Central Pacific Financial Corp. (CPF) Q3 2008 Earnings Report, Transcript and Summary

Welcome to the Central Pacific Financial Corp. third quarter 2008 conference call. During today’s presentation all parties will be in listen-only mode. (Operator Instructions) I'd now like to turn the call over to Mr. David Morimoto, Senior Vice President, Investor Relations. Please go ahead, sir.

Good morning everyone from Hawaii. With us today are Ron Migita, President and Chief Executive Officer; Dean Hirata, Vice President and Chief Financial Officer; Glen Fujimoto, Vice Chairman Hawaii Market 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 web site. Ron and Dean will begin by reviewing our third 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 these forward-looking statements, please see our earnings release issued this morning and our other recent documents filed with the SEC. Now I would like to turn the call over to Ron Migita.

Thank you all for joining us today to review Central Pacific Financial Corporation’s financial performance for the quarter ended September 30, 2008. I will be addressing the highlights of our company and the marketplace including updating you on the progress we have made in our California loan portfolio. Our Chief Financial Officer, Dean Hirata, will follow with a detailed financial report of our third quarter results. After we have completed our remarks we will be happy to take your questions. Central Pacific Bank is a company with strong roots in Hawaii. I have been on the job for about three months now and it is indeed an honor and a privilege to serve as CEO of Central Pacific Financial Corporation and Central Pacific Bank. I enjoy spending time with many of our customers to see how we can address their needs and concerns. I have also been impressed by the dedication of our employees. As you all know these continue to be challenging times for our bank and the entire financial industry. Central Pacific Financial Corporation like many financial institutions across the country continue to be faced with formidable problems stemming from problems in the national housing market and the ripple effect of the sub-prime lending crisis. We are pleased to announce that Central Pacific Financial Corporation has returned to profitability in the third quarter of 2008 with net income of $3 million or $0.11 per diluted share. This compares to a net loss of $146.3 million or $5.10 per diluted share in the second quarter of 2008. The earnings include credit costs of $23 million for the third quarter 2008 compared to credit costs of $116.1 million and a non-cash goodwill impairment charge of $94.3 million in the second quarter of 2008. The company did not report a goodwill impairment charge for the third quarter of 2008. CPF returned to profitability and reflects the continued strength of our core Hawaii franchise and our strategy to reduce exposure to the troubled California residential construction market. As previously reported, in July 2008 the company successfully reduced its exposure to this sector by selling assets with a combined carrying amount of $44.2 million. The company had previously written these assets down to their sales price in the second quarter of 2008 resulting in no impact on earnings in the third quarter 2008. We continue to address the impact of the weak California market and the slowing Hawaii economy in our loan portfolio. Hawaii is coming off a five-year boom. Tourism is obviously much weaker and looks to be weakening further. This will have ripple effects throughout our economy. The turmoil and uncertainty in the financial markets and in the California real estate market is also having negative effects on Hawaii’s real estate market. Central Pacific reported total losses of $5.5 billion at September 30, 2008. This reflects a decrease of $143.3 million or 2.5% from a year ago and a decrease of $146 million or 2.6% from June 30, 2008. Total loans and leases of $4.1 billion at September 30, 2008 reflect an increase of $7.7 million or 0.2% from a year ago and an increase of $2.3 million or 0.1% from June 30, 2008. Overall the Hawaii loan portfolio grew by $17.2 million during the current quarter while the mainland loan portfolio decreased by $14.9 million. Total loans of $3.8 billion at September 30, 2008 reflect a decrease of $165.2 million or 4.2% from a year ago and a decrease of $143.6 million or 3.7% from June 30, 2008. Non-interest bearing demand, interest bearing demand and savings in money markets decreased in the current quarter by $53 million, $13.4 million and $84.1 million respectively. Our timed deposits increased by $7 million. We believe these results are partly related to the softening of the overall economy and are similar to results seen by other financial institutions. For example, Hawaii has seen slowing in the real estate market which has impacted our title and escrow departments. Some foreign customers have also moved some of their deposits based on concerns about the overall U.S. economy. However, we are confident that increases to the FDIC insurance limits have reassured our customers and addressed concerns faced by all financial institutions during these challenging economic times. The good news is we are seeing a 30% increase in the number of new deposit accounts for the first three quarters of this year and we believe going forward these new relationships will prove fruitful in the coming months and years. Although Hawaii’s economy is beginning to slow, we are not experiencing the challenging market conditions facing California and our Hawaii commercial and residential real estate portfolios continue to perform within our expected credit parameters. In addition to a decrease in credit cost in the second quarter of 2008, the company reported a sequential quarter decrease in net loan charge offs and nonperforming assets. Net loan charge offs for the third quarter 2008 totaled $8.7 million compared to $73.9 million in the second quarter 2008. The company also reported nonperforming assets of $132.6 million at September 30, 2008 compared to $145.9 million at June 30, 2008. The allowance for loan and lease losses as a percentage of total loans was 2.46% at September 30, 2008 compared to 2.11% at June 30, 2008. We continue to be well capitalized as on September 30, 2008 our tier one risk based capital, total risk based capital and leveraged capital ratios were 10.13%, 11.39% and 8.66% respectively. However, given the uncertainty in the economy and the significant challenges facing the entire financial services industry our consistent position has been to closely evaluate our capital levels. I also want to underscore that Central Pacific Financial Corporation does not hold directly or indirectly any common stock, preferred stock or subordinated debt of Fannie Mae or Freddie Mac. We have been aware of our challenges in California since 2007 and continue to take proactive steps to aggressively deal with each problem California residential and construction loan. At September 30, 2008 the company’s exposure to the California residential construction market totaled $95.4 million. This amount consisted of $76.7 million in the loan portfolio, $13.1 million classified as held for sale and two foreclosed properties totaling $5.6 million. At June 30, 2008 the company’s total exposure to this sector was $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. California residential construction loans held in the third quarter represented 1.9% and 2.1% of total loans and leases at September 30, 2008 and June 30, 2008 respectively. Of the remaining $76.7 million balance in the California residential construction portfolio the allowance for loan and lease losses established for these loans was $23.6 million at September 30, 2008 and 30.8% of the total outstanding loan balance. Nonperforming assets related to this sector were $51.5 million at September 30, 2008 or 0.984% of total assets. This balance was comprised of non-accrual portfolio loans totaling $32.8 million, non-accrual loans held for sale totaling $15.1 million and other real estate owned totaling $5.6 million. At September 30, 2008 the company’s loans to the mainland commercial real estate and construction market was $998.4 million which consisted of $992.4 million in the loan portfolio and one foreclosed property totaling $6 million. The $992.4 million balance ended up mainly commercial real estate and construction portfolio which excludes the aforementioned California residential construction portfolio consisted of $713.8 million in California and $278.6 million in other western states. Commercial real estate and construction loans held in the mainland portfolio represented 24.3% of total loans and leases at September 30, 2008. Nonperforming assets related to this sector were $45.6 million at September 30, 2008 or 0.83% of total assets. This balance was comprised of fall off loans totaling $39.6 million and one foreclosed property totaling $6 million. We are not currently making any new loans in California. Our team of senior level personnel continues to work to reduce our exposure to the California real estate market. We continue to execute on our plan to reduce our remaining loan portfolios over the coming years through a combination of pay downs, participations, restructuring and loan sales. At September 30, 2008 the company’s Hawaii commercial real estate and construction loan portfolio totaled $1.2 billion. There were no Hawaii commercial real estate or construction loans classified as held for sale. Central Pacific Bank is a Hawaii bank and our core operations in Hawaii remain solid with strong operating fundamentals. We continue to move forward with strategies that will allow us to expand our footprint in the Hawaiian market and provide us with opportunities for growth and market share expansion. We continue to offer new products and services to the market place including a successful iPod deposit gathering campaign and an innovative free plus checking product. We were also recently named small business administration lender of the year in our home market category for the fifth year in a row. Our community based banking strategy has increased our competitive presence and deposit gathering particularly in the small business sector. By decentralizing our banking expertise and empowering our front line to become fully integrated with employee’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 and our 100 ATM network. Finally, our board of directors has declared a fourth quarter cash dividend of $0.10 per common share payable on December 19, 2008 to shareholders of record as of November 21, 2008. As we have stated in the past we know our dividend continues to be important to our shareholders and it is important to us as well. Despite the turmoil and uncertainty in the financial markets our Hawaii operations are solid and growing and we are well positioned to meet the needs of our customers during these challenging times. At this time our Chief Financial Officer, Dean Hirata, will discuss the financial results of our third quarter.

Turning to slide three let me just again summarize the third quarter results. First, we have returned to profitability with quarterly net income of $3 million or $0.11 per diluted share. We have maintained our well-capitalized regulatory designation as of September 30, 2008 with tier one risk based capital, total risk base capital and leverage capital ratios of 10.13%, 11.39% and 8.66% respectively. All three of these ratios were an improvement from June 30, 2008. We showed a decline in our total credit costs from $116.1 million in the second quarter to $23 million in the third quarter of 2008. The increase in allowance for loan and lease losses as a percentage of total loans and leases from 2.11% at June 30 to 2.46% at September 30, 2008. Finally we have improved the company’s credit risk profile by reducing our exposure to the California residential construction market through the previously announced sale of assets in July of this year with a combined carrying amount of $44.2 million. Turning to slide four, as you can see our net interest margin was 4.07% in the current quarter as compared to 3.97% in the second quarter and as you can see from the periods presented we do compare favorably compared to our national peers. Our expectation is that we will compare favorably in the third [sic] quarter. Turning now to the balance sheet on slide five and starting with our loan portfolio, again this slide provides a break down of our total loan portfolio by loan category at September 30 compared to balances as of June 30. Later in the presentation I will provide additional detail on each of these specific categories. This slide also shows past due amounts by category comparing June 30 with September 30. In total our loan portfolio increased by $2.3 million during the quarter. As you can see from the slides the Hawaii portfolio increased by $15.3 million while the mainland portfolio decreased by $13 million. On the mainland we saw decreases in our residential construction and commercial mortgage portfolios which was partially offset by a partial increase in our mainland commercial construction portfolio. In Hawaii the majority of our growth came from our residential mortgage and commercial construction portfolios. This growth was partially offset by decreases in our commercial mortgage and CNI portfolios. Past dues in the mainland were up from 5.9% at June 30 to 8.1% as of September 30 primarily due to an increase in past dues in our mainland commercial construction portfolio. I will again provide more detail on this portfolio later in my presentation. Past dues in Hawaii were up slightly to 1.4% as of September 30 primarily due to past dues in our Hawaii residential construction portfolio and again I will provide further detail as I go through the presentation. Turning now to slide six and starting first with the mainland residential construction portfolio total outstandings of $93 million as of September 30. As you can see from the pie charts $74 million or 79% of the portfolio is comprised of single-family residential projects. Townhouse and condo projects account for the remaining 13% and 8% respectively. Looking at the portfolio geographically our two biggest exposures are in our Fresno, $25 million or 27% of the portfolio and Sacramento $24 million or 26%. These two locations account for a little more than 50% of the entire portfolio. Starting with the Fresno portion of this portfolio we have two loans outstanding both of which are performing. We expect repayment to come either from refinance or a longer-term amortization. On the Sacramento portfolio we have outstanding loans to three borrowers. These are classified as nonperforming assets as of September 30 and we have substantially written down the balances on all three of these loans. In all cases we believe we are adequately secured in comparison to our remaining net book value. All loans in the portfolio graded five or higher have been reappraised within the last 9 months. Turning to slide seven, which is our mainland commercial construction portfolio, again as you can see by the chart the portfolio in looking at by property type is comprised predominately of office properties of $149 million or 35% and retail restaurant of $133 million or 31%. Geographically our biggest exposures are in Sacramento at $74 million or 17% and Riverside $60 million or 14%. Starting with the Sacramento piece, we have eight project loans comprised of six loans for office space, one shopping center and one warehouse. Six of the projects are completed and in various stages of either lease up and/or sale. Two of these loans are non-accrual. We are working through the sale lease up of the property with one of the borrowers while we have begun foreclosure on the other. Based on current absorption of the remaining project we expect full repayment on all of the others. On the Riverside portion of the portfolio we have ten loans outstanding. Five are entitled land for future development and five are construction loans. Of the five land loans two are nonperforming totaling $8.5 million and the other three are performing. Of the five construction loans one loan is for an apartment complex, one for office space and three loans for retail projects. The office project is under contract for sale. The apartment loan is 50% complete and the retail projects are in the process of pre-lease. All of these construction loans are performing. Turning now to slide eight shows the mainland commercial mortgage portfolio and total outstandings of $566 million as of September 30. As you can see from the chart starting first by property type the portfolio comprised predominately of retail restaurants of $245 million or 42% of the portfolio and office/commercial properties of $139 million or 25%. Geographically our biggest exposures are in Los Angeles with $222 million or 39%, Sacramento $55 million or 10% and King County in the state of Washington of $70 million or 12%. With respect to the geographic markets the southern California group tends to focus on in-field markets in Los Angeles. In the Seattle area we tend to focus on in-field areas of downtown Seattle within the Queen Anne district, both of which are good apartment markets. In Sacramento our exposure consists primarily of office and warehouse properties. Of this amount $40 million was split between 2003 and mid-2005 and is well seasoned. For our retail restaurant exposure all loans are performing. The average debt service coverage ratio is 1.42 and the weighted average loan to value is 64%. For our office commercial exposure we have 17 loans. One of the loans is classified and the rest of the loans are performing. The weighted average loan to value for this portfolio is 66% and the average debt service coverage is 1.24. Our apartment exposure represents 14 separate loans to two investor groups. One of the investor groups is located in southern California and the other is in Seattle. Both groups specialize in apartment rehab and repositioning and have large portfolios of stabilized and repositioned apartments. The stabilized portfolios provide cash flow for repositioned projects if necessary. All are performing and all have positive cash flow after debt service. Debt service coverage on an interest only basis averaged between 1.25 and 1.5 while average loan to values are in the 65-75% range. All loans graded five or worse were reappraised within the last 10 months and the average remaining maturity for this portfolio is 33 months. Turning now to slide nine, which is our Hawaii residential construction portfolio with total outstandings of $349 million. As you can see the majority of our Hawaii construction loans are structured with pre-sale, pre-leasing requirements with minimum cash equity contributions and recourse individuals. Overall, Hawaii construction exposure is expected to be reduced significantly somewhere between 25-50% in the next 12 months as projects will be either completed and absorbed. As you can see from the chart, 59% or $201 million or our exposure relates to single-family residential projects. Our three largest loans account for a combined $101 million or approximately 29% of the outstanding balance. Our largest loan with an outstanding balance of $51 million is for an affordable condo project in Honolulu that is currently sold out with expected delivery in January 2009. Turning now to slide ten which is our Hawaii commercial construction portfolio again total outstandings of $303 million as of September 30. As you can see from the chart this portfolio is well diversified. Our biggest exposure items are retail restaurants, $77 million or 24%, industrial warehouses with $66 million or 22% and storage facilities with $45 million or 15%. Our retail projects are typically pre-leased and well located. Of our retail exposure two loans represent more than $61 million of the committed amount. One of the loans is located in Lahina Maui and it is completed and stabilized. The other loan is on Oahu in the early stages of construction with a strong anchor tenant in Target. The industrial warehouse projects are split between three loans. All are for lock development for sale, mostly to owner users on the island of Oahu. Demand for this type of space is driven by shortages of these properties and plans for redevelopment of lease properties. These redevelopment plans are driving tenants to seek fee space to reduce lease expenses for their businesses. Turning now to slide eleven, our Hawaii commercial mortgage portfolio outstandings of $859 million as of September 30. As you can see the commercial mortgage portfolio is fairly granular. The average loan size is less than $2.5 million and as noted in the slide our three largest loans are from $19 million to $16 million. This portfolio is also very seasoned as evidenced by the low loan to values of 50% and average debt service coverage ratio of 1.6. As you can see from the graph our three largest exposures are owner user with $235 million or 28%, office space with $124 million or 14% and retail restaurants with $119 million or 14%. Turning to slide twelve, our Hawaii residential mortgage portfolio. This is a break down by loan type and as you can see the vast majority of the portfolio is comprised of fixed rate loans of $449 million or 49% and ARM of $279 million or 30%. We have conservative underwriting as reflected by low weighted average loan to values of 57%, high average FICO scores of 738 and very low delinquencies. We have also tightened our underwriting to include lower the maximum loan to values on those loans without mortgage insurance to 85%. We do not have any sub-prime exposure in this portfolio. Turning to slide thirteen, our Hawaii commercial and other loan and lease types as of September 30 the commercial book was $312 million or 55%, auto loans were at $140 million or 25% and leases at $60 million or 11% and our consumer loans round out the portfolio at $45 million or 9%. Again, the commercial portfolio is granular comprised of more than 3,300 loans and no major concentrations by industry type. Over 70% of the CNI portfolio is on Oahu. Turning now to slide fourteen, looking at the detail of our nonperforming assets, comparing September 30 to June 30 and March 31, as you can see from the table our nonperforming asset balance has decreased by $13.4 million during the quarter. There was a decrease of $41.6 million in non-accrual mainland residential construction loans held for sale during the current quarter again due to the bulk loan sale back in July. The decrease attributable to the loan sale was partially offset by increases in the non-accrual mainland commercial construction loans of $28.7 million and Hawaii commercial construction loans of approximately $5.4 million. New mainland commercial construction loans placed on non-accrual status were to three bars. We have five loans outstanding to one of these three bars. Four of these five loans are for commercial land development and one is for construction of an office condo project. All five of these properties are in Sacramento. Of the remaining two bars one is for a land development project in Riverside county and the other is for a land development industrial warehouse project. There were three new Hawaii residential construction loans placed on non-accrual status during the quarter which are located on Oahu and Hawaii. Of these loans we expect to sell one of these loans at par and we believe we are well secured on the other two loans. Other real estate increased by $8.1 million during the quarter and the increase was due to a transfer of one residential construction loan and one commercial construction loan from the portfolio to REO. Turning to slide fifteen, this slide illustrates the extent to which we have aggressively reduced our exposure to the California residential construction market over the last twelve months. Through a combination of transfers, loan sales and charge offs we have reduced this portfolio by 77% from September 2007 to September 30, 2008. Excluding the loans that are part of the bulk loan sale, we charged off an additional $74 million which further emphasized our efforts to reduce the portfolio. Of the remaining $77 million in this portfolio we have reserved of approximately $24 million or 31% of the remaining balance. Based on the loans that remain in the portfolio combined with our assessment of the collateral supporting it we believe the level of reserves are appropriate. The remaining $77 million in the portfolio has been written down either via charge offs or reserves to approximately $0.50 on the dollar. Turning to slide sixteen, this shows our mainland residential construction loss coverage basically summarizing what our net book value net of reserves is as a percent of the original note balance for this portfolio. Again, the purpose of this slide is to give you an idea of how much we have written these balances down from their original amounts, again either through reserves or charge offs. As you can see we have written the loans in this portfolio down to $0.54 on the dollar. For loans classified as held for sale, these balances are at levels at $0.38 on the dollar and for our classified loans these balances are down to $0.46 on the dollar. There are five non-accrual loans remaining and they have been written down to $0.42 on the dollar. Again, we believe that the net book value at these levels appropriately reflect fair value. Turning