Central Pacific Financial Corp (CPF) 2007 Q2 法說會逐字稿

And welcome to the Central Pacific Financial Corporation Second Quarter Earnings Conference Call. Today's conference 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 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 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 the impact of local, national, and international economics and events including natural disasters on the company's business and operations and on tourism, the military and other major industry operating within markets we serve; 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 changes in asset quality generally; the price of the company's stock. For further information on factors that could cause actual results to differ materially from those projections, please see the company's publicly available Security and Exchange Commission filing including the company's Form 10-K and the last fiscal year-- for the last fiscal year. The company does not update any of its forward-looking statements.

And with that said, I would now like to turn the conference over to Mr. Clint Arnoldus, Chief Executive Officer. Mr. Arnoldus, please go ahead.

Thank you Dwayne and thanks to all of you for joining us today to review Central Pacific Financial Corp.'s financial performance for the quarter ended June 30th, 2007. With me here today are Dean Hirata, our Chief Financial Officer; and Curtis Chinn, our Chief Risk Officer; and Blenn Fujimoto, who's in charge of all of our Hawaii markets.

I'll be addressing the highlights of our company and marketplace and Dean will provide a detailed financial report of our second quarter results.

I'm very pleased to report that Central Pacific Financial Corp. realized another solid quarter of increased earnings with net income of $21 million or $0.68 per diluted share. This represents an increase over the same period last year of 3% for net income and earnings per share. Despite the challenging environment in our marketplace we attained solid organic growth on our balance sheet while containing non-interest expenses.

Compared to the second quarter of 2006, deposits increased by 6.8%. Loans and leases increased by 6.7%. And total assets grew by 5.2% to $5.6 billion. Non-interest expenses were reduced by $200,000 compared to the same period last year.

We've realized the successful launch of our Remote Deposit Capture program for businesses in mid-April and now have $34.7 million in core business deposits in RDC accounts. We expect further growth in this program as we remain the only bank in Hawaii to offer this technology.

Our residential real estate loan origination continues to be strong despite the significant slowdown in home sales activity. We've continued with our strategy to establish joint ventures with real estate brokers and developers and now out selling such partnerships. In addition, our commercial real estate loans remain very stable. Overall 70% of our loan growth for the quarter was realized in Hawaii with the remaining 30% through our West Coast offices.

Asset quality continues to be strong with non-performing assets at two basis points of total assets as of June 30th. With regard to the market concerns over subprime credit exposure within our industry, I'm very pleased to report that we do not have any exposure with subprime residential mortgages. In addition, all of our residential construction loans are currently performing.

I'd also like to update you on our Bank Secrecy Act compliance initiatives. As we reported in the previous quarter, we've been on track with improving our BSA program which included the installation of a new automated system for detecting, monitoring, and reporting large currency transactions and suspicious activity. We believe that we will substantially meet the requirements contained in the FDIC order which was issued on November 29th, 2006, by the end of the third quarter of this year.

This time I'd like to share a few highlights of the economic climate in the state of Hawaii. Overall the economic growth indicators for Hawaii have tapered off and moderate growth is projected for 2007. Real domestic product-- real gross domestic product has grown by 2.7% in 2006 is projected to keep that pace in 2007 and 2008 at 2.6% and 2.5% respectively. Inflation-adjusted personnel income is also expected to maintain constant rates of growth at 1.8% in 2007 and 1.9% in 2008.

Visitor arrivals have gotten off to a slow start and are projected to be flat but at record levels for the remainder of the year. Arrivals are projected to increase by 1% in 2007 and visitor expenditures increasing by 3.3%.

The construction sector provides a slightly brighter picture although it has decelerated from peak activity experienced in 2004 through 2006. Construction jobs increased by 5.9% in the first quarter of this year and an 8% increase in private building permits in 2006 should provide for continued activity throughout the year.

The government construction pipeline remains strong with $854 million in contracts awarded statewide last year, representing a 17.8% increase over the previous year. The privatization of military housing will also add to a positive growth in construction for the next several years.

Job growth was strong in the first quarter of 2007 with a 2.3% increase in the first three months of the year. Unemployment continues to be at a nationwide low with an unemployment rate of 2.4% in June, which was again the lowest rate in the nation according to the U.S. Bureau of Labor Statistics. Based on the increases in energy costs and a rise in the U.S. inflation forecast, the consumer price index for Honolulu is expected to increase by 4.5% in 2007.

Moving forward, we remain confident in our business strategies to generate organic growth with the projected stable economic conditions in the coming quarters. In the current quarter, we have started the implementation of our community-based banking strategies which is designed to increase our competitive posture and deposit gathering, particularly in the small business sector. In essence, we're decentralizing our banking expertise and empowering our front line to become fully integrated within our marketplace.

We believe that businesses desire and appreciate community bankers to understand their needs are in a position to respond to them. We project that key allocation of resources will be completed in the coming months to deliver our services closer to our customers in communities we serve.

As previously reported, our 39th branch in Pearl Highlands is scheduled to open at the end of August and will serve as our new hub for this growing community. Plans to further extend our branch network into Lahaina and Maui are also progressing.

In summary, we remain optimistic for continued solid financial performances in the remaining quarters.

At this time, our Chief Financial Officer, Dean Hirata will review the details of our second quarter financial performance. Dean?

