Bank merger cuts
Central Pacific’s earnings

Central Pacific Financial Corp., beginning a new chapter as a bigger and more diversified bank, said yesterday that net income fell 7.2 percent in the third quarter as merger and labor costs spiked in connection with the acquisition of City Bank's parent.

The parent of Central Pacific Bank posted earnings of $7.7 million, or 42 cents a share, compared with $8.3 million, or 51 cents a share, a year ago when the two financial institutions were independent companies.

Central Pacific closed its merger with CB Bancshares Inc. on Sept. 15 and CB Bancshares' results are included in Central Pacific's earnings as of that date. The banks are expected to merge in the second quarter.

Excluding merger-related expenses for last quarter and the year-ago period, Central Pacific's net income would have risen 19.6 percent to $10.4 million, or 57 cents a share, from $8.7 million, or 53 cents a share.

"The company's strong third-quarter results were driven by organic (internal) loan and deposit growth, an expanding net interest margin and sound asset quality," said Clint Arnoldus, chief executive of Central Pacific. "We believe the completion of our merger with CB Bancshares provides the company with numerous revenue and expense synergy opportunities."

Operating expenses soared 54.6 percent in the quarter to $22.1 million from $14.3 million a year ago due to the merger. Salaries and employee benefits rose 48.3 percent to $11.3 million from $7.6 million and retention bonuses paid to certain Central Pacific executives totaled $2 million. Other operating expenses, excluding salaries and benefits, increased 61.9 percent to $10.8 million from $6.7 million.

The merger of the two companies, which initially was hostile before Central Pacific made some last-minute concessions, resulted in some downsizing at both banks. Central Pacific said it is consolidating nine overlapping branches, relocating one branch and opening another one.

Central Pacific also instituted a voluntary separation program in the areas in which it was overstaffed. Employees have until Monday to accept the offer.

Total assets, loans and leases, and deposits all showed big gains largely as a result of the merger.

Assets jumped 116.4 percent to $4.6 billion from $2.1 billion a year ago. Loans and leases rose 114.7 percent to $3.1 billion from $1.4 billion. And deposits grew 90.5 percent to $3.3 billion from $1.7 billion.

Excluding the impact of the merger, assets grew by $424.7 million, or 19.9 percent; loans and leases increased by $239.5 million, or 16.8 percent. And deposits increased by $192.2 million, or 11.1 percent.

Investment securities overall gained 68.3 percent to $904.3 million from $537.1 million.

Excluding the merger, they rose by $51.4 million, or 9.6 percent.

Central Pacific's investments in high-tech businesses in Hawaii earned net tax benefits of $390,000 compared with $244,000 a year ago.

Central Pacific's net interest income grew 22.6 percent to $28.6 million from $23.3 million due to a 31.8 percent increase in average interest-earnings assets. Net interest margin, which reflects the difference of what the bank pays depositors and what it brings in from loans, fell to 4.5 percent from 4.9 percent a year ago.

Nonaccrual loans soared 529.8 percent to $11.6 million, or 0.4 percent of loans, from $1.8 million, or 0.1 percent. More than half of that amount, or $6.6 million, was caused by three borrowers whose loans are primarily secured by commercial property.

Excluding the impact of the merger, nonaccrual loans decreased $401,000 to $6.8 million. Net loan charge-offs, or uncollectible loans, decreased in the quarter to $611,000 from $1.1 million a year ago.

Central Pacific's return on assets ratio, which indicates how many dollars of profits it achieves for each dollar of assets it controls, fell to 1.1 percent from 1.6 percent a year ago. Excluding after-tax merger-related expenses, it dropped to 1.5 percent from 1.7 percent.

The bank's return on equity ratio, a measure of how well it used reinvested earnings to generate additional earnings, decreased to 12.6 percent from 18 percent a year ago.

Excluding after-tax merger related expenses, it slipped to 17.1 percent from 18.8 percent.