Central Pacific Financial Corp (CPF) 2005 Q3 法說會逐字稿

Good day, and welcome to the Central Pacific Financial Corporation 3rd Quarter Earnings Call. Today’s call is being recorded. This presentation may contain forward-looking statements concerning projections of revenue, income, EPS, capex, dividends, capital structure and other financial items concerning plans and objectives of management for future operation concerning future economic performance, or concerning any of the assumptions underlying or related 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 words like, “Believes, plans, intends, expects, anticipates,” or words of similar meaning. While we believe that our forward-looking statements and 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 projects, 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, 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. Movement in interest rates, loan-delinquency rates and trading of Company stock.

For further information on factors which could cause actual results to materially differ from projections, please see the Company’s publicly available SEC filings – including the Company’s registration statement on Form S3 and Form 10K for the last fiscal year.

The Company does not update any of its forward-looking statements.

At this time, for opening remarks and introductions, I’d like to turn the call over to Mr. Clint Arnoldus, CEO. Please go ahead, sir.

Thank you, Tom. And thank you all for joining us today, to review Central Pacific Financial Corp’s financial performance for the 3rd quarter of 2005.

With me here today is Dean Hirata, our CFO. I’ll be addressing the highlights of our Company and marketplace, and Dean will follow up with the detailed financial report for the quarter.

Let’s start off by looking at 3rd quarter highlights. We’ve just completed a full year of operations, since our merger with CD Bankshares, Inc. I’m very happy to report that Central Pacific Financial Corp realized its 4th consecutive quarter of record earnings.

Total assets surpassed the $5 billion mark for the first time in the Company’s history. For the 3rd quarter ending September 30th 2005, net income was $18 million – up from $7.7 million in the same period last year – and from $17.9 million from the preceding quarter.

Earnings per diluted share was $0.58, compared to $0.41 per share in the 3rd quarter of 2004, and the same as in the previous quarter. The solid earnings result in the 3rd quarter was sustained by increases in net interest income of 2.2 percent, and a non-interest income of 12.1 percent over the previous quarter.

The Company’s efficiency ratio, adjusted for the exclusion of non-recurring merger-related expenses, improved to 43.9 percent, compared to 49.1 percent in the preceding quarter, and 49.5 percent for the same period one year ago.

Significant growth was realized in our total loans and leases – which increased by $161.5 million, or 5 percent from the second quarter. Our growth strategy in the West Coast and Pacific Northwest played a key role in complementing our financing activities in Hawaii, to achieve strong overall loan growth in this quarter.

Total deposits remained relatively stable, as we experienced an industry trend of funds moving to non-insured investments, in this rising interest rate environment.

Our deposit strategy has been to focus on increasing our market share in core checking and savings accounts, through highly competitive products and programs designed for the consumer and small business segments.

We have achieved great success in attracting new customers through our sales campaigns, and believe the composition of our core deposits has strengthened our franchise value, going forward.

In mid-August, we finalized our acquisition of Hawaii Home Loans, Inc, a premier mortgage banking company in Hawaii, which now operates as Central Pacific Home Loans – a wholly-owned subsidiary of Central Pacific Bank.

The increased activity in residential mortgage origination and loan sales, as well as increases in bank fee income, contributed significantly to our non-interest income growth.

I’d like to talk about the economy for just a few minutes, too. Market conditions and key economic indicators have continued to improve in the State of Hawaii. In general, the current revised economic outlook has improved slightly since the previous quarter – primarily as a result of actual growth experienced in 2004, and the first half of 2005.

Expectations are for continued solid growth in tourism, personal income and employment. Visitor arrivals and expenditures are projected to increase by 6.1 percent and 6.8 percent, respectively, in 2005. And by 2.7 percent and 5.6 percent in 2006.

These projections reflect the fact that the data for the first 2 quarters of this year have exceeded expectations. Arrivals are expected to achieve an all-time high of 7.4 million visitors in 2005.

The forecast for unemployment in 2005 has been increased, from 1.9 percent to 2.4 percent, due to the unexpected high growth… I’m sorry. I misstated. The forecast for employment in 2005 has been increased from 1.9 percent to 2.4 percent, due to the unexpected high growth rate in jobs of 2.8 percent, that occurred in the first half of the year.

The forecast for job growth in 2006 is currently 1.5 percent. Adjusted for Hawaii’s projected inflation rate of 3.3 percent and 2.9 percent in 2005 and 2006 respectively, the forecast for real personal income is 3.4 percent in 2005, and 2.6 percent in 2006.

