Business Context and Reporting Period
Company: Central Pacific Financial Corp. (CPF)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: CPF is a Hawaii-based bank holding company serving as the parent to Central Pacific Bank. The company operates primarily in Hawaii and California, offering commercial, construction, residential mortgage, and consumer loans, as well as deposit services. The reporting period reflects continued economic contraction in Hawaii and California, significantly impacting the commercial real estate and construction sectors.
Key Financial Metrics
| Metric (in thousands) | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Interest Income | $46,060 | $51,384 | $92,533 | $102,241 |
| Provision for Loan Losses | $74,324 | $87,800 | $101,074 | $122,072 |
| Net Loss | $(34,442) | $(146,258) | $(31,813) | $(144,600) |
| Loss Per Share (Basic/Diluted) | $(1.27) | $(5.10) | $(1.24) | $(5.04) |
| Total Assets | $5,525,287 | $5,876,047 | $5,525,287 | $5,812,250 |
| Total Loans & Leases (Gross) | $3,688,519 | $4,346,980 | $3,688,519 | $4,297,175 |
| Allowance for Loan Losses | $166,071 | $86,050 | $166,071 | $86,050 |
| Shareholders' Equity | $615,047 | $688,175 | $615,047 | $694,210 |
| Net Interest Margin | 3.77% | 3.97% | 3.80% | 3.98% |
Note: Q2 2008 figures include a non-cash goodwill impairment charge of $94.3 million.
Material Changes vs. Prior Period
- Improved Loss Profile: The net loss for Q2 2009 ($34.4 million) was significantly lower than Q2 2008 ($146.3 million), primarily because the prior year included a $94.3 million goodwill impairment charge. YTD 2009 loss ($31.8 million) also improved compared to YTD 2008 ($144.6 million).
- Asset Quality Deterioration: Nonperforming assets increased to $261.2 million (6.89% of loans) from $143.8 million (3.52%) at year-end 2008. This was driven by deteriorating commercial real estate markets in Hawaii and California.
- Increased Reserves: The Allowance for Loan and Lease Losses rose to $166.1 million (4.50% of total loans) from $119.9 million (2.97%) at year-end 2008, reflecting higher risk ratings and collateral value declines.
- Capital Injection: In January 2009, the company issued $135.0 million in senior preferred stock under the TARP Capital Purchase Program, increasing Tier 1 capital. This resulted in preferred stock dividends and accretion of $2.0 million for Q2 2009.
- Loan Portfolio Reduction: Total loans decreased by approximately $342 million from year-end 2008 due to a bulk sale of residential mortgages ($98.4 million), net charge-offs ($54.9 million YTD), and scheduled pay-offs.
Guidance, Outlook, and Risks
- Economic Outlook: Management anticipates that credit costs will remain at elevated levels due to the uncertain economic environment and continued contraction in Hawaii and California real estate markets. The company expects further deterioration in asset quality.
- Capital Raising: In July 2009, CPF announced a public offering to raise up to $100 million but postponed it on July 29, 2009, due to insufficient authorized unissued shares. The company plans to seek shareholder approval to increase authorized shares to facilitate future capital raising.
- Dividend Suspension: The board suspended cash dividends on common stock effective January 28, 2009, to preserve capital.
- Regulatory Actions: The company is subject to Memoranda of Understanding (MOUs) with the FRB, FDIC, and Hawaii DFI. These require the bank to maintain a leverage capital ratio above 9% and restrict dividend payments without regulatory approval.
- Key Risks:
- Continued decline in commercial and residential real estate values in Hawaii and California.
- Liquidity constraints and potential inability to access capital markets.
- Increased FDIC insurance assessments (a $2.5 million special assessment was recorded in Q2 2009).
- Rating downgrades (Fitch placed ratings on "Rating Watch Negative" in June 2009).
Investor Verification Checklist
- Capital Adequacy: Verify the status of the postponed $100 million equity offering and the timeline for increasing authorized shares.
- Asset Quality Trends: Monitor the trajectory of nonperforming assets (currently 6.89% of loans) and the adequacy of the allowance for loan losses (4.50% coverage) given the specific exposure to Hawaii and California construction loans.
- Liquidity Position: Review the loan-to-deposit ratio (improved to 93.0% from 103.0%) and reliance on non-core funding sources like FHLB advances.
- Regulatory Compliance: Confirm adherence to the MOU requirement of maintaining a 9% leverage capital ratio and the ability to obtain regulatory approval for future dividends or capital distributions.
- OTTI Impact: Assess the impact of the $2.6 million other-than-temporary impairment charge on non-agency collateralized mortgage obligations and potential future write-downs.