Central Pacific Financial Corp (CPF) 2005 Q1 法說會逐字稿

Good day everyone and welcome to the Central Pacific Financial Corporation first quarter earnings call. Today call’s 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. One would 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 introduction, I would turn the call over to the CEO Mr. Clint Arnoldus.

Thank you all for joining us to today to review Central Pacific Financial Corp’s financial performance for the first quarter of 2005. I have with me here today Dean Hirata, our Chief Financial Officer. I will be reviewing some of the significant highlights of the quarter including the current status of the successful merger of our two bank subsidiaries in February, as well as comment on the current economic and business environment in Hawaii and Dean will follow with review of the financial results in more detail and we will close by answering any questions that you might have.

Start with the first quarter. I am extremely pleased to report the Central Pacific Financial Corp. realized record earning in the first quarter of 2005. Net income for the quarter was $17.2 million or 59 cents per share compared to $7.9 million or 48 cents per share for the same period last year. Last year was prior to the merger with CB Bancshares Inc. Compared to the previous quarter, which did reflect the operating results of the combined company. Net income increased substantially by $4.1 million or 13 cents a share. From December 31, 2004 to March 31, 2005, total assets increased by a $129 million with total loans and leases increasing by $136 million, total deposits increased by $55 million of which non-interest bearing deposits were up by $58 million. We believe this growth in our core lines of business in the post-merger environment is indicative of the strength and the potential of our combined organization in this market place. The consolidation of our City Bank subsidiary in the Central Pacific Bank was completed on February 22, 2005. Our branch rationalization plan was simultaneously executed on this day. We have 9 duplicate branches close that day, one branch relocated in Kapolei on the Island of Oahu and one new branch opened in Wailuku on the Island of Maui resulting network of 37 branches operating under the Central Pacific Bank branches, well positioned geographically, this is a part of the focus we have on business banking and is comprised of 31 branches in Oahu, 3 on Maui, 2 on the Island of Hawaii, and one on Kaui.

In a nutshell, the consolidation of our bank subsidiary exceeded our expectations in every respect. Thanks to the diligent planning and dedicated efforts our multiple integration teams, together with the positive attitude and cooperative spirit adopted by our entire employee force, we were able to achieve great success in what was really a massive undertaking. Customer attrition was nominal as we were able to integrate all City Bank accounts with the same account numbers with essentially the same or enhanced product features. Customer contact employees were retained and with the exception of natural employee attrition, our front line remained very familiar to our customers. While the first few weeks following the bank merger were very busy it was largely a seamless and very smooth transaction for our customers.

We are now focusing on the future of our company and fine tuning our organization and I am thoroughly enjoying being a stronger competitor in our market place. In March of this year, CPF issued an additional 2 million common shares at $34 per share. This follow-on offering raised approximately $64 million to the use for general corporate purposes and has strengthened the company's capital position. The company has also taken a new approach in promoting employee ownership of our company's performance with the establishment of a stock grant program for all employees. Effective March 15, 2005, every current employee is eligible for stock grants contingent upon the company’s earnings per share performance over the 2005-2007 period. We believe very strongly this program will encourage proactive behavior, increase the sense of ownership in the company, and affect everyday decisions and may help to improve revenue and/or reduce costs.

We have also embarked on a community involvement program that includes partnerships with several key community organizations to develop signature programs over the next few years. This will be in addition to our annual corporate giving programs. Some of these partnerships include The Hawaii Chapters, The March of Dimes, American Red Cross, Salvation Army as well as our own initiatives such as Charity Golf Tournament. Community support has always played an integral part of this bank's success and it will remain in our future strategic plans.

The economic outlook for the remainder of this year continues to be one of optimistic and robust growth and fueled by the increasing activity in all the key industries for the state of Hawaii. Visitor arrivals have reached record levels, that were setback in 2000, has projected to continue upwards. Visitor accounts for the first quarter this year reflect increases of 7.8% from the US market and 10.2% from the Japanese market over the same period last year. Projections for the 2005 year are increases of 4% from the US and 8% from Japan as well as a significant increase in airline capacity.

Construction activity in the private and military sectors continue to be substantial with $6 billion pipeline. A low commercial vacancy right at the 2% should also prompt additional commercial development and activity. Job and personal income growth is expected to be at 2 and 2.7% respectively in 2005 with particular strengths in the construction, wholesale, retail, healthcare, food, and accommodation services sector. Hawaii's 2.8% unemployment rate continues to lead the nation as the lowest within 14 years. Overall, we are very fortunate to have completed the back merger in the period of strong economic and business activity.