While current construction activity continues at an unprecedented rate, construction permit levels have declined slightly from the previous quarter. However, with new permits averaging $200 million per month, the construction pipeline will continue to provide for robust activity into the foreseeable future.

Overall, the outlook for the local economy remains very positive, with a combined strength of the 3 main sectors that fuel Hawaii’s economic engine. The visitor industry, federal spending, and construction activity.

Moving forward, we continue to be optimistic for the remaining quarter of this year, and for 2006. Our business plans for developing a solid post-merger infrastructure, and improving financial performance on a consistent basis, have yielded positive results.

We believe our Company’s well-positioned to capitalize on the favorable market conditions for economic growth in the State of Hawaii.

At this time, I’d like to turn the call over to our CFO, Dean Hirata, to review the details of our 3rd quarter financial performance.

Thank you, Clint.

My discussion will cover the 3rd quarter 2005 consolidated financial highlights for Central Pacific Financial Corp, and its subsidiaries.

As a result of non-recurring merger-related expenses, there was a certain amount of noise in the 3rd quarter numbers. But starting first with our earnings, and focusing on the operating earnings, 3rd quarter 2005 operating earnings – again, defined as “net income adjusted for non-recurring merger-related expenses,” was $20.1 million – an increase of 91 percent over the same quarter last year.

The increase was primarily due to an increase of $21 million, or 74 percent in net-interest income, and a $6.5 million or 132 percent increase in other operating income.

On a sequential-quarter basis, there was a $1.9 million or 10 percent increase in operating earnings. On a per-share basis, operating earnings was $0.65 for the current quarter – and increase of 14 percent over the same quarter last year, and a 10 percent increase over the second quarter of 2005.

The key performance ratios based on operating earnings for the 3rd quarter of 2005 were as follows. Return on assets of 1.63 percent. Return on tangible equity of 23.85 percent. Return on equity of 12.06 percent. And an efficiency ratio of 43 percent.

Looking now at the balance sheet, total loans and leases as of September 30, 2005 – of $3.4 billion – grew by 305 percent over the 3rd quarter of 2004. On a linked-quarter basis, the increase was $162 million – or 5 percent unannualized.

The average yield on loans increased by 75 basis points – for 6.83 percent – compared to the prior-year period – due to the upward repricing of loans. On a linked-quarter basis, the increase was 16 basis points.

Total deposits as of September 30, 2005 – of $3.5 billion – increased by 5 percent from the previous year’s quarter. On a sequential quarter basis, the decrease was $35 million, or 1 percent unannualized.

While we were down on a quarter-to-quarter basis, average deposit balances increased by 2 percent sequentially. The effective cost of interest-bearing liabilities for the current quarter was 1.95 percent – an increase of 59 basis points over the last year’s 3rd quarter. On a linked-quarter basis, the increase was 17 basis points.

Our continued efforts to strengthen existing customer relationships, and build new relationships through our broader retail network, and expanded products suite, are enhancing our core deposit mix.

We currently have 3 deposit promotions in the marketplace. First, a business exceptional account, which allows our customers to combine business and personal accounts. Second – an 11-month CD special at an attractive rate. And lastly, a totally free checking-direct mail campaign.

The [inaudible] margin of 4.6 percent for the current quarter increased by 6 basis points over the same quarter last year. As a result of loan growth outpacing deposit growth, combined with the flattening of the yield curve, we did experience a compression in the net-interest margin of 5 basis points, on a sequential-quarter basis. The provision for loan and lease losses for the current quarter totaled $1 million, compared to $533,000 in the 3rd quarter of 2004, and $1 million in the second quarter of 2005.

Net loan recoveries were $88,000 in the current quarter, compared to net loan charge-offs of $611,000, and $967,000 in the 3rd quarter of 2004, and 2nd quarter of 2005, respectively.

Other operating income for the current quarter was $11.5 million – an increase of 132 percent over the 3rd quarter of 2004. In addition to the impact of the merger, the increase was primarily due to service charges on deposit accounts, other service charges and fees, and gains on sale of loans in connection with Central Pacific Home Loans.

On a linked-quarter basis, there was an increase of 30 percent – primarily due to service charges on deposit accounts, and gains on sale of loans.

Other operating expense for the current quarter was $32.3 million, compared to $22.1 million in the same quarter last year, and $2[0].7 billion in the 2nd quarter of 2005.

The 3rd quarters of 2005 and 2004, and the 2nd quarter of 2005, included non-recurring merger-related expenses of $3.5 million, 4.5 million and 524,000 respectively. The merger-related expenses in the current quarter included [4] severance accruals for 2 executives, totaling $1.6 million, severance accruals for certain former Citibank employees totaling $784,000, and an additional FDIC deposit insurance assessment of $780,000 – related to the former Citibank.

