Central Pacific Financial Corp (CPF) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Central Pacific Financial Corp. second quarter 2008 conference call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS).

This conference is being recorded, and will be available for replay shortly after it's completion on the Company's website at www.centralpacificbank.com.

I would now like to turn the call over to Mr. David Morimoto, Senior Vice President, Investor Relations, please go ahead, sir.

Thanks Andrea. Thank you everyone for joining us this morning. With us today from management are Clint Arnoldus, President and Chief Executive Officer, Dean Hirata, Vice Chairman and Chief Financial Officer, and Curtis Chinn, Executive Vice President and Chief Risk Officer. Today's call will refer to a PowerPoint presentation that can be found on our Investor Relations website at http://investor.centralpacificbank.com. Clint and Dean will begin by reviewing our second quarter results, and then we will open the call up for questions.

During the course of today's call, management may make forward-looking statements with respect to the financial conditions, results of operations, and the business of Central Pacific Financial Corp. These forward-looking statements involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to forward-looking statements, please see our earnings release issued this morning, and our other recent documents filed with the SEC.

At this time, I would lake to turn the call over to Clint Arnoldus.

Thanks very much, David. Thank you all for joining us today to review Central Pacific Financial Corp's financial performance for the quarter ended June 30th, 2008.

I will be addressing the highlights of the Company, and the marketplace, including updating you on the progress we have made in aggressively downsizing our California loan portfolio, and strengthening our capital position. Our Chief Financial Officer, Dean Hirata, will follow me with a detailed financial report of our second quarter results, including a discussion on the California residential construction loan portfolio. After we have completed our remarks, we would be happy to take your questions.

But before we proceed, I would like to take this time to introduce our new President and CEO to you. This morning we announced the appointment of Ronald K. Migita as President and Chief Executive Officer of Central Pacific Financial Corp and Central Pacific Bank. Ron is the right leader for the job at the right time. He brings over 40 years of banking experience to the table. He has an in-depth understanding of the Hawaii market, and he knows Central Pacific Bank's customers, employees, and shareholders.

Ron, would you like to say a few words?

Yes. Good morning and thank you, Clint. It is indeed an honor and privilege to be appointed as President and CEO of Central Pacific Financial Corporation and Central Pacific Bank. Central Pacific Bank is a solid company with strong roots in Hawaii, I am excited about leading this dedicated hardworking team in my new capacity. I would also like to take this time to thank Clint for his hard work over the past six years. As you know, Clint announced his retirement in March of this year.

As you will hear, there are challenging times for our bank, and the entire financial industry. But I have seen difficult times before, and met every challenge head on. I believe that my banking experience, my deep knowledge of the Hawaii market, and my intimate understanding of our stakeholders, will allow me to move quickly and decisively, to tackle the charges we currently face. I am confident that our team at Central Pacific Bank can successfully overcome these challenges, and continue to serve our customers and our shareholders.

Thanks, Clint.

Thank you very much, Ron.

I agree with you in over 30 years of banking, I have never seen a marketplace that is more challenging than the one we find ourselves in today. Central Pacific Financial Corp like many financial institutions across the country, continues to be faced with formidable challenges stemming from problems in the national housing market, and the ripple effect of the subprime lending crisis. Our quarterly results reflect this. Our California residential construction lending businesses continue to be impacted by deterioration in credit trends during the second quarter of 2008.

However as we stated in our first quarter earnings call, our team is executing on our aggressive plan to reduce our risk in the California residential construction loan portfolio. As you will see, we have taken significant steps to reduce our exposure to these problem loans, and enhanced our risk management. We continue to address the impact of the weak California residential construction market on our loan portfolio, which resulted in significant writedowns with higher credit costs this quarter.

In meeting these challenging times, we are focused on reducing our credit risk, and strengthening our capital ratios, to better position us throughout this economic cycle. We continue to be well capitalized as of June 30, 2008 with Tier 1 risk-based capital, total risk-based capital, and leverage capital ratios, of 9.83, 11.09, and 8.21% respectively, all of which are above the regulatory requirements of 6, 10, and 5%.

I want to underscore that our core operations in Hawaii remain solid with strong operating fundamentals. While Hawaii's economy has begun to slow, we remain encouraged by the long-term outlook for our core Hawaii franchise. There are no easy answers here, but I do want to assure all of our stakeholders that we are committed to facing every single one of these challenges head on. Central Pacific Financial Corp. today reported a net operating loss for the second quarter of 2008 of $52 million, or $1.81 per diluted share.

The net operating cost includes pretax credit costs directly related to the Company's mainland loan portfolio of $112 million, or $2.35 per diluted share on an after-tax basis. The net operating loss does not include a noncash goodwill impairment charge of $94.3 million. Including the goodwill impairment charge the Company recognized the current quarter net loss of $146.3 million, or $5.10 per diluted share.

It's important to note that the goodwill impairment charge had absolutely no impact on the Company's cash flows, tangible equity, or regulatory capital. It was the result of the Company writing off the remaining balance of goodwill allocated to it's commercial real estate reporting unit. This was due to continued deterioration in the California residential construction market, and the resulting decline in the Company's market capitalization and asset values with exposure to this sector. The remaining goodwill on the Company's books at June 30, 2008, was allocated to the Hawaii operations.

Excluding the goodwill impairment charge and mainland credit costs, Central Pacific's net income was 15.2 million for the second quarter 2008. Our second quarter results reflect net credit costs of $116.1 million, comprised of a provision for loan and lease losses of $87.8 million, writedowns of loans held for sale of $22.4 million, write downs of foreclosed property of $4 million, and an increase to the reserve for unfunded commitments of $1.9 million.

Of this amount, $112 million or 96.5% was directly attributable to our mainland lending operations, primarily due to continued weakness in a limited number of residential tract lending projects that we financed in California. To address this, we have taken meaningful credit provisions against this portfolio and sold loans and assets, which we will discuss in greater detail.

Total assets of $5.7 billion at June 30th 2008, reflect an increase of $86.8 million, or 1.6% from a year ago, and a decrease of $149.7 million, or 2.6% from March 31, 2008. Total loans and leases of $4.1 billion at June 30, 2008, reflect an increase of $140.9 million, or 3.6% from a year ago, and a decrease of $98.6 million, or 2.4% from March 31, 2008. The current quarter decrease was primarily attributable to the transfer of 13 mainland residential construction loans totaling $46.4 million to the held for sale category, and partial chargeoffs of 18 mainland residential construction loans totaling $73.3 million, offset by net loan growth of $21.1 million.

