Central Pacific Financial Corp (CPF) 2007 Q1 法說會逐字稿

Good day, and welcome to the Central Pacific Financial Corporation first quarter earnings call.

Today's call is being recorded. This call 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 for management purposes for 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 may include the words believes, plans, intends, expects, anticipates, forecasts 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 impact of local, national and international economies and events including natural disasters on the Company's business and operation and on tourism, military and other major industries operating within the markets we serve. Impact of legislation affecting the banking industry, impact of competitive products, services, pricing, and other competitive courses, movements in interest rates, loan delinquency rates, and changes in asset quality generally and the price of company stock.

For future information on factors that 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. 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 Mr. Clint Arnoldus, Chief Executive Officer. Please go ahead, sir.

Thank you, Richard, and thank you all for joining us today to review Central Pacific Financial Corporation's financial performance for the quarter just ended March 31, 2007. With me here today are Dean Hirata, our Chief Financial Officer, and Curtis Chinn our Chief Risk Officer.

I will be addressing the highlights of our company and marketplace, Dean will provide a detailed financial report of the first quarter results, and Curtis will provide more information on credit related issues.

For the quarter ended March 31, 2007 I'm very pleased to report that Central Pacific Financial Corp. realized another solid quarter of increased earnings with net income of $20.1 million or 4.1% over the first quarter of 2006. Earnings per diluted share increased by 3.2% to $0.65 per share compared to the same period last year.

The economic climate in Hawaii has mirrored national trends and it's been a challenging environment for growth. However, our momentum in organic loan and deposit growth has continued from 2006 into the first quarter of this year. Loans and leases increased by 7.8% from a year ago fueled by strong commercial real estate loan production from our California and Pacific Northwest loan offices.

Consumer residential mortgage origination was also robust in the first quarter contrary to national and local trends. Our strategic joint ventures and alliances with key developers continue to play a key role in our success in this area.

Overall asset quality continues to improve with non-performing loans at 3 basis points of total assets at the end of the quarter. Total deposits increased by 4.5% over the first quarter of 2006, we maintained our strategy to develop high quality deposit relationships through our retail flagship program and exceptional plan.

For the business segment, we publicly launched a remote deposit capture program on April 13th after a very successful soft launch of this new technology in September of last year. We're excited to be the only Hawaii bank to currently offer this delivery system in our marketplace. We expect to strengthen our deposit gathering efforts as a result.

As we reported in the last quarterly earnings call our BSA compliance initiatives relative to the provisions contained in the FDIC order we received on November 29th of last year continues to be a top priority. Our progress is on schedule and we remain very confident that we will be in full compliance with the order to enhance our policies and procedures for monitoring large currency transactions and suspicious activity by the middle of this year.

Installation of a specialized software program to better monitor suspicious activity going forward has been installed and implemented, and we have not experienced any material impact on our day to day business operations or the service quality we provide our customers during this process. This time I would like to share a few highlights of the economic climate in the state of Hawaii. Overall the economy has decelerated from the peak in real gross state product growth of 4.7% in 2004 to 2.7% in 2006.

Key indicators for our state have been mixed, however there are no signs that the economic expansion will come to a halt. Growth in tourism has been stalled by capacity limitations with relatively soft demand. While hotel occupancy rates averaged 81% in 2006, visitor arrivals were essentially flat and as projected to increase modestly by 0.8% in 2007. By contrast, growth in visitor arrivals for 2004 and 2005 were at 8.3% and 7.3% respectively.

An estimated 5,000 hotel room units are currently in the pipeline for inventory expansion based on planned construction through 2010. A moderate correction to the statewide construction industry's expected in 2007, residential construction activity has passed its peak last year and home prices have flattened. The pipeline for residential construction is expected to decline by 13% in 2007, to $1.3 billion by the end of the year.

However, the pipeline of commercial building permits in 2007, although down from 2006, is expected to remain at about 40% higher than the previous five years at $1.4 billion by year-end. Combined with government construction contracts of $800 million the total construction pipeline is projected to be $3.5 billion in 2007.

Job creation is expected to slow from a growth rate of 2.7% in 2006 to 1.3% in 2007. The unemployment rate however is expected to remain at a near record level of 2.6% through 2007, gradually rising in the following years. Fueled by housing costs and oil prices a 15 year high inflation rate of 5.8% in 2006 impacted the 0.2% growth in real personal income for the state of Hawaii. For 2007 the inflation rate is expected to subside to 4.8% and real income growth is projected to increase by 1.8%.

