Central Pacific Financial Corp. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Central Pacific Financial is a Hawaii bank holding company; its subsidiary, Central Pacific Bank, operates 34 branches and 120 ATMs in Hawaii. Results are unaudited.
Financial performance and condition
| Metric | Q3 2011 / September 30, 2011 | Comparable period / December 31, 2010 |
|---|---|---|
| Net income (loss) | $11.6 million; diluted EPS $0.28 | Q3 2010: loss of $72.5 million; diluted EPS loss of $49.27 |
| Nine-month net income (loss) | $24.5 million; diluted EPS $3.16 | Nine months 2010: loss of $248.9 million; diluted EPS loss of $168.45 |
| Net interest income, GAAP | Q3: $29.8 million; nine months: $87.0 million | Q3 2010: $27.4 million; nine months 2010: $91.6 million |
| Net interest margin, taxable-equivalent | Q3: 3.05%; nine months: 3.04% | Q3 2010: 2.74%; nine months 2010: 2.95% |
| Other operating income / expense | Q3: $11.5 million / $48.8 million | Q3 2010: $11.7 million / $31.7 million |
| Total assets | $4.12 billion | $3.94 billion |
| Loans and leases, gross | $2.06 billion | $2.17 billion |
| Deposits | $3.35 billion | $3.13 billion |
| Short-term borrowings and long-term debt | $259.6 million | $662.3 million |
| Shareholders’ equity | $440.9 million | $66.1 million |
Q3 interest income was $34.3 million and interest expense was $4.5 million. For the first nine months, operating cash flow was $9.6 million, investing cash flow was negative $635.8 million, and financing cash flow was $135.3 million. Cash and cash equivalents ended the period at $299.9 million, down from $790.7 million at year-end 2010.
Bank capital ratios at September 30 were 12.4% leverage, 21.3% Tier 1 risk-based, and 22.6% total risk-based. The bank reported compliance with the Bank MOU’s 8% minimum leverage ratio and capital levels above the regulatory “well-capitalized” thresholds. It had $449.5 million undrawn under its FHLB line and a $66.3 million Federal Reserve discount-window line with no advances outstanding.
Material changes versus prior periods
- Profitability improved: this was the third consecutive profitable quarter. Management attributed the improvement principally to lower credit costs. The provision for loan losses was a credit of $19.1 million in Q3 2011, versus an expense of $79.9 million in Q3 2010; nine-month provision was a credit of $29.5 million versus an expense of $159.1 million.
- Nonperforming assets fell to $223.3 million from $302.8 million at December 31, 2010. The allowance for loan and lease losses declined to $143.4 million, or 6.96% of loans, from $192.9 million, or 8.89%.
- The loan portfolio contracted by $110.0 million. Construction and development loans excluding owner-occupied loans declined to $181.3 million, or 8.8% of the loan portfolio, from $299.9 million, or 13.8%.
- Deposits increased $215.1 million, while total borrowings fell substantially. The bank prepaid $120.5 million of FHLB advances during Q3.
- Capital strengthened following the February $325 million private placement, the exchange of Treasury preferred stock for common shares, and the May $20 million rights offering. Total shareholders’ equity increased by $374.8 million from year-end.
Outlook, commentary, risks and unusual items
- One-time EPS impact: Nine-month diluted EPS of $3.16 includes an $85.1 million accounting benefit related to the TARP preferred-stock exchange. Excluding that item, management reported diluted EPS of $0.68. The exchange did not increase reported consolidated net income or total shareholders’ equity.
- Unusual Q3 expenses: Other operating expense included a $6.2 million loss on early debt extinguishment, a $5.0 million unconditional contribution promise to the Central Pacific Bank Foundation, and a $1.2 million accrual for a tentative overdraft-litigation settlement. The settlement remained subject to court approval.
- Regulation and distributions: The bank’s 2009 Consent Order was replaced in May 2011 by a Bank MOU, but significant supervisory requirements remain. The company is also subject to a Federal Reserve written agreement and a Bank Secrecy Act MOU. Dividends and certain debt or stock transactions are restricted absent regulatory consent; the bank’s accumulated deficit also prevents it from paying dividends to the parent. The company deferred interest on trust-preferred-related debt for nine consecutive quarters, with $7.6 million accrued.
- Management outlook: Management’s recovery plan emphasizes capital strength, reducing credit risk, and focusing on core Hawaii markets. It described Hawaii’s economy as recovering modestly, while noting uncertainty in U.S. and global conditions and continued weakness in real estate markets. The filing provides no specific company earnings or revenue guidance.
- Key risks: The loan portfolio remains exposed to commercial real estate and construction, including Hawaii and California. Further property-value declines, borrower stress, maturities, or economic weakness could increase delinquencies, charge-offs, and reserves. Regulatory noncompliance could lead to additional restrictions or enforcement action. Mortgage-loan repurchase demands increased; the reserve was approximately $7.0 million at quarter-end.
- Tax position: No income tax expense was recorded. A $167.0 million valuation allowance remained against net deferred tax assets because management concluded realization was more likely than not not to occur, citing the cumulative loss position and future taxable-income uncertainty.
Important facts for investors to verify
- Whether asset-quality improvement continues and whether the reduced loan-loss allowance remains adequate amid real-estate and borrower risks.
- Progress toward satisfying the Bank MOU, Federal Reserve written agreement, and BSA MOU, and any related limits on capital distributions or operations.
- The sustainability of earnings after excluding the $85.1 million TARP-exchange accounting benefit and considering unusual Q3 costs.
- Liquidity and funding capacity, including the availability and collateral requirements of FHLB and Federal Reserve facilities.
- Future mortgage repurchase demands and losses, and final court approval and payment of the tentative $1.2 million overdraft settlement.