Overall, the Hawaii loan portfolio grew by $23.1 million during the current quarter, while the mainland loan portfolio decreased by $121.7 million, primarily due to the aforementioned chargeoffs totaling $73.3 million, and a transfer of loans to the held for sale category totaling $46.4 million. We have seen a record number of new accounts opened and our deposit numbers are growing.

Total deposits of $3.9 billion at June 30, 2008 reflect an increase of $5.8 million, or 0.1% from a year ago, and an increase of $140.6 million, or 3.7% from March 31, 2008. Noninterest bearing demand, interest bearing demand, savings and money market and time deposits increased in the current quarter by $17.8 million, $13.6 million, $39.5 million, and $69.8 million respectively. We are very pleased with these deposit results which are solid, even though the overall economy is softening.

We have been aware of our challenges in California since June 2007, and continue to take a number of proactive steps to aggressively deal with each problem California residential construction loan. At June 30, 2008, the Company's remaining exposure to the California residential construction market totaled $143.9 million, which consisted of $87.2 million in the loan portfolio, $53.2 million classified as held for sale, and two foreclosed properties totaling $3.5 million. This compares with March 31, 2008 when the Company's total exposure to this sector was $247.8 million, which consisted of $197.9 million in the loan portfolio, $47.9 million classified as held for sale, and one foreclosed property totaling $2 million. California residential construction loans held in the portfolio were reduced to 2.1% of total loans and leases at June 30, 2008, from 4.7% of total loans and leases at March 31, 2008.

In July of 2008, the Company sold mainland assets with the combined outstanding balance of $44.2 million. As of June 30, 2008, the Company had written these loans down to their purchased sales price. Accordingly, we will not incur any additional losses related to this loan sale in the third quarter. Upon completion of the sale, the Company's remaining exposure to the California residential construction sector was $102.1 million, which consisted of $87.2 million in the loan portfolio, $13.4 million classified as held for sale, and one foreclosed property totaling $1.5 million.

With respect to the remaining $87.2 million balance in the California residential construction portfolio, we have booked a specific reserve in our allowance for loan and lease losses equal to $22.4 million at June 30, 2008, or 25.7% of the total outstanding balance. Our solid team of senior level personnel and outside real estate consultants continues to work around the clock, to reduce our exposure to the California residential construction market. We are not currently making new loans in California. We have a new management team, and we have enhanced our credit administration operations in California.

We plan to reduce our mainland loan portfolio to $500 million over the coming years, through a combination of paydowns, participations, restructurings, and loan sales. As we reported in our first quarter conference call, we have reduced our staffing and mainland operations in California, and have transferred certain functions to Hawaii. We expect this transfer to be completed before the end of 2008. We are committed to taking proactive steps to ensure that our capital position remains strong, despite the continuing deterioration and uncertainty in the California real estate market.

After long and careful deliberation, the Board determined it would be in the best long-term interest of our shareholders, to reduce the quarterly dividend to $0.10 per common share commencing with a third quarter 2008 dividend. We know that our dividend is important to our shareholders, and it is important to us as well. The decision to reduce the dividend was one of the most difficult decisions the Board and I have had to make here.

However, we are confident that building capital is the right thing to do now, based on the current economic environment. Historically, when the bank has done well, we have shared that profitability with our shareholders by consistently paying dividends. When the environment stabilizes, and CPF's profitability is restored, we will take a fresh look at our dividend. It is important to underscore that other challenges to date remain specific to California residential construction.

Although Hawaii's economy has begun to slow, we are not experiencing the challenging market conditions faced in California, and our Hawaii commercial and residential real estate loan portfolios continue to perform. Central Pacific continues to move forward with strategies that will allow us to expand our footprint in the Hawaii market and provide us with opportunities for growth and market share expansion. This strategy has resulted in deposit growth during the second quarter of 2008, as we discussed earlier.

I am also pleased to announce that on July 1, 2008, we hired two new senior members in our Trust department, David Kirkeby and Everett McDaniel were the principals of Pacific Island Management LLC, and personally oversaw 150 client relationships, representing $160 million of assets under management. I am confident that this experienced team will spearhead our efforts to expand our business line, further diversify our existing business mix, and offer our value to customers competitive product offerings, as well as convenient and exceptional service.

We are also executing on our community-based banking strategy, which has increased our competitive presence in deposit gathering, particularly in the important small business sector. By decentralizing our banking expertise and empowering our front line to become fully integrated within Hawaii's marketplace, we are offering our valued customers a more convenient and efficient way to bank. We also continue to consider strategies aimed at improving and expanding our 39 branch network.

At this time, our Chief Financial Officer, Dean Hirata will discuss the financial results of our second quarter. Dean?

Thank you, Clint. My remarks will cover the consolidated financial results of Central Pacific Financial Corp's and subsidiaries for the second quarter 2008. I will be going over the PowerPoint presentation that you should all have, as part of my review of the financial results.

So turning to slide 3, starting with the highlights of our second quarter, as well as a significant event that occurred in the third quarter, as we did maintain a well-capitalized regulatory designation as of June 30, 2008. With our Tier 1 total risk base and leverage capital ratios of 9.83%, 11.09% and 8.21% respectively.

This is despite the operating loss that we recognized during the second quarter. Our net revenues were $65.4 million, excluding the effects of the reversal of interest of $2.1 million, related to certain nonaccrual loans that occurred during the second quarter. An increase of 1.5% compared to net revenues of $64.4 million in the second quarter of 2007. The increase was comprised of net interest income, which increased by about $600,000, and noninterest income, which was up $400,000.

We opened a record number of deposit accounts which resulted from the success of our deposit campaigns. Overall there was a 53% lift in consumer demand deposit account openings, as compared to the first quarter. The allowance for loan and lease losses as a percentage of total loans to leases increased 2.11% at June 30, compared to 1.31% at June 30, 2007.

