Central Pacific Financial Corp (CPF) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to the Central Pacific Financial Corp. third-quarter earnings call. Today's call is being recorded.

This release may contain forward-looking statements concerning projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items concerning plans and objections of management for future options concerning future economic performance, or concerning any of the assumptions underlying or relating to any of the foregoing. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally include the words believes, plans, intends, expects, anticipates, or words of similar meaning. While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could materially differ from projections for a variety of reasons, to include but not limited to the impact of local, national and international economies and events on the Company's business and operations, and on tourism, the military, and other major industries operating within the Hawaiian market; the impacts of legislation affecting the banking industry; the impact of competitive products, services, pricing and other competitive forces; movements in interest rates; loan delinquency rates, and trading of the Company's stock. For further information on factors which could cause actual results to materially differ from projections, please see the Company's public available Securities and Exchange Commission's filings, including the Company's Form 10-K for the last fiscal year. We advise the Company does not update any of its forward-looking statements.

At this time, I'll turn things over to your host for opening remarks and introductions, the CEO, Mr. Clint Arnoldus. Please go ahead, sir.

Thank you, Jason, and thank you to everyone listening in -- for joining us today to review Central Pacific Financial Corp's financial performance for the third quarter of 2004. I have with me here today Dean Hirata, our Chief Financial Officer.

I'll start off by reviewing some of the significant highlights of the quarter and comment briefly on the current economic outlook for Hawaii, and Dean will follow that with a review of the financial results in more detail, and then we'll close by answering any questions that you might have.

Looking first of all at third-quarter highlights, of course, the key highlight for us was the merger of CB Bancshares Inc. into Central Pacific Financial Corp. You recall that closed on September 15th. And we were particularly pleased to have received such overwhelming support from the shareholders of both companies. The Company, as of September 30th, has now doubled in size. Our total assets are $4.6 billion. Our total loans and leases are $3.1 billion, and total deposits, $3.3 billion. Our market capitalization has increased significantly to $771 million. And shareholders' equity now stands at $559 million.

I'm also pleased to tell you that independent of the merger, we've made significant gains in our organic loan and deposit growth in the third quarter. Our average balances for loans increased by 18.8 percent to $1.6 billion, and average deposit balances increased by 8 percent to $1.8 billion compared to the same period last year; and these numbers are independent of the merger.

One of our key concerns this year that was a key concern in the overall banking industry was interest margin compression. We're pleased to report that our net interest margin in the third quarter improved by 23 basis points over the previous quarter, although we're still lagging the 2003 levels. We've also made great progress in our strategies to improve fee income. We've introduced our free checking program in July, and we continue to focus on expanding wealth management services. Other operating income increased by 25.9 percent over the third quarter of last year.

The integration and consolidation of our two bank subsidiaries, Central Pacific Bank and City Bank, is on target for the first quarter of 2005. We've been working diligently through multiple integration teams. These teams have key employees from both banks, and cover every aspect of our operation. Key strategic decisions have already been made. So we're really focusing right now on operating a full throttle in the execution phase. Our new executive management team has been in place since September 16. So we put this team together so that we can combine the strengths and the expertise of both organizations. Certain areas of our banks have also been combined shortly after the closing of the merger to generate immediate efficiencies. We also introduced a voluntary separation program to certain employees on September 15th. We should have an indication of the impact of this program the beginning of November.

Upon the consolidation of the bank subsidiaries in the first quarter of 2005, we'll be opening one new branch, relocating one branch, and closing nine overlapping branches. The (indiscernible) branch network will comprise of 37 branches across four major islands in the state of Hawaii. To date, we've been very pleased with the integration progress, and the minimal impact we've experienced with our existing customers. We (technical difficulty) our market position as the fourth-largest financial institution. And the service reputation that's driven the success of both Central Pacific and City Bank will result in significant success in our marketplace.

Let's talk about the economy for a minute. The economic forecast for Hawaii continues to be extremely optimistic for the remainder of this year and into 2005. Primary drivers are real estate activity, a very strong construction pipeline, and improving visitor counts. The visitor industry experienced a 6.6 percent increase in domestic visitors, and a 14 percent increase in international visitors this year through the month of August. There has been significant growth in private building permits from under $2 billion last year to close to $3 billion presently. That combines with nearly $3 billion in military construction projects. So all this spells a very healthy pipeline for the construction industry looking in the future.

Bankruptcy filings are going the right direction. They've fallen for nine consecutive quarters in Hawaii -- just under 3000 projected for year-end. Job growth projections are very solid, increasing by 2 percent in 2004 and 2.2 percent in 2005. And Hawaii currently enjoys the lowest unemployment rate in the nation, at 2.9 percent.