Overall and similar to the economic conditions in the mainland U.S. the outlook for the local economy in 2007 is for a continued soft landing from the economic surge that peaked in 2005. Looking forward we will continue to focus on our core competencies and aggressive deposit gathering, innovative customer solutions such as a remote deposit capture technology and high touch relationship banking.

High value customer households and small businesses continue to be our primary opportunities for growth combined with our market leadership in commercial real estate lending and residential mortgages, we look forward to solid financial performance in the coming quarters. Our 39th branch office in Pearl City on the island of Oahu is on schedule to open for business in the third quarter. This full service branch will also house business banking and residential mortgage officers to serve as a hub for this growing community. We also look forward to expanding our presence in Lahaina on the island of Maui with our 40th branch.

At this time I would like to turn the call over to our Chief Financial Officer, Dean Hirata, to review the details of our first quarter financial performance. Dean?

Thank you Clint.

My discussion will cover the first quarter of 2007 consolidated financial highlights for Central Pacific Financial Corp. First quarter 2007 net income was $20.1 million, an increase of 4.1% over the same quarter last year. The increase was primarily due to an increase in net interest income of $1.5 million or 2.9% and a decrease in other operating expense of $3.3 million or 9.8%, partially offset by an increase in the provision for loan and lease losses of $2.1 million.

On a sequential quarter basis net income increased by $1.3 million or 7.1%. On a first share basis net income was $0.65 for the current quarter, an increase of 3.2% over the same quarter last year and 6.6% over the fourth quarter of 2006. Key performance ratios based on net income for the first quarter of 2007 were as follows.

Return on assets of 1.48%, return on tangible equity of 19.06%, return on equity of 10.73%, an efficiency ratio of 45.43%, and a net interest margin of 4.52%. Total loans and leases of $3.9 million as of March 31, 2007, grew by $284 million or 7.8% over March 31, 2006. On a linked quarter basis the increase was $58. 5 million or 1.5% unannualized.

Average loan balances increased by 2.5% sequentially. The average yield on loans for the first quarter of 2007 increased by 62 basis points to 7.9% compared to the prior year due to the upward repricing of loans. On a linked quarter basis the increase was 10 basis points.

Total deposits of $3.8 billion as of March 31, 2007, increased by $166 million or 4.5% over March 31, 2006, and was virtually unchanged on a sequential quarter basis. Successful growth in savings, money market and CDs during the current quarter was offset by a decline in demand deposits. Decline in demand deposits was primarily attributed to seasonal fluctuations in title and escrow deposit accounts.

Over the coming quarters we expect to see solid increases in demand deposits as a result of our remote deposit capture delivery system as discussed earlier in the call. Effective cost of interest bearing liabilities for the current quarter was 3.32%, an increase of 87 basis points over the prior year. On a linked quarter basis the increase was 13 basis points.

The net interest margin of 4.52% for the first quarter of 2007 decreased by 12 basis points from the same quarter last year and increased by five basis points over the fourth quarter of 2006. The current quarter included interest income totaling $0.9 million related to the full payoff of the non-accrual loan which contributed 6 basis points to the net interest margin.

Over the coming quarters we expect our average deposit cost to increase at a slowing pace as we have repriced the majority of our large CDs. As a result we project our net interest margin to stabilize in the 4.4% to 4.5% range.

Provision for loan and lease losses total $2.6 million for the current quarter compared to $525,000 in the first quarter of 2006 and no provision in the fourth quarter of 2006. The majority of the increase in the provision in the current quarter resulted from commercial loan chargeoffs from a single bar totaling $2.9 million.

Other operating income was $11.2 million for the current quarter, a decrease of 8.2% compared to the first quarter of 2006. The decrease was primarily due to lower mortgage origination activity from Central Pacific Home Loans in the current quarter as compared to 2006. On a linked quarter basis other operating income was up 17.6%, primarily due to the investment portfolio repositioning in the fourth quarter of 2006.

Other operating expense was $30.5 million for the current quarter, compared to $33.8 million in the same quarter last year and $35.7 million in the fourth quarter of 2006. The current quarter included a $1.8 million reversal of incentive compensation accruals and a $0.8 million reversal of reserves for unfunded commitments.