The credit costs of $116.1 million were comprised of a provision for loan and lease losses of $87.8 million, writedowns of loans held for sale of $22.4 million, foreclosed asset expenses of $4 million, and an increase in reserve for unfunded commitments of $1.9 million. Of this total amount, $112 million, or 96.5% was directly attributable to the mainland loan portfolio.

During the quarter, we recorded a noncash goodwill impairment charge of $94.3 million to write-off the remaining balance of goodwill associated with the Company's mainland operations. This charge was the result of the continued weakness in our mainland residential construction portfolio, and a decrease in our market capitalization. The remaining goodwill balance of approximately $150 million is allocated to our Hawaii operations.

Subsequent to the second quarter, in the third quarter, we improved the Company's credit risk profile by significantly reduce our exposure to the California residential construction market, through the sale of assets in July, with a combined carrying amount of $44.2 million at June 30, 2008.

Moving to slide 4, this represents the second quarter results. I take you through the individual columns. Starting first with column one. These are the reported results, which resulted in a net loss of $146.3 million, If you exclude the goodwill impairment charge of $94 million, you then show in the second column an operating loss of $52 million. Further excluding the mainland credit costs of approximately $112 million, you show an operating earnings of $15.2 million. Of the $15.2 million, 14.6 million came from the core Hawaii operations.

Turning to slide 5, this is a graph of our net interest margin over the last three years. Shown in the chart our margin for the current quarter was 3.97%. Again normalizing for the interest reversal of $2.1 million for loans that were placed on non-accrual status, our margin was 4.13%. Again, we believe our initiatives to downsize the mainland portfolio, will help improve the margin going forward. Again despite the recent depression, we still compare favorably to our national peers.

Turning to slide 6. This is a chart of our nonperforming assets. Again, the slide shows the components of our nonperforming assets as of June 30, 2008 as well as the pro forma impact upon completion of the bulk loan sale. As we discussed earlier in the call, the sale significantly reduced our exposure to the California residential construction sector.

Starting with the bulk loan sale, this sale was comprised of 16 loans, and one other real estate owned property. Five of these loans were a tract development, three were low rise condos, and nine were land related.

Looking at the sale geographically, six loans were in the Inland Empire, three were in Fresno, and one was in Sacramento. Of the 17 assets that were sold, 14 were nonperforming assets. As you can see from our slide, our nonaccrual loans, which include loans held for sale decreased by $42.2 million, and our nonperforming OREOs decreased by $2 million as a result of the bulk sale.

The nonaccrual loans to total loans ratio dropped to 2.46%, as compared to the 3.49% at the end of June. The nonperforming assets to total assets after the loan sale stood at 1.81%, and the coverage, our allowance as compared to the nonaccrual loans increased to 86%, subsequent to the loan sale. Again, I want to emphasize that all assets in the nonperforming assets were written down to the sales price at June 30, 2008. As a result, we will not be recognizing any additional losses as a result of this loan sale that occurred in July.

Turning to slide 7. This slide provides a breakdown both geographically and by loan type of our total nonperforming assets at June 30, 2008, with a comparison to March 31, 2008, as well as the pro forma impact after the loan sale. Starting with the mainland residential construction nonperforming assets, that dropped by approximately $25 million to $41.2 million as the June 30, from the $66.5 million as of March 31. We did see an increase in the mainland commercial construction nonperforming assets of approximately $9 million, with the transfer of one nonperforming loan to held for sale with an outstanding balance of $6.9 million.

The increase in the mainland commercial construction portfolio was attributable to three loans. Two of these loans are located in Riverside, and these loans are land developments for future retail construction. We are pursuing a loan sale on one of the Riverside loans. The other loan is a completed commercial condo project in Sacramento, and it is 35% sold. The other loan is a retail project that is 80% leased. We also saw an increase in our nonperforming assets in Hawaii of approximately $28 million, this increase primarily relates to loans to two Hawaii commercial real estate borrowers, which were placed on nonaccrual during the current quarter.

One of the borrowers subsequent to our loan that was made became overextended, and the problems with these larger loans caused issues that impacted our loans. However, we believe that we are very well-secured on this loan. The other commercial real estate borrower, relates to a residential land development project, we have obtained additional real estate collateral, and the developer is currently reviewing new offers for this development. Again, we believe we are very well-secured on this borrower.

Moving to the mainland commercial construction, the increase was due to one loan, which is a retail project that is 80% leased. On this loan, we are pursuing a loan sale. Nonperforming loans held for sale was reduced by $42.4 million as a result of the loan sale. Again, all mainland nonaccrual loans have been written down to fair value, based on either recent appraisals, which were further discounted where appropriate, based on the values that we had received in the bulk loan sale.

Turning now to slide 8, this slide provides a breakdown of our total loan portfolio by loan category at June 30, with comparisons to balances as of March 31. Later in the presentation, I will provide additional detail for each of these categories. The slide also shows the past few months by category as of June 30 and March 31. In total, our loan portfolio decreased by approximately $99 million during the quarter.

The overall decrease was primarily due to chargeoffs, and transfers of mainland loans to held for sale, offset by net loan growth in our Hawaii portfolio. As you can see from the slide, our total mainland loan portfolio decreased by approximately $124 million from March 31. The majority of this decrease was due to a decrease in the mainland residential construction portfolio of approximately $113 million.

During the quarter, we did see growth in our Hawaii construction portfolio and Hawaii residential mortgage portfolio, of approximately $18 million each. Past dues in the mainland are down from 9% at March 31, to 5.9% as of June 30. Primarily due to transfers of certain past due loans to held for sale, as well as chargeoffs. Past due loans in Hawaii are up at March 31, to 1.1% at June 30, again primarily due to the nonperforming assets that I talked about earlier. Excluding the effects of these two borrowers, the past due amount was approximately 0.4%, or no change from March 31.

Turning now to slide 9. This slide illustrates the extent to which we have reduced our exposure to the California residential construction market through transfers, loan sales and chargeoffs, we have reduced our exposure to the sector by approximately 74%. Bulk loan sales plus individual loan sales represented 22 individual loans aggregating $151 million of the June 30, 2007 portfolio balance. Proceeds from these sales totaled $61 million. Chargeoffs related to loan sales totaled $46 million, and further emphasized our efforts to reduce the portfolio. Of the remaining $87 million as of June 30, we have reserves of approximately $22 million, or approximately 25% of the remaining balance.

