Central Pacific Bank (trading symbol CPF)

[Purron]

Has anyone seen this situation before? What am I missing?

Politics are playing a role for sure. Plus the "serving the underserved" feeling at the FDIC that, even in these difficult times, is alive and well. I'm thinking the Feds would love to dump this dog but can't.

 

[Nords]

A couple of updates:

First, CPB carried out their 1:20 (reverse) stock split on 2 Feb. (Central Pacific Financial Corp. Announces Effectiveness of Reverse Stock Split) The stock was trading at about $1.50/share before it levered up to $30/share, and 3 Feb it closed at $26.16... the pre-split equivalent of $1.31. Volume was humongous, even despite the number of shares being reduced by a factor of 20-- maybe some of the investors thought they were cashing out, and maybe the shorts have been taking advantage of the volume & volatility to cover. (I wish short reports came out more frequently.) It'll be interesting to see where the price settles out.

Or maybe the volatility was caused by their quarterly report. (Central Pacific Financial Corp. Reports Fourth Quarter 2010 Results) CPB reported losing "only" $2.1M this last quarter ($2.80 per $26 share), which admittedly is far better than anything they've recorded in the last couple years. In general all their numbers got better (or "less worse") but their risk-based and leveraged capital ratios are still not in compliance with the FDIC consent decree-- not even close. However I think that in general the FDIC is willing to stand back and see how the recapitalization goes.

CPB said in the split announcement:

As a result of the reverse stock split and elimination of fractional shares, the number of outstanding common shares was approximately 1,529,000 as of the effective time.

Before the 1:20 split, CPB also had 135,000 preferred shares (TARP) outstanding, plus their accrued dividends. The preferred TARP shares (and dividends) are also converting at 50 cents for a total value of $55.8M or 5,580,000 post-split shares. The recapitalization is going to sell $325M at 50 cents/share for 32,500,000 post-split shares. And finally the bank has agreed to sell another $20M at 50 cents/share to existing investors, or 2,000,000 post-split shares. After the recapitalization is finished, outstanding shares will rise from 1,529,000 to ~41.6 million shares.

The initial TARP investment of $130M in 135,000 preferred shares, plus accrued dividends, converted at less than half that amount ($55.8M). I don't see how the government expects to ever get its money back, but this "$74M + dividends loss" is probably much cheaper than throwing the entire bank to the FDIC. So there doesn't seem to be a minimum price for the government to worry about getting its money back like it would with AIG or GM.

The record date has still not been set for the existing shareholders before the recapitalization. If there are 1,529,000 shares outstanding and another 2,000,000 being offered to those shareholders during the recapitalization then existing shareholders could expect to get 1.3 shares for every existing share.

Hypothetically a brand-new "existing shareholder" (before the record date) could start tomorrow at $26.16 with one share, within a month add 1.3 shares at $10/share, and have a total cost basis of $17.03/share for 2.3 shares. Unloading them at $26.16 would be a short-term gain of 54%. (Not including commissions & fees.) However the recapitalization has been rumored to invoke a 180-day lockup for all shareholders. (I don't know how to confirm this.) After the lockup expiry, though, the share value might drop rapidly to $17/share-- especially if the bank is still unprofitable. Frankly there's nothing but emotion, faith, and hype holding the share price above $10 (which, pre-split, was the 50-cent recapitalization price).

Help me out here-- did I just conclude that the most logical investment here for the next 7-8 months would be to short the shares even more? Can a brokerage even borrow shares to short? What happens to an investor who's shorted existing shares before even more shares are issued-- is the short automatically boosted by a factor of 1.3? If shares are subject to a 180-day lockup, does that keep a short from borrowing them? Is it better to short before the record date, or to wait until after the recapitalization? I'm going to presume that there's no reason to be short after the lockup expires... unless the bank isn't making money.

The only things that could reasonably be expected to raise the bank's share price would be (1) the FDIC canceling the consent decree, and (2) the bank turning a profit, and (3) the bank declaring a dividend. I believe all three of those things would have to happen, but if I was shorting then I'd cover as soon as any one of them occurred.

Any other suggestions on how best to invest (long or short) in this situation?

And now that the reverse split has happened, next week I'll start looking at the prices on the options market...

 

[Danmar]

Wow Nords sounds like a pretty complicated situation. I think there would be some pretty sophisticated investors involved here. I personally would not feel comfortable with his one.

 

[Purron]

I wonder what Inouye is up to in all this....

 

[Nords]

Wow Nords sounds like a pretty complicated situation. I think there would be some pretty sophisticated investors involved here. I personally would not feel comfortable with his one.

"Complicated". Good word. I hope this is the case-study opportunity of a lifetime. No better time to get comfortable with studying such an "issue-rich environment".

It's tempting, but I don't have any money in this. Yet. Bank of Hawaii went through a milder version of these problems back in 2001. A new executive team took over and a few years later the bank came roaring back with its stock returning 10x. Admittedly CPB's problems are an order of magnitude worse but it would appear that the worst is over.

I don't want to keep seeing these rescue situations over & over for the next five decades and keep wondering whether or not to invest. I'd rather work through the issues now and understand them a little better so that I can assess the next one more quickly. I'm posting about it here in an attempt to capture the emotion of the time so that I can appreciate that this is not as easy as buying some shares and ignoring them for five years. I doubt that I'll ever again have a ringside seat like this.

You've said before that you're comfortable with your asset-allocation plan being overweighted in one area because you know & trust management. Two of the new guys at CPB, John Dean & Larry Rodriguez, are local VCs/investment bankers. Dean in particular has waded in to save a bank at least once before so he presumably has some competence in this area. Hawaii is a very small place to screw around with ethics and these two know that they have a lot at stake on their reputations. I don't know these guys well enough to "trust" them the way I'd trust a shipmate, but I know people who do trust them. I think that they appreciate what they're setting out to do and that they know how to do it. So I think their motivations are aligned with the recapitalization investors and the existing shareholders. For now, anyway.

Unlike my experience with Nortel, CPB has had no whiff of fraud or other illegal behavior. Hubris and incompetence abounded among the old team but no actual laws appear to have been broken. I'm mildly concerned that John & Larry are riding to the rescue once more for old times' sake, like a bad Lone Ranger film, but they've already made their fortunes and their reputations. At this point in their lives I think that they place a higher value on their reputations than their net worth.

The reality is that if they pull CPB's chestnuts out of the flames then their VC firm & investment bank will have more business than they can handle. So while this is an irresistible temptation to them, maybe this really is all about their reputations.

I wonder what Inouye is up to in all this....

Yeah, I hope he's keeping an eye on his reputation too.

It's not as if he's going to need any of his CPB stock for retirement expenses or long-term care. This guy is literally going to keep collecting paychecks until he dies, and Strom Thurmond's record is in jeopardy.

Oh, look, the stock's about to break down below $24/share. Ouch...

 

[Thingamajigger]

I appreciate the thread Nords

I can't make any sense out CPF --- it would take me a whole day just to figure out what is going on with the reverse splits and the option to buy at a lower price and the fact that our taxpayers money is the mix

what a complete mess --- I hope it works out for them but I stay far away from anything that takes me more than ten minutes to figure out what is going on

 

[Danmar]

OK Nords. I am not giving advice here. If you really know the principals that makes a big difference. I think in my case I know senior management like you would know a shipmate. Incidently , my big position hit an all time high his morning. Good luck if you decide to go in.

 

[Eder]

I think buy about 199 shares so when it finishes its death throes your confidence will remain intact....if it is a 20x in 2 years you can brag about the whale that didn't get away.

Pooches will crap on the grass.

 

[MooreBonds]

Help me out here-- did I just conclude that the most logical investment here for the next 7-8 months would be to short the shares even more? Can a brokerage even borrow shares to short? What happens to an investor who's shorted existing shares before even more shares are issued-- is the short automatically boosted by a factor of 1.3? If shares are subject to a 180-day lockup, does that keep a short from borrowing them? Is it better to short before the record date, or to wait until after the recapitalization? I'm going to presume that there's no reason to be short after the lockup expires... unless the bank isn't making money.