So based on what we're seeing right now, on the current and the projected economic and business conditions in our state, we're reaffirming our guidance of $2.50 to $2.60 in earnings per share for 2005. I'll now turn the call over to Dean Hirata, our Chief Financial Officer, and he'll review the financial highlights in more detail. Dean.

Thank you, Clint. My discussion will cover the third-quarter 2004 consolidated financial highlights for Central Pacific Financial Corp. and its subsidiaries, Central Pacific Bank and City Bank, whose financial results are included in the consolidated financials from September 15th, 2004 as a result of the merger.

As you would expect, there is a certain amount of noise in the third-quarter numbers due to the merger, which I will try to distill through. Starting with the summary of earnings, the third-quarter 2004 net income, adjusted for merger-related expenses, was $10.4 million or an increase of 19.6 percent over the same quarter last year. The increase was primarily due to an increase of 5.3 million or 22.6 percent in net interest income and $1 million or 25.9 percent in other operating income. Additionally, the income taxes declined by 948,000 as a result of certain investments generating state tax credits. On a per-share basis, net income adjusted was 57 percent cents for the current quarter, or an increase of 7.5 percent for the same quarter last year.

Now looking at the loan and lease portfolio, total loans and leases as of September 30, 2004 of $3.1 billion grew by 115 percent from the third quarter of 2003. Excluding the impact of the merger, the increase was $240 million, or 16.8 percent. The average yield on loans decreased by 57 basis points to 6.08 percent compared to the prior year, due to the downward pricing of loans. Excluding the impact of the merger, loans increased by $46 million during the third quarter. Total deposits as of September 30 of 3.3 billion increased by 91 percent over the previous year's quarter. Again, excluding the impact of the merger, the increase was $192 million, or 11.1 percent with non-interest bearing deposits increasing by 5.6 percent.

The management believes that the continued efforts in building and strengthening customer relationships are enhancing our core deposit base. The effective costs of interest-bearing liabilities for the quarter was 1.36 percent compared to 1.17 percent for last year's third quarter. Although our funding costs has increased slightly from a year ago, we are optimistic about the opportunities to grow core deposit relationships through the larger retail network and expanded product suite as a result of the merger.

Net interest margin of 4.54 percent for this year's third quarter decreased by 35 basis points from last year's third quarter. Again, as I indicated earlier, the impact was due to the downward repricing of loans occurring during the last year, but has now stabilized due to the prime rate increases over the last two quarters. But as a result, the net interest margin increased by 23 basis points during the current quarter as compared to the second quarter of 2004. We expect the net interest margin for the fourth quarter to be in the 4.5 to 4.6 percent range.

The provision for loan losses for the quarter totaled 533,000, with 611,000 in net loan charge-offs compared to $1.1 million in net loan charge-offs a year ago. The improvement in non-interest income of 25.9 percent over the third quarter of 2003 was primarily due to income from fiduciary activities and service charges on deposit accounts.

The increase in non-interest expense of $7.8 million over the prior year's quarter primarily resulted from merger-related expenses of $4.5 million and half a month of City Bank's operations in the second half of September.

The effective rate on income taxes for the third quarter of 2004 was 29.62 percent compared to 33.55 percent for the second quarter of 2003. Effective tax rate declined as a result of certain investments generating state tax credits. And the expected rate for the fourth quarter is approximately 30 percent.

The asset quality of the Company continues to be strong. Nonaccrual loans at September 30, 2004 totaled $11.6 million, or 38 basis points of total loans, up from $1.8 million a year ago. However, excluding the impact of the merger, nonaccrual loans totaled $6.8 million, which represented a decrease of 401,000 from June 30, 2004. Nonaccrual loans were mainly comprised of loans secured by commercial property, and no losses are anticipated at this time.

Stockholders' equity at September 30 increased to $559.4 million or a tangible equity ratio of 5.18 percent. The drop in the tangible equity ratio from the year ago of 8.77 percent, again, reflects the impact of the merger. However, we expect this ratio to quickly increase with the accumulation of earnings.

Key performance ratios for the third quarter were as follows -- ROA on an adjusted basis was 1.49 percent; ROE, adjusted, was 17.05 percent; and the efficiency ratio, adjusted, was 52.73 percent. Again, all of these ratios were adjusted for the impact of the merger.