Turning now to slide 10. This slide summarizes what our net book value, which we define as current outstanding loans net of reserves as a percentage of the original note balance for our mainland residential construction loan portfolio. As you can see from the slide, looking at our classified loans we have written these balances down to $0.46 on the dollar, included in this category are seven nonaccrual loans that have been written down to $0.42 on the dollar. For loans classified as held for sale, these balances have been written down to $0.36 on the dollar. We believe that the net book values as of June 30, 2008 appropriately reflect the fair values for this portfolio.

Turning now to slide 11. This represents a breakdown of our mainland residential construction portfolio, both by property type as well as location. Now as you can see from the graphs, starting with the property type, $84 million, or 82% of the portfolio is comprised of single family residential projects. Now looking at the portfolio by location, our three biggest exposures with respect to concentrations in this portfolio are Fresno at $25 million, which has a net book value of 75% of the original note. Sacramento at $24 million, which has been written down to 48% of the original note. Lastly, Riverside of $19 million, which has a net book value of 32% of the original note.

Starting first with the Fresno piece of the portfolio. We are currently pursuing sales on two loans that would net, at or about our net book value which is our balance net of reserves. For the Sacramento portion of the portfolio, there are outstanding loans to three borrowers. We have substantially written down the balances of two of these loans as of June 30. We believe we are well-secured on both in comparison to our remaining net book value. We expect loans for the other borrower will be repaid or refinanced by securing income property as collateral.

And for the Riverside portion of the portfolio, we have two loans outstanding. We have outstanding loans to borrowers. Both are classified as nonperforming assets as of June, 30 and both have been substantially written down to current values. Again, we believe we are sufficiently reserved in the event of further erosion in values related to this collateral. The 16 loans in this portfolio have a net book value of 57% of the original note balance. All loans created 5 or higher have been reappraised within the last six months. All loans are scheduled to mature by March 31, 2009.

Turning now to slide 12, which is a breakdown of our mainland commercial construction portfolio, again by property type and location. As you can see from the graphs, our remaining portfolio is comprised predominantly of office and commercial projects of $142 million, and retail and restaurant of $129 million. Looking at it by location, the biggest geographic exposures again are in Sacramento of $68 million, Riverside of $55 million, and Los Angeles of $41 million.

Starting fist with Sacramento, our exposure there we have eight project loans comprised of six office, one shopping center, and one warehouse. Six of these loans are completed and in various stages of lease-up or sale. One of the loans is on nonaccrual, and we are working through a sale lease-up of the property with the borrower. Based on the current absorption of the remaining projects, we expect full repayment on all of the other loans. The average loan-to-value ratio for this portfolio is 69%.

On the Riverside, this portfolio consists of 11 loans, six entitled land for future development, and five construction loans. Of the land loans, two are nonperforming assets totaling $4 million. We have a letter of intent on one of these loans, and the other has a loan-to-value ratio of 37%. The other four loans are all performing.

Of the five construction loans, one is for an apartment complex. One for an office project, and three are retail projects. The office project is under contract for sale. The apartment is 50% complete, and the retail projects are in the process of pre-lease. All of the construction loans are performing.

Lastly with the Fresno exposure, there is one project for a master plan development, to include and industrial warehouse, retail restaurant, and an office complex. This is Phase 1 for the industrial warehouse. One lot is build to suit and should be completed shortly. At that time, we would expect a $10 million paydown on this loan. The guarantor is very strong, with a portfolio of income producing properties, to provide cash flow and liquidity support if necessary. The current loan-to-value ratio is 75%.

Turning now to slide 13. This is our mainland commercial mortgage portfolio again by property type and location. Starting with the property type, you can see that our remaining portfolio's comprised predominantly of the retail restaurant of $253 million, and commercial property of $139 million. Geographically, our exposures are in Los Angeles $237 million, Sacramento $58 million, and King County in Washington $63 million.

With respect to the geographic markets, the Seattle portion of the portfolio tends to focus on in field areas of downtown Seattle to the Queen Ann district, both of which are good apartment markets. The Southern California piece of the portfolio also tends to focus on in field markets in Los Angeles. All of our Southern California collateral is in Ventura County. On the Sacramento portion of the portfolio, the exposure consists primarily of office and warehouse properties. Of this amount, $40 million of these loans were booked between 2003 and mid-2005, and are well seasoned.

Looking at our apartment portion of the portfolio, this represents 14 separate loans to two investor groups. One located in Southern California and the other in Seattle. Both groups specialize in apartment rehabilitation and repositioning, and have large portfolios of stabilized and repositioned apartments. The stabilized portfolios provide cash flow to support repositioned projects if necessary. All of these loans are performing, and all have positive cash flow after debt service. Debt service coverage on an interest only basis averages between 1.25 and 1.5 times, while the average loan-to-values are in the 65% to 75% range.

On the retail restaurant portion of the portfolio, all loans are performing. The average debt service coverage ratio is 1.42 times. The weighted average loan-to-value is 64%. Finally looking at the office commercial portion, this consists of 17 loans. One is classified, and the rest are all cash graded and performing loans. The weighted average loan-to-value is 66%, and the average debt service coverage ratio is 1.24 times. All loans again were reappraised within the last seven months, and the average remaining maturity is approximately 35 months.

Turning now to slide 14, which is our Hawaii construction portfolio, again by property type. The majority of the Hawaii construction loans are structured with presale or preleasing requirements, minimum cash equity contributions, and recourse individuals. The overall Hawaii construction is expected to be reduced significantly between 25 to 50% within the next 12 months, as the projects are completed.

We have identified only one project for which there have been some construction issues, and this development has now been further secured with additional cash and collateral. As you can see, there are 76 loans, with the origination, weighted average loan-to-value of 65%. The three largest loans in the portfolio are first, a $56 million loan to build a 269-unit of affordable condos in Honolulu, which was sold out and completion is expected in January of 2009.

The next loan is a $40 million loan to construct a 137,000 square foot retail center in Lahaina, Maui. The project is 90% complete and 80% leased. The third of the larger loans in the portfolio, a $41 million loan to build a 230-unit affordable condo in Waipahu,Oahu. This is a joint development with the state of Hawaii, and the project is complete and 60% of the units are sold.

