Central Pacific Financial Corp (CPF) 2004 Q2 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Central Pacific Financial Corp.'s second-quarter earnings conference call. At this time, I would like to inform that you this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

This document contains forward-looking statements. Such statements include, but are not limited to: (1) statements about the benefits of a merger between Central Pacific Financial Corp. (CPF), and CB Bancshares, Inc. (CBBI), including future financial and operating results, cost savings, and accretion to reported and cash earnings that may be realized from such merger; (2) statements with respect to CPF's plans, objectives, expectations and intentions and other statements that are not historical fact; and (3) other statements identified by words such as believes, expects, anticipates, estimates, intends, plans, targets, projects, and other similar expressions. These statements are based upon the current beliefs and expectations of management and are subject to significant risk and uncertainties. Actual results may differ from those set forth in the forward-looking statements.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) the business of CPF and CBBI may not be integrated successfully, or such integration may be more difficult, time consuming or costly than expected; (2) expected revenue, synergies, and cost savings from the merger may not be fully realized, or realized within the expected time frame; (3) revenues following the merger may be lower than expected; (4) deposit attrition, operating costs, customer loss and business disruption, including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers, may be greater than expected following the merger; (5) any necessary approvals from the merger may not be obtained on the proposed terms; (6) the failure of CPF's and CBBI's shareholders to approve the merger; (7) competitive pressures among depository and other financial institutions may increase significantly and may have an effect on pricing, spending, third-party relationships and revenues; (8) the strength of the United States economy, in general, and the strength of the Hawaii economy may be different than expected, resulting in, among other things, a deterioration in credit quality or reduced demand for credit, including the results and effect on the combined company's loan portfolio and allowance for loan losses; (9) changes in the U.S. legal and regulatory framework; and (10) adverse conditions in the stock market, the public debt market, and other capital markets, including changes in interest rate conditions and the impact of such conditions on the combined company's activities.

Additional factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in CPF's and CBBI's reports, such as interim reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K filed with the Securities and Exchange Commission (SEC), and available at the SEC's Internet website, www.sec.gov. All subsequent written and oral forward-looking statements concerning the proposed transaction or other matters attributable to CPF and CBBI, or any person acting on their behalf, are expressly qualified in their entirety by the cautionary statements above. CPF and CBBI do not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statement is made.

CPF has filed an amended registration statement on Form S-4, to register shares of CPF common stock to be issued in this transaction. The registration statement includes a joint proxy statement, prospectus for solicitation of proxies from CPF and CBBI shareholders, in connection with meetings of such shareholders at a date or dates subsequent hereto. Investors and security holders are urged to read this registration statement and joint proxy statements, prospectus and any other relevant documents filed with the SEC, as well as any amendments or supplements to those documents, because they contain important information. Investors and security holders may contain obtain a free copy of documents filed with the SEC, at the SEC's Internet website at www.sec.gov. Such documents may also be obtained free of charge from CPF by directing such requests to Central Pacific Financial Corp., 220 South King Street, Honolulu, Hawaii, 96813, and the attention David Morimoto, phone number 808-544-0627, or from CBBI by directing such requests to CB Bancshares, Inc., 201 Merchant Street, Honolulu, Hawaii 96813, attention investors relations, phone number 808-535-2518.

I will now turn the conference over to Mr. Arnoldus, chairman, president and CEO of Central Pacific Bank. Please go ahead, sir.

Thanks, Charlene. And thanks to all of you for joining us today to review Central Pacific Financial Corp.'s financial performance for the second quarter of 2004. I have Neal Kanda with me here today, our chief financial officer. We'll start off with me reviewing some of the significant highlights of the quarter. I 'll add further comments on the current economic outlook in Hawaii, and then provide an update on the merger and our integration initiatives. Neal will follow with a -- a little deeper review of the financial results, and we'll close by answering any questions that you have.

