Central Pacific Financial profit falls 92 percent
The sagging home construction market in California weighed on the bank's results
Central Pacific Financial Corp.
, plagued by its exposure to the sagging California residential construction market, took another hefty loan-loss provision for the third consecutive quarter as net income in the first three months of the year fell 91.8 percent to $1.7 million.
The parent of Central Pacific Bank, which earned $20.1 million in the year-earlier quarter, said yesterday it set aside $34.3 million in the first quarter for potential loan losses, bringing its total such provisions for the last three quarters to $83.7 million. In the first quarter of 2007, Central Pacific's loan-loss provision was just $2.6 million. But Hawaii's fourth-largest bank in terms of assets set aside $49.4 million for potential losses in the second half of last year as the California market worsened.
"While our capital position and the operating fundamentals of our core Hawaii franchise, including asset quality, remain strong, we continue to experience the same challenging credit markets in California that are affecting the entire financial sector," said President and Chief Executive Clint Arnoldus, who is retiring at the end of this year.
Arnoldus said the bank has begun loan-sale proceedings on several California residential construction loans and is "pursuing a wide range of opportunities to aggressively reduce our credit-risk exposure to this sector."
Central Pacific had total loans outstanding in the California residential construction market of $245.8 million at the end of the quarter, consisting of $197.9 million in the loan portfolio and $47.9 million classified as held for sale -- individual and bulk loan sales that Central Pacific expects to make over the next couple of quarters. That's down from $310.6 million at the end of the fourth quarter when the bank had $305.2 million in the loan portfolio and $5.4 million classified as held for sale.
California residential construction loans held in the bank's portfolio represented 4.7 percent of total loans and leases at the end of the quarter, a decrease from 7.4 percent at the end of the fourth quarter.
In addition, Central Pacific had net loan charge-offs in the first quarter totaling $54.2 million, including partial charge-offs of 16 California residential construction loans totaling $53.7 million.
Brett Rabatin, an analyst with Nashville, Tenn.-based FTN MidWest Research, called the earnings "very disappointing."
"In the past, you could have found some positives in the results, but clearly the credit number they reported so overshadows anything else," he said. "It's not good when you have to charge off 5 percent of your loan portfolio on an annualized basis and your nonperforming assets nearly double (to $118.8 million in the first quarter from $61.5 million in the fourth quarter)."
Central Pacific had earnings per share last quarter of 6 cents versus 65 cents a share a year ago.
Analysts were forecasting earnings per share of 38 cents last quarter, according to a survey by Thomson Financial.
Revenue edged up 0.5 percent to $65.1 million from $64.8 million.
Central Pacific's stock fell $1.12, or 5.8 percent, to $18.36.
In late February, Central Pacific said it was revising its fourth-quarter earnings by taking a "goodwill impairment charge of $48 million associated with its 2004 buyout of City Bank, which had the initial exposure in California real estate that is now creating problems for Central Pacific.
That accounting charge left Central Pacific with a $44.5 million loss in the fourth quarter because the value of City Bank had diminished since the acquisition.
"We still believe that this acquisition of City Bank gave us a critical mass to compete and round out our slate of services for our customer base and made the convenience factor greater," Arnoldus said. "Certainly, the loan production office in California was initially established by City Bank, but since we merged in 2004, we've significantly expanded the loan base and opened additional offices. The problems in California are just reflective of the bottom dropping out of the market and is not a negative reflection of the merger of City Bank and Central Pacific Bank."
Central Pacific also reaffirmed its intention to maintain its 25 cents-a-share dividend, which is yielding an annual payout of 5.5 percent, the highest of any Hawaii-based company and more than double the yield of the bank's highest five-year certificate of deposit.
Net interest income, the difference of what Central Bank pays depositors and what it brings in from loans, fell 5.3 percent to $50.9 million from $53.7 million. Net interest margin fell to 3.99 percent from 4.52 percent.
Noninterest income, which includes service charges and fees, rose 28 percent to $14.3 million from $11.2 million primarily due to its redemption of Visa Inc. stock totaling $900,000, increased income from bank-owned life insurance totaling $800,000 and higher gains on sales of loans of $400,000.
Total assets increased 5.3 percent to $5.8 billion from $5.5 billion
Total loans and leases grew 7 percent to $4.2 billion from $3.9 billion
And total deposits fell 1.7 percent to $3.78 billion from $3.84 billion.