First quarter of 2006 included a $2.2 million retirement charge paid to a former senior executive and the fourth quarter of 2006 included adjustments to certain employee benefit accruals totaling $0.9 million. Excluding these expense items other operating expense increased by 2.5% over the prior year and decreased by 5.5% on a sequential quarter basis. The expected quarterly run rate is in the $31.5 to 32.5 million range.

Effective tax rate was 36.61% for the current quarter compared to 35.65% in the same quarter last year and 30.81% in the fourth quarter of 2006. The sequential quarter increase reflects the impact of state and federal tax credits generated from our investments in high technology businesses in Hawaii and energy conservation leases in the fourth quarter of 2006.

Asset quality remains strong as evidenced by the levels of our non-performing assets and asset quality ratios at March 31, 2007, the lowest levels over the past three years. Non-performing assets at March 31, 2007, totaled $1.6 million or 3 basis points of total assets, down from $6.1 million or 12 basis points a year ago and $9 million or 16 basis points as of December 31, 2006. During the first quarter of 2007 we received a full payoff of a non-accrual loan of $4.8 million. Non-performance 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 $0.6 million at March 31, 2007, compared to $3 million a year ago and $0.9 million as of December 31, 2006. Net loan chargeoffs were $4.3 million in the current quarter compared to$0.4 million in the year ago period and$0.3 million in the fourth quarter of 2006.

The increase as compared to a year ago and on a sequential quarter basis was primarily due to commercial loan chargeoffs isolated to a single bar. Shareholder's equity at March 31, 2007, increased to $753.5 million or a tangible equity ratio of 8.3%.

The outlook for 2007 is based on the following assumptions. First, net interest income growth will be driven by expected loan growth of 6% to 8% and slower deposit growth of 3% to 5% and a stabilized net interest margin in the 4.4% to 4.5% range. Second, our asset quality is expected to remain strong and we expect the provision for loan and lease losses to approximately--to approximate $1 million per quarter.

And third, we will actively manage overhead costs in order to sustain a strong efficiency ratio. Based on these assumptions and current economic and business conditions, management is forecasting diluted earnings per share for 2007 in the range of $2.75 to $2.85 per share. This concludes the discussion of Central Pacific Financial's results for the first quarter of 2007.

I'll now turn the call over to Curtis Chinn, our Chief Risk Officer.

Thank you Dean.

I wanted to spend a few moments to speak about three topics. First, loan chargeoffs, second sub prime mortgages and finally our mainland residential lending business.

With respect to the loan chargeoff as Dean mentioned earlier, loan chargeoffs in the first quarter were primarily due to one loan to a contractor that had expanded too rapidly and experienced significant overruns on one large project that strained the cash flow and capacity of the Company. If you recall in the fourth quarter we took a $1.5 million partial charge against this borrower and at that point reported that we had an additional $3.5 million in exposure. The $2.9 million chargeoff essentially writes off the remainder of that exposure. We do have a $1 million in well secured exposure left and we expect that will be fully collected.

With respect to sub prime mortgages, as a general policy we do not have programs or products specifically tailored to the sub prime market. We do however from time to time provide customized mortgage financing for relationship borrowers. These are typically interest only loans that are for bridge purposes, and at this juncture we literally only have only a handful of those type of loans.

We do also sell non-traditional or sub prime mortgages into the secondary market. Our 2006 volume ago aggregated roughly $77 million and in the first quarter that volume was $34 million. We do have repurchase obligations for these transactions, theIR repo obligations are typically for three to six months, AND those will be triggered by payment delinquencies, in the past year we have had no repurchases.

Finally with respect to our mainland residential business, as you know we have been an active lender of residential projects in California. We typically have underwritten this portfolio on a recourse basis to the developer. Our developer base is typically made up of strong developers with many years of experience who have the capacity and liquidity to support their projects if necessary. Thus far we have seen a slow down in our projects consistent with the general marketplace.

However, for the most part our projects are continuing to demonstrate adequate absorption rates to repay our loans within the original maturity or with modest extensions of maturity. On a going forward basis we expect THAT the market will remain slow to soft, but are confident that our developers can successfully manage their projects through the correction that we're seeing today.

That concludes my formal comments and I would like to turn the call back to Clint at this time.

Thanks Curtis and Dean. We would be an happy to entertain any questions from anyone on the line.

(OPERATOR INSTRUCTIONS)

We will pause for just a moment to allow everyone a chance to signal. We will go first to Joe Morford with RBC Capital Markets.

