CPF Corp. sees its net plunge by 81.1 percent

The banking company has been hurt by its exposure to California market conditions

Central Pacific Financial Corp. said today it took a $28.2 million loan-loss provision in the fourth quarter due to its exposure to the deteriorating California residential construction market, and that it is performing an accounting analysis of its subsidiary, Central Pacific Bank, that could further reduce net income.

The bank said the accounting analysis would not impact cash flows, tangible book value or regulatory capital, and its fundamentals remain strong.

An analyst said the market has already factored in most of Central Pacific's California exposure.

The state's fourth-largest bank, which had warned on Jan. 11 that the loan-loss provision might go as high as $32 million to $34 million, saw its net income plunge 81.1 percent to $3.5 million, or 12 cents a share, from $18.8 million, or 61 cents a share, a year earlier. Revenue rose 1.6 percent to $63.9 million from $62.9 million.

Overall, nonperforming assets jumped 587 percent to $61.5 million, or 1.07 percent of total assets, compared with $9 million, or 0.16 percent of total assets, a year ago.

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Stung by a steep downturn in California residential construction, the parent of Central Pacific Bank said yesterday it put aside $28.2 million in the fourth quarter as a provision for potential loan losses, and warned that it was in the process of an acquisition-related analysis that could result in an additional non-cash charge for "goodwill impairment."

"Although a potential impairment charge would reduce our net income, the fundamentals of the bank remain strong," said Clint Arnoldus, president and chief executive of Central Pacific Financial Corp.

The state's fourth-largest bank said net income plunged 81.1 percent to $3.5 million, or 12 cents a share, from $18.8 million, or 61 cents a share, a year earlier. Revenue rose 1.6 percent to $63.9 million from $62.9 million.

Central Pacific gained a foothold in the California housing market as a result of its 2004 acquisition of rival City Bank, and subsequently expanded the operation. But recently Central Pacific has been hurt by its exposure in that state to the subprime lending crisis.

The bank's exposure to the California residential construction market was $305.2 million at the end of 2007, with the allowance for loan and lease losses related to that portfolio at $45.6 million, or 14.9 percent of the total outstanding balance. Nonperforming assets related to this sector was $57.7 million, or 1.01 percent of total assets, at the end of December.

Central Pacific's loan exposure to California represents about 8.2 percent of the bank's $4.14 billion loan portfolio.

Overall, nonperforming assets jumped 587 percent to $61.5 million, or 1.07 percent of total assets, compared with $9 million, or 0.16 percent of total assets, a year earlier.

The company said it was performing an impairment test on the acquisition-related goodwill of the bank "due to the inherent volatility in the financial markets," and that any potential charge would reduce net income in the just-concluded fourth quarter. But it said there would be no impact on cash flows, tangible book value or regulatory capital.

A goodwill impairment charge reflects a past acquisition when some facet of the business, such as operations or client base, has diminished in value since the acquisition.

"Goodwill, in my opinion, is accounting garbage on the balance sheet," said Brett Rabatin, an analyst who covers Central Pacific for FTN MidWest Research in Nashville, Tenn. "These banks aren't looking forward to charging it off. The accountants and the (Securities and Exchange Commission) are pretty strict on this. It's not something you do at your will."

Central Pacific, which warned on Jan. 11 that it would take a fourth-quarter loan-loss provision of $32 million to $34 million, already had taken a $21.2 million provision in the third quarter.

The bank took loan charge-offs in the fourth quarter of $8.7 million, which included a partial charge-off of four California land loans totaling $6.3 million and one Hawaii commercial loan totaling $2 million.

"They have a higher level of exposure to an area that's soft right now than they probably wish they did," Rabatin said. "I think that's mostly reflected in the stock. It's fairly well known they had this exposure and their results are not a meaningful surprise relative to expectations."

Central Pacific, which warned it would earn 10 cents to 14 cents a share, beat analysts' revised estimate of 8 cents.

For the full year, Central Pacific's net income fell 32 percent to $53.8 million, or $1.77 a share, from $79.2 million, or $2.57 a share. Central Pacific had warned that its earning per share would be between $1.75 and $1.79 a share. The revised estimate of four analysts was for $1.72 for the year.

Central Pacific's revenue for the year rose 1.4 percent to $257.7 million from $254 million. Its assets gained 4.4 percent to $5.73 billion from $5.49 billion.

The bank also said it would maintain its quarterly dividend at 25 cents. It will be payable March 14 to shareholders of record as of Feb. 15. In addition, it approved stock repurchases of up to 1.2 million shares.