Regardless of whether or not there are shares to short....why not buy some Put options? I don't know what kind of premiums they'll have (Yahoo! Finance hasn't adjusted the options yet for the reverse split), but they shouldn't be too out of line...and that would limit your loss barring [-]another government handout[/-] a white lightning strike of the FDIC lifting their covenant or something crazy like that.

 

[Nords]

More progress.

Central Pacific Financial Corp. Receives Regulatory Approval for $325 Million Private Placement
CPF received Treasury approval to convert their TARP preferred to common and to proceed with the recapitalization. Note that they declared the date of record of existing shareholders to be 17 Feb, the same date that they put out this press release. The lesson learned is that if a company starts talking about determining a record date, by the time they make the decision it's too late for you to jump into becoming a shareholder. Not that anything about this deal would make you want to jump in.

Next week another $20M of shares will be issued at $10/share to existing shareholders, effectively awarding them a warrant of 1.3 shares for every share they currently own. As Purron has noted, Senator Inouye is a founder of CPB from the 1950s and still a major "shareholder of record". Not that he's going to decide to retire on this "windfall".

Central Pacific Financial Corp. Completes $325 Million Private Placement and Exchange of TARP Preferred Stock
The recapitalization closed the next day, 18 Feb, with 32,500,000 common shares issued at $10 and another 5,620,117 common exchanged for the Treasury's TARP preferred. The Treasury spent $130M to get those preferred shares and accumulated another $5M or so in accrued dividends. CPF's stock closed for the weekend at $28.33, so if the Treasury were to be able to sell all of their shares at that price then they'd gross $159.2M. That gives them a nice 15% return over the last couple years, although I doubt it's commensurate with the risk they took. But, hey, your tax dollars are at work here, and it looks like they all survived the experience.

Of course Treasury wouldn't be able to sell all 5M shares at at that price, even if they weren't locked up, and next week the stock price is expected to rapidly go down toward the $10/share at which the bank carried out the recapitalization. Or at least that's the logical expectation. We'll have to see whether the shareholders are that rational.

With the completion of the Private Placement, the Company's capital ratios now exceed the minimum levels required by its regulatory consent order and are at "well capitalized" levels under applicable guidelines.

CPF also announced that, nearly a year after they agreed to it, they're finally in compliance with the consent decree. This is the consent decree which sets risk ratios that effectively cripple their competitiveness, so John Dean's next step is to persuade the FDIC to void the consent decree.

I haven't been able to find out the rules for short sellers when their shorted shares are issued more warrants. I suspect that if a shareholder loans their 1000 shares to a short seller, and is then awarded 1.3 warrants with a $10 strike for each of those loaned/shorted shares, then the shareholder can spend another $13,000 for another 1300 shares while leaving the original 1000 shares on loan to the short. At that point it'd be up to the shareholder whether or not to loan the shares to the short for more shorting, but those warrant shares are probably unable to be loaned until the lockup expires.

I think the lockup expires around the middle of August, although nothing has been specified yet.

I'm learning a lot from watching all of this wheeling & dealing, but the fact is that CPB is still shrinking and losing money. They just started foreclosure last week on a $48M loan on a Maui shopping center, and there's no way that the commercial rent will justify a $48M assessment. That's just one of hundreds of millions of dollars of delinquent loans.

Although a tremendous amount of progress has been made, this stock remains a bet of confidence in management's execution skill. What would turn the company's stock price around in a hurry will be three things: (1) the FDIC vacating the consent decree, which would allow CPF to pay dividends again, (2) CPF declaring a real no-foolin' profit, and (3) proving it by restarting their dividend. The first and second could happen during their next quarterly report (end of April). The third could happen shortly after the first gives them discretion to do so again. I suspect that management would very much like it all to happen before the August lockup expires, so I expect this next quarterly report to be full of "one-time" losses in order to let the real window-dressing start for declaring victory in the July earnings report.