Excluding these merger-related expenses, other operating expense increased by 2 percent on a linked-quarter basis.

The effective rate on income taxes for the 3rd quarter of 2005 was 35.05 percent, compared to 29.62 percent for the 3rd quarter of 2004, and 35.[14] percent in the 2nd quarter of 2005. Again – [so much of] what we saw in the 2nd quarter – the increase in the effective tax rate for the current quarter, compared to the same quarter last year, reflects the impact of State tax credits generated from our investments in high-technology businesses in Hawaii.

Our asset quality remains strong. Non-performing assets, at September 30, 2005, totaled $14 million – or 28 basis points of total assets – up from $12.2 million a year ago. On a sequential-quarter basis, non-performing assets decreased from $16.1 million, as of June 30, 2005.

Non-performing assets are mainly comprised of loans fully secured by commercial and residential properties, and no losses are anticipated at this time.

Loans delinquent for 90 days or more, and still accruing interest, totaled $10.2 million at September 30, 2005 – compared to $607,000 a year ago, and $469,000 as of June 30, 2005.

The increase over last year and on a sequential-quarter basis, was due to 2 commercial mortgages, totaling $9.7 million.

Shareholders equity at September 30, 2005, increased to $665 million, for a tangible-equity ratio of 6.97 percent.

The forecast for 2005 is as follows. Our net-interest income growth will be driven by expected loan growth, in a stabilized net-interest margin in the range of 4.55 to 4.65 percent. Balance-sheet sensitivity is expected to be offset by strong balance sheet growth.

Our loan quality is expected to remain strong, and we are on-track to achieve the expected revenue and cost synergies, in connection with the merger.

Based on current economic and business conditions, management forecasts 2005 operating EPS in the range of $2.47 to $2.52.

This concludes the discussion of Central Pacific Financial’s financial results for the 3rd quarter of 2005. I’ll now turn the call back over to Clint.

Thank you, Dean. We’ll just throw it open to questions, at this time.

Today’s q-and-a session will be conducted electronically. If you’d like to ask a question, please do so by pressing the * key, followed by the digit “1” on your touchtone telephone. Again, that’s *1 at this time, if you’d like to ask a question.

Joe Morford, RBC Capital Markets.

Good afternoon, or good morning, gentlemen. This is actually [Aaron Dare]. A couple of questions. First, can you give us where the margin was at the end of the quarter?

The margin for 3rd quarter?

Yes. Where did it stand at end-of-quarter?

It was at 4.57.

Okay. Then, with the California Pacific Home Loans, Or Central Pacific whatever, is that… The gains, I presume are on mortgage originations. Is that origination level sustainable? Or would you characterize that as being a high-level? I’m just trying to get a sense of where we’d model that, going forward.

Yes. We believe that the production that we did see in the 3rd quarter, and recognizing that the acquisition closed mid-quarter – in mid-August. But based on our forecast, going forward though, we do believe that the production levels are sustainable at these levels.

Then lastly, did you have any outside pay-downs this quarter? The long growth is pretty strong. It seems like maybe some of the pay-downs – payoffs that you’ve seen in recent quarters… Has that pressure let up?

Yes. The pressure has let up. We didn’t see the level of pay-downs that we experienced in the 2nd quarter, and it’s actually moved back to more-normal levels.

Great. Thank you very much. I appreciate the help.

Brett Rabatin, FTN Midwest Research.

Couple questions. First off, I wanted to ask you about the service charges from a linked-quarter perspective. They were, obviously, much better. Were there any new programs in there that you guys initiated this quarter that drove that? That’s sort of a good run rate, as well.

Beginning in the end of the 2nd quarter, the service charge of the NSF charges in connection with the former Citibank customers – we had a program that was just at that time being offered strictly to the Central Pacific customers.

We opened that program to the former Citibank customers at the end of the 2nd quarter. As a result, we did experience a sustained growth with our NSF charges, going into the 3rd quarter.

Then as it relates to the acquisition, it looks like you obviously had a strong feeding coming from the originations. But it didn’t appear – if you exclude the merger charges, expenses are up only about $700,000 – linked-quarter and personnel were actually flat. Did the expenses not come over to the same degree? Or any color on why expenses were not higher, given the acquisition?

Again, the acquisition did occur mid-quarter, in the middle of August. As far as the overall staffing levels, there wasn’t much reduction in the staffing levels from Central Pacific Home Loans. But we did have vacancies within our own mortgage banking operation. So, we are able to fill those vacancies with the acquisition.

