Central Pacific Bank loses $146.3 million

The bank slashes its dividend 60 percent but says its Hawaii operations are solid

» Ex-City Bank chief tapped to lead CPB

On the same day that Central Pacific Financial Corp. announced a new chief executive officer, the state's fourth-largest bank said yesterday that its exposure to the slumping California residential construction market produced a staggering $146.3 million loss in the second quarter and prompted the board to slash the company's dividend by 60 percent.

Second-quarter Loss: $146.3 million Year-earlier Net: $21 million

The bank said its loss included a noncash goodwill impairment charge of $94.3 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. Excluding the charge, which was taken to reflect the diminished value of the City Bank acquisition, Central Bank lost $52 million, or $1.81 a share, in the quarter.

The loss per share including the charge, which had no impact on the bank's cash flows, was $5.10.

A year ago, Central Pacific had net income of $21 million, or 68 cents a share.

Revenue slipped 1.7 percent to $63.3 million last quarter from $64.4 million a year earlier.

Central Pacific announced its earnings just hours before disclosing that it had ended a four-month search for a new CEO by naming non-executive chairman Ronald Migita to replace the retiring Clint Arnoldus. The bank's shares fell 70 cents, or 6 percent, to $11.07, leaving the stock down 40 percent for the year.

Arnoldus said reducing the quarterly dividend to 10 cents a share from 25 cents a share was "an extremely difficult decision" but that given the significant challenges facing the entire financial services industry that "a partial dividend reduction is a prudent means of preserving and building capital."

The dividend will be payable on Sept. 19 to shareholders of record as of Aug. 15.

Arnoldus said the bank's Hawaii operations continue to be solid with strong operating fundamentals.

"Though the Hawaii economy is slowing, it's still a very strong market -- especially relative to what's happening in other markets like California," he said. "This is where our home and heart is -- in Hawaii. "

Central Pacific continues to be aggressive in reducing its exposure to California real estate and said yesterday that in July it sold assets from the California residential construction market totaling $44.2 million after writing down those assets to their sale price in the second quarter.

"As we wrote these assets down to the sales price in the second quarter, we will not incur any additional losses related to these assets in the third quarter," Central Pacific Chief Financial Officer Dean Hirata said. "We expect our credit costs to significantly decline from the levels that we've experienced over the past four quarters."

The bulk-loan sale reduced Central Pacific's exposure in the California residential construction market to $102.1 million, down from $143.9 million at the end of the second quarter and $247.8 million at the end of the first quarter.

Central Pacific also took a provision for loan and lease losses of $87.8 million versus just $1 million a year ago. That amount set aside for potential loan losses is more than the combined $83.7 million that the bank put aside in the three previous quarters and brings the bank's loan-loss provision over the last four quarters to $171.5 million.

The bank's net interest income, the difference of what Central Pacific pays depositors and what it brings in from loans, fell 2.8 percent to $51.4 million from $52.8 million. Its net interest margin decreased to 3.97 percent from 4.36 percent.

Noninterest income, which includes service charges and fees, rose 3.4 percent to $11.9 million from $11.5 million.

Total assets rose 1.6 percent to $5.7 billion from $5.6 billion. Total loans and leases gained 3.6 percent to $4.1 billion from $3.9 billion. And total deposits were up 0.1 percent to $3.9 billion.

Analyst Brett Rabatin of Nashville, Tenn.-based FTN MidWest Research said it's hard to imagine the earnings getting any worse for Central Pacific.

"I certainly hope that comparisons going forward improve," Rabatin said. "I don't think they can get any worse than in the second quarter. I think they've made mistakes with the mainland lending, but the only positive thing you can take from that is recognizing that and working as fast as they could to get through those issues. I've seen other banks have some issues, but none quite as meaningful as this. Their loans were to areas that were boom-bust locales."