Turning to slide 15, this is a breakdown of our Hawaii commercial mortgage portfolio by property type. As you can see, this is a very granular portfolio, and a well seasoned portfolio. The delinquencies are nominal, and the debt service coverage ratios are well above current underwriting standards. The origination weighted average loan-to-value is 49%, and the origination weighted average debt service coverage ratio is 1.69. The three larger loans in this portfolio are a $19 million affordable condo conversion in Honolulu. A $15 million loan secured by the stabilized retail center in Napili, Maui, and an $11 million stabilized industrial complex in Honolulu.

Turning to slide 16, which represents our breakdown of our Hawaii residential mortgage portfolio by property type. As you can see, the vast majority of the portfolio was comprised of fixed rate loans of $503 million, and adjustable loans of $281 million. We have conservative underwriting as reflected by a low weighted average loan to value of 57%. High average FICO scores of 738, and very low delinquencies.

We have tightened our underwritings to include lowering the maximum loan-to-values without mortgage insurance to 90%. We eliminated portfolio lending to sellable products and finally, we do not have any subprime exposure in this portfolio. All the loans are secured by real property in Hawaii.

Turning now to slide 17, which are our other loan and leases in the loan portfolio. The Hawaii commercial book was just under $340 million. Home equity lines were at $110 million, and other consumer loans were at 70 million as of June 30. The commercial portfolio is granular as it is comprised of more than 3,300 loans.

Almost 70% of the commercial portfolio is on Oahu, and our largest loan in that portfolio is just under $7 million. Looking at the three largest loans in this portfolio, starting first with a $10.9 million loan to a church-owned training center. This loan was paid off in full in July. The second loan is a $10.9 million to a theater chain operator with multiple locations in Hawaii. Finally a $6.9 million loan to finance a water treatment plant on the island of Kauai.

Turning now to slide 18. Going forward, we have continued focus on strengthening our asset quality. We have new line management and credit management teams in place in California. We have hired several seasoned credit and workout officers to proactively manage both the performing loan portfolio, and to resolve problem loan assets. These teams have been reorganized and the business strategy is redirected from business development, to that of ongoing portfolio management. We have stopped loan production since December of 2007.

Throughout the Company, the underwriting standards for commercial real estate have been tightened specifically on land and land development lending. Our credit performance for residential mortgage loans remains favorable. We continue to seek lending opportunities, however, we have recently tightened our underwriting parameters, such that all loans must be salable in the secondary market. We have also increased the frequency of loan portfolio reviews required for all commercial real estate and commercial loans. Ongoing credit transaction reviews are conducted by our loan officers. Specifically, these officers are required to complete risk rating validations for each loan within their portfolios on a monthly basis.

These risk ratings are also affirmed by credit administrators as well as the loan review department. At a minimum, each quarter, the project status for each commercial real estate loan in both the Hawaii, as well as the mainland portfolios are reviewed by senior management. If any risk issues surface, loan officers are required to discuss their action plans to discuss these issues. As part of this process, we also evaluate the collateral value. If a problem situation isn't covered, immediate action is taken to develop a remediation or exit strategy. Monthly updates regarding the status of each of these credit situations are provided to senior management.

Turning now to slide 19, and looking at our deposit funding. Total deposits at June 30 was $3.9 billion, and represents 69% of our total assets. As mentioned previously, our nonCD deposit growth was primarily the result of a significant increase in account openings during the quarter. These account openings were driven by successful deposit campaigns, as well as our community based banking initiatives. As you can see in the slide towards the bottom, our deposit costs compare favorably against our national peers. Again, broker CDs, looking at the pie chart, broker CDs continue to represent only a small percentage of our total deposit base at June 30.

Turning now to slide 20. The other operating income for the second quarter was $11.9 million, compared to $11.5 million in the year ago quarter, and $14.3 million during the fist quarter of 2008. The sequential quarter decrease was due to lower bank-owned life insurance income of $1 million, as we did receive death benefit proceeds in the previous quarter, and a gain recognized on the mandatory sale of VISA stock in connection with VISA's IPO. The year-over-year increase is due to higher gains in sales of residential loans totaling $800,000, offset by lower bank owned life insurance income of $300,000.

Looking at our Other operating expense was $66 million, again excluding the $94 million noncash goodwill impairment charge. Again excluding this charge, the $66 million compared to $31.3 million in the year ago quarter, and $31.5 million during the first quarter of 2008. The sequential current quarter increase was partly due to the credit costs that were described above.

Specifically, we recognize asset writedown expense of $22.4 million, higher reserves for unfunded commitments of $6.5 million, and higher foreclosed asset expense of $1.4 million. In addition to credit costs we also recognized a loss in the sale of commercial real estate loans in connection with the sale of certain Washington loans totaling $1.7 million, and higher salaries and benefits, primarily due to the payment of higher commissions on our residential mortgage origination activity during the current quarter.

Turning to slide 21, our reported efficiency ratio for the current quarter was 58.37%, the reported ratio excludes the goodwill impairment charge of $94 million, asset writedown expense of $22 million, foreclosed asset expense of $4 million, and the loss of the sale of commercial real estate loans totaling $1.7 million. Despite the exclusion of these items, the increased efficiency ratio was primarily attributable to the increase in the reserve for unfunded commitments, the higher commission expense described previously, and other costs associated with the disposition and maintenance of certain mainland assets.

Besides the increases to noninterest expense, the efficiency ratio was also neglectively impacted, due to the reversal of $2.1 million related to certain nonaccrual loans placed on nonaccrual status during the current quarter. Looking at last quarter's efficiency ratio of 42.8%, this was skewed lower because it did include a reduction in our reserve for unfunded commitments for approximately $4.6 million.

Turning now to slide 22, looking at our liquidity and capital position. The chart on the left depicts the composition of our funding sources, with deposits providing a strong 69% of our overall funding. We also have significant available liquidity with access to over $1.5 billion in excess borrowing capacity.

Again, as mentioned at the opening of my presentation, despite the losses that we experienced during the current quarter, we maintained our well-capitalized designation for all capital ratios. In addition with the reduction of our quarterly dividend to $0.10 per share, this will provide an additional $17 million of capital per year.

