Central Pacific says purchase of rival leads to $44.5M loss
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The 2004 acquisition of a rival came back to haunt Central Pacific Financial Corp. yesterday, as the state's fourth-largest bank revised its fourth-quarter earnings to show a $44.5 million loss.
The loss, a revision from a $3.5 million profit previously announced for the quarter, stems from a $48 million accounting charge involving California operations of the former City Bank that were indirectly hurt by the subprime mortgage meltdown.
Chief Financial Officer Dean Hirata said the accounting charge would have no effect on Central Pacific Bank's cash flows or its regulatory capital requirements.
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Central Pacific Financial Corp. said yesterday it lost $44.5 million in the fourth quarter after revising its earnings to account for a $48 million accounting charge associated with its 2004 buyout of rival City Bank.
The parent of Central Pacific Bank, which warned on Jan. 31 it was conducting an accounting analysis that could lower its net income, previously announced $3.5 million in profits for the period ended Dec. 31.
The accounting charge, known as a "goodwill impairment charge," is taken when some facet of a business has diminished in value since an acquisition -- in this case, the buyout of City Bank, which had operations in California.
Central Pacific, the state's fourth-largest bank, also revised its full-year earnings to show narrower net income of $5.8 million compared with profits of $53.8 million previously reported.
Chief Financial Officer Dean Hirata said the revision was a noncash charge that would have no effect on the bank's cash flows or its regulatory capital requirements.
Hirata blamed the accounting charge on the company's sagging stock price, which has been cut in half -- down 50.9 percent -- during the past year. Its shares also have dropped nearly 19 percent since the bank first announced on Oct. 30 that it had indirect exposure to California's subprime meltdown.
By comparison, the Standard & Poor's 500 Small Cap Regional Banks Index is down 33.7 percent over the past 52 weeks and off 19.6 percent since Oct. 30.
"We have no exposure to the subprime residential borrower," Hirata said. "Our exposure is indirect, to the home builders who provide the market which these residential buyers will purchase. It's indirect as a result of the subprime prices on the mainland."
The goodwill impairment charge follows Central Pacific's announcements in the third and fourth quarters of 2007 that it set aside $49.4 million during the second half of the year as a provision for potential loan losses.
Central Pacific, which gained a foothold in California when it bought City Bank, had a total exposure of $305.2 million to the California residential construction market at the end of 2007 -- about 7.4 percent of the bank's $4.14 billion loan portfolio.
Hirata said the goodwill provision was set up at the time of the acquisition of City Bank.
"As far as the reason for the impairment itself and why it's occurring now, it really starts with the drop in our share price that was a result of the credit challenges we had in the California residential construction market," he said. "So there's goodwill associated with our commercial real estate reporting segment, which includes the California residential construction portfolio. For accounting purposes, we need to go through this impairment test."
Hirata said he cannot predict where the bottom is in the California real estate market.
"Some economists are looking at the market bottoming out late this year or early 2009," he said. "That being said, we are taking steps to reduce our risks and exposure in the California residential sector."
Central Pacific's shares closed down 7.2 percent at $18.49 yesterday, before it made the goodwill charge announcement.
Hirata said the bank would continue to pay its dividend at the current level, which is 25 cents a share and represents an annualized yield of 5.4 percent. The next dividend is payable on March 14.
