Central Pacific Financial Corp (CPF) 2004 Q4 法說會逐字稿

Welcome to the Central Pacific Financial Corporation 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 objectives of management for future operations, 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 Hawaii market; the impact 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 publicly available Securities and Exchange Commission filings, including the company's Form 10-K for the last fiscal year. Be advised the company does not update any of its forward-looking statements.

At this time, for opening remarks and introductions, I will turn the call over to Chief Executive Officer, Mr. Clint Arnoldus.

Please go ahead.

Thank you very much, Ruthie, and thank you all for joining us today to review Central Pacific Financial’s performance for the fourth quarter of 2004. With me here today is Dean Hirata, our Chief Financial Officer.

I’ll start off by reviewing some of the significant highlights of the quarter and the progress of the merger, as well as comment on the current economic and business environment in Hawaii. Dean is then going to follow with a review of the financial results in more detail, and we will close by answering any questions you might have.

Let’s look at the fourth quarter highlights first. The immediate impact of the merger with CB Bancshares, Inc., which you’ll recall closed on September 15, 2004, is reflected in the strong earnings performance and the significant balance sheet growth for the quarter. Net income increased by 44% over the same period in the previous year and by 71% in the previous quarter. As of December 31, 2004, compared to the same period in 2003, total assets of net loans increased by 114.6% and 115% respectively. Total deposits were up by 89.8% and the Company’s market capitalization increased to $1 billion dollars compared to $483 million just a year ago. To consummate the merger transaction, the Company issued 11.9 million shares of common stock and paid $88.9 million in cash or a total merger consideration of $423.1 million based on the Company’s stock price on the closing date of the transaction. Earnings per share for the 2004 fiscal year were $1.87. Dean will review the financial results in more detail in a few minutes.

I would like to take a few minutes and make a few comments on the progress of our efforts to consolidate our 2 bank subsidiaries, Central Pacific Bank and City Bank. I’m very pleased to report that the integration initiative as to date exceeded our expectations. We’re on schedule to complete the consolidations of our operations over the President’s Day weekend, next month, and open up our 37 branch offices under the Central Pacific Bank name on February 22, 2005. Thanks to the dedicated efforts of our employees from both banks, especially those involved in the 13 specialized integration teams, were right on target in virtually every aspect of the bank merger. Our executive management team which we build from the best talent from both organizations, has already proven their abilities to bring the companies together and to very importantly set the example for the entire team. We’re also very fortunate to have the full support of our 15-member board of directors, which includes 6 former directs of CB Bancshares, Inc. These 15 directors acute understanding of our local market and individual business expertise have provided tremendous value to our operations. They have been instrumental and also leading by example to bring the 2 companies and cultures together in this merger initiative.

Our employees have been nothing less than remarkable in working diligently toward a successful merger. We’ve had overwhelming responses to several joint employee events that were held after the transaction closing. As clearly demonstrated, our employees desire to move onward and upward. Consistent with our no involuntary layoff commitment, a voluntary separation plan was offered to certain employees in November which resulted in a 99% participation rate. We’re already experiencing great success in generating business referrals in areas that are highly complementary between the banks. As we state previously, City Bank is a major market player in the residential mortgage and leasing segments. Central Pacific Bank is strong in trust and local wealth management services as well as being a market leader in commercial real estate lending. Our strategic decision to maintain the commercial real estate lending operations in California, which was originally developed by City Bank, and the Pacific Northwest, will resolve in significant revenue contributions to the Company. We look forward to the [indiscernible] that will become available when we’re finally able to merge with the customers with both banks into Central Pacific Bank.

Our customer retention efforts have also been very successful to date. We’re optimistic that with the minimal changes and impact our customers will experience upon conversion, we’ll continue to retain our customer base and provide them with enhanced services. We feel very strongly that by providing expanded services and resources at the same time maintaining our highly personalized service and attention to customers will position our Company with a competitive advantage in our marketplace. This has been the driving force behind the success of both banks historically, and we are committed to perpetuating this brand after the consolidation.

