Central Pacific Bank has a lot riding on an independent appraisal by a New York turnaround expert.

The state's third largest financial institution, reeling from problem commercial loans in California, recently hired Alvarez & Marsal to conducted an outside review of its loan portfolio.

The review comes as the bank has agreed to a consent order with the Federal Deposit and Insurance Corp. and the Hawaii Division of Financial Institutions to develop a plan  in 60 days to improve its capital position and its asset quality. (See:)

"The loan review and loan sales are important steps in reaching our capital and asset quality goals in order to comply with the consent order," said company CEO Ronald Migita.

The company has conducted reviews of its loan portfolio in the past. That includes a goodwill impairment test conduct  in the fourth quarter 2007.

That test led to the bank to take a noncash charge of $48 million due the the slumping value of its California loan portfolio.

The review was based on the prevailing real estate prices at the time using what's known as mark to market accounting.

There have been many complaints about mark to market accounting, which has become standard in the post Enron era. Central Pacific is one of those many cases where market to market hurts a company.

Central Pacific's 2007 appraisal relied on comparable sales and property values during one of the most tumultuous periods in U.S. economic history. The value of the bank's loan portfolio then -- both Mainland and Hawaii loans --  may not reflect their market values today.

Since 2007, the U.S. and California economies have has shown some signs of recovery while Hawaii's commercial real estate slowdown was relatively mild.

Alvarez & Marsal has a good reputation for its work in turnarounds and will no doubt key on that point.

The company and its partner Steven Varner once served as Aloha Airline's chief restructuring officer during the airline's first bankruptcy, which resulted in the sale to California billionaire Ron Burkle's Yucaipa Co.s.

If the updated appraisal by the Alvarez firm shows that the true value of Central Pacific's loan portfolio is more than that held on the bank's books, it will go a long way to address the FDIC's concerns.

On the other hand, if the appraisal of CPB's loan portfolio comes in lower, it could hurt the bank's ability to develop a plan that meets the FDIC's capital requirements and could prompt the federal agency to order the sale or merger of the bank.

Tags: Alvarez & Marsal, Central Pacific Bank, Federal Deposit Insurance Corp., Hawaii Division of Financial Institutions, mark to market, turnaround expert

This entry was posted on Monday, December 14th, 2009 at 12:48 pm and is filed under Biz Bites. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.