So let me go right into the second-quarter highlights. As indicated in today's earnings release, we realized a very solid quarter, with net income of $8.7 million, or 53 cents per share. This is an increase of 8.6% over the same period last year. The primary drivers for this result included an increase in loans of $160 million that generated a 22.7% increase in loans and leases compared to a year ago. We continue to realize strong deposit growth, and had an 11.7% increase in other operating income, to $4.1 million dollars for the quarter. We're especially pleased with the solid growth indicators for our core banking business, and expansion of our fee income programs. We continue to experience asset repricing, consistent with the whole industry during this last quarter, due to the interest rate and competitive market environment that we're in, and the resultant impact on our net interest margin. Our continued focus and commitment to serving our customers, despite the added activity of the merger and the integration, we think is a true testament to the dedication and caliber of our outstanding employees.

Key performance ratios for the second quarter remain stable, compared to the same period last year. Return on average equity was 17.05%. Return on average assets was 1.5%. And our efficiency ratio was at 52.85%. Diluted earnings per share improved to 53 cents, from 49 cents in the second quarter of 2003.

Let me talk about the economy for just a minute. There's -- there's general optimism that Hawaii's economy is in the midst of a robust recovery. Our visitor industry is improving. Domestic visitor count is up approximately 6% from last year. And international visitors counts are rebounding steadily from the slump that was caused by the initiation of the conflict in Iraq and the SARS scare. Construction activity remains very strong, fueled primarily by the federal government's commitment to invest over $2 billion into its military infrastructure in Hawaii, and the favorable interest rate environment as well. Residental construction permits are running at about 12% above the same period last year, and recently published figures indicate that Hawaii now has the lowest unemployment rate in the nation, at 3.1%.

The office vacant rate is currently at 11%, and it is expected to dip into single digits by year end. The inflation rate in Hawaii is expected to top 3% this year, primarily due to surging housing costs and increased energy costs. Real personal income, adjusted for inflation, is expected to increase by 2.8% this year. This would make the eighth consecutive year of increase in that category. So overall, we feel very optimistic about the economic growth prospects in Hawaii and the positive results on our business.

I'd like to take a little bit of time right now to update you on the merger and the integration planning process with our acquisition of CB Bancshares, Inc. and their subsidiary, City Bank. As you all know, almost exactly a year after making our purchase offer to CB Bancshares, Inc. public, the boards of our two holding companies signed a definitive merger agreement on April 22 of this year. Despite the tension in the past year, there is a strong mutual spirit of cooperation toward making this proposed merger work for the best interests of all of our constituencies. We're well into the planning for our integration, with multiple integration teams of dedicated employees from a very broad cross-section of both organizations. And they're working very effectively side by side. We've also engaged a consulting team from Ernst &Young to assist in the overall coordination of a smooth transition for our customers and employees.

On July 20, our registration -- excuse me, registration statement on Form S-4 was declared effective by the SEC and, subsequently, we and CB Bancshares initiated our proxy solicitation efforts, with a distribution of joint proxy materials on July 22. Both companies have set September 13 as the date of our respective special shareholder meetings to approve the merger. We hope to close this transaction on September 15, and are working toward a merger of the bank subsidiaries in the first quarter of 2005. As you may have already read in the Form S-4 filed with the SEC, we project the transaction to be accretive to the combined organization from the first full year of combined operation, based on the company's expected earnings per share and the expected cost savings. In addition to the projected cost saves, we're optimistic that the common values and the cultures upon which both organizations were founded will enhance the competitive strength of the combined company. Lines of business and asset composition are also highly complementary, and are expected to contribute significantly to the synergies of the proposed merger. We'd like to invite you to visit our website at www.centralpacificbank.com, to view a PowerPoint presentation that will provide more details on the dynamics of the proposed merger and its impact to the resolved entity, Central Pacific Financial Corp. We're very excited about the tremendous opportunities that we expect this proposed merger to provide to some very important constituencies, our shareholders, our employees, our customers, and the communities that we serve.

At this time, I'll turn the call over to Neal, and you may recall that in the merged company, Neal will be the president and chief operating officer, and he will review the financial highlights in more detail.

Thank you, Clint. The following-- the following is a discussion of second quarter 2004 financial highlights for Central Pacific Financial Corp. and its subsidiary, Central Pacific Bank. The 8.6% increase in second-quarter net income, compared to last year's second quarter, was due to an increase of $326,000, or 1.5% in net interest income, and a $420,000, or 11.7% increase, in other operating income. Additionally, income taxes declined by 440,000 on the quarterly comparison, partially due to a tax credit investment entered into during the second quarter.

