CPF

Business Context and Reporting Period

Company: Central Pacific Financial Corp.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2003
Business Overview: A Hawaii-based financial holding company operating through two primary segments: Financial Services (retail, corporate, and mortgage lending) and Treasury (investment portfolio and wholesale funding). The Company is actively pursuing a contested merger with CB Bancshares, Inc. (CBBI).

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 4.9% in Q3 and 7.5% for the nine months ended September 30, 2003, compared to the prior year. This growth was driven by strong loan and core deposit expansion.
• Interest Rates: Net interest margin declined from 5.24% to 4.89% in Q3 due to lower interest rates and accelerated amortization of investment securities. However, total net interest income rose slightly due to higher average interest-earning assets.
• Expense Management: Total operating expenses remained relatively flat in Q3 ($14.3M) but increased 1.2% year-to-date ($41.0M), primarily due to $1.3 million in merger-related expenses.
• Asset Growth: Total assets grew 7.7% year-over-year to $2.13 billion. Net loans increased 11.0% to $1.40 billion, and total deposits grew 7.7% to $1.73 billion.
• Credit Quality: The provision for loan losses increased 66.7% in Q3 to $500,000, largely due to an $882,000 charge-off on a commercial mortgage loan. However, net charge-offs for the nine-month period remained low at 0.01% of average loans.

Outlook, Risks, and Management Commentary

• Merger with CBBI: The Company is pursuing a merger with CB Bancshares, Inc. CBBI's board has rejected two offers. The Company has filed regulatory applications which are pending. As of September 30, 2003, $8.8 million in merger-related costs were capitalized; these will be expensed if the merger fails. Legal proceedings between the two entities are ongoing.
• Economic Outlook: Management notes Hawaii's economy is improving with low unemployment and strong construction and housing markets. However, the international tourism market, particularly Japanese visitor arrivals, is declining, which poses a risk to the local economy.
• Capital Adequacy: The Company remains well-capitalized. At September 30, 2003, the Tier 1 risk-based capital ratio was 12.98% (minimum required 4.00%) and the leverage ratio was 10.01% (minimum required 4.00%).
• Dividends: The Board declared a Q3 cash dividend of $0.16 per share, a 61.1% increase over the prior year quarter.
• Forward-Looking Risks: Risks include the failure to integrate with CBBI, regulatory approval delays, deposit attrition, and potential deterioration in credit quality if the Hawaii economy weakens.

Investor Verification Checklist

• Merger Status: Verify the current status of regulatory approvals and shareholder votes regarding the proposed acquisition of CB Bancshares, Inc.
• Merger Costs: Monitor the treatment of the $8.8 million in capitalized merger costs; confirm if they remain capitalized or are expensed based on the transaction outcome.
• Credit Quality: Review the specific details of the $882,000 commercial mortgage charge-off and the $1.6 million impaired loan to assess potential future credit risks.
• Interest Rate Sensitivity: Evaluate the impact of the declining net interest margin (4.88% YTD) on future profitability in a low-rate environment.
• Tourism Exposure: Assess the potential impact of the 13.4% decline in Japanese visitor arrivals on the broader Hawaii economy and the Company's loan portfolio.