now to slide seventeen, we continue to have a strong focus on strengthening our asset quality. Throughout the company our underwriting standards for construction and commercial real estate loans have tightened since the fourth quarter 2007. As mentioned in earlier calls we have stopped new loan production in California since December 2007. We conduct ongoing credit transaction reviews and our officers are required to complete risk-rating validations for each loan within their portfolios on a monthly basis. These risk ratings have been reaffirmed by our credit administrators and our loan review area. At a minimum, each quarter the project status for these commercial real estate loans in both Hawaii and the mainland are reviewed by senior management. Any risk issue surfaced the loan officers are required to discuss their action plans to address these issues and as part of this process the collateral values are assessed. If a problem situation is uncovered immediate action is taken to develop remediation or [inaudible] strategies. Again, we have monthly updates regarding the status of any loans that provide challenges within the portfolio. In addition to more stringent underwriting standards for our construction and commercial real estate loans we have also tightened the underwriting guidelines for all other retail products including residential mortgages, home equities and other consumer loans. Our credit performance for the Hawaii residential mortgage loans remains favorable and we continue to seek lending opportunities. However, we have recently tightened our underwriting parameters in such that all loans must be sellable in the secondary market. Turning now to slide eighteen and looking at our deposit funding, total deposits were $3.8 billion as of September 30. As you can see from the chart more than 70% of our balances are comprised of demand, now, money market savings and small timed deposits. On a sequential quarter basis quarter deposits are down $144 million or 3.7%. As we discussed earlier the current quarter decrease is consistent with what we have seen within the Hawaii market in other financial institutions. The decrease reflects declines in our escrow and total deposit balances as the Hawaii real estate market has slowed and declines in the deposit balances of some of our foreign customers due to concerns over the U.S. economy. However, despite the decrease in balances we did see a 30% increase in account openings so far this year compared to the same period last year. Again, the increases are attributable to our community based banking initiatives and our successful deposit campaigns. Brokered CD’s continue to represent only a small percentage of our total deposit base at 3% and as you can see on the bottom half of the slide our deposit costs continue to compare favorably against our national peers. Turning to slide nineteen and looking at our other operating income and expense other operating income was $11.7 million during the current quarter compared to $11.8 million in the year-ago quarter and $11.9 million in the second quarter of 2008. The sequential quarter decrease was due to lower gains on sales of residential mortgage loans. The year-over-year decrease was due to lower bank owned life insurance income partially offset by higher gains on sale of loans. Other operating expense was $37.5 million in the current quarter compared to $31.6 million in the year-ago quarter and $66 million in the second quarter of 2008 excluding the non-cash goodwill impairment charge. The sequential quarter decrease was primarily due to the credit related charges we took in the second quarter which included write-downs of our loans held for sale of $22.4 million, foreclosed asset expense of $4 million, higher reserves for unfunded commitments of $2 million and losses on sales of commercial real estate loans of $1.7 million. The sequential quarter decrease is also due to lower commission expense as a result of reduced mortgage loan origination during the quarter. These decreases were partially offset by higher FDIC insurance expense and the recognition of certain requirements and severance compensation accruals of $0.8 million. Although the retirement and severance compensation expenses is non-recurring we do anticipate increased FDIC insurance expense going forward in light of the recent increases in FDIC coverage limits. The increase from the year-ago quarter was primarily due to higher FDIC insurance expense, the recognition of retirement and severance compensation accruals, higher occupancy expense and higher expenses attributable to the maintenance and disposition of some of our mainland assets. Turning to slide twenty and looking at our efficiency ratio, the ratio was 57.71% for the current quarter. Again, the ratio excludes foreclosed asset expense, the loss on sale of commercial real estate loans and asset write-downs. However, despite the exclusion of these items the higher efficiency ratio in comparison to historical periods was primarily due to the increase in the FDIC insurance expense as well as some of the other costs that were discussed earlier. Besides the increases to non-interest expense the current quarter efficiency ratio was also negatively impacted by the reversal of $400,000 in interest related to certain non-accrual loans. If you normalize for these credit related costs and certain non-recurring items, the efficiency ratio would have been approximately 51.5%. Again, in the short-term we believe the efficiency ratio will be in the range of 54-56%. Turning to slide twenty-one and looking at our liquidity and capital position this chart depicts the composition of our funding sources with deposits providing 69% of our overall funding. We also have significant available liquidity with access to additional borrowing capacity of approximately $1.3 billion. As mentioned earlier, we maintained our well-capitalized regulatory designation for all capital ratios as of September 30. Again, as we discussed earlier given the uncertainty in the economy and the challenges facing all financial institutions our consistent position has been to closely evaluate our capital levels. Turning to slide twenty-two and our overall summary and outlook for the quarter, in closing our fundamentals have strengthened. First we have returned to profitability in the current quarter due to a significant decrease in our credit costs in comparison to the second quarter. We have also further strengthened our allowance for loan and lease losses as a percent of total loans and leases to 2.46% and continue to rigorously analyze our portfolio and current reserves to appropriately reflect current asset values. Our capital ratio continues to exceed well-capitalized regulatory requirements. We continue to serve our customers by investing in our core Hawaii markets. Again, despite the sequential quarter decrease that we saw in our deposit balances we did see a significant increase in our new account openings. Finally, the Hawaii economy is softening but not to the extent that we have seen in the rest of the nation. This concludes my review of Central Pacific’s financial results for the third quarter 2008 and I will now turn the call back over to Ron.

Thank you for participating in our call today. In conclusion I would like to underscore several key points here. I am confident that our team at Central Pacific Bank can successfully overcome these current economic challenges and continue to serve our customers and our shareholders. While Hawaii’s economy has begun to slow, Central Pacific Financial Corporation’s core operations in Hawaii remain solid with strong operating fundamentals. We remain encouraged by the long-term outlook for our core Hawaii franchise. We continue to take proactive steps to actively reduce our credit exposure in California’s real estate market. We are also well prepared for these challenging times facing financial institutions like ours all across the country. Now at this particular time we would like to entertain questions from the audience.

(Operator Instructions) The first question comes from Brett Rabatin – FTN Midwest Research. Brett Rabatin – FTN Midwest Research: I wanted to start off talking about the commercial construction portfolio and ask how much of that portfolio was spec versus you had someone pre-bill kind of situation?

In Hawaii in the commercial construction portfolio our underwriting requires pre-leasing so from that perspective it really isn’t a pure spec type of transaction. On the mainland it was more spec, probably 50% of that portfolio required some level of pre-leasing when it was originated. Probably about 50% was spec. Brett Rabatin – FTN Midwest Research: If I understand it correctly it sounded like of those eight loans six of them were office space related. Was that the case?

Are you talking about the eight loans in Sacramento? Brett Rabatin – FTN Midwest Research: I’m not sure if I quite understood. There was reference to and you mentioned it in the call as well, there is eight California commercial real estate loans with three borrowers totaling $29 million which appears to be where you had your weakness in the “mainland commercial construction portfolio.” So I wanted to make sure I understood those are all commercial construction loans not also commercial real estate?

You were talking about the eight loans that were added to non-performing status in the quarter. Those were commercial construction and development. Two of them were actual construction. Six were actually in development so they were more on the spec side. Most of those loans were also in Sacramento so geographically that is where we have experienced more of our issues. Brett Rabatin – FTN Midwest Research: I also wanted to ask about the auto portfolio. I’m curious, how much of that is fore plan and what are you seeing in terms of the performance of that portfolio? I think it is about $140 million.

That is all in our indirect portfolio so that is paper we bought from dealers and that has been performing very well. Our delinquency rate has been 92 basis points at the end of the quarter and it has been running at about the 1% range pretty much all year. About a year and a half ago we made a decision given that is a relatively small portfolio for us to concentrate all of our new production on A&B tiers so it tends to be pretty high quality paper. We give up some yield but we have good quality.