Average loans for the second quarter of 1.48 billion increased by 133 million, or 9.9% over the second quarter of 2003. Average yield decreased by 84 basis points, to 5.71% over that period, due to downward repurchasing of loans. Loans at June 30, 2004 totaled $1.62 billion, increasing by $160 million during the second quarter. Most of the increase occurred towards the latter part of the 2004 second quarter, and will have its full impact on revenues during the coming quarter. Average deposits of $1.8 billion increased by 7.9% over the previous year's quarter, with average noninterest-bearing deposits increasing by 18%. With a just-ended June 30, 2004 deposit number for a temporary demand deposit of $80 million, total deposits compared to a year ago decreased by 8.4%, and noninterest-bearing deposits increased by 15.5%. Management believes that the continued efforts in building customer relationships are enhancing our core deposit base.

Effective costs of interest-bearing liabilities for the quarter was 1.22%, compared to 1.36% for last year's second quarter. The recent increase in federal funds rates have little immediate impact on core deposit pricing. However, we expect TD costs to gradually increase in the coming quarter. Net interest margin of 4.31% for the quarter decreased by 48 basis points from last year's second quarter. The downward repricing of loans occurring in the last year, as mentioned, has stabilized, and the recent and projected prime rate increases will reverse the trend. The net interest margins for the remainder of the year is predicted to be in the 4.30% to 4.40% range.

Provision for loan losses for the quarter totaled $300,000, with 214,000 in net loan charge-offs, compared to 116,000 in net recoveries a year ago. The increase in noninterest income for the quarter was mainly due to income from fiduciary activities and service charges on deposit accounts. Noninterest expense mainly due to $550,000 credit recorded in the previous year's second quarter. The effective rate on income taxes for the second quarter of 2004 was 29%, compared to 34% for the year-ago quarter. The expected run rate for the remainder of the year is 33%.

Nonperforming assets at June 30, 2004 totaled 8.7 million, or 54 basis points of total loans, up from 274,000 a year ago. Nonaccrual loans of $7.2 million were mainly comprised of loans secured by commercial property. Management believes that no write-downs to these loans are required at this time. A property was added to other real estate during the second quarter, totaling $1.5 million. This property is in the process of being sold. Loans delinquent for 90 days or more totaled $14.4 million, or 89 basis points of total loans. Loans to borrowers comprised most of this quarter's addition and involve -- involve two residential properties and a commercial property. Management believes that the subject loans are adequately secured.

Stockholders' equity at June 30, 2004 increased 299 million, or 7.99% as a percent of total loans, compared to a year ago. The drop -- the drop in this equity ratio from a year ago of 8.82% reflects the year-over-year increase in assets. Looking ahead, we expect stand-alone earnings per share to -- to increase by approximately 5 to 7% for 2004, over 2003. Net interest income growth will be driven by increased loan growth, as net interest margin is expected to be in the 4.3 to 4.4% range, as mentioned earlier. The company's balance sheet remains relatively neutral to changes in interest rates. Despite the increase in nonconforming loans during the second quarter, loan quality is expected to remain relatively strong during the remainder of the year, and management has additionally increased its focus on cost containment.

This concludes the discussion of Central Pacific Financial's financial results for the second quarter of 2004. We welcome any questions you may have.

Thank you. The question-and-answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star, 1 on your pushbutton telephone. If you wish to withdraw your question, please press star, 2. Your questions will be taken in the order they are received. Please stand by for your first question. Our first question comes from Brett Rabatin from FJN Midwest Research. Please state your question.

Hi, guys. Good afternoon.

Hi, Brett.

Hi, Brett.

A couple questions for you. First, I wanted to get some additional color on those loans that were 90-days-plus past due. What -- what sort of resolution or time line can you -- can you put on those particular credits, if any, at this point?

Actually, with regards to time lines on -- on loans, the bulk of the loans is to one borrower, and we are actively working to get that loan paid current, and we feel that we can be successful shortly. And with regards to possible sale of the underlying collateral, that -- that is being worked on, also.

Okay. And then I wanted to get some additional color on what the future holds for the balance sheet, in terms of if you might purchase any more loans, and then if you had any thoughts on reserve -- loan loss reserve levels, given CBBI pulled theirs down a little bit in the second quarter, and then you guys did as well. Sort of where -- where you see the loan loss reserve levels shaking out in 3Q. And then the same goes for capital ratios, given what the balance sheet did in the second quarter.

With regards to the loan purchase, actually that was a unique opportunity to purchase loans, Hawaii-based loans, from a company that has ceased operations in Hawaii, so there was a particularly attractive portfolio of loans that we feel that we can -- we can leverage out from a relationship -- relationship standpoint also, and pricing was fairly attractive. With regards to the reserve, it did drop, and we feel that the 1.5% level is sort of a baseline or -- or a minimum target that we are looking at.

And is that -- that's for the pro forma company, Neal?

For the pro forma company, we believe that it's perhaps higher than that, or it will be higher than that, and we will be targeting a higher level. Also, once combined we will be revisiting that and rationalizing appropriate levels, with, you know, further study of the combined portfolio.

Okay. And then would you -- would you care to give any sort of thought process on the -- on the tangible equity ratios are up to -- from the 5.5% pro forma range you gave previously?

Yes, with regards to the capital ratio, we -- in our pro formas in the -- in ensuing quarters, the -- the tangible equity ratio is expected to, you know, based on our earnings projections, be solidified over time, to levels that perhaps are -- have been more traditionally kept. So that -- that should be a --a first order of business in the coming quarters.

Okay. But that --that specific number and -- in front of you there?

Well, again, we -- you know, we want to see the -- first of all, the 6% threshold soon -- soon after -- after the combination, and with regard to the long-term run rate on -- on equity to asset ratio, we are not [inaudible] as yet. I think the combined companies historically have kept something between 8 and 9%. But that needs to be rationalized, also.

Okay. Fair enough. And then -- than wanted to -- to delve into the margin a little more, in terms of your guidance for the margin to be 430 to 440 for the second half of the year. Could -- could you give us the loan and securities portfolio yields during -- during 2Q, if you have that available?

Okay. For the second quarter of this year, our securities portfolio yield -- okay, the second quarter, the securities -- the securities portfolio yield on a melded basis was approximately -- I'm sorry, I'm getting it -- 4.41%. And the loan -- loan yield was 5.71%.

Okay. And -- and then implicit in your guidance, is there consideration for the reduction of the liquidity that you had right after the end of -- 2Q end? Meaning that you had the big deposit roll off the balance sheet, and that you might have had some shorter-term duration liquid assets that would also come off right after 2Q end?

Well, actually, the guidance does not factor in the impact of any liquidity build-up during this quarter. So it really -- it's -- it's -- we conducted our projections based on a stand-alone basis. It's a difficult exercise during these times to separate the stand-alone from, you know, preparing for -- for the combination. As an example, you know, having built up the just preferred liabilities, also, as well as other operational impacts to it -- expense, but as best as we could, we tried to project on a stand-alone basis, so the liquidity build-up has not been factored in as a -- a negative to the guidance. As far as the -- I think you referred to the temporary run-up in deposits?

We just --

Is that what you referred to, also?

Well, there was one $80 million deposit that you noted that came off right after the quarter end.

Yeah. Yeah, that was just a -- it just was a very short-term situation, which we -- we didn't -- you know, being that that resulted in a 40% increase on a June 30 to June 30 comparison, I wanted to ensure that the market understood that it's not on an average basis, that's not going to be factored in for the future.

Okay.

Did I answer -- did I answer your question?

Yeah. No, I understand. I'll -- I'll step back and get back in the queue.

And our next question comes from Aaron Deer [ph] from RBC Capital Markets. Please state your question.

Hi. Hi, guys. A question about the expenses in the quarter. It seemed like there's pretty good expense control, in particular salaries and employee benefits came down. I just wondered, is that just coming off of -- of first quarter highs from FICA expenses that were not -- or is -- is this -- is this rate here kind of a go-forward, at least in terms of the stand-alone run rate?

Okay. So the first quarter had an impact from -- instead of payouts, so that kind of ratcheted up for the -- that -- that quarter. Did I answer your question?

Yeah, okay. So that -- that was kind of outsized then.

Yeah. Yeah.

Okay, and then on the -- with the securities portfolio growing, I was wondering if you could give us some -- some color on the -- on the duration of where that stands now?