Turning to slide 23, in summary and the outlook going forward, as you can see, the second quarter was a challenging quarter, as we dealt decisively with our underperforming assets in California. With the higher credit costs, our Company remains financially solid and well-capitalized. We expect our credit costs to significantly decline from the levels that we have experienced over the last four quarters. Finally, we will continue to serve other customers by investing and growing our core Hawaii franchise.

This concludes my review of Central Pacific's financial results for the second quarter of 2008. I will now open up the call for questions.

Thank you. (OPERATOR INSTRUCTIONS).

Our first question comes from Brett Rabatin of FTN Midwest. Please go ahead.

Good morning, everyone. First, a housekeeping issue. What was at the end of the quarter the total risk-based assets and total risk-based capital on a dollar basis?

We are getting that for you.

Okay. While you are looking for that, the unfunded commitment growth of 6.5 million this quarter, I am curious to hear some thoughts on the mainland portfolio in a minute, but is the pipeline of loans growing? Aside from whatever sales you do in the second half of the year, is the loan pipeline growing, relative to where it was a quarter or two ago is my question?

Brett, this is Curtis Chinn. The answer to your question on the loan pipeline is no it is not growing.

Okay. So why did the unfunded commitment, was there a catch-up?

If you recall, last quarter we actually had a decrease in reserves for unfunded commitments, and what we do when we classify a loan, if it is substandard and we have unfunded commitments, we treat that as if it was fully funded so we apply the same loss factors to the unfunded as we do the funding, where as loans pay off or we decrease commitments, the numbers go down. That is what happened in the first quarter, second quarter. We have a couple loans, the ones we put on nonperforming in Hawaii, where if you had unfunded commitments, and again, we have to have that treatment. That is what caused the up and down movement over the last two quarters.

Okay. Obviously, very aggressive with the construction portfolio in California with capital ratios where they are, I am assuming that there is a strong consideration for a bulk sale of CRE loans in the second half?

At this point we are not anticipating any further bulk loan sales. We will however consider individual transactions as they make sense for the bank.

Okay. Well, just a question, will the loan portfolio aside from the transaction that you already accomplished prior to quarter end shrink?

The load portfolio aside from sale of loans that you indicated you have already completed, well the loan portfolio shrink, or are you actually thinking the portfolio will grow?

We think the loan portfolio will shrink rolling forward.

Given the credit quality you have experienced in the construction portfolio, the obvious question is as investors probably thinking about the CRE portfolio, with a continued soft economy, and whether or not the CRE portfolio is any better than the construction portfolio? I think you have obviously been very aggressive with the construction book. But the question is, how aggressive have you been with the CRE book, and how do we know that that portfolio is indeed not going to weaken in the next few quarters, as the construction portfolio has?

On the mainland we reviewed every loan in the portfolio. We are much more comfortable with the CRE portion of that portfolio. As Dean mentioned, we are doing that slide, that Sacramento [inaudible], that portfolio is much more geographically diverse. We don't have the large concentration in areas like Inland Empire and Sacramento that we did with the residential construction. If you recall, for example, in the residential portfolio at one point one-third of that exposure was in the Inland Empire. We don't have anywhere near those kind of concentrations in the CRE portfolio.

Plus we still have good [DSEs]. So while I agree with you that the economy will slow, and that we will have some impact, we are much more comfortable that we will not have anywhere near the kind of experience that we have had with residential.

On capital, obviously you indicated the dividend cut, but haven't talked about what you might do going forward. It sounds like you don't have any planned actions, to either look to raise capital or change the dividend from the current quarter as well?

Brett, that is an issue that we continue to evaluate. As we said today, we are in a challenging environment for banks, and we entered today's environment with strong capital ratios and earnings, which has allowed us to aggressively writedown and sell these underperforming assets in California that we talked about.

And we feel very good that we remain well-capitalized even with that aggressive action, but we are going to continue to take necessary and appropriate steps to maintain that well-capitalized position. We believe in times like this, all banks need to be focused on capital, not just to protect ourselves against unexpected problems, but also we have got the ability to serve our clients banking needs. So this management team and the Board of Directors will continue to closely evaluate our capita levels, and we are going to remain at a well-capitalized position.

Okay. Then the level of operating expenses going forward, if we look at kind of a core rate of 40 million in 2Q, or 1) is that what you are looking at? and 2) Will there be any nonrecurring items in the third quarter i.e. for yourself with your departure, or any other nonrecurring items?

Okay. Brett on the run rate we are looking at 34 to $35 million for the quarter.

Okay. Maybe we can follow up offline about that.

I have the numbers for you, so on the total risk based capital ratio the 11.09%, total capital was $527.964 million, off a total risk weighted asset base of $4.8 billion.

Is the bank much lower than that?

The bank is at 10.7%. And that is off of a capital base of $506 million, as compared to risk weighted assets of $4.7 million.

Okay, thanks.

Thank you. Our next question comes from Fred Cannon of KBW. Please go ahead.

Hi. I was just wanted to look at the California residential. Am I reading nine and ten correct that a year ago you guys had $330 million of California residential, and I guess only about 16 million is now pass rated, so essentially more than 95% of those portfolios have been impaired in one way or the other?

Correct.

Do you believe that is reflective of simply the market, or do you believe it is reflective of some flaw in the underwriting and loan production at CPF?

I really think it is reflective of the market.

Okay. So then you would think that we should think about California construction loans generally having, 95% being impaired?

Not all construction loans. I think in residential because the meltdown in residential has been severe, as you know.

Of residential construction?

Yes.

Okay. And then this portfolio was legacy City Bank or legacy Central Pacific, I had forgotten?

It started with City Bank, but we continue to grow at post-merger on a combined basis.

Give than it came from City Bank, I was wondering if Mr. Migita can comment on kind of the development of that portfolio, the history of it, and maybe his thoughts about what went wrong there, or any thoughts he had?

As far as those loans are concerned, when we initially opened our LPOs in California, we had hired a team of account officers, and over the past four years, a number of the team members had left the bank. I am talking about the Central Pacific Bank, and I have to say that that had some impact, upon the oversight of the portfolio.

And do you feel that you have the right oversight now on a go forward basis?

I believe so, yes.

Thank you.

Thank you. Our next question comes from Joe Morford of RBC Capital Markets. Please go ahead.

