If Guaranty Financial Group Inc. in Austin and Central Pacific Financial Corp. in Honolulu had made loans only in their home states, they might have reported solid profits for the second quarter.
But they both lend to real estate developers in California, one of the states hardest hit by the mortgage crisis, and they reported huge losses as they worked to dig themselves out from under piles of bad loans.
The $16 billion-asset Guaranty said Thursday that it lost $85 million in the quarter, almost entirely because of rising loan delinquencies in California. As of June 30 it had $123 million of nonperforming loans to home builders in California and just $1 million in Texas.
Also Thursday, the $5.7 billion-asset Central Pacific reported a loss of $146.3 million, surprising analysts who had predicted that it would post at least a small profit. It attributed $94 million of the loss to goodwill impairment charges and said the rest was related largely to troubles in its California construction portfolio. Its $116 million of credit costs included an $87.8 million loss provision and $22.4 million of writedowns for loans held for sale.
Both banking companies have stopped making construction loans in California, and they are working to shrink their portfolios there. Central Pacific said Thursday that it sold $44.2 million of its troubled loans in July, and that it is aiming to cut its overall loan portfolio in Western states other than Hawaii in half, to about $500 million, over the next few years through paydowns, participations, restructuring, and loan sales.
"As promised last quarter, we have taken steps to reduce our exposure to problem loans in the weak California residential construction market and enhance our risk management," chief executive Clint Arnoldus said in a press release Thursday. "We continue to address the impact of this market on our loan portfolio and are focused on reducing our credit risk and strengthening our capital ratios to better position the company through this economic cycle."
(Also Thursday, Central Pacific said Ronald K. Migita, its chairman, has been named its president and CEO. Mr. Arnoldus had announced plans to retire in March.)
Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research, had said Central Pacific would report a profit of 11 cents a share for the quarter after earning 68 cents a year earlier.
"In this kind of environment, it's very difficult to predict the provision, and the one they reported was much more significant than anybody would have presumed," he said.
Still, Central Pacific did sell off the worst of its loans, Mr. Rabatin said, so its exposure to the California construction market is now "minimal."
Guaranty has struggled since it was spun off from Temple-Inland Inc. in December, losing $95 million in the first six months of the year.
"It will take a while for the excess inventory of homes and lots in certain submarkets [in California] to be absorbed," Kenneth R. Dubuque, Guaranty's president and CEO, said in an e-mail to American Banker. "However, the long-term outlook, considering the attractive demographics, the powerful state economy … will all combine to work through this cyclical problem."
Guaranty also said Thursday that it has canceled its roughly $150 million rights offering, because it feels it is adequately capitalized after raising $600 million from private-equity investors in recent weeks. It had planned to offer the shares at $5 each.