I still don't see any reason to buy the stock. I'm not sure there's any assurance to shorting it, either. I'm just going to keep watching & learning. But it might not be a bad idea to buy OTM call options in June or July.

 

[Danmar]

Sure thing Jorge. I'll look at that right now. Not.

 

[Nords]

No big news, but time for an update.

As expected, CPF opened the rights offering for the $20M in shares that they're handing out to existing shareholders. Before the 1:20 reverse share split, the bank was recapitalized by several large investors at 50 cents/share or, post-split, what's now $10/share. The $20M of new shares to existing shareholders is also being handed out at that $10 price to attempt to pacify those who've already lost millions while the new investors scooped up shares at 50 cents.

Central Pacific Financial Corp. Announces Commencement of $20 Million Common Stock Rights Offering

CPF had been stubbornly floating along at $20-$25 per share while all of this paperwork was being discussed, but now that it's in effect the share price has finally followed the news and dropped to $15. I guess people didn't see it coming what with all those SEC filings and other confusing stuff.

StarAdvertiser.com - Mobile Edition

We'll probably see a wave of short covering in the next couple weeks.

Despite the accurate forecasting, I'm glad that I didn't put any money into shares or shorting or options. This stock has been irrational for far longer than I would've been solvent. There's been talk of a return to profitability in 3Q, and the call options are priced way too low for what the bank's execs claim to be able to do. The options are pretty thinly traded, too. But the dumb money sloshing around in this one seems too scary to exploit.

The more time & effort I put into this type of in-depth research, the more I come back to index funds...

 

[Nords]

CPF has been hammered down pretty hard by their stock dilution.

When they first completed the recapitalization their share price was above $25, even rising above $30 a couple times in Feb. However on 12 Apr they started the $20M rights offering for shareholders of record from 17 Feb: 1.3 shares at $10/share for every share they own. Those shares can be acquired through tomorrow. As stockholders have been exercising those rights, the stock's price has steadily shrunk to open this morning at $13.10. Note that before the reverse split this would have been 65 cents for a stock that used to trade at 40x-70x that price.

So I called the short. Whoopee. I'm not even sure that a brokerage could have obtained shares for the purpose. I doubt that Jim Chanos is riding this one down.

Ironically, as the share price has dropped by over 50% since Feb, the bank's making money. Last week they declared a profit of $4.6M (18 cents/share). They've slightly reduced their nonperforming assets and they're still keeping plenty in reserve. However they've significantly reduced their borrowing from the FHLB and they're in compliance with the FDIC consent decree for the first time since they "agreed" to it in 2009.

John Dean has stepped down from chairman, although he still retains President & CEO. Some other execs have moved around and I think that he's prepping his exit for the next year or two. He'd predicted profitability by 3Q11 and he has no other reasons to stick around.

There's no fundamental reason to own the stock. The bank still can't pay dividends until the FDIC says it's OK, and the consent decree essentially cripples their competitiveness by requiring higher ratios than other Hawaii banks. They still have a lot of bad loans on the book and they're shrinking back to the Hawaii market (out of California) against other banks that are already well entrenched.

Yet if I was shorting this stock, I'd be covering right now. The rights offering will expire tomorrow and let shareholder's irrational exuberance take over again. It's quite possible that the consent decree will be lifted in the next 3-6 months, as soon as the bank proves that these profits weren't a financial-manipulation fluke. Once that happens the board will quickly establish a token dividend and keep trying to make money. Of course the bank is still relatively weak and could still be taken down by a random disaster like a summer hurricane or another severe credit crunch. This is all speculative.

The VCs who recapitalized the bank agreed to a lockup until mid-August. Although they could start dumping their shares then, I'm not sure that they have any reason to move so quickly. It's possible that John Dean has enough influence to ask them to keep the shares until he's achieved his goals, and he has the credibility to motivate them to do that. The Treasury has no reason to sell their converted TARP common shares, either. In other words I don't see much reason for continued downward pressure on the stock price.