The 2nd quarter also had the impact of some of the voluntary separation program team. So I think the combination of all of that resulted in the salaries and benefits at these levels.

On the deposits, obviously, averages were up for the quarter. But the ending period was a little lower. Any color on the general trend there, and if we should read anything into that?

Yes. Like we talked about. Currently, we have 3 deposit promotions in the market. There was a promotional CD that we had offered at the time of the merger. We raised about $70 million in deposits. That CD did mature during the 3rd quarter. So that did impact the quarter-to-quarter numbers. But again, going forward, we feel that with the existing deposit program, we will be able to continue to grow our core deposits.

Once again, ladies and gentlemen, if you’d like to ask a question, press the * key, followed by the digit 1 on your touchtone telephone. *1 to ask a question, at this time.

Fred Cannon, KBW.

I just had one follow-up question on the mortgage business. You said the volume on the loan sales appears to be stable. I was wondering about gain on sale margins – if you saw any downward pressure during the quarter, as we’ve seen in other banks.

No. We didn’t experience that. But again, it’s like I said. The acquisition was a mid-quarter acquisition. So I think we still need to see what the run rate would be, going forward.

Now these are gain-on-sale, and retaining servicing. Is that right?

It’s a combination of both service released as well as service retained.

And the servicing-related fees and MSR valuation changes – will that be going through other service charges and fees?

Yes. The service fees will flow through the other service charges and fees. But the amortization of the fair-value adjustment to the MSR portfolio will flow through other operating expense.

Other operating expense. Then, just one question on the ongoing merger charges, relative to the Citibank transaction. I guess I was a little surprised to see the level of merger charge, at this stage – about a year after the merger was complete. I was wondering if you could kind of comment on where you are on that, and if we’re likely at the end of any merger-related charges.

Again, these were non-recurring merger-related charges. We don’t anticipate charges at these levels, going forward.

Okay. Great. Congrats on a strong quarter.

Brett Rabatin, FTN Midwest.

Wanted to ask a follow-up on the non-accrual of this quarter. I guess the past-dues, as well. Were any of the credits mainland-oriented? Can you talk about the credit quality you’re seeing from the originations you’ve been doing on the mainland?

Clint Arnoldus None of them were mainland-related. They’re in Hawaii. Our overall credit quality continues to be very solid, as you can see in our numbers. On the mainland, we continue to have no delinquencies and no charge-offs.

I apologize. I was trying to take notes on that piece of it. But you were commenting on asset quality, and I didn’t quite catch the anticipated outcome of when particularly you had the ones that were past-due. It sounded like you said, “No losses.” But I didn’t quite hear the resolution pieces on that.

Yes. These are loans that are very well-secured by strong real estate assets. So, on a worst-case basis, the sale of those assets would make us all… And we’ve had conservative loan de-value levels, going into these loans. So even if there were an unanticipated drop in asset value, we’d still be whole.

Then last follow-up. It seems like in the construction market, the condo market in Hawaii is very strong. Should we anticipate that loan originations will continue to be 2/3 or 75 percent mainland, and ¼ Hawaii, or might the Hawaiian trends pick up and result in a higher concentration in loan growth from Hawaii, going forward?

I think Hawaii’s economy is going to continue to move forward very strongly. And we’re going to continue to see strong results coming out of Hawaii. I expect over time, we’ll be seeing a higher percentage coming out of Hawaii, looking at that future real estate loan growth.

So any change to the concentration? You’re willing to limit the exposure to it from mainland perspective?

You saw it was a pretty healthy percentage of our loan growth this last quarter. That kind of growth, we don’t see as sustainable. They’re still relatively young offices. And we will hit a leveling-off period, we feel. So three aren’t any concentrations that we’re concerned about.

[Julian Kiserino], Prospector Partners.

I was wondering of your current loan balances, what percent are on the mainland?

About 21 percent on the mainland. That includes both the California and Washington [outfields].

And what percent, if any, of deposits?

We don’t have a deposit-gathering operation on the mainland.

I thought you had an arrangement, though, with another bank.

Yes. We do have an arrangement with Wells Fargo. However, the deposits that we’ve gathered to date have not been significant.

We’re finding the rates that we have to pay on the mainland approximate the rates we’re paying in the wholesale market.

Actually, my other question was the deposit rate environment on the islands, on Hawaii. Is it intensifying at all? Or is it about the same kind of benign pricing environment that it’s been?

It actually has not changed much from the 2nd as for the 1st quarter to the year. There’s still excess liquidity in the marketplace that’s resulted as reduced competition for deposits.

Where does that extra liquidity coming from?