Yeah, right now the duration is about 4. We -- we expect that that should be declining over time. We have been working on that issue with regards -- you know, in light of the expected -- anticipated interest rate increases by the Fed.

Okay. And -- and what -- what kind of unrealized loss would there be currently? As of June 30, it was $11 million. Okay. Thanks, guys.

We do have follow-up coming from Brett Rabatin. Please state your follow-up.

Hey, guys. I wanted to ask you -- CBBI reported, and their numbers were off the chart strong, and depending on how you look at numbers, the -- the run rate for the 678 in '05 could be conservative, you know, depending on how you want to call core earnings in 2Q, they stated 263, but, you know, core could be anywhere from $1.70 to $1.90. Do you guys care to comment at all on -- on, sort of, CBBI's earnings or, you know, sort of their prospects going forward?

Well, you know, if you look at -- if you factor out some of the nonrecurring items, yeah, you're -- you know, I would agree with what your number range is with regards to a run rate, and perhaps, you know, the -- I mean, there definitely is a strong -- they have strong momentum in quarter earnings. With regards to what our projections were for their earnings and the pro forma numbers, they may exceed that. It remains to be seen, but it's very positive from our viewpoint.

Okay. And then -- wanted to get an update -- you touched on during the call, but wanted to get an update from you guys on sort of where you stood from the potential for the expense saves in the deal, particularly from the attrition on FTE's side.

Brett, this is Clint. We, as I mentioned, have retained a consultant to help us in the overall integration effort, Ernst & Young, and have broken down into very specialized integration teams throughout the bank and are very focused on realizing that number, and at this point feel very confident that we will be able to, in terms of the -- specifically of the FTE reduction, as you know, we did announce there will be no involuntary layoffs. We are looking at about a 20% attrition rate in each organization. We currently have a hiring freeze, and we're working on a voluntary termination program as well. So we think between those three, we will be able to get our FTE count down.

Okay, so --

And we're currently close to having what that FTE number should be for the combined organization. But we're going through it unit by unit, branch by branch, to make sure that we've really analyzed it.

Okay. So it has -- the attrition rate has been running 20% or so for the past quarter? Is that what you're saying?

Well, last year, we -- it was 20%, and it's -- it's -- it's difficult to really read a trend rate this year, because of what's been going on.

Okay. Fair enough. And then -- and then just one last question, guys. Neal, can you -- can you walk us through a Fed tightening, how much, you know, the Fed -- the Fed tightens, how much of your loan portfolio immediately reprices and how much, you know, gets repriced within the first year of a Fed move?

Okay. Okay, hold on.

If you guys want to give me a call after the call, that's fine, too.

Okay, well, first of all, as long as you don't pass it on to Alan Greenspan, will be glad to disclose this. We do project 3 -- 3 moves -- we -- we assume that, you know, for the rest of the year, there will be 3 25-basis-point moves, and we model our -- base it in that way. We do have $280 million in prime rate daily repriced loans. So hopefully that gives you some color as to the impact there. With regards to the impact on the core deposit side of our balance sheet, with the most recent increase, as I mentioned earlier, there was little immediate impact on certain core deposit products, in the local markets, and a lot of the -- of course, our -- our projections on the margin are very dependent on how -- how aggressive the local market will be in repricing core deposits. And our assumption right now is that there will be just a gradual increase in those repricings.

Okay. So that's baked into the numbers. Okay. Great. Thanks, guys.

Once again, ladies and gentlemen, as a reminder, should you have a question, please press star, 1 at this time. Once again, ladies and gentlemen, as a final reminder, should you have a question, please press star, 1. If there are no further questions, I will now turn the conference back to Mr. Arnoldus.

Thank you very much. We appreciate your interest in -- in calling in today, and -- and feel very positive about how the integration effort is proceeding. Both banks, as I mentioned, are certainly working together in a very cooperative form, and -- and have a lot of confidence and enthusiasm for what the future holds, because we think building a really formidable community bank will fill a needed niche here in Hawaii, and -- and that we'll have a lot of success with the model. We look forward to that unfolding. Thank you for your time today.

Ladies and gentlemen, if you wish to access a replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089, with an ID number of 365262, or visit the corporate website at www.centralpacificbank.com. This concludes the conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.