Moving forward we are very optimistic of the potential for growth in 2005. The thrust of our 2005 business plan is to increase our market share and core line the business with a continued focus on personalized service as our competitive market advantage. The first quarter exceeded our expectations with a challenge of merging our 2 bank subsidiaries. We are well positioned going forward with the increased level of expertise and experience in our company as well as an expanded range of financial services that have resulted from the merger. At this time I will turn the call over to Dean Hirata our Chief Financial Officer. Dean will review the details of our first quarter financial performance.

Thank you Clint. My description will cover the first quarter 2005 consolidated financial highlights for Central Pacific Financial Corp and its subsidiaries.

Similar to last quarter, there was still a certain amount of noise in the first quarter numbers related to the merger.

First quarter 2005, operating earnings, which we defined as net income adjusted for nonrecurring merger-related expenses was $18.1 million, an increase of 126% over the same quarter last year. The increase was primarily due to an increase of $23.6 million or 104% in net interest income and $5.2 million or 132% increase in the operating income. On a sequential quarter basis the increase in operating earnings was 14.5%. On a per share basis, our operating earnings was 62 cents for the quarter, an increase of 27% over the same quarter last year and 13% over the fourth quarter of 2004. The key performance ratios, again based on operating earnings for the first quarter of 2005, were as follows: Our return on assets was 1.54%, return on tangible equity was 27.26%, return on equity was 12.1%, and the efficiency ratio was 54.41%.

Total loans and leases as of March 31, 2005, $3.2 billion grew by 122% over the first quarter of last year. On a linked-quarter basis the increase was $136 million or 4.4% unannualized. The average yield on loans increased by 55 basis points to 6.43% compared to the prior year period due to the upward repricing of loans. On a linked-quarter basis the increase was 7 basis points.

Total deposits as of March 31, 2005, of $3.4 billion, increased by 87% from the previous years quarter. On a sequential quarter basis the increase was $55 million or 1.7% unannualized. Our continued efforts in strengthening the customer relationships and building new relationships are enhancing our core deposit base. The effective cost of interest-bearing liabilities for the current quarter was 1.59%, an increase of 40 basis points over last year's first quarter. On a linked-quarter basis the increase was 8 basis points, although our funding cost has increased from a year ago. We continued to capitalize on opportunities to strengthen the customer relationships and build new relationships through out broader retail network and expanded product suite.

Net interest margin for this quarter was 4.59% which is an increase of 7 basis points over last year's first quarter. As a result of our low cost deposit base combined with higher loan yields the net interest margin remained relatively stable on a sequential quarter basis. Provision for loan losses for the current quarter totaled $917,000 compared to $300,000 in the first quarter of 2004, and $950,000 in the fourth quarter of 2004. We recognized net loan recoveries of $3,000 in the current quarter compared to net loan charge-offs of $226,000 and $126,000 in the first and fourth quarters of 2004 respectively. Other operating income for the current quarter was $9.3 million, an increase of 137% over the first quarter of last year. In addition to the merger, the increase was primarily due to service charge on deposit accounts and net gains on investment securities. On a linked-quarter basis the increase was 2%. Other operating expense for the current quarter was $30.9 million, an increase of 113% over the prior year's first quarter. In addition to the impact of the merger the increase was due to merger-related expenses of $1.5 million. Excluding non-recurring merger-related expenses other operating expense decreased by 5% on a linked-quarter basis. The effective rate on income taxes for the first quarter of 2005 was 27.54% compared to 32.99% for the first quarter of 2004. The decrease in the effective tax rate for the current quarter reflects the impact of state tax credits generated from our investments in high technology businesses in Hawaii. We expect the effective tax rate of approximately 32% over the coming quarters.

Our asset quality continues to be strong. Nonaccrual loans at March 31, 2005, totaled $9.9 million or 31 basis points of total loans, up from $7.5 million a year ago. However, nonaccrual loans decreased 3.6% on a sequential quarter basis. Nonaccrual loans were mainly comprised of loans secured by commercial properties and no losses are anticipated at this time. Loans delinquent for 90 days or more are still accruing interest totaled $7 million at March 31, 2005, compared to $168,000 a year ago. Included in these loans are 2 potential problem loans. First a commercial real estate loan of $1.8 million and a residential mortgage loan of $4.8 million. Both loans are fully secured and no losses are anticipated at this time. Stockholders equity at March 31, 2005, increased to $641 million for a tangible equity ratio of 6.97%. The decrease in the actual FP ratio from the tangible ratio of 8.91% reflects the impact of the merger partially offset by the follow-on comment stock off return to the current quarter as previously mentioned. The off load for 2005 is as follows:

