CPF

Business Context and Reporting Period

Company: Central Pacific Financial Corp. (CPF)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: CPF is a Hawaii-based bank holding company serving as the parent to Central Pacific Bank. The bank operates 39 branches in Hawaii and offices in California, offering commercial, construction, residential mortgage, and consumer lending services. The reporting period coincides with a severe economic recession and significant disruptions in the financial and real estate markets.

Key Financial Metrics

Material Changes vs. Prior Period

• Capital Injection: In January 2009, CPF issued $135.0 million in senior preferred stock and warrants under the U.S. Treasury's Troubled Asset Relief Program (TARP) Capital Purchase Program. This significantly increased shareholders' equity and Tier 1 capital.
• Dividend Suspension: The Board of Directors suspended cash dividends on common stock effective January 28, 2009, to preserve capital.
• Asset Quality Deterioration: Nonperforming assets increased to $159.9 million (4.10% of loans), driven by additions in commercial and residential construction loans in Hawaii and California. However, net charge-offs decreased significantly compared to the prior year.
• Interest Rate Environment: Net interest income declined due to a falling interest rate environment. Average yields on earning assets dropped 88 basis points, outpacing the 84 basis point decline in funding costs, compressing the net interest margin.
• One-Time Items: Net income was boosted by a $3.6 million gain on the sale of land, a $2.2 million increase in gains on loan sales, and a $2.2 million tax benefit from a state tax contingency settlement.

Guidance, Outlook, and Risks

Management Commentary: Management notes that the global and U.S. economies are in a protracted slowdown. While Hawaii's economy is expected to contract at a slower rate than the national average, the California economy faces negative growth. The company expects continued deterioration in real estate markets in both states, which will impact loan demand and asset quality.

Regulatory Action: CPF and its subsidiary entered into a Memorandum of Understanding (MOU) with the Federal Reserve Board and the Hawaii Department of Financial Institutions. This requires regulatory approval for the company to increase, renew, or guarantee indebtedness.

Risks and Contingencies:

• Real Estate Exposure: Significant exposure to Hawaii and California commercial and residential construction markets, which are experiencing price declines and high unemployment.
• Liquidity Constraints: Access to capital markets remains difficult due to market disruptions. The company relies on core deposits and secured borrowing lines (FHLB and Federal Reserve Discount Window).
• Capital Requirements: While currently "well-capitalized," the company may need to raise additional capital or reduce assets if economic conditions worsen. There is no assurance that additional capital can be raised on favorable terms.

Investor Verification Checklist

• TARP Terms: Verify the specific dividend obligations (5% for 5 years, then 9%) and warrant exercise terms ($12.77/share) associated with the $135 million preferred stock issuance.
• Nonperforming Asset Composition: Review the specific breakdown of the $159.9 million in nonperforming assets, particularly the concentration in California residential construction and Hawaii commercial real estate.
• Allowance Adequacy: Assess whether the $122.3 million allowance (3.20% of total loans) is sufficient given the accelerating risk rating migration and declining collateral values in the current economic climate.
• Regulatory Restrictions: Confirm the impact of the MOU on the company's ability to manage liquidity and incur new debt without regulatory approval.
• Dividend Policy: Monitor future announcements regarding the resumption of common stock dividends, which are currently suspended.