Looking forward, we’re very confident that the execution of our integration plan and business strategies will be on target to deliver our projected performance ratios and earnings-per-share guidance of $2.50 to $2.60 in 2005.

I’d like to take a minute to talk about the business and economic climate in Hawaii as well. We think this is going to provide a solid platform for our business plan in the coming year. Strong activity in tourism and construction industries in 2004 has fueled our job market and real income growth in Hawaii. Total visitor arrivals for 2004 were just 40,000 visitors shy of the record 6.95 million that arrived in 2000, an increase of 8% in 2004 over the previous year. In the forecast, there is an increase of another 4% in 2005, which would then set a new record. We’re particularly encouraged by the resurgence of the Japan visitor arrivals which increased by 13% in 2004. Private construction permits have increased significantly to approximately $3 billion with residential construction permits increasing by 31% in 2004. In addition, over $3 billion is expected to be invested in infrastructure improvements by the federal government for the military community in our state. Job growth is projected to increase by 2.2% in 2004 and continue to increase by 1.8% in 2005. Employment rate has dipped to 3.3% in 2004 and it’s expected to hold steady at 3.2% in 2005. Real personal income is projected to grow by 2.5% in 2004 and 2005. Gross domestic product growth in Hawaii is expected to by 4.3% in 2004 and continue to grow in the 3.5% range in 2005 and 2006.

So overall, all leading economic indicators in our state show great momentum going into the new year.

At this time, I’ll turn the call over to Dean to review the details of our fourth quarter and our year-end financial performance.

Thank you, Clint.

My discussion will cover the fourth quarter 2004 consolidated financial highlights for Central Pacific Financial Corp and its subsidiaries Central Pacific Bank and City Bank.

Similar to last quarter, there was still a certain amount of noise in the fourth quarter numbers as a result of the merger and I’ll point these out as I go through the discussion.

So starting first with our earnings, the fourth quarter 2004 net income, again now adjusted for merger-related expenses was $16.4 million, an increase of 79.8% over the same quarter last year. The increase was primarily due to an increase of 24.2 million, or 110% in net interest income, and a $4.5 million, or 98%, increase in noninterest income. On a per share basis, net income adjusted was $0.57 cents for the current quarter, an increase of 4% over the same quarter last year.

The key performance ratios for the fourth quarter and the year, respectively, were as follows – the return on assets adjusted was 1.40% and 1.46%, respectively. Return on equity adjusted was 11.71% and 14.44%. Return on tangible equity adjusted was 29.2% and 21.46% and the efficiency ratio adjusted was 54.05% and 53.26%, respectively, for the fourth quarter and the year.

Total loans and leases as of December 31, 2004, of $3.1 billion grew by 115% from the fourth quarter of 2003. Again, excluding the impact of the merger, the increase was $259 million, or 18%. The average yield on loans increased by 39-basis points to 6.36% compared to the prior year period due to the upward repricing of loans. Excluding the impact of the $60 million residential mortgage loan bulk sale during the fourth quarter, loans increased by $100 million during the fourth quarter of 2004.

On the deposit as of December 31, 2004, of $3.3 billion, there was an increase of [indiscernible] from the previous year’s quarter. Again, excluding the impact of the merger, the increase was $198 million, or 11%. Management continues to believe that its efforts in building and strengthening customer relationships are enhancing our core deposit base. The effective cost of interest bearing liabilities for the quarter was 1.51% compared to 1.1% for last year’s fourth quarter. Although our funding cost has increased from a year ago, we remain optimistic about the opportunities to grow core deposit relationships through our larger retail network and our expanded product suite.

