Central Pacific Bank, the primary subsidiary of Central Pacific
Financial Corp., is again in the news for less-than-desirable reasons. The financially troubled Hawaiian bank
agreed to the issuance of a consent order by regulators last week.
The agreement with the Federal Deposit Insurance Corp. requires the bank
to take sweeping measures to improve its fiscal health. They include greater
supervision by the board of directors and senior executive officers, an
increase in Tier 1 Capital, submission of a capital plan, and the stricture not
to pay cash dividends to shareholders without first obtaining written
permission from the FDIC and the Hawaii Division of Financial Institutions.
Regulators also told Central Pacific to develop a contingency plan in
the event that it fails to meet agreed-upon stipulations. This document "must include a plan to
sell or merge the bank if the FDIC and DFI so direct."
Central Pacific got $135 million in public money in January through
the Troubled Asset Relief Program. The Treasury Department's decision to gave rise to controversy in June, when news reports disclosed that the bank won approval for that aid shortly after an aide to U.S. Sen Daniel Inouye contacted federal regulators to inquire about the application.
Inouye, a Democrat from Hawaii, had much of his personal wealth tied up
in Central Pacific shares at the time.
Although the senator publicly denied any wrongdoing in a statement
released June 24, the question remained how an institution whose business
practices had already been censured by the FDIC and state regulators could possibly be among the supposedly "healthy"" TARP applicants
initially selected to receive funding.
Indeed, according to a June 30 report published simultaneously in the
Washington Post and at Propublica.org, internal FDIC e-mails reveal that
Central Pacific's application for funding had already been forwarded to another
Treasury-headed council that reviews cases where a bank failed to meet
guidelines for government investment.
In other words, the bank was not among the first group selected for
TARP's Capital Purchase Program because it failed to meet the decisive
criterion that it "demonstrate [its] viability without the benefit of federal
funding." It was, in short,
not a healthy bank.
Much of the criticism leveled at Central Pacific prior to its receipt of
the TARP funds is echoed in the latest consent order. The bank's balance sheet is loaded with troubled assets,
particularly those attached to commercial real estate. On September 30, 2008, the bank held
roughly $133 million in troubled assets; one year later that amount had
skyrocketed to more than $446 million.
The consent order requires Central Pacific "develop or revise and
implement a plan" that will help to extricate it from the non-performing and
non-accruing loans in the areas of land development and construction. In its
press release on the FDIC order, the bank's parent company states that it has
already brokered deals to unload many of its commercial real estate loans and
has engaged an outside firm to review its CRE loan portfolio. It said the bank was winding down its
California operations and planned to dispose of all related holdings within the
next two years.
Additionally, the company's shareholders approved increasing the number
of shares of common stock this October, setting the stage for a stock offering
or private placement to raise additional capital.
The task before Central Pacific is formidable, and a change of course appears
necessary for its survival.
According to Wendell Cochran of the Investigative Reporting Workshop at
the American University School of Communication, Central Pacific's "troubled
asset ratio" has risen from 10.2 percent in December 2007 to 71.3 percent in September
2009. The national median is 14.1
percent. "Of the 92 banks that
have failed so far this year," Cochran wrote, "84 had troubled asset ratios of
100 percent or greater in the final quarter they reported data before they
closed."
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