Well again, for our bank, the deposit that we generate, we do loan out with the lending that we do with our mainland LPOs. While the other banks locally – most of their lending is just primarily in Hawaii. So as a result, we’re all going after the same deals. That does create some excess liquidity for some of the other banks.

It’s a very strong economy, and companies are doing very well. They’re in strong cash positions. The owners of those companies obviously are doing well along with that. But it’s really just a very favorable economy we have that’s generating all that liquidity.

Is that true for businesses, as well as individuals? That people just are pretty flush with cash?

Yes.

And it’s just because the economy is doing very well?

Yes. It’s performing very well. And the outlook is, it will continue performing very well.

[operator instructions] David [Soku], Baron Capital.

On the mortgage production, when you say it should approximate the 3rd-quarter level in the 4th quarter – is that because it was only there for half the quarter in the 3rd quarter? And you don’t have the normalcies on slowdown? Or am I not thinking about that correctly?

No. When I talked about the production levels, I was looking at it on a normalized basis. Taking into account the fact that it was a mid-quarter acquisition.

Then the pay-down pressures that you saw in the 2nd quarter on the commercial lending side that you said lessened any reason or factors in the market – to explain that.

I think, looking at our portfolio, we just had a critical mass that would have been subject to that – just because of very favorable conditions in the market. They were essentially given offers they couldn’t refuse. That availability has simply gone down. We’re just no longer vulnerable for that.

And given all the excess liquidity in the market, why would those offers have [been anticipated]?

Our developers have gone off with new projects and don’t have the equity in them that some of those offers that came through in the 2nd quarter made evident. So, they just aren’t as inclined to sell. There isn’t the profit in there for most of them, that they would expect.

So it wasn’t that they were refinanced away. They actually sold the project.

It was a combination. But in most cases, the majority of the cases, the projects were sold.

I got on the call late, but you mentioned that in addition to the yield curve, one of the factors impacting the net interest margin down 5 basis points sequentially to [inaudible] impressive level was due to more loan growth, which at first blush, I think would be a positive – in terms of a better earning-asset mix. But I guess that’s not the case. So what am I missing?

With the loan growth outpacing the deposit growth, in terms of the incremental growth that we put on during the quarter, that growth has come on at thinner margins than the existing portfolio of interest-earning assets. Yes. Interest-rate liabilities, there.

So, as a result of that pressure, with more reliance on borrowings, as opposed to our deposits, that has put pressure on the margin. But again, going forward, we anticipate that with the deposit programs that we have, we will be able to continue to grow the core deposits. And again, maintain the margin within that 455 to 465 percent.

Historically, we have been able to manage a fairly well-matched balance sheet. The margin over the last 5 years has been in the range of 4.5 to 5.1 percent. Again, we anticipate we’ll be able to continue to do this, going forward.

And are you expecting to see better deposit growth in the 4th quarter?

We are.

Then the last 2 questions. Can you just refresh me in terms of your capital ratios and targets? You mentioned approximately 7 percent [casual] equity. At what point would you be comfortable buying back stock? Then maybe also just on defense spending? And an update on that, as it relates to the Hawaii economy. Thank you.

The [casual] equity ratio – again – it’s just under 7 percent. So we’d be comfortable with the 7-8 percent range. Again, as far as any buybacks, with the [following] offering that we just completed in the 1st quarter, we wouldn’t anticipate any buybacks probably for another year or so. But again, we do take a look at the overall capital management on a quarterly basis. But again, based on our anticipated loan growth going forward – combined with that range on the tangible equity ratio – we wouldn’t anticipate buyback, at this time.

In terms of the government spending in Hawaii, and its impact on our economy – the biggest event that has started here now is the privatization of all the military housing in Hawaii. Every branch of the military. So it will be a project that will take 10 years to complete, and will be a significant boost to our economy throughout the duration of that project.

In addition to that, they’ve put Striker Rapid Response forces in Hawaii. There’s still strong optimism that an aircraft carrier will be stationed here. Hawaii’s in a very strategic location, and has the infrastructure to support any kind of military involvement, here. So the outlook is that the military strength that is evident here will just grow, if anything. There’s no discussion of cutbacks.

So the outlook for continued federal spending in Hawaii is still very positive.

Then on the privatization of the military housing – roughly – what dollar size is that project estimated to be?

$4 billion.

That’s a healthy number.

There appear to be no further questions at this time. I’d like to turn the call back over to Mr. Arnoldus for any closing comments.

Thank you very much for listening in on our conference, today. We appreciate your interest in our Company. We move forward with a high degree of confidence in the forecast that we shared with you, today. Thank you.