Central Pacific Financial Corp., closing in on profitability and the completion of its $325 million capital-raising program, sharply cut its losses and finished just $2.1 million in the red during the fourth quarter.

The parent of Central Pacific Bank, which lost $98.8 million in the same period a year ago, said yesterday it expects to finalize its recapitalization next month after receiving the required regulatory approvals. Central Pacific also plans to implement a previously announced 1-for-20 reverse stock split sometime next week.

Shares of the company ended up 2 cents at $1.68 after hitting an intraday high of $1.79. The stock is up 9.8 percent since the beginning of the year.

"We are encouraged by our improved financial results, including significant reductions in credit costs, nonperforming assets and our overall credit risk exposure," Central Pacific Executive Chairman John Dean said.

Central Pacific, the state’s fourth-largest bank in terms of assets, posted its seventh straight losing quarter, but it was the bank’s best financial result since the first quarter of 2009, when it had a profit of $2.6 million.

"They continue to de-risk the balance sheet," Sterne Agee analyst Brett Rabatin said. "The loan portfolio continues to shrink, and it impacts negatively their net interest margin because they have a lot of cash piling up. But the good thing is they’re de-risking their balance sheet, so if you’re thinking about the credit quality of the bank they’re finally getting around to, maybe they’ll make some money this year."

Dean said the bank does indeed expect to be profitable in 2011.

"It’s a little early to pick which quarter it’s going to come in, but obviously the last quarter of last year was a significant movement in the right direction," Dean said.

Central Pacific also disclosed in a Securities and Exchange Commission filing yesterday that the company’s compensation committee approved an increase in Dean’s cash salary to $360,000 from $1, effective Jan. 1. Dean, who was appointed last March to turn around the bank, also was awarded $206,667 in annual stock grants, with the stock grants due from January through April of this year to be paid as deferred cash on Jan. 1, 2013.

The bank said the significantly narrower loss last quarter was primarily due to reducing its credit costs to $4.6 million — most of which was set aside for potential loan losses — compared with $76.2 million in the third quarter and $109.5 million in the fourth quarter of 2009.

The bank also had some large nonrecurring items. It had a $7.7 million gain on the sale of the Kaimuki Business Plaza building but took a $5.7 million one-time loss for the prepayment of long-term borrowings with an average interest rate of 4.78 percent. The bank also increased its reserve for repurchased residential mortgage loans to $5 million at the end of the year from $1.1 million as of Sept. 30. The reserve is for mortgage loans made in the secondary market that could fall back to Central Pacific if proper documentation is not followed in making the loans.

Central Pacific’s net interest margin, which reflects the difference between what it pays depositors and the interest income generated from loans, was 2.76 percent last quarter, compared with 2.74 percent in the third quarter and 3.30 percent in the fourth quarter of 2009. The margin has been negatively affected by the bank’s ongoing efforts to maintain elevated levels of cash to meet any liquidity needs.

"We would expect to redeploy a lot of our excess liquidity once the recapitalization is complete," Chief Financial Officer Larry Rodriguez said. "We’ll obviously move to higher- yielding investment securities and plan to keep the duration somewhat on par with our current portfolio."

Central Pacific, which has focused on preserving cash, shedding riskier loans and closing its California loan operations, decreased its nonperforming assets by $70 million, or 17 percent, to $302.8 million from the third quarter. Net loan charge-offs were reduced by $39 million, or 60 percent, to $25.2 million from the previous three months. And the bank’s construction and development loan portfolio, where it has the highest risk exposure, declined by $155 million, or 34 percent, from the previous quarter.

"They’ve made better progress on (the credit portfolio) than I was expecting," B. Riley & Co. analyst Joe Gladue said. "They’ve been working pretty aggressively at it. But there’s still a lot to be done. Their level of nonperforming assets, which is up around 8 percent of total assets, is still very high. Industrywide the average for small-cap banks is a little over 2 percent of assets."

Central Pacific still has about $300 million in its loan portfolio in California, with about $100 million of that considered troubled assets.

"Our plan is obviously not to grow that portfolio, but to continue to work down the nonperforming assets," said Bill Wilson, Central Pacific executive vice president of special credits. "The performing part of that portfolio will be maintained for the time being."

Last quarter the bank’s loss per share was 14 cents versus $3.33 a year ago. Two analysts surveyed by Thomson First Call were forecasting a loss per share of 32 cents.

As a result of the bank’s streamlining, total assets decreased 19.1 percent to $3.9 billion from $4.9 billion a year ago, total loans and leases declined 28.7 percent to $2.2 billion from $3 billion, and total deposits fell 12.2 percent to $3.1 billion from $3.6 billion.

For the year, Central Pacific’s loss narrowed to $251 million, or $8.56 a share, from $313.7 million, or $11.03 a share.

Central Pacific, which has been under a mandate since December 2009 by federal and state regulators to improve its capital ratios, received commitments over the past several months from two lead investors, The Carlyle Group and an affiliate of Anchorage Capital Group LLC, as well as other institutional investors and some directors and officers of the company to buy Central Pacific common stock at 50 cents a share.

In addition, the bank restructured a deal with the U.S. Treasury to exchange $135 million in preferred shares for approximately 111.6 million shares common stock priced at 50 cents a share, or roughly $55.8 million. Based on yesterday’s closing price, those shares would be worth about $187.5 million.

When the capital raise and the Treasury exchange close, the bank will exceed the minimum levels required by the consent order with the Federal Deposit Insurance Corp. and the Hawaii Division of Financial Institutions. Following that closing, Central Pacific will offer a $20 million rights plan to shareholders that will allow them to purchase a set number of common shares at 50 cents a share, which will equate to $10 a share following the 1-for-20 split. Those eligible must be shareholders of record as of the close of business on the trading day immediately preceding the still-to-be-determined closing date of the recapitalization.