So the outlook, starting with the net interest income growth, will continue to be driven by loan growth as the net interest margin is expected to stabilize in the 4.5 to 4.6 percent range. The Company's balance sheet remains relatively neutral to changes in interest rates. Loan quality is expected to remain strong during the fourth quarter. And management continues to focus on both revenue and cost synergies in connection with the merger. Once again, based on current economic and business conditions, management reaffirms its 2005 EPS guidance of $2.50 to $2.60.

This concludes the discussion of Central Pacific Financial's financial results for the third quarter of 2004. And we now welcome any questions that you may have.

(Operator Instructions). Our first question comes from Brian Conn with RBC Capital Markets.

Good afternoon, everyone. Just a couple of housekeeping questions. You guys did a good job of trying to let us know where the margin and some of the other factors were going to play out in the fourth quarter. Can you guys discuss, both on the fee lines as well as expenses, where we should expect them to be modeled? And then secondly, on the merger charges, it sounds like there wasn't much in this quarter. Can you guys just give us an estimate of what's going to play out over the next couple of quarters?

Brian, again, first starting with the fee income and the noninterest expense, again, you know, as you would expect, there were the restructuring charges on the noninterest expense of about 4.5 million during the third quarter. We do expect that number to decrease, but there are additional charges that will be realized during the fourth quarter.

Could you break out where those 4.5 million flow into the expense statement for the current quarter? Broken out between computation costs and any of the other costs?

Yes, the biggest expense was in the salaries and benefits. About $2.1 million related to payments made in connection with the completion of the merger. And the other amounts are spread through the various categories on both terms of legal fees and other related costs in connection with the merger.

So they would flow into that other line essentially, the remaining costs?

Yes. And again, going forward, again, we do expect both the fee income as well as the noninterest expense to be in line with the baseline projections that were provided for 2005.

I think, moving onto -- weren't those total merger charges expected to be somewhere around 50 million after-tax?

That's correct.

Can you -- and it seems like we only got 4.5 million this quarter. Are the majority of these expenses going to hit next quarter in the first quarter of '05 as the integration takes place?

Yes, plus -- the 4.5 related to actual expenses that were recognized during the third quarter, like I said, in the noninterest expense categories. But certain parts of the overall restructuring charges, as well as transaction costs were recognized by CB Bancshares at the time of the closing of the merger. We have a combination of amounts that are sitting in the goodwill that is reflected on the balance sheet, as well as the charges that are flowing through the income statement.

So we shouldn't see much flow through the income statement in the next couple of quarters?

Yes, the projection for the fourth quarter in terms of what will flow through the income statement, would be approximately $4 million.

Thank you.

There are no further questions at this time. (Operator Instructions). It looks like we do have a question from Brett Rabatin from FTN Midwest Research.

A couple of questions. First off, I wanted to touch on the level of expenses going forward. You just mentioned in the previous questioning that you'd anticipated the run rate for expenses being in line with the projections you initially put out. So I guess, to make that more lucid, can you say then that going forward, the run rate for the CBBI piece of the expense base will be somewhere in the vicinity of 11.5 to $12 million, excluding your sort of 14-ish run rate, on a stand-alone basis?

Yes, again, as far as the CBBI run rate, what were you referring to specifically?

I'm just looking at -- when you guys put out your original projections, you know, we're talking about a $60 million expense base for CBBI. And you were looking to trim off 20 to 21 percent of the expenses. And so that's approximately 13 million pretax. So that gets you down considerably. And you'd indicated that you would have that out pretty quick. Or I thought that's what you just indicated. Is that not what you meant?

That's correct. Yes, again, the numbers that you're referring to that include the synergies that we anticipate as a result of the merger. And that being the case, those would be the numbers going forward.

Okay. So I mean, I'm basically just taking the 47 million number, which is -- their expense baseline is the savings and saying okay, it's 12 million-ish on run rate.

Correct.

So for 4Q, we can assume the 12 plus your 14 sort of, excluding -- the numbers in 3Q are obviously skewed given that you closed the deal the middle of last month.

Right. And again, including the additional restructuring charges of approximately $4 million.

Okay. And then, was curious, the capital ratios were a little lower than I was expecting. So I was a little -- the securities portfolio increase was a little unanticipated during the quarter on a relative basis. So I was curious if you could talk about -- you mentioned an improvement in capital ratios over the next year. I was curious if you could give us any thought process on sort of an average balance sheet growth rate in '05 given where you're giving guidance?

Again, the growth rate that we forecast for '05 would be between 7 to 8 percent. With regards to the tangible equity ratio, we do have a target of 6 percent. And again, with the earnings that will accumulate during the year, we should approach that level.