Thanks, good afternoon guys.

Hi Joe.

I guess first I was just curious if you could give us a little more color on the loan growth this quarter realive to year-end by type of product, what parts of the portfolio were growing, and also how big was your mainland portfolio at period end?

Joe, this is Curtis.

Hi.

The portfolio growth since year-end was essentially 70% of the growth came from the mainland and 30% of the growth came from Hawaii. We expect that that will balance out through the course of the year. Growth by product continues to come from construction markets. We have also seen more growth in our C&I portfolio locally. With respect to the mainland portfolio, that is now roughly a $1.1 billion total.

Excuse me, a billion what?

1.1 billion.

Okay, and then Dean, I just had a question on expenses and really the other, other category which is down from last quarter, $7 million to 4.7. Even even with excluding the $800,000 reserve reversal for unfunded commitments, it's still a pretty--down quite a bit and it sounds like you're projecting fairly flat expenses going forward. Was there anything in there just to comment about ability to keep expenses relatively flat?

Joe, as compared to the fourth quarter, I mean, there were some items in there in the fourth quarter of 2006 that on a quarter to quarter basis it is down compared to last quarter. But again going forward, overall expenses we are going to actively manage our efficiency ratio, we are taking a look at additional process improvements that we can make throughout the Company that should also have an impact on the overall salary and benefit cost going forward. Again, the range that I gave is $31.5 to $32.5 million in total as far as a run rate for the next coming quarters.

Right. Okay.

Thanks very much Dean.

(OPERATOR INSTRUCTIONS) And we will go next to Fred Cannon with KBW.

Thanks and good afternoon. Kind of two questions, one on the tax line. I notice that the tax rate moved up this quarter and it doesn't appear that you were involved with some of the Hawaiian tax based incentives.

I was wondering, moving forward should we expect this tax rate to be in this kind of range or do you think you can do some more of those investments to help manage your tax--tax line?

Hi Fred, this is Dean. Yes, we expect the effective tax rate to come down incoming quarters. We are looking at a few more of these investments that will result in these tax credits in the second and third quarters, so again the rate would come down closer to about the 32% to 33% range.

As a result should we expect, especially with the application of FIN48 are we going to kind of see a fairly volatile tax line as a result of kind of lumpiness of those investments in each quarter?

No, the FIN48 which we have adopted will not have--will not be impacted by these types of investments going forward.

Okay. Thanks, Dean.

A broader question on capital Clint, your capital levels are starting to move up fairly rapidly, especially with your return on tangible equity quite strong. I was wondering if you could talk about how you're thinking about the capital build at the Company and possible uses of capital, especially with I believe you still expect the cease and desist to be lifted by mid-year?

Yes, let me address the cease and desist first. We expect the regulators to come out mid-year and subject to their approval of how good we feel about our progress we expect that to get a favorable result.

In terms of the capital deployment we certainly are building up capital levels as you correctly point out. We had addressed earlier that we intended to buy a bank in California that we would possibly use, we're not in any rush to do that for obvious reasons with our cease and desist order still outstanding. Also just because of market conditions and our commitment to find something that will be accretive from the very beginning and a strong cultural fit for us.

But certainly that's still a market that we anticipate to be very important for us in the future and we need to have a stronger presence in our current loan production, office network. We also look to remain--to keep a very competitive dividend policy vis-a-vis the pier group that we compare ourselves to, and we also have a buyback program in place, which we don't plan on aggressively using frankly, but it is there and could be a possible use depending on market conditions if we decided to employ that particular strategy.

Great. So it sounds like, I don't know if you can correct me, but it sounds like you're probably not too aggressive on the share repurchase and kind of focus on opportunities, and see how things play themselves out over the rest of the year?

Yes, that's correct.

Okay, thank you very much.

Thanks.

And ladies and gentlemen, at this time we have no other questions, (OPERATOR INSTRUCTIONS).

Okay, thank you everyone for participating in our call today. We appreciate your interest in our company. Look forward to speaking with you next quarter.

And ladies and gentlemen, this concludes today's conference. If you would like to listen to an audio replay of this call you can do so by dialing 888-203-1112 and entering access code 4535249.

Once again, if you would like to listen to an audio replay of this call, you can do so by dialing 888-203-1112 and entering access code 4535249. A replay of today's call will be available starting this evening at 6:00 pm Central time and ending Monday, May 7th at 12:00 am Central time. You may now disconnect. Thank you.