Net interest margin of 4.60% for this year’s fourth quarter increased by 7-basis points from last year’s fourth quarter. Again, the impact of the repricing of real estate loans combined with the primary increases during the last year have stabilized the net interest margin going forward. As a result, the net interest margin improved by 6 basis points during the current quarter on a sequential quarter basis. Provision for credit losses for the current quarter totalled $950,000 with $126,000 in net loan charge-offs, compared to 31,000 in net loan charge-offs a year ago. The increase in noninterest income for the current quarter of 98% over the fourth quarter of last year, in addition to the merger, was primarily due to income from fiduciary activities and service charges on deposit accounts. The increase in noninterest expense for the current quarter of 21 million over the prior year’s quarter primarily resulted from City Bank’s operations of $13.5 million and merger-related expenses of $5.4 million or $0.11 cents per share.

The effective rate on income taxes for the fourth quarter of 2004 was 30.81% compared to 24.63% for the fourth quarter of last year. The effective rate for the fourth quarter of last year reflects the impact of certain investments generating state tax credits. The expected effective rate for the first quarter of 2005 is 32%.

Our asset quality continues to be strong. Nonaccrual loans at December 31, 2004, totalled $10.3 million, or 33 basis points, of total loans, up from 3.6 million a year ago. However, excluding the impact of the merger, nonaccrual loans totalled $5.5 million, which represented a decrease of $1.3 million on a sequential quarter basis. Nonaccrual loans were mainly comprised of loans secured by commercial property, and no losses are anticipated at this time. Stockholder’s equity at December 31, 2004, increased to $568 million, or a tangible equity ratio of 5.39%. The drop in the tangible equity ratio from a year ago of 8.97% again reflects the impact of the merger; however, we expect this ratio to move above 6% by the end of 2005.

So the outlook for 2005 is as follows – starting with the net interest income, we anticipate that this growth will be driven by continued loan growth combined with a stabilized net interest margin in the 4.55 to 4.6% range. The Company’s balance sheet is slightly asset sensitive and should benefit from a gradual rising rate environment. Loan quality is expected to remain strong and management continues to focus on revenue and cost synergies in connection with the merger. We have already started to see revenue synergies through the leveraging of the customer base of the 2 banks and expect this to continue going forward in 2005. On the cost side, we expect that our projected cost savings for compensation and benefits and occupancy will be fully phased in by the third quarter of 2005 and other expenses fully phased in by the end of 2005.

So once again, based on the current economic and business conditions, we reaffirm our 2005 EPS guidance of $2.50 to $2.60 cents.

So this concludes the discussion of Central Pacific Financial’s financial results for the fourth quarter of 2004, and at this time I will now turn the call back over to Clint.

Thank you, Dean. Why don’t we just open it up to questions at this time.

Brett Rabatin; FTN Midwest Research.

A couple questions. First, I wanted to get some additional color. You just gave some broad outlines for ’05 and I was curious if you exclude the amortization in the current quarter 4Q, the operating efficiency ratio is about 50%, so I was curious to hear your thoughts on sort of a second half of the year efficiency ratio on a core basis.

Again, if you exclude – are – you’re saying if we were to include the amortization what would the –

No. If you exclude the amortization it’s about 50%, which is about what both companies sort of on a standalone basis were running excluding some nonrecurring items.

And we expect the efficiency ratio to be at the 50% level in the second half of the year.

Okay. So – but does that include amortization?

That includes the amortization.

Okay. And then I wanted to hear some additional color, if possible, on the loan growth in the quarter. How much of it was related to the loan production emphasis and if any was participation credits and if we should continue to expect you guys to change the mix on the earnings assets with mortgage sales?

You know, as you can see, we have a pretty strong loan to deposit ratio right now, and as a result of that, we really aren’t looking at many participations and going forward that will be very much our philosophy. We’re trying to build relationships with all of our borrowers and feel that we can deploy those assets much more – in a much more beneficial way to our shareholders if we use those for relationship building. We do think that we’re going to continue to see strong loan growth. We think, you know, we’ve already said we expect to see 8% going forward. We’re still very comfortable with that number. You know, as we said, we’re in a very strong economy right now in Hawaii, so we think we’re going to continue to see strong loan growth there. We don’t think we’re going to get a disproportionate share of that growth from our loan production offices on the mainland. We see pretty even growth.

Okay. And then I wanted to hear – if – let’s just say from a scenario perspective that the recoveries slow down and so the net charge-offs increase from really low levels, you’ve got a relatively healthy loan loss reserve. Can we see some more provisioning even if chronic costs were to increase from a reduced level of recoveries going forward or is there some other thesis that makes more sense?

Again, you know, based on the projected past quality going forward and then looking at provision that we’re currently providing, we would expect provision to remain at these levels and actually expect the overall asset quality to remain at these levels, even with the lower level of charge-offs.

Maybe just to clarify. It sounds like you’re saying that you think, Dean, that charge off levels should continue to be really light and that the reserve will be maintained at similarly levels going forward?

Yes.

Okay. All right, guys. Thanks much.

Joe Morford; RBC Capital; Analyst.

Thanks. Good afternoon, everyone. Just follow-up to Brett’s question. I guess more specifically, excluding the loan sale, of the $100 million of growth that you saw in the fourth quarter, how much of that came from California and how much was out of the local Hawaiian market?

The overall growth about two-thirds from California and about a third from the local Hawaiian market.

And the 8% growth projection that you made for ’05 for loan growth, should we expect a similar mix, two-thirds California, one-third Hawaiian?

Yes.

Okay. And can you talk about the $65 million sale you did? What was kind of the thought process behind that?

That was really done as an overall balance sheet restructuring in our loan portfolio and again – and just going through the overall evaluation of the portfolio itself we sold it to enhance the liquidity and reduce our exposure to rising interest rates. The loans generated a net gain of approximately $640,000. These consisted of 15-year conforming residential mortgages.

Okay. And I guess lastly, just looking forward to ’05, you talked about 8% loan growth. What’s your expectation currently for deposit growth?

The same, 8%.

Okay. Thanks very much.

[Brian Kahn; Sandler O’Neill] [ph]

Good afternoon. I just wanted to get a little better timing wise on when the expense cuts were coming through. It sounds like with the voluntary separation package, I couldn’t imagine that you would have expected that type of acceptance rate. Does this mean that we should get the majority of the [inaudible] over the next quarter to 2 quarters, and I just wonder if you could break it down for us a little better?

Yes, again, on the cost saves in connection with the compensation and benefits, the majority of that will come from the voluntary separation program and we did have the high acceptance, and the actual savings will occur and – or have started to occur since the merger and will continue even beyond the merger between the 2 banks in February through the end of April. So again, we expect to see fully saves costs from this program beginning in the third quarter.

And I guess my question is should we see the majority of the saves hit in the first quarter or is going to wait to the transition is complete and then the majority of the saves are going to hit the second and third quarters?

The majority of the saves will hit in the second quarter.

Okay. And then it also looks like you did a little restructuring in the securities program – or in the securities portfolio. Can you just run us through where that stands on a duration basis?

We are continuing to look at the overall restructuring of the portfolio and currently on the duration of approximately 3 years.

With the changes that you’re making on the residential mortgage loans, and I would assume on the securities portfolio, is there a chance that you’re able to – the interest rate increases will actually start to benefit the margin going forward through 2005?

Yes. Again, in a gradual rising rate environment we do expect to see some benefits in the margin.

Does flattening play a big role in your ability to see upper movement in the margins?

No. I mean, there will be some compression if it’s a rising flattening but we don’t anticipate that to be significant.

Great. Thanks.

And at this time there are no further questions in the queue. I will turn the conference back to our speakers for closing remarks.

Okay. Thank you very much everyone for participating in our call today. We feel very encouraged by the progress we’re making with the merger and in the resultant positive outlook for 2005 and we look forward to future quarters where we can talk to you specifically about those results we anticipate. Thank you very much.

This does conclude today’s conference. We do appreciate everyone’s participation. If you would like to listen to an audio replay of this call, you can do so by dialing (888) 203-1112 and entering the access code 144144. The replay of today’s call will be available starting today at 6 p.m. Central time, and ending on Tuesday, February 1, at midnight Central time. Once again, we appreciate your participation. You may now disconnect.

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