Our net interest income growth will be driven by continued loan growth and a stabilized net interest margin in the range of 4.55 to 4.6%. 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. We continue to remain on track to achieve the expected revenue and cost synergies in connection with the merger. We continue to see revenue synergies through the leveraging of the customer base of the two banks. We expect to see our prospective cost ratings or compensation and benefits and occupancy fully phased in by the third quarter of this year and other expenses fully phased in by the end of 2005. Based on current economic and different conditions, management reaffirms its 2005 EPS guidelines of $2.50 cents to $2.60 cents per share. This concludes the discussion of Central Pacific Financial's financial results for the first quarter of 2005. I am now turning the call back over to Clint.

Thank you Dean. We would be happy to address any questions that you might have at this time.

Today's question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. We will take our first question today from Brian Conn from Sandler O'Neil & Partners L.P.

I just have 2 quick questions, one on the comments on having the balance sheet being asset sensitive but it seems like that the range you give on the margins would suggest that we should see the margin improve through the remainder of the year.

That is correct. Again, with the flattening of the yield curve we do anticipate the margin to remain in this range.

So any increment on the net yield will be offset by the flattening yield curve. On the long growth, if you could split it up between the growth that was experienced on Hawaii vs. the mainland and then what product type the growth was in?

Geographically, one-third of the growth came from the mainland, two-thirds from the Hawaii, and again, as part of the loan categories, primarily in the commercial real estate and in the construction categories.

On the last call, the expected growth was I guess switched between the two. Can you just give us an update either what the trends are within each of the different geographies as well as the expectations for the growth moving forward?

I believe, on the last call, we talked about the growth that we did experience in the fourth quarter and more of the growth at that time had come from the mainland and again, we anticipate strong growth from both Hawaii as well as from mainland for the remainder of the year.

Can you quantify with the growth expectations are after you had such a strong first quarter. Again, we expect the mainland to continue to show strong growth, but as we have seen strong growth in the first quarter, and just looking into the pipeline of the second quarter, most of the growth during the quarter did occur in the second half of the first quarter, towards the end of February and then continued on until March, so we expect this growth to help us, going into the second quarter and looking at the pipeline for the second quarter. It continues to remain appropriately strong, but it will be split between these 2 geographic areas.

Again, we feel comfortable with the 8% loan growth that we forecasted.

For our next question today, we will go to Joe Morford with RBC Capital Markets.

I have a couple of questions, first, just on deposits. You had very strong growth in non interest bearing accounts of 56 to 58.9 since year. I am kind of curious as to what was driving that and secondly, did you continue run off some of the high cost CD’s at City Bank?

On the growth in non-interest earning deposits, again, there was just various, both on the retail as well as the commercial side. We did launch a deposit product over ramp towards the end of the quarter and that did offset the slow start that we are going off to the beginning of the year. As far as the similar CD customers, we have seen some run-off with that, but again that has been offset by the results of it's being an exceptional product, which again, is a linked checking and money marketed product.

When we merged the banks, the whole thought was that we would be able to take the deposits generated typically that Central Pacific has had and that put forth positive effects and spread out over the City Bank branches, that we would be acquiring and start developing the same dynamics, and we are seeing that start to play out.

Again, clarifying on the cost savings, you said that they can be fully phased in by the end of the third quarter and then I understand what was happening by the year end, because it was originally, I think you said 75% of savings come by the end of the second quarter, if you could run through that again please?

On the competition benefits today, again the reconnection with the voluntary separation program, we would state that about 83% of employees had been terminated in conjunction with that program and remaining 17% will occur by the end of the second quarter, so by the third quarter, we will have fully phased in savings with that program and similarly on the occupancy with the merger of the two banks in mid February and the savings that we would expect to see in that area, to be fully phased and with the leasing out of the spaces and the ultimate impact through our operating expense, we expect to be fully phased in beginning with the third quarter, and then on the other expense categories, in those stages will occur over the course of the year, but again fully phased in beginning with fourth quarter.

Our next question today will go to Brett Rabatin with FTN Midwest.

Quite a few questions. First of, couple of housekeeping things. From a dilution impact perspective on going forward on the 30 million shares, is about .7 million a good drive for the dilutional factor.

Yes.

Then also merger-related costs were a little different than what you guys have been talking about. Do we have any additional merger-related charges in the next quarter or two, or have we done with merger-related charges?

About half a million in the second quarter.

And when you go back to the strong loan growth that you have and that was more tail-ended in the quarter. Dean I was a little surprised, with the margin guidance that was essentially flat as it looks like to me that you are going to be able to materially increase your loan to earning asset ratio to in the next quarter, especially, does that not kind of have a positive influence on the margin in 2Q?

The guidance we are giving is based on a combination of the higher loan yields, but again offset by the impact of the flattening of the yield curve.

Would it be fair to say that the loans would be 20% or 80% of earning assets in 2Q?

Yes. That is a good approximation.

And then also in your guidance of 250 to 260 you give us any thoughts if that includes any credit leverage going forward are there non-operating items, or the way you calculated the core earnings of the first quarter.

No that would be based on core earnings that would not include any of the items that you have just mentioned.

When you say core, do you mean reported or do you mean the way you calculated the one 1Q, I believe you called it 18 plus.

Right. It would be based on operating earnings, but if you are excluding any non-recurring merger-related expenses.

Okay but including any other fee income related items or what have you?

Correct.

We will go next to [Jordan Simowitz] with Philadelphia Financial.

Good quarter. A bunch of direct questions. First of all, the service charge fees kind of turned it a little bit sequentially. Do you guys offer free check as a part of seasonality because there are a lot of banks are offering category in Q1?

Yes, we do have a coded free checking product that does generate the service charges.

Have you changed pricing on that or it is just a volume issue?

It is just the volume that has gone down a little.

Are there other operating from which was just down by about a $1.5 million, what was the variants in that?

Primarily due to decrease in the gain on loan sales.

So it is more sustainable at the lower level?

Yes.

I guess there was an increase in 90-day in over delinquencies and then rose to 7 million from 400,000 what caused that?

Again, that was primary due to 2 loans, commercial real estate loan of $1.8 million and a residential mortgage loan of $4.8 million. Again, with both these loans, we are fully secured and we do not anticipate any losses with these 2 loans.

Finally the tax rate was a little lower than in the quarter, what should the tax rate be going forward?

32%.

[OPERATOR INSTRUCTIONS] We will go next to Jacqueline Reeves with Ryan Beck.

Good afternoon. I just wanted to follow up on a prior question, because when I backed out, the gain on sales loan, I still had a significant decline, is there anything else going on that line?

No, the only other significant item and varies is the income on our bank home life insurance. The other item we guess is related to the portfolio is the on some of these securities that we have got in there, we do have market adjustment in connection with those securities.

Okay.

That again is related to the regain on the loan offsets.

Okay. Did you discuss all the trend line in terms of booking, security gains going forward that part of you know the core number, this obviously jump outs at you.

No again the security portfolio was part of an overall structuring that we did in the balance sheet, we have re-positioned the portfolio for higher yielding investments.

So then if we were to back that out actually the run rate then is more like a 55-cent number going forward.

No. Again, I mean, if you were to take out the gains you get down to 59 cents as opposed to the 62 cents that we have excluding the non-recurring merger-related expenses.

We have a followup question from Brian Conn with Sandler O'Neil.

You guys made the comments at all the expense cuts remain on track. Can you just quantify how much of the expense saves that is still remaining and how many have already been realized?

The best way to put is you know how we talked about it throughout the call, the expenses are basically in 3 categories, compensation and benefits, occupancy and other expenses. Again on the compensation, benefits the primary stage will come through the voluntary separation program, an 83% of the employees have left, the other 17% will leave by the end of the second quarter, so again you can expect annualized savings of about $5.5 million in conjunction with that program if I can say fully phased in by the third quarter. Occupancy began, we started to see the savings of if any this quarter and with the releasing of some of the facilities we expect the savings of approximately $2 million annualized to be fully phased in the beginning third quarter. And in the last category, you know, we expect the saves throughout the year but again to be fully phased by the beginning of the fourth quarter, so a total of just under $13 million in annualized cost savings.

So, none of that has flowed through the expense side yet, minus a little bit of the cost expense from the people leaving the quarter.

The cost phase that we have actually seen in the first quarter would primarily be in the salaries and benefits again due to the savings that we have achieved with the VSP program.

There is no number you can attach to the first quarter?

No I do not have a number coming at this time. I can get back to you on that.

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

Thank you all for participating in our earnings call. We feel very pleased with this first quarter that demonstrates the benefits of merging our 2 banks in city areas and we anticipate being able to have a much stronger position to go into the market, continue to grow bank and give our shareholders positive return. Thank you very much.

This does conclude today's conference. If you would like to listen to an audio replay of this call, you may do so by calling 1-888-203-1112 and entering access code 752294. The replay of todays call will be available starting today at 6 PM central time and ending on Tuesday May 3rd at midnight, central time. We appreciate your participation, you may disconnect at this time.