The options market, however, has lost faith. Dec $15 calls are bid at 75 cents and could probably be purchased at $1.25. It's difficult to tell because volume is almost zilch and any significant buying would drive the price up. However even a $1.50 price on that call would turn a simple profit if the stock rose above $16.50 by 17 Dec, and that's only $3.50 away from its current price... where it was trading a month ago, before the profit report.

So buying the call options presents a bet that the bank will keep earning money and persuade the FDIC to lift the consent decree before 17 Dec. The two-year anniversary of that consent decree is 9 Dec, one week before expiry. In the meantime a call holder would have seven months to wait for the share price to return back to the $20s, where it spent most of early 2011 and nearly all of 2010. They'd be free to trade the calls at any time (although the options market is very thin), and I think there'd be enough residual time value for the calls to rise above $2/share even as late as Sep.

Tempting. Yet I think I still have better places to put my money. I certainly have safer places offering proportionally more reward per unit of risk. The truth is that I have no idea what I'd do with the profits from something like this-- the analysis is its own reward.

But if any of you testosterone-poisoned moon-shooters are looking for a target, let me know what price you pay for those calls.

 

[clifp]

But if any of you testosterone-poisoned moon-shooters are looking for a target, let me know what price you pay for those calls.

Nope still in the too hard column. I'll shot for easier things to analyze like the bottom of the Las Vegas real estate market, or evaluating the prospects of using helium balloons to float windmills up to higher wind speeds.

 

[ERD50]

Nope still in the too hard column. I'll shot for easier things to analyze like the bottom of the Las Vegas real estate market, or evaluating the prospects of using helium balloons to float windmills up to higher wind speeds.

Well, I bet this guy is looking for VC:

High-Flying Windmills Blow Away Their Ground-Based Cousins | Alternative Energy | DISCOVER Magazine

( It's actually pretty interesting)

-ERD50

 

[Nords]

Nope still in the too hard column. I'll shot for easier things to analyze like the bottom of the Las Vegas real estate market, or evaluating the prospects of using helium balloons to float windmills up to higher wind speeds.

Yeah, this CPF introspection has me questioning the purpose for a whole lot of financial analysis that I've been spending my time on...

 

[Nords]

Wow, the FDIC just lifted the consent decree. That was pretty snappy.
Central Pacific Bank Announces Lifting of Regulatory Consent Order

CPF now gets to play by the same banking rules as the banks who haven't been screwing up for the last four years.

The consent decree has been replaced by an MOU, but although the MOU was signed last week the terms don't seem to be available until CPF files a 10Q. I'm not sure why it's done that way.

The stock closed today (Thursday) at $13.28. I bet there's a bunch of short covering on Friday morning. It'll be interesting to see what happens to the prices of the call options, too.

 

[deserat]

Yeah, this CPF introspection has me questioning the purpose for a whole lot of financial analysis that I've been spending my time on...

Yup - reading this thread over the months has made me scratch my head and run for simplicity - I think the nuclear engineering brain needs something complex to challenge it.....

 

[Nords]

Ah, there's the 10Q.

http://www.snl.com/Cache/11193321.pdf?O=3&IID=100213&OSID=9&FID=11193321

In May 2011, the members of the Board of Directors of the bank entered into a Memorandum of Understanding ... which replaced the Consent Order ... The termination of the Consent Order was effective May 11, 2011. The Bank MOU continues a number of the same requirements previously required by the Consent Order... The Bank MOU lowers the minimum leverage capital ratio that the bank is required to maintain from 10% in the Consent Order to 8% and does not mandate a minimum total risk-based capital ratio.

In 2009, our Board of Directors suspended the payment of all cash dividends on our common stock. Our ability to pay dividends with respect to common stock is subject to obtaining approval... and is restricted until our obligations under our trust preferred securities are brought current. Additionally, our ability to pay dividends depends on our ability to obtain dividends from our bank. In addition to obtaining approval from the FDIC and DFI, Hawaii law only permits Central Pacific Bank to pay dividends out of retained earnings. Given that the bank had an accumulated deficit of $478.1 million at March 31, 2011, the bank is prohibited from paying any dividends until this deficit is eliminated. Accordingly, we do not anticipate that the bank will be permitted to pay dividends for the foreseeable future.

(b) By September 30, 2011, the Bank shall have reduced the assets (including loans and other real estate) classified "Substandard" or "Doubtful" on the bank ' s internal loan and problem asset reports... to not more than 65 percent of Tier 1 capital and allowance for loan and lease losses.
(c) By March 31, 2012, the Bank shall have reduced the assets classified "Substandard" or "Doubtful " on the bank's internal loan and problem asset reports... to not more than 50 percent of Tier 1 capital and allowance for loan and lease losses.

The markets have been open for a couple of hours, and the share price is just fluctuating a couple percent each way. No activity in the options, either. Hard to tell that anybody's paying attention.

I think the nuclear engineering brain needs something complex to challenge it.....

Any brick wall will do!

 

[Sandhog]

Nords,

I'm sure other members agreed that we appreciate your in-depth analysis of a stock. I wished someone would do other stocks as well you have done with CPF. However, if a life was perfect, I'll be FIRE'd fishing and drinking cold beer instead of working two jobs so I may have a chance of ER.

 

[Nords]

I wished someone would do other stocks as well you have done with CPF.

I should disclose again that I don't actually have any money invested in CPF, either short or long.

The analysis is a lot more enjoyable when you don't have anything at risk...

 

[Sandhog]

I should disclose again that I don't actually have any money invested in CPF, either short or long.

The analysis is a lot more enjoyable when you don't have anything at risk...

That's the reason no bias on you analysis. If you were holding and wanting dump you would give an opinion of being a good stock to invest while if you want to buy, you'll give negativity opinion of the stock. Much like MF writers where they buy but gives out negative opinion in their write up.

 

[HFWR]

I should disclose again that I don't actually have any money invested in CPF, either short or long.

The analysis is a lot more enjoyable when you don't have anything at risk...

And, as we all know, the market can stay irrational longer than most of us can stay solvent...

 

[Nords]

Not much in the news, and not much happening with CPF's stock price or revenues, but they're registering all the shares they've recently issued.

http://www.snl.com/Cache/11323554.pdf?O=3&IID=100213&OSID=9&FID=11323554

One interesting tidbit is that the lead investors have a one-year lockup:

We issued a large number of Common Shares to the Investors in the Private Placement and to Treasury in the TARP Exchange. The Lead Investors have certain registration rights with respect to the Common Shares held by them following a one-year lock-up period provided in their respective Investment Agreements. The Additional Investors have certain registration rights with respect to the Common Shares purchased by them in the Private Placement until six months following the completion of the Private Placement and those shares are being registered on a registration statement of which this prospectus is a part.

If I understand this paragraph correctly, then Anchorage & Carlyle will be able to start selling as soon as this December. I can't imagine why they would, but that's a choice they don't have right now. The "additional investors" will be able to sell their shares in August. Anchorage & Carlyle paid $10/share for their capital injections, while the "additional investors" were allowed to pay $10/share to buy 1.3 shares for every share they already owned.

The stock's current price is $14.13/share... at least it may be that up until August.

I expected options prices to start edging up. Assuming that back in early May Dec $15 calls were bid at 75 cents and could probably be purchased at $1.25/share, today's bid-ask spread was $1.40-$2.35. But the last time any changed hands was at $2/share, and there's only 25 contracts open. Not exactly a lot of reward for a heckuva lot of risk, especially in such a [-]dead[/-] thinly-traded market.

The S-1 has over 10 pages of "risk factors" starting on page 9. Interesting reading.

 

[BUM]

Holy cow! I haven't felt this urge to buy since I loaded up on Washington Mutual a couple years ago. History repeats itself. I'm a victim of circumstance.