Business Context and Reporting Period
Company: Central Pacific Financial Corp. (CPF)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Business Overview: CPF is a Hawaii-based bank holding company operating primarily through its subsidiary, Central Pacific Bank. The company serves Hawaii and California markets with a focus on commercial real estate, construction, and residential mortgage lending. The reporting period reflects severe economic headwinds, including a recessionary environment and significant deterioration in the Hawaii and California real estate markets.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Dec 31, 2008 (Balance Sheet) |
|---|---|---|---|
| Net Interest Income | $43.5 million | $136.0 million | - |
| Provision for Loan Losses | $142.5 million | $243.6 million | - |
| Net Income (Loss) | $(183.1) million | $(215.0) million | - |
| EPS (Basic & Diluted) | $(6.38) | $(7.67) | - |
| Total Assets | - | - | $5.17 billion |
| Total Loans & Leases (Gross) | - | - | $3.46 billion |
| Allowance for Loan Losses | - | - | $204.9 million |
| Total Deposits | - | - | $3.86 billion |
| Shareholders' Equity | - | - | $436.6 million |
| Net Cash Provided by Operating Activities | - | $103.7 million | - |
Material Changes vs. Prior Period
- Significant Losses: The company reported a net loss of $183.1 million for the quarter and $215.0 million for the nine-month period, compared to a net loss of $141.6 million for the nine months ended September 30, 2008. The prior year quarter (Q3 2008) showed a net income of $3.0 million.
- Provision for Loan Losses: The provision increased dramatically to $142.5 million in Q3 2009 (vs. $22.9 million in Q3 2008) and $243.6 million for the nine months (vs. $145.0 million in the prior year period). This was driven by deteriorating asset quality in Hawaii and California commercial real estate portfolios.
- Nonperforming Assets (NPA): Total nonperforming assets rose to $418.5 million (11.83% of loans) at September 30, 2009, compared to $143.8 million (3.52%) at year-end 2008. Nonaccrual loans increased to $397.4 million.
- Goodwill Impairment: A non-cash goodwill impairment charge of $50.0 million was recorded in Q3 2009 related to the Hawaii Market reporting unit, compared to $94.3 million in the prior year period.
- Deferred Tax Asset (DTA) Valuation Allowance: A $64.4 million valuation allowance was established against DTAs in Q3 2009 due to recent net operating losses, resulting in a $61.4 million non-cash charge to income tax expense.
- Net Interest Margin (NIM): NIM compressed to 3.56% in Q3 2009 from 4.07% in Q3 2008, driven by declining loan yields and reduced loan balances.
Guidance, Outlook, Risks, and Unusual Items
- Regulatory Action: The bank is not in compliance with the 9.0% leverage capital ratio required by its Memorandum of Understanding (MOU) with the FDIC and DFI. Management anticipates a formal enforcement action requiring directives to strengthen capital, improve asset quality, and maintain liquidity.
- Capital Raising: The company is actively pursuing capital raising measures, including potential public or private equity offerings. Shareholders approved an increase in authorized common stock to 185 million shares in October 2009. A previous public offering was suspended pending regulatory developments.
- Dividend Suspensions: The company suspended cash dividends on common stock (since Jan 2009) and deferred interest payments on junior subordinated notes and dividends on TARP preferred stock (since Q3 2009) to preserve capital.
- Outlook: Management expects credit costs to remain at elevated levels through 2010 due to the uncertain economic environment and continued deterioration in real estate markets. Significant additional capital is required to continue operations.
- Unusual Items:
- TARP Participation: Issued $135.0 million in preferred stock and warrants to the U.S. Treasury in January 2009.
- OTTI Charge: Recorded a $2.6 million other-than-temporary impairment charge on non-agency collateralized mortgage obligations.
- FDIC Special Assessment: Incurred a $2.5 million special assessment charge in 2009.
Investor Verification Checklist
- Capital Adequacy: Verify the status of the formal enforcement action with the FDIC/DFI and the specific capital requirements imposed.
- Asset Quality Trends: Monitor the trajectory of nonperforming assets and the adequacy of the allowance for loan losses, particularly in the Hawaii and California construction portfolios.
- Liquidity Position: Assess the company's ability to access funding sources (FHLB, Fed Discount Window) given the reduction in borrowing capacity and market volatility.
- Capital Raise Execution: Track the success of ongoing efforts to raise substantial additional capital to meet regulatory requirements and operational needs.
- Stock Price Volatility: Note the risk of delisting from the NYSE if the stock price remains below $1.00 and the potential for further goodwill impairments if market capitalization declines.