SECOND CONSECUTIVE PROFITABLE QUARTER
HONOLULU, HI, July 27, 2011 – Central Pacific Financial Corp. (NYSE: CPF), parent company of Central Pacific Bank (the “Bank”), today reported net income for the second quarter of 2011 of $8.2 million, or $0.20 per diluted share, compared to a net loss in the second quarter of 2010 of $16.1 million, or $12.01 per diluted share, and net income in the first quarter of 2011 of $4.6 million, or $4.58 per diluted share. Net income per diluted share in the first quarter of 2011 included the impact of a previously reported one-time accounting adjustment totaling $85.1 million resulting from the exchange of the Company’s preferred stock issued to the U.S. Department of Treasury for common stock as part of its recapitalization in February 2011. Excluding this one-time adjustment, which did not impact the Company’s net income of $4.6 million, the Company’s net income per diluted share for the first quarter of 2011 was $0.18.
"We are pleased to report our second consecutive profitable quarter," said John C. Dean, President and Chief Executive Officer. "Continued improvement in our asset quality led to a significant reduction in total credit costs, lower net charge-offs, and an overall decrease in our nonperforming assets during the quarter. In addition to our ongoing efforts to further reduce our credit risk exposure and improve profitability, we are pursuing strategic growth opportunities in our core Hawaii market."
Significant Highlights and Second Quarter Results
| § | Second consecutive profitable quarter reported with net income of $8.2 million, compared to net income of $4.6 million in the first quarter of 2011. |
| § | Total credit costs were reduced from a charge of $1.9 million in the first quarter of 2011 to a credit of $6.4 million in the second quarter of 2011. Total credit costs during the quarter included a credit to the provision for loan and lease losses of $8.8 million and net income from foreclosed assets of $0.8 million, partially offset by write-downs of loans held for sale of $3.1 million. Total credit costs for the first quarter of 2011 included net foreclosed asset expense of $2.2 million and write-downs of loans held for sale of $1.6 million, partially offset by a credit to the provision for loan and lease losses of $1.6 million and a decrease to the reserve for unfunded commitments of $0.3 million. |
| § | Reduced nonperforming assets by $35.6 million to $249.3 million at June 30, 2011 from $284.9 million at March 31, 2011. |
| § | The allowance for loan and lease losses, as a percentage of total loans and leases, decreased slightly to 8.16% at June 30, 2011, compared to 8.61% at March 31, 2011. In addition, the Company had an allowance for loan and lease losses, as a percentage of nonperforming assets, of 66.95% at June 30, 2011, compared to 62.49% at March 31, 2011. |
| § | Improved its tier 1 risk-based capital, total risk-based capital, and leverage capital ratios as of June 30, 2011 to 22.48%, 23.80%, and 13.13%, respectively, from 21.34%, 22.67%, and 12.64%, respectively, as of March 31, 2011. The Company’s capital ratios continue to exceed the minimum levels required for a “well-capitalized” regulatory designation. |
| § | The regulatory Consent Order with the Federal Deposit Insurance Corporation (the “FDIC”) and the Hawaii Division of Financial Institutions (the “DFI”) that was placed on the Company’s primary subsidiary, Central Pacific Bank, was lifted. In place of the Consent Order, the Bank entered into a Memorandum of Understanding (the “MOU”) with its regulators effective May 5, 2011. |
| § | Completed a previously announced common stock rights offering totaling $20.0 million on May 6, 2011. |
Earnings Highlights
Net interest income for the second quarter of 2011 was $29.0 million, compared to $29.2 million in the year-ago quarter and $28.2 million in the first quarter of 2011. The net interest margin was 3.04%, compared to 2.90% in the year-ago quarter and 3.03% in the first quarter of 2011. The sequential quarter improvement in the Company’s net interest margin reflects its continued efforts to redeploy a portion of its excess liquidity into higher yielding investment securities and further reduce its overall funding costs. Net interest income includes the reversal of interest on certain nonaccrual loans totaling $1.2 million during the current quarter, compared to $0.5 million in the year-ago quarter and $0.3 million in the first quarter of 2011. Excluding the effects of interest reversals on nonaccrual loans, the net interest margin was 3.16% for the current quarter, compared to 2.95% in the year-ago quarter and 3.07% in the first quarter of 2011.
The provision for loan and lease losses for the second quarter of 2011 was a credit of $8.8 million, compared to a credit of $1.6 million in the first quarter of 2011 and a charge of $20.4 million in the second quarter of 2010. The reduction was primarily due to continued improvement in the Company’s credit risk profile as evidenced by further declines in nonperforming assets and net charge-offs during the quarter, which is more fully described below.
Other operating income for the second quarter of 2011 totaled $10.9 million, compared to $12.7 million in the year-ago quarter and $12.5 million in the first quarter of 2011. The decrease from the year-ago quarter 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 $0.9 million. The sequential-quarter decrease was primarily due to: (1) lower gains on sales of residential mortgage loans of $1.2 million and (2) lower unrealized gains on outstanding interest rate locks of $0.4 million.
Other operating expense for the second quarter of 2011 totaled $40.5 million, compared to $37.6 million in both the year-ago quarter and the first quarter of 2011. The increase from the year-ago quarter was primarily attributable to: (1) a higher provision for repurchased residential mortgage loans of $2.1 million and (2) higher net credit-related charges of $1.2 million. The sequential quarter increase was primarily attributable to: (1) a higher provision for repurchased residential mortgage loans of $1.7 million and (2) higher legal and professional services of $1.1 million.
The efficiency ratio for the second quarter of 2011 was 94.3% (excluding foreclosed asset income of $0.8 million and write-downs of loans held for sale totaling $3.1 million), compared to 86.5% in the year-ago quarter (excluding foreclosed asset expense of $0.4 million and write-downs of loans held for sale of $0.2 million) and 81.2% (excluding foreclosed asset expense of $2.2 million and write-downs of loans held for sale totaling $1.6 million) in the first quarter of 2011.