Okay. And then, can you give us any numbers on, going back to the expense savings, can you give us any numbers on -- you mentioned the voluntary separation program, you wouldn't have those numbers until November. Are you getting early indications that that program has been highly successful? And how much will you save from the nine branch closings?

Starting first with the voluntary separation plan -- the response has been very favorable. And we do anticipate that a majority of employees that were offered the plan will accept it. They have until November 1st to make that decision.

As far as the branch closings, again, in connection with the savings in the net occupancy category, we are -- our projections are in line with the estimates that we have for 2005 of approximately $1.9 million.

Okay. And then just one last question. Your relative reserve levels has increased as anticipated. Can you give us any color on whether or not those are a piece of the 2.50 to 2.60 guidance in terms of maybe some slight decreases on a relative ratio over the next year?

Again, for both banks, the asset quality was strong as of the merger and continues to remain strong. And the allowance, in terms of the coverage, is also strong coverage. So we believe that going forward into 2000 -- I guess into the fourth quarter, as well as going into 2005, we do have a strong allowance that does position the bank for the growth. As far as a target level, we'd be looking at a target of between 1.5 to 1.75 percent.

Okay. So you don't plan on pulling that down much?

No.

Okay. Interesting. And then I apologize. One more last question. I wanted to hear a little more color if possible on the three pieces of commercial -- the three properties related to the NPAs added last quarter. I was curious about it. It sounded like they would be somewhat of an extended duration on a workout for those properties. I was curious if there was any visibility that those might get worked out in the next year or so, in terms of getting them off the balance sheet.

As of the end of the quarter on the first property -- first loan -- there are two loans that aggregate $3.8 million. Again, we are continuing to look for a buyer for the collateral securing this loan. And the other two loans have been brought current as of September 30.

If I can just add on that first loan, again, how strong this market is and how many investors are anxious to invest and enjoy the economic climate we're in. So we feel like we're in a very strong position with that first one as well.

Okay. Great. Thanks, guys.

(Operator Instructions). You have a follow-up from Mr. Brian Conn.

Just want to touch on two things. First would be the tax rate. It sounds like the tax credit you got this quarter will also flow into the fourth quarter. Is that also a good number for us to use in '05?

Again, 30 percent for the fourth quarter and about 32 percent for '05.

Okay. And then secondly, on the loan growth that you guys saw this quarter, it was strong -- pretty strong again. What is the outlook for '05 as far as what portfolios you expect to see the biggest growth in?

We think that '05 will be a strong year for loan growth, Brian. We think it's going to be very strong in the construction sector, consistent with what's happening in the economy; very strong in the mini-perm real estate loans. We think we're going to see strong growth from our private banking sector. And those will be the real drivers. But we really see, in a general sense, overall strong growth in our lending areas. But those will be the real engines that will pull us next year.

Is the construction side related to the military housing?

Partially. But the real construction that we're going to see -- that's a great boost to the economy in general. And we're seeing some good deposit activity out of that. There are large developers that are handling that privatization project that have tapped large mainland sources for any loan demand. But we are seeing already some good deposit activity. But on the lending side in construction, we're going to see it related to the extremely strong growth of the condominium market, the timeshare market. There are plans for new hotels, refurbishments of existing hotels. And certainly on the housing front, very robust. So it's going to be a pretty broad spectrum of where we expect to see activity.

Thank you.

And Mr. Rabatin has another question.

Just wanted some clarity on the core deposit and tangible amortization. Is all in, with everything going forward, is a 2 million run rate sort of good? Or can you give us any thoughts on that? You had 645 in the third quarter.

The projection for '05 would be about 8 million.

Okay, so 2 million quarterly is a fair assumption?

Yes, that's a fair assumption.

Okay. Great. Thanks.

It appears there are no further questions at this time. I'll turn the conference back over to our speakers for any closing or final comments they may have.

Okay. Thank you, again, everyone, for joining us. Just to summarize, we're very pleased with how the merger is progressing. Certainly, I know there were some concerns about the culture, and I think we're well beyond that. We just had a rally with all employees over the weekend that went extremely well. So really anticipating, with this strong economy, with the merger going so well, that we're going to be able to capitalize on combining these two banks and really show some strong performance, in line with the guidance we gave you. Thank you very much.

Once again, this will conclude today's conference. If you would like to listen to an audio replay of this call, you can do so by calling 888-203-1112, and entering access code 877859. A replay of today's call will be available starting today at 6 Central time and ending on Tuesday, November 2nd at midnight Central time. You may now disconnect. Thank you.