Business Context and Reporting Period
Company: Central Pacific Financial Corp. (CPF)
Reporting Period: Fiscal year ended December 31, 2010
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 34 branches in Hawaii and a servicing office in California. The company is heavily concentrated in real estate lending, with approximately 84% of its loan portfolio secured by real estate as of year-end 2010.
Regulatory Status: The company is under a Consent Order with the FDIC and DFI (since December 2009) and a Written Agreement (FRB Agreement) with the Federal Reserve (since July 2010). These orders require the bank to improve capital ratios, asset quality, and liquidity. As of December 31, 2010, the bank was not in compliance with the capital ratio requirements of the Consent Order.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net Loss | $(251.0) million | $(313.7) million |
| Net Interest Income | $118.7 million | $174.5 million |
| Provision for Loan Losses | $159.5 million | $348.8 million |
| Total Assets | $3.94 billion | $4.87 billion |
| Total Loans and Leases | $2.17 billion | $3.04 billion |
| Total Deposits | $3.13 billion | $3.57 billion |
| Shareholders' Equity | $66.1 million | $336.0 million |
| Nonperforming Assets | $302.8 million | $499.8 million |
| Allowance for Loan Losses | $192.9 million | $205.3 million |
| Net Interest Margin | 2.91% | 3.62% |
| Loss Per Share (Diluted) | $(171.13) | $(220.56) |
Material Changes vs. Prior Period
- Reduced Losses: The net loss decreased by approximately $62.7 million compared to 2009, primarily due to a significant reduction in the provision for loan and lease losses ($159.5 million in 2010 vs. $348.8 million in 2009).
- Balance Sheet Contraction: Total assets decreased by 19.1% ($931.5 million) and total loans decreased by 28.7% ($872.5 million) as the company executed a recovery plan to shrink its balance sheet and reduce credit risk exposure, particularly in construction and commercial real estate.
- Goodwill Impairment: The company recorded a non-cash goodwill impairment charge of $102.7 million in 2010, compared to $50.0 million in 2009. By year-end 2010, all goodwill had been written off.
- Asset Quality Improvement: Nonperforming assets decreased by 39.4% to $302.8 million, driven by loan sales, charge-offs, and transfers to other real estate. However, the allowance for loan losses as a percentage of total loans increased to 8.89% from 6.75%.
- Equity Erosion: Shareholders' equity plummeted by 80.3% to $66.1 million due to accumulated losses, goodwill impairments, and a full valuation allowance against deferred tax assets.
Guidance, Outlook, and Risks
Recapitalization Plan: The company is pursuing a $325 million private placement to raise new capital. Agreements were reached with lead investors (Carlyle Group and Anchorage Capital Group) and additional investors. The company also agreed to exchange its TARP Preferred Stock for common stock. Completion of these transactions was expected in February 2011 and is critical to meeting regulatory capital requirements.
Going Concern: The filing explicitly states that substantial doubt exists regarding the company's ability to continue as a going concern. This is due to the failure to meet Consent Order capital requirements and the uncertainty surrounding the closing of the private placement. If the capital raise fails, the company may face regulatory receivership or liquidation.
Key Risks:
- Regulatory Compliance: Failure to complete the private placement could result in severe regulatory actions, including the appointment of a receiver.
- Real Estate Exposure: High concentration in Hawaii and California real estate markets remains a significant risk. Continued deterioration in these markets could lead to further loan losses.
- Liquidity: The holding company (CPF) has limited cash resources ($6.0 million) and relies on the successful completion of the recapitalization to meet ongoing obligations.
- Management Turnover: The company was operating without a named CEO or Chief Credit Officer at the time of filing, with the Executive Chairman serving in an acting capacity.
Investor Verification Checklist
- Recapitalization Status: Verify if the $325 million private placement and TARP exchange were successfully closed in February 2011 as planned.
- Regulatory Standing: Confirm current compliance status with the FDIC Consent Order and FRB Agreement, specifically regarding leverage and risk-based capital ratios.
- Asset Quality Trends: Monitor the trend of nonperforming assets and net charge-offs in the construction and commercial real estate portfolios to assess if the deterioration has stabilized.
- Management Appointments: Verify the appointment of a permanent Chief Executive Officer and Chief Credit Officer.
- Going Concern Opinion: Review the most recent audit report to see if the "substantial doubt" regarding the going concern assumption has been resolved.