Thank you Clint. My discussion will cover the second quarter of 2007 consolidated financial highlights for Central Pacific Financial Corp. and its subsidiaries.

Starting with our earnings, second quarter 2007 net income was $21 million, an increase of 2.8% over the same quarter last year. The increase was primarily due to an increase in net interest income of $716,000 or 1.4%, an increase in other operating income of $578,000 or 5.3% and a decrease in other operating expense of $127,000 or 0.4%. The increase was partially offset by an increase in the provision for loan and lease losses of $475,000. On a sequential quarter basis, net income increased by $881,000 or 4.4%. On a per share basis, net income was $0.68 for the current quarter, an increase of 3% over the same quarter last year and 4.6% sequentially.

Key performance ratios based on net income for the second quarter of 2007 were as follows; return on assets of 1.52%; return on tangible equity of 19.03%; return on equity of 10.99%; an efficiency ratio of 47.03%; and net interest margin of 4.36%.

Turning to the balance sheet, total loans and leases of $3.9 billion as of June 30, 2007, grew by $247.7 million or 6.7% over June 30, 2006. On a linked quarter basis, the increase was $32.5 million or 0.8% un-annualized. Average loan balances increased by 2.2% sequentially. The average yield on loans for the second quarter of 2007 increased by 32 basis points to 7.76% compared to the prior year due to the upward re-pricing of loans. On a linked quarter basis, there was a decrease of 14 basis points. The decrease was due to a combination of lower real estate construction loans and increased competition in loan (inaudible).

Total deposits of $3.9 billion as of June 30, 2007, increased by $250.7 million or 6.8% over June 30, 2006, and increased 1.8% on a sequential quarter basis. We experienced growth in demand, savings, and CDs during the current quarter. Over the coming quarters, we expect to see continued growth in core deposits as a result of our Remote Deposit Capture initiative and community-based banking strategy as discussed earlier in the call. The effective cost of interest-bearing liabilities for the current quarter was 3.4%, an increase of 67 basis points over the prior year. On a linked quarter basis, the increase was 8 basis points.

Turning now to our earnings, the net interest margin of 4.36% for the second quarter of 2007 decreased by 21 basis points from the same quarter last year and decreased by 16 basis points on a sequential quarter basis. The compression we experienced in the net interest margin was primarily due to a shift in the competition of the deposit base into higher rate CDs combined with the change in the loan composition discussed earlier. In addition, the first quarter of 2007 included interest income totaling $900,000 related to the full payoff with the amount of accrual loans which contributed 6 basis points to the net interest margin.

Over the coming quarters, we expect our funding costs to stabilize as we do not expect a continued shift in the deposit composition and we have re-priced the majority of our large CDs. As a result, we project our net interest margin to stabilize at these current levels in the 4.3 to 4.4% range.

The provision for loan and lease losses totaled $1 million for the current quarter compared to $525,000 in the second quarter of 2006 and $2.6 million in the first quarter of 2007. The higher provision in the first quarter of 2007 resulted from commercial loan charge-offs from a single borrower totaling $2.9 million.

Other operating income was $11.5 million for the current quarter, an increase of 5.3% over the same quarter last year. The increase was primarily due to higher mortgage origination activity from Central Pacific HomeLoans in the current quarter as compared to the same quarter last year. On a linked quarter basis, other operating income was up 3.5%, primarily due to higher income from bank loan life insurance.

Other operating expense was $31.3 million for the current quarter compared to $31.5 million in the same quarter last year and $30.5 million in the first quarter of 2007. The sequential quarter decrease was primarily due to a reversal of incentive compensation accruals in the first quarter of 2007. Excluding the effect of the reversal, other operating expense decreased by $1 million or 3.1% on a sequential quarter basis. The expected quarterly run rate is in the $31.5 million to $32 million range.

The effective tax rate was 34.51% for the current quarter compared to 34.38% in the same quarter last year and 36.61% in the first quarter of 2007. The sequential quarter decrease reflects the impact of state and federal tax credits generated from our investments in high technology businesses in Hawaii in the current quarter.

Asset quality remains strong at June 30, 2007. We actively monitor the asset quality of our loan portfolio. And in this process have identified two loans that we are closely monitoring. These two loans total $15.9 million and represent 1.4% of our total mainland portfolio and 0.4% of our total loan portfolio. Both are land loans related to track residential properties in the Riverside and Fresno counties. In both instances, land values have decreased significantly and guarantor liquidity had diminished. As part of our monitoring process, we are currently evaluating the collateral value and the continued ability of these borrowers to service these loans.

Non-performing assets at June 30, 2007, totaled $1.4 million or 2 basis points of total assets, down from $10 million and 19 basis points a year ago and virtually unchanged from March 31st, 2007. During the first quarter of 2007, we received a full payoff of a non-accrual loan of $4.8 million. Non-performing assets are mainly comprised of loans fully secured by commercial and residential properties.

Loans delinquent for 90 days or more and still accruing interest totaled $0.3 million at June 30, 2007, compared to $1.5 million a year ago and $0.6 million at March 31st, 2007. Net loan charge-offs were $205,000 in the current quarter compared to $668,000 in the year ago period and $4.3 million in the first quarter of 2007. The decrease on a sequential quarter basis was primarily due to commercial loan charge-offs isolated to a single borrower.

Shