Central Pacific profitable again as credit improves

The parent of Central Pacific Bank has been cleaning up its loan portfolio, and the results are paying off in a big way.

Central Pacific Financial Corp. posted today its third straight profitable quarter after adding $19.1 million in income that previously had been set aside for potential loan losses.

The reduction of the reserves helped the state’s fourth-largest bank post a profit of $11.6 million, or 28 cents a share, in the third quarter compared with a year-earlier loss of $72.5 million, or $49.27 a share. Analysts estimated the bank would earn 18 cents a share, according to an average of two analysts compiled by Zacks Investment Research.

It was the third straight quarter that the bank had taken a credit in their provision for loan losses on its income statement, having added $8.8 million in the second quarter of this year and $1.6 million in the first quarter.

Central Pacific announced the earnings before the stock market opened today. On Thursday the bank’s shares jumped 64 cents, or 5.7 percent, to $11.96.

With its financial condition improving, the bank also prepaid $120.5 million in Federal Home Loan Bank borrowings. While that prepayment resulted in a $6.2 million prepayment penalty, it also eliminated interest charges at an average rate of 4.36 percent that will improve the bank’s future net interest margins.

In addition, the bank also funded its CPB Foundation, established last year, with $5 million that will be used to support nonprofits in the community.

The prepayment penalty and the funding for the foundation totaled $11.2 million, nearly matching what the bank made for the quarter. Without those two payments, the bank’s net income for the quarter would have been nearly double what it reported.

John Dean, president and CEO of Central Pacific, said the bank uses a mathematical model in determining what to hold in reserve for potential loan defaults and said the bank wasn’t intentionally being conservative with its loan-loss provisions.

"It’s still an art in terms of trying to determine what the future losses will be for any institution, especially for ours where we had so many challenges in the size of our nonperforming asset portfolio (loans delinquent 90 days or more)," he said. "If you look at our nonperforming assets from the second to third quarter, it was reduced by $26 million, from $249.3 million to $223.3 million. The point is the quality is improving, and we don’t need as much in terms of reserves as we did in the past."

Central Pacific, which earlier this year recapitalized itself with a $325 million stock sale to private investors and an additional $20 million generated from a shareholder rights offering, ended the third quarter with $143 million in its loan-loss reserve. Heading into this year, Central Pacific had recorded seven straight losing quarters.

"In terms of quality, we’re very pleased with the continued improvement we see in the loan portfolio," Dean said. "If you go back to the end of 2009, we peaked at about half a billion dollars in nonperforming assets. So we’ve basically reduced that peak of $500 million to roughly a quarter of a billion.

"That doesn’t mean we’re satisfied with where we’re at, because we have a lot of improvement to do, but I think you’re going to see continued improvement in the nonperforming assets number in the coming quarters."

Central Pacific, which has said it will stop pursuing new loans in California after getting hammered by that state’s real estate meltdown, still has $295 million in outstanding loans there, down from a high of $1.3 billion in 2008. Of the remaining loans, $47.9 million are classified as nonperforming assets.

The bank, which plans to focus on Hawaii, has just under $1.8 billion in loans in the islands, with $175.3 million in nonperforming assets.

Overall, the bank had $2.1 billion in loans and leases at the end of the third quarter, down from $2.4 billion in the year-earlier period.

Net loan charge-offs were just $4.4 million last quarter compared with $64.3 million in the year-earlier quarter.

Total assets slipped to $4.1 billion from $4.2 billion a year ago, while deposits edged up to $3.3 billion from $3.2 billion.

Central Pacific’s net interest income — the difference between what the bank pays depositors and what it brings in from loans — rose to $29.8 million last quarter from $27.4 million in the year-ago quarter, while its net interest margin improved to 3.05 percent from 2.74 percent a year ago.

Noninterest income, which includes charges and fees, fell to $11.5 million from $11.7 million a year ago.