Actually Dave King for Joe. First on the margin. I believe you said it should improve given the risk expose to the mainland. Is that just assuming less reversals, so an improvement from the 387 level, or is that an improvement off the core margin of 13?

It is a combination of that along with deleveraging the balance sheet. So we expect the margin to be in the range of about 4.1 to 4.2% going forward.

That helps. Second for the loans you sold in July, it looks like those are sold for about $0.30 on the dollar. Is that correct? Maybe a little less than $0.30 on the dollar?

The pool sale against the original note value was roughly $0.37 on the dollar, based on the carrying value at the end of the first quarter was about $0.42 I believe.

Thanks very much.

Our next question is from Aaron Deer, Sandler O'Neill. Please go ahead.

Good morning, everyone and congratulations, Ron, on your new position. I guess I just have one question. Following up on the commercial construction portfolio, I am just curious, it sounds like the trends there have been reasonably favorable, I guess, but when I look at the data coming out of a lot of these markets here in California with respect to commercial vacancy rates and absorption, it looks like that we could see some significant deterioration there. I am wondering if you just give an update on what the trends are you are seeing on absorption and vacancy in your commercial construction properties?

You are right. The markets in California are slowing, and we have seen slowdowns in absorption, but our projects still are moving forward. On the CRE side, we really have not experienced big decreases in occupancy on our properties.

With the commercial construction though, are the developers getting things filled up as they are getting things completed, or in advance of completion? How is that performing?

They have been able to continue to prelease it is slower this year, than it has been in prior years. They are still able to attract tenants. They are still negotiating leases and LOIs with prospective tenants. It is slower, though.

Thank you.

Thank you. Our next question comes from Brian Hagler of Kennedy Capital. Please go ahead.

Good afternoon. First I appreciate all of the details you guys gave. Dean, my first question is I think you mentioned that you sold 14 out of your 21 nonperforming mainland residential loans, with the remaining 7 written down to, I believe you said 35% of original value, or something like that. Any reason why you didn't sell them all?

Brian, this is Curtis Chinn. As we evaluated our portfolio, as there were certain loans that we felt that the better strategy was to, in certain cases build out an inventory that had started, and then sell through and sell remnant lots. So some of the loans that we retained fall into that category.

A few others were very problematic. So we thought it would be better to take a longer term view with those assets, but we still did write those down to our view of fair value. That is really taking the current appraisals and providing additional discounts based on the data we have from the pool sale, and information we have from other banks as to their experiences as well.

So it sounds like the ones that were not sold as they get maybe a little more developed, you would potentially consider a sale at that point?

We might. Again, it is really a function of if somebody is interested in buying it, what is the price and how does that compare to the value we are holding it at the time?

Right. Okay. When Dean was running through the various segments of the remaining portfolio of the 102 million, I believe, I think he mentioned that this was, for example, pending loan sales on a couple loans in Fresno, and then he may have mentioned a few others, but can you just tell us what kind of aggregate amount of potential loan sales, or pending loan sales there are on that portfolio?

Hang on one second. We potentially have 25 to 32 million in possible loan sales at this point on that portfolio. We are also expecting paydowns in the 5 to $8 million range over the next few quarters just from normal repayment.

Okay. And last question if you were successful in moving 25 to 32 million of those assets, what percent of the 22 million specific reserve would go with that, or would that still remain for the remaining credits?

The specific reserves that we have attached with those assets I would keep in the loan loss reserve. So it would be available for other assets.

So none of that specific reserved assigned to the 25 to 30 that you are trying to sell?

Yes, there are specific reserves allocated to those specific loans.

Do you know how much of the 22 is assigned to those by any chance?

There is about 7 million.

Okay. Thank you.

Thank you. Our next question comes from Brett Rabatin. Please go ahead.

Earlier in the call, you were talking about the growth in the deposit accounts. It sounds like there was some gross growth in deposit accounts. I was wondering if you had any data on what the net account growth was this quarter, and just what you are seeing from a competitive perspective? I know one of why you are competitors has come out with a new product on the checking side.

Brett, like I mentioned in the call, during the quarter, we did see a 53% lift in our new account openings as compared to the first quarter. We have running a couple campaigns, again tied to bringing in again, and we have talked previously about our exceptional account, which ties a money market with a checking account. We have had some success in bringing in new accounts with that campaign. We have also had a CD promotion where we have been able to bring in some deposits from some of our retail customers.

Okay. No comparisons year-over-year, or quarter-to-quarter on net account growth?

Again, the growth during the quarter was about $140 million. And of that $40 million was related to core deposit growth.

Okay. All right. And then I was trying to keep up with notes, but there were some comments on the branches on Hawaii, and I didn't quite understand, maybe I just didn't catch it, if there was going to be any expansion or atrophy in the branch profile in the next couple of quarters?

In the next couple of quarters, we have an ongoing program of evaluating each of our branches on a separate, as a separate business unit. We continue to look at that very stringently as part of a regular review process that we have. We do have plans in place to improve some of our existing branches.

We still have two we are going to consolidate from the merger, that we just weren't able to get a site for until recently. And the next two quarters, things don't move real quickly here, when you have got branch projects announced. So we don't expect to see anything in the next two quarters in that regard. It is something that we are looking at on a long-term basis, a continual process.

Great. Thank you.

Thank you. Our next question comes from Brian Roman, Robeco Investment Management. Please go ahead.

Yes, hi. Thanks for taking my questions. Couple of questions. Could you talk about your local economy in Hawaii? You referenced there has been a slowdown, and also talk about housing prices in Hawaii? Then I have got more questions.

This is Curtis Chinn. Yes. This has been a slowdown in the economy and it is tied to I think you are all aware we have had two airlines go out of business, that had airlift from the mainland to Hawaii so that has affected tourism. Plus the price of oil affecting air fare has resulted in a slowdown of tourism, so we are seeing a slowdown into our general economy.

What is the most recent number on slowdown in tourism? Don't they or somebody put down a number for visits, or something like that?

I am sorry.

It is down I believe 14.2% is the last number we have.

Is that year-to-date?

Year-over-year.

Yes. Okay, great. Thanks. Home prices in Hawaii. Did they have a significant run-up in the last 5 to 7 years sort of comparable to the mainland?

