portfolio totaling $7.7 million.
Loans delinquent for 90 days or more still accruing interest increased from $1.1 million at September 30, 2010 to $8.5 million at December 31, 2010. In addition, loans delinquent for 30 days or more still accruing interest increased from $23.3 million at September 30, 2010 to $38.2 million at December 31, 2010.
Net loan charge-offs in the fourth quarter of 2010 totaled $25.2 million, compared to $104.9 million in the year-ago quarter and $64.3 million in the third quarter of 2010. Net charge-offs included the following significant amounts: Hawaii construction and development loans totaling $20.8 million, Hawaii residential mortgage loans totaling $1.0 million, and Mainland construction and development loans totaling $2.0 million.
The allowance for loan and lease losses, as a percentage of total loans and leases, was 8.89% at December 31, 2010, compared to 9.19% at September 30, 2010. The allowance for loan and lease losses, as a percentage of nonperforming assets, was 63.69% at December 31, 2010, compared to 58.39% at September 30, 2010.
Construction and Development Loans
At December 31, 2010, the construction and development loan portfolio (excluding owner-occupied loans) totaled $299.9 million, or 13.8%, of the total loan portfolio. Of this amount, $201.6 million were located in Hawaii and $98.3 million were located on the Mainland. This portfolio decreased by $154.6 million from September 30, 2010 and by $500.9 million from December 31, 2009. The sequential quarter decrease was attributable to decreases in the Mainland and Hawaii construction and development loan portfolios (excluding owner-occupied loans) of $25.3 million and $129.3 million, respectively.
The allowance for loan and lease losses established for these loans was $73.1 million at December 31, 2010, or 24.4%, of the total outstanding balance, compared to $87.5 million, or 19.2%, of the total outstanding balance at September 30, 2010. Of this amount, $51.6 million related to construction and development loans in Hawaii and $21.5 million related to construction and development loans on the Mainland.
Nonperforming construction and development assets in Hawaii totaled $159.3 million at December 31, 2010, or 4.0%, of total assets. At December 31, 2010, this balance was comprised of portfolio loans totaling $107.5 million, loans held for sale totaling $30.9 million, and foreclosed properties totaling $20.9 million. Nonperforming assets related to this sector totaled $201.2 million at September 30, 2010.
Nonperforming construction and development assets on the Mainland totaled $72.1 million at December 31, 2010, or 1.8%, of total assets. At December 31, 2010, this balance was comprised of portfolio loans totaling $35.6 million, loans held for sale totaling $4.4 million, and foreclosed properties totaling $32.1 million. Nonperforming assets related to this sector totaled $89.9 million at September 30, 2010.
Capital Levels
At December 31, 2010, the Company’s Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios improved to 7.64%, 8.98%, and 4.42%, respectively, compared to 7.23%, 8.57%, and 4.39%, respectively, at September 30, 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 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
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 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 February 28, 2011 by dialing 1-877-344-7529 (passcode: 447614) and on the Company's website.
About Central Pacific Financial Corp.
Central Pacific Financial Corp. is a Hawaii-based bank holding company with $3.9 billion in assets. Central Pacific Bank, its primary subsidiary, operates 35 branches, 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.
