Central Pacific Financial Corp. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request identifies 2011 Q4, this filing is an annual report; quarterly figures are included where disclosed. The company is a Hawaii-based bank holding company operating Central Pacific Bank, with 34 branches and 120 ATMs in Hawaii.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total interest income | $136.5 million | $160.8 million |
| Net interest income | $117.8 million | $118.7 million |
| Net interest margin | 3.09% | 2.91% |
| Provision (credit) for loan losses | ($40.7 million) | $159.5 million |
| Other operating income | $50.2 million | $57.0 million |
| Net income (loss) | $36.6 million | ($251.0 million) |
| Diluted EPS | $3.31 | ($171.13) |
| Total assets at year-end | $4.13 billion | $3.94 billion |
| Total deposits at year-end | $3.44 billion | $3.13 billion |
| Shareholders’ equity at year-end | $456.4 million | $66.1 million |
Fourth-quarter 2011 net income was $12.1 million, diluted EPS was $0.29, net interest income was $30.8 million, and the credit for loan losses was $11.2 million. The year’s $36.6 million profit followed three consecutive loss years. The $3.31 diluted EPS includes a substantial noncash accounting benefit related to the TARP preferred-stock exchange: $85.1 million was added to income available to common shareholders, but not to net income or total equity.
- Credit quality: Nonperforming assets fell $107.2 million to $195.6 million; nonperforming assets were 8.99% of loans, loans held for sale and other real estate, versus 13.18% a year earlier. Net charge-offs were $30.1 million, down from $172.0 million. The allowance declined to $122.1 million, or 5.91% of loans, from $192.9 million, or 8.89%.
- Portfolio: Loans and leases declined 4.8% to $2.06 billion. About 85% of loans were real-estate-related. Construction and development loans excluding owner-occupied loans fell to $148.4 million from $299.9 million.
- Cash flow and liquidity: Operating cash flow was $23.1 million; investing cash flow was negative $687.2 million, largely reflecting $775.7 million in net investment-security purchases; financing cash flow was positive $130.5 million. Cash and cash equivalents ended the year at $257.1 million, compared with $790.7 million. The loan-to-deposit ratio fell to 60.0% from 69.2%. The bank reported a $753.3 million FHLB credit line, with approximately $703.3 million undrawn, and a $31.0 million Federal Reserve line with no balance outstanding.
- Debt and capital: Year-end long-term debt was $158.3 million, including $50.0 million of FHLB advances and $108.2 million of subordinated debentures. FHLB advances and other borrowings were sharply reduced. Parent-company capital ratios were 22.9% Tier 1 risk-based, 24.2% total risk-based and 13.8% leverage; the bank’s corresponding ratios were 21.6%, 22.9% and 13.0%. Both entities exceeded applicable well-capitalized ratio levels, but remain subject to regulatory agreements.
Material changes and notable items
- The company raised $325 million in a private placement, completed a $20 million rights offering and exchanged Treasury-held TARP preferred stock and accrued dividends for common shares. A 1-for-20 reverse stock split was completed in February 2011.
- Profitability improved mainly because credit costs shifted from a $168.9 million charge in 2010 to a $29.9 million credit in 2011, and the 2010 period included a $102.7 million noncash goodwill impairment. Net interest income was nearly flat; loans and interest income declined as the company reduced risk exposure.
- Net interest margin improved to 3.09% from 2.91%, primarily due to lower funding costs and FHLB debt prepayments. Those prepayments generated a $6.2 million early-extinguishment charge in 2011. The efficiency ratio worsened to 92.06% from 82.88%.
- The Consent Order was replaced by a Bank MOU in May 2011, and the separate Bank Secrecy Act MOU was terminated in November. The company remains subject to a Federal Reserve/DFI Written Agreement and the Bank MOU.
- The company recorded no income tax expense or benefit for 2011 and maintained a $162.3 million valuation allowance against deferred tax assets. The $1.2 million overdraft-fee class-action settlement was accrued in 2011 and paid in February 2012.
Outlook, risks and contingencies
Management plans to continue its recovery strategy: improve asset quality and core profitability, reduce risk, increase cross-selling and improve operating efficiency. It did not expect significant improvement in Hawaii economic conditions in 2012, while expressing cautious expectations for some improvement in the Hawaii real-estate market. These are expectations, not earnings guidance.
- Material risks include continued weakness in Hawaii and California real estate, the high concentration of real-estate and construction lending, further borrower distress, collateral-value declines and possible additional loan losses or allowance increases.
- Regulatory agreements restrict dividends, certain debt and capital actions, and bank credit activity; the bank must maintain at least an 8% leverage ratio under the Bank MOU. The company cannot predict when these agreements will end. Cash dividends were not expected in the foreseeable future; the bank also had a $441.5 million accumulated deficit.
- The company had deferred interest payments on $105 million of trust preferred securities; accrued related interest was $8.5 million at year-end. Liquidity depends substantially on local deposits and continued access to external funding.
- Other exposures include mortgage-loan repurchase claims (reserve of $6.8 million), $451.4 million of commitments to extend credit, executive and finance-team turnover, and the risk that tax benefits will be limited by an ownership change. Carlyle and Anchorage each held approximately 24% of common shares.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of year-end. Management also concluded disclosure controls were effective.
Key facts for investors to verify
- Whether lower nonperforming assets and credit provisions reflect sustained improvement, and whether the $122.1 million allowance is adequate against remaining problem loans.
- How much of reported earnings and EPS is repeatable, separating core banking results from credit-cost reversals, capital transactions and other unusual items.
- Compliance progress and any changes to the Bank MOU and Written Agreement, including the practical effect of restrictions on dividends, debt and operations.
- Deposit stability, available borrowing capacity and the company’s ability to fund operations as cash balances, loan volumes and market conditions change.
- Potential losses from real-estate concentrations, mortgage repurchase demands, off-balance-sheet commitments and deferred trust-preferred interest.