The Company continues to recognize a full valuation allowance against its net deferred tax assets and did not record any income tax benefit or expense during the second quarter of 2011.
Balance Sheet Highlights
Total assets at June 30, 2011 were $4.1 billion, compared to $4.3 billion and $4.0 billion at June 30, 2010 and March 31, 2011, respectively.
Total loans and leases at June 30, 2011 were $2.0 billion, compared to $2.6 billion and $2.1 billion at June 30, 2010 and March 31, 2011, respectively. The current quarter decrease was primarily due to decreases in the construction and development and commercial mortgage loan portfolios of $30.9 million and $22.9 million, respectively, partially offset by increases in the residential mortgage and commercial loan portfolios of $21.2 million and $15.0 million, respectively.
Total deposits at June 30, 2011 were $3.2 billion, which was virtually unchanged from June 30, 2010 and up slightly from $3.1 billion at March 31, 2011. Core deposits, which include demand deposits, savings and money market deposits, and time deposits less than $100,000, totaled $2.7 billion at June 30, 2011. This represents a decrease of $78.0 million from a year ago and a decrease of $34.1 million from March 31, 2011. Significant changes in total deposits during the quarter included an increase in time deposits and non-interest bearing demand deposits of $87.8 million and $9.5 million, respectively, while interest-bearing demand deposits and savings and money market deposits decreased by $7.5 million and $4.9 million, respectively.
Total shareholders’ equity was $423.8 million at June 30, 2011, compared to $156.5 million and $385.0 million at June 30, 2010 and March 31, 2011, respectively, and reflects the successful completion of the previously mentioned $20.0 million Rights Offering in May 2011.
Asset Quality
Nonperforming assets at June 30, 2011 totaled $249.3 million, or 6.03% of total assets, compared to $284.9 million, or 7.10% of total assets at March 31, 2011. The sequential-quarter decrease in the Company’s nonperforming assets was primarily attributable to sales of nonperforming loans held for sale and foreclosed properties totaling $26.7 million and $17.8 million, respectively. The sequential-quarter decrease reflects net reductions in Hawaii and Mainland construction and development assets totaling $37.5 million and $14.2 million, respectively, partially offset by net increases in Hawaii residential mortgage assets totaling $11.2 million and Mainland commercial mortgage assets totaling $6.5 million.
Loans delinquent for 90 days or more still accruing interest totaled $4,000 at June 30, 2011, compared to $0.5 million at March 31, 2011. In addition, loans delinquent for 30 days or more still accruing interest totaled $3.5 million at June 30, 2011, compared to $15.5 million at March 31, 2011.
Net loan charge-offs in the second quarter of 2011 totaled $2.3 million, compared to $30.1 million in the year-ago quarter and $13.3 million in the first quarter of 2011. Net charge-offs included the following significant amounts: Hawaii residential mortgage loans totaling $1.0 million, Mainland construction and development loans totaling $1.0 million, and Mainland commercial mortgage loans totaling $0.8 million, partially offset by net recoveries of Hawaii construction and development loans totaling $0.5 million.
The allowance for loan and lease losses, as a percentage of total loans and leases, was 8.16% at June 30, 2011, compared to 8.61% at March 31, 2011. The allowance for loan and lease losses, as a percentage of nonperforming assets, was 66.95% at June 30, 2011, compared to 62.49% at March 31, 2011.
Construction and Development Loans
At June 30, 2011, the construction and development loan portfolio (excluding owner-occupied loans) totaled $226.5 million, or 11.1%, of the total loan portfolio. Of this amount, $140.1 million were located in Hawaii and $86.4 million were located on the Mainland. This portfolio decreased by $31.7 million from March 31, 2011 and by $363.5 million from June 30, 2010. The sequential quarter decrease was primarily due to loan pay downs and reflects decreases in the Hawaii and Mainland construction and development loan portfolios (excluding owner-occupied loans) of $24.9 million and $6.8 million, respectively.
The allowance for loan and lease losses established for these loans was $41.6 million at June 30, 2011, or 18.4%, of the total outstanding balance, compared to $53.9 million, or 20.9%, of the total outstanding balance at March 31, 2011. Of this amount, $31.1 million related to construction and development loans in Hawaii and $10.5 million related to construction and development loans on the Mainland.
Nonperforming construction and development assets in Hawaii totaled $107.7 million at June 30, 2011, or 2.6%, of total assets. At June 30, 2011, this balance was comprised of portfolio loans totaling $93.0 million and foreclosed properties totaling $14.7 million. Nonperforming assets related to this sector totaled $145.2 million at March 31, 2011.
Nonperforming construction and development assets on the Mainland totaled $57.4 million at June 30, 2011, or 1.4%, of total assets. At June 30, 2011, this balance was comprised of portfolio loans totaling $33.6 million and foreclosed properties totaling $23.8 million. Nonperforming assets related to this sector totaled $71.7 million at March 31, 2011.
Capital Levels
At June 30, 2011, the Company’s Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios improved to 22.48%, 23.80%, and 13.13%, respectively, compared to 21.34%, 22.67%, and 12.64%, respectively, at March 31, 2011. The Company’s capital ratios continue to exceed the minimum levels required by both the MOU and the levels required for a “well-capitalized” regulatory designation.
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 (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 27, 2011 by dialing 1-877-344-7529 (passcode: 10001847) and on the Company's website.
About Central Pacific Financial Corp.
Central Pacific Financial Corp. is a Hawaii-based bank holding company with approximately $4.1 billion in assets. Central Pacific Bank, its primary subsidiary, operates 34 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.