Yes. There has been a run-up in the last five years in home prices in Hawaii. I think that there is a distinct difference. Some of the run-up on the mainland quite frankly was due to speculation, and a lot of the subprime lending in particular Inland Empire, Sacramento, Central Valley, California, Arizona, Florida, and Las Vegas.

In Hawaii, a lot of the increase in price really had to do with basic supply/demand factors, as the 1990s were a very, very flat decade for Hawaii, in terms of real estate prices, so you had a lot of pent-up demand that really came online starting around '03. That helped increase prices, plus historically Hawaii, particularly single family residential has been an undersupplied market. There is always a shortage of housing, particularly on the island of Oahu, so even though the run-up has been similar, the factors that lead to that have been quite different.

Okay. Now let's see. I am looking at the slide deck here. You used a concept on page 4 of normalized credit costs. What is normal?

On slide 4, with respect to the credit costs and coming down to the $15.2 million of normalized net income, what we excluded were the credit costs related to the mainland of $112 million. You start with the reported net loss, you exclude the goodwill impairment, you then exclude the mainland credit costs, and then you come out with the $15.2 million.

So you are saying that 4.123 does not represent a percentage, it is just excluding the other numbers?

Correct.

Okay.

Those credit costs relate to Hawaii.

Fine. And then you have I think on page 5, I think it's sort of asked already but what is a normalized net interest margin? How do you normalized a net interest margin?

If you start with the 3.97% which was the margin for the second quarter, if you normalize it for the interest reversals of 2.1 million for those loans that are placed on nonaccrual status, it is adding back that interest, you come out with a normalized margin of 4.13%.

Do you think that is a workable number for all other things being equal, changes in interest rate. Is that workable for the second half of '08?

Yes, again, we expect the margin to be somewhere in the range of 4.1 to 4.2% going forward.

A couple more questions. This detail is amazing. Page 8. If you look at nonperformers in Hawaii, that went from 40 basis to 110 basis points. The construction portfolio went from 40 to 310. Can you just talk about what is going on there? Obviously there is a slowdown. I get that.

This is Curtis Chinn again. With respect to the numbers on Hawaii, these are past due, not just nonperformers. But the nonperformers are included in these numbers. And really, this is influenced by the two relationships that Dean earlier commented on. If you exclude the nonperformers from these numbers, the 30 to 89-day delinquencies at the end of the second quarter we are about $18 million, or 44 basis points. That compares to about $55 million, and 125 basis points at the end of the first quarter. So clearly the NPAs are what are influencing those numbers.

Okay. Two other questions. A year from now, how big are you going to be in assets? Obviously you have got run off on the mainland. I think you said we're going to stop originating some sort of construction loan on Hawaii.

Again, we talked about going forward. We are deleveraging the balance sheet, specifically with reducing our exposure on the mainland, as a result we see the portfolio shrinking over the next year.

So a year from now next summer it is 4.1 billion today, how big do you think it will be.

It will be slightly down.

If I could just correct one thing, too. We maybe didn't express ourselves very well, if you had the impression you said we were cutting off construction lending in Hawaii. It is a very good market, we continue to be very active in it.

It was probably my mistake I am sure. Then Ron, how do you pronounce your last name so I don't butcher it?

It is Migita.

A good old English name. There you go. A nice Jewish name. laughter) But what are your plans and expectations here? I mean, you have obviously been Chairman of the Board for a while. You can't sit here and say, well you just got on the job and you will figure it out after 30, 60, 90 days. What is kind of like the vision thing for this Company?

I have really not assumed my position yet because Clint is still CEO today. I promise the following, I will look at all of our business lines with a critical eye. Secondly, I promise to ensure that the bank continues to serve the Hawaiian market and our customers, and that any kinds of operations that don't fit into this objective will be scrutinized. I would go on to say that we are fortunate to have the capital and the capacity to face the issues. I want to position the bank to continue to serve our customers.

All right. Great. Thank you for taking my questions.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Brian Hagler of Kennedy Capital. Please go ahead.

Hey. I just had one quick follow-up. You mentioned that the credit costs in the second half would be down dramatically. I was wondering if you could provide any sort of range for the loan loss provision for the second half?

Well, what we said was our expectation was that credit costs should come down significantly from what we have experienced over the last year on a run rate basis.

Okay. Thanks.

Our next question comes from Tim O'Brien of Sandler O'Neil. Please go ahead.

Good morning, gentlemen. I have one question. It sounded like the 14 loans that you sold that were classified as available for sale on the mainland, you gave some good characteristics on the seven that you retained, can you characterize those 14 that you sold, in terms of what markets were the unlying collateral properties located in? Where were they? How far along the construction curve were they towards completion, home completion versus finish lots? Just a little bit of color on that portfolio you sold would be greatly appreciated? I will step back.

The assets we sold were 16 loans, and one ORE property, so a total of 17 assets. Of that 17, nine were land. So there was no construction on those. Of the other eight, five were tract development, and three were condos. Several of the tract developments, we had finished inventory and there was no further construction going on, so the borrowers were obviously trying to sell the finished inventory, but with sales just dropping through the floor, that was really problematic. In terms of the condos, two were completed, and one is still under construction. In the case of the condos again, absorption was very slow.

All right. Thanks a lot.

We show no further questions at this time. I would like to turn the conference over to Clint Arnoldus for closing remarks.

I would like to thank all of you for participating in our call today. This call went much longer than our normal calls, but these aren't very normal times, and we made the best effort we could to be as transparent in all of the factors that are influencing this bank as we could. I hope you found that helpful.

I do want to underscore three key points. The first one is that Central Pacific Financial Corp's core operations in Hawaii remain very solid with strong operating fundamentals. The second point I want to underscore is that we have undertaken proactive steps, to actively reduce our credit exposure in the California real estate market, and the third is that we are well-capitalized. We have a solid plan in place to remain well-capitalized, and we are well prepared for these challenging times facing financial institutions like ours all across the country.

On a personal note, I would just like to say it has been an honor and privilege to serve as President and CEO of Central Pacific Bank. We have been a bank in Hawaii since 1954, and over those 50 plus years, we faced many challenges and we have always prevailed. And I remain confident that Central Pacific under Ron Migita's leadership, will successfully meet the challenges currently before us, and do what is best for our customers, our employees, our shareholders, and our communities for many years to come. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.