Business Context and Reporting Period
Company: Central Pacific Financial Corp. (CPF)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: CPF is a Hawaii-based bank holding company operating primarily through its subsidiary, Central Pacific Bank. The company offers full-service commercial banking with 37 branches in Hawaii. In December 2009, the company announced plans to exit the mainland U.S. market (specifically California) and wind down loan operations there. The company is currently implementing a recovery plan to downsize the bank, focus on core Hawaii markets, and reduce its loan portfolio to improve capital ratios.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Income (Loss) | $(313.7) million | $(138.4) million |
| Net Interest Income | $174.5 million | $202.0 million |
| Provision for Loan and Lease Losses | $348.8 million | $171.7 million |
| Total Assets | $4.87 billion | $5.43 billion |
| Total Loans and Leases | $3.04 billion | $4.03 billion |
| Total Deposits | $3.57 billion | $3.91 billion |
| Shareholders' Equity | $336.0 million | $526.3 million |
| Allowance for Loan and Lease Losses | $205.3 million | $119.9 million |
| Nonperforming Assets | $509.4 million (16.16% of loans) | $144.9 million (3.55% of loans) |
| Net Interest Margin | 3.62% | 4.02% |
| Return on Average Assets | (5.87%) | (2.45%) |
Material Changes vs. Prior Period
- Significant Losses: The company reported a net loss of $313.7 million in 2009, a deterioration from the $138.4 million loss in 2008. This was driven primarily by a doubling of the provision for loan losses to $348.8 million and a $50.0 million goodwill impairment charge.
- Asset Quality Deterioration: Nonperforming assets surged to $509.4 million (16.16% of total loans) from $144.9 million in 2008. Net charge-offs totaled $263.4 million in 2009 compared to $143.8 million in 2008.
- Balance Sheet Contraction: Total assets decreased by 10.4% to $4.87 billion, and the loan portfolio shrank by 24.5% to $3.04 billion as the company executed a strategy to reduce credit risk exposure, particularly in commercial real estate and construction loans.
- Capital Erosion: Shareholders' equity declined by 36.2% to $336.0 million. The company established a $104.6 million valuation allowance against deferred tax assets in 2009 due to cumulative losses.
Guidance, Outlook, and Regulatory Status
Regulatory Actions (Consent Order & MOU): The company is subject to a Consent Order with the FDIC and Hawaii DFI, and a Memorandum of Understanding (MOU) with the Federal Reserve Bank of San Francisco.
- Capital Requirements: The Consent Order mandates a leverage capital ratio of at least 10% and a total risk-based capital ratio of at least 12% by March 31, 2010. As of December 31, 2009, the company was not in compliance and does not expect to meet these specific mandates in the near term.
- Going Concern: The uncertainty regarding the ability to meet regulatory capital requirements raises substantial doubt about the company's ability to continue as a going concern. The auditors have included an emphasis of matter paragraph regarding this uncertainty.
- Aggressively managing existing loan portfolios to minimize losses.
- Shrinking the balance sheet through loan sales and paydowns.
- Exiting the mainland market (California).
- Reducing operating costs.
Key Facts for Investor Verification
- Regulatory Compliance: Verify the company's progress toward the 10% leverage and 12% risk-based capital ratios required by the Consent Order by March 31, 2010, and the potential for further regulatory enforcement actions if these are not met.
- Going Concern Status: Assess the viability of the recovery plan and the likelihood of the company continuing operations without regulatory takeover or receivership.
- Asset Quality Trends: Monitor the trajectory of nonperforming assets and net charge-offs, particularly in the construction and commercial real estate sectors, which comprise a significant portion of the loan portfolio.
- Liquidity Position: Review the company's ability to meet obligations given the suspension of dividends, the deferral of preferred stock payments, and the potential for deposit outflows due to financial instability concerns.
- Goodwill Impairment: Note the remaining $102.7 million in goodwill, which faces a high likelihood of further impairment if the company's financial condition or stock price continues to deteriorate.