I also want to clarify, you said fore plan, we only have one line of credit that is considered a fore plan and it is to the tune of about $10 million and as Curtis had said earlier all of our positions remain very conservative. Particularly, as you know as car sales are declining across the United States. Brett Rabatin – FTN Midwest Research: I wanted to make sure I understood if I’m reading this correctly and I appreciate all the color in the PowerPoint presentation, there basically are no non-performing commercial real estate loans and you really haven’t seen much in the way of risk migration in that portfolio? Can you give us any additional clarity on that?

That is correct. That commercial real estate portfolio are the income property and multi-family portfolios and we really haven’t seen at this juncture the stress we have seen in other segments on the mainland. Brett Rabatin – FTN Midwest Research: So the retail restaurant is about $245 million and the office $139 million. No major stress there. You indicate grade five loans or reappraised. Do you have an estimate how much you have in grade five loans for the mainland CRE portfolio?

I’m going to estimate that number off the top of my head but it is going to be around $50 million range. The recent appraisals have been holding their value better. We have seen in publications everybody has said that thus far those valuations have held up a bit better. Brett Rabatin – FTN Midwest Research: Lastly, I wanted to ask about TARP and what your correspondence has been like with the regulators and what you are anticipating right now?

Again, as we talked about we continue to be well capitalized as of September 30 in terms of our capital ratios and again we are committed to ensure our capital position remains strong. We have applied for the capital through the Treasury’s capital purchase program. Again, we have been in close contact with the regulators on our application.

The next question comes from Joe Morford – RBC Capital Markets, Joe Morford – RBC Capital Markets: I wanted to circle back to these eight new loans California commercial real estate added to NPA this quarter. I’m just wondering if you can talk about the reason for the weakness or the move to NPA. Was it problems with the borrower or the collateral values or kind of write down as you take them and move them into NPL and then lastly what is the prospect for resolution here.

In terms of the eight, six of those are to one borrower and the issue really wasn’t with the collateral value it really was more liquidity of the borrower. The borrower basically over extended and ran out of cash and couldn’t continue debt service. So that was really the problem there. The other two one was a land development for a retail project. When we underwrote it had a certain amount of acreage, it was pre-leased. The pre-leases fell out and that caused the issue there. The other one again was a liquidity issue with the borrower. Joe Morford – RBC Capital Markets: Write-downs taken as you moved into NPL?

At this juncture we have taken no write downs on those specific loans. Joe Morford – RBC Capital Markets: Any color on the prospects for resolution here?

At this juncture it is pretty early in the game because we just moved it to NPL. We had on a number of those loans we had a couple of investors fishing and calling us with offers for note sales at discounts we were not interested in.

I will just add though like any other loan on the mainland we are putting these up for sale. If we can find a buyer that makes sense we will consider it. But again we are very cautious on the amount of discount we have to entertain there. Joe Morford – RBC Capital Markets: What other plans for sales do you currently have in California or any pools being currently marketed?

We don’t really anticipate trying to do another large wholesale like we did that was completed in July. We are opportunistically looking at opportunities. We are in discussions on a number of non-performing loans for sale. There was about 3-4 we have ongoing conversations to the extent we can get closer to our carrying value we will consider those opportunities more closely. Some of the other loans we have in NPA are sort of sell through of the collateral on an absorption basis so that is just a longer-term work through process. Joe Morford – RBC Capital Markets: Lastly, I know it is the smallest part of the portfolio, but given your comments at the outset about the growing stress on the Hawaii economy I just wonder if you could comment on the CNI portfolio there and what trends you are seeing there in terms of strain or potentially increased classified assets or what have you.

We have seen softening in the Hawaii market and that has had affected some of our CNI borrowers. We started a process about 6 months ago where we were reviewing our portfolios on a monthly basis for all of our loans. So we have been adding to reserves to that to cover that. We have seen some movement in classifieds and criticized but no major moves in terms of NPA. Many of the borrowers also saw this coming and have been adjusting their costs to maintain their cash flows. So far we haven’t had any major issues in that portfolio.

With all of that said, we are continuing to stay on top of our entire portfolio here in Hawaii.

The next question comes from Bobby Bowen – KBW. Bobby Bowen – KBW: Continuing on the Hawaii loans I was wondering if you could give some comments on the hotel loans especially if we are seeing visitor arrivals down as much as we are both on the construction and on the commercial?

We don’t really have a lot of hotel exposure. Dean referenced one $15 million loan. We have aggregate about $50 million exposure to hotels so we are not a big hotel bank and we typically do not provide financing on a single property basis. That said, as you can imagine occupancy rates are down across the board and you have probably read that in the paper or seen that in the press releases. In terms of our performance of our loans to those hotel operators, their occupancies are down but they are still performing and have adequate cash and liquidity to service their debt. Bobby Bowen – KBW: Further on the Hawaii economy, what is your outlook for GDP or obviously softening but is there a possibility we could start seeing negative marks on GDP in Hawaii?

There is no question the Hawaii market is softening. However, the downturn locally is not as severe as the overall U.S. economy. You may have read about this but in September of this year visitor headcount fell by about 19% and that has been the largest decline in about 5 years. Our unemployment rate for the month of September was at 4.5% and is up from a year ago. But again this unemployment issue was caused by several large companies that were forced to address layoffs locally. Overall we are cautiously optimistic. We think things will continue to get softer and we are just watching everything very closely.

The next question comes from Eileen [Lipsky] – Sandler O’Neill & Partners. Eileen [Lipsky] – Sandler O’Neill & Partners: You had mentioned you had applied for TARP. My first question was can you tell us what the maximum amount of capital you would receive from the program is?

Again, the maximum amount is based on 3% of risk-weighted assets which would be approximately $135 million. Eileen [Lipsky] – Sandler O’Neill & Partners: Would you consider any other capital raising efforts or would that money be sufficient to carry you through this environment?

Again, as I talked about earlier we remain committed to ensuring our capital position remains strong. At this time we are working with the Treasury on our application for TARP. Eileen [Lipsky] – Sandler O’Neill & Partners: So no other methods at this moment, the TARP would be sufficient?

Again, that is what we are currently working on.

The next question comes from Brett Rabatin – FTN Midwest. Brett Rabatin – FTN Midwest : I just wanted to follow up on some deposit related stuff. I’m curious given what I hear locally about competitive deposit rates I am assuming your [prognication] for the margin in the fourth quarter is a little softer with CD pricing and I’m also curious how much do you have in foreign deposits? I’m trying to figure out how much of an impact the title escrow and foreign deposit factor impacts you.

We actually don’t have a large amount in foreign deposits but we did see some foreign deposits leave as there was concern about the overall U.S. banking industry. So a lot of that was repatriated back. There was some overall softening in the economy but with the decline and softening in the real estate market we did see some decline in the title and escrow balances this quarter. We expect that to soften for the remaining part of the year in those types of balances but we are starting to see those overall balances start to flatten out and come back a little bit. Brett Rabatin – FTN Midwest : It sounds like you are being locally a little more competitive on CD rates so I’m curious about funding. I know you are shrinking the balance sheet but how you are funding the assets going forward in terms of mix of borrowings. Can you bring that down with higher CD levels? Do you expect the margin to be a little softer in Q4?

We are focused on our loan to deposit ratio. Again we expect this ratio to decrease over time as we focus on growing our deposits. Again we did talk about some of the initiatives including some products such as our free plus checking, the exceptional account as well as the roll out of our community based banking model. With respect to the mainland again we are focused on downsizing the mainland portfolio. Combined with the slower growth here in Hawaii overall we do expect to manage our funding levels with a decline in the overall loans. As far as the margin, with the recent cuts by the Fed we expect the margin to be somewhere in the range of 3.9-4.1% going forward. Brett Rabatin – FTN Midwest : Are you in the Cedars program?

Yes.

The next question comes from Charles Phipps – Palm Desert National Bank. Charles Phipps – Palm Desert National Bank: You mentioned the deposits are up because you are servicing the small business market very well it sounds like. What products are driving that? Are you pushing your remote deposit capture? ACH? What?

Actually with our community banking initiative the large reason why we embarked on that was we felt there would be opportunity in the small business market. That continues to take root. We are seeing an increase in the number of accounts being opened as mentioned earlier by Ron. We expect that in the next few months and quarters to expand. We also launched our new free plus checking account. That also contributed to some of our growth in consumer deposits and that again is something we think is the most competitive product in the marketplace so we expect to see growth in that category in the next few months also.

The next question comes from Al [Sevastano] – Unknown Firm. Al [Sevastano] – Unknown Firm: I was just wondering if you can add a little color on the mainland commercial construction rise in delinquencies and the Hawaii residential construction rise in delinquencies.

Let me go back to that slide. The delinquency numbers that Dean referenced included the NPA. If you look at the less than 90-day delinquencies only the delinquencies in the third quarter were $23 million or 57 basis points compared to $18 million and 44 basis points in the second quarter of 2008. So the delinquencies were up quite modestly. Most of those delinquencies got cleared at the end of the quarter. So the real issue was the NPA’s.

Again, thank you everyone. Central Pacific Bank has been a Hawaii bank since 1954. Over these 54 years we have faced many challenges and prevailed. I remain confident that the bank will successfully meet the challenges currently before us and do what is best for our customers, employees, shareholders and our communities for many years to come. Thank you again for joining us this morning.

The conference has now concluded. You may disconnect.