Business Context and Reporting Period
Company: Central Pacific Financial Corp. (CPF)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2010
Business Overview: CPF is a Hawaii-based bank holding company operating primarily through its subsidiary, Central Pacific Bank. The company is currently under a Consent Order with the FDIC and Hawaii Division of Financial Institutions (DFI) requiring improvements in capital, asset quality, and liquidity. Additionally, CPF is subject to a Written Agreement with the Federal Reserve Bank of San Francisco (FRBSF) and DFI restricting dividends and debt incurrence. The company is executing a recovery plan to downsize its balance sheet, reduce credit risk exposure (particularly in commercial real estate), and raise substantial capital to avoid regulatory receivership.
Key Financial Metrics
| Metric | Q3 2010 (Three Months) | YTD 2010 (Nine Months) | YTD 2009 (Nine Months) |
|---|---|---|---|
| Net Interest Income | $27.4 million | $92.1 million | $137.7 million |
| Provision for Loan Losses | $79.9 million | $159.1 million | $243.6 million |
| Net Loss | $(72.5) million | $(248.9) million | $(215.0) million |
| Loss Per Share (Basic/Diluted) | $(2.46) | $(8.42) | $(7.67) |
| Total Assets | $4.17 billion | $4.17 billion | $4.87 billion (Dec 31, 2009) |
| Total Loans & Leases | $2.37 billion | $2.37 billion | $3.04 billion (Dec 31, 2009) |
| Total Deposits | $3.19 billion | $3.19 billion | $3.57 billion (Dec 31, 2009) |
| Shareholders' Equity | $80.5 million | $80.5 million | $336.0 million (Dec 31, 2009) |
| Cash & Cash Equivalents | $924.4 million | $924.4 million | $488.4 million (Dec 31, 2009) |
| Nonperforming Assets | $372.7 million | $372.7 million | $499.8 million (Dec 31, 2009) |
| Allowance for Loan Losses | $217.6 million | $217.6 million | $205.3 million (Dec 31, 2009) |
Material Changes vs. Prior Period
- Net Loss Increase: The YTD 2010 net loss of $248.9 million increased compared to $215.0 million in YTD 2009. This was primarily driven by a non-cash goodwill impairment charge of $102.7 million recorded in Q1 2010, which was not present in the same magnitude in the prior year period.
- Balance Sheet Contraction: Total assets decreased by approximately $700 million from year-end 2009 as part of the recovery plan to shrink the balance sheet. Loans and leases decreased by $674.7 million (22.2%), driven by sales of Mainland commercial real estate loans and paydowns.
- Equity Erosion: Shareholders' equity plummeted from $336.0 million at year-end 2009 to $80.5 million at September 30, 2010, due to cumulative operating losses and the goodwill impairment charge.
- Liquidity Improvement: Cash and cash equivalents more than doubled to $924.4 million from $488.4 million at year-end 2009, achieved by selling $462.6 million in investment securities.
- Asset Quality: Nonperforming assets decreased by $127.1 million (from $499.8 million to $372.7 million) due to sales, paydowns, and charge-offs, though the allowance for loan losses increased to 9.19% of total loans.
Guidance, Outlook, Risks, and Unusual Items
- Going Concern Uncertainty: Management states that the inability to meet capital ratio requirements under the Consent Order raises substantial doubt about the company's ability to continue as a going concern. Without timely capital infusion, the company faces potential regulatory takeover or receivership.
- Capital Raise: On November 4, 2010, CPF entered into definitive agreements with The Carlyle Group and Anchorage Capital Group to invest approximately $98 million each. This is part of a planned $325 million aggregate capital raise. Closing is conditioned on raising the remaining $130 million, exchanging TARP preferred stock, and obtaining regulatory approvals. There is no assurance the raise will be completed.
- Regulatory Restrictions: The company is prohibited from paying dividends, incurring new debt, or redeeming stock without regulatory consent. The bank is currently in default under its FHLB credit arrangement due to the Consent Order, though no notice of default has been received.
- Unusual Items:
- Goodwill Impairment: A $102.7 million non-cash charge was recorded in Q1 2010, eliminating all goodwill from the balance sheet.
- Valuation Allowance: A full valuation allowance of $167.5 million was established against net deferred tax assets, resulting in a 0% effective tax rate for the period.
- Outlook: Management expects challenging economic conditions to persist. The recovery plan focuses on reducing credit risk exposure, lowering operating costs, and raising capital. The company has limited cash resources at the holding company level ($4.0 million) and may require additional funds in the first half of 2011.
Investor Verification Checklist
- Capital Raise Status: Verify the progress and closing conditions of the $325 million capital raise with Carlyle and Anchorage Capital, including the exchange of TARP preferred stock.
- Regulatory Compliance: Monitor compliance with the Consent Order capital ratios (10% leverage, 12% risk-based) and the Written Agreement with the FRBSF/DFI.
- Asset Quality Trends: Track the ratio of nonperforming assets to total loans and the adequacy of the allowance for loan losses, particularly in the commercial real estate and construction portfolios.
- Liquidity Position: Assess the holding company's ability to meet obligations beyond the end of 2010 given the limited cash on hand and restrictions on borrowing.
- Dividend Restrictions: Confirm the continued suspension of dividends on common and preferred stock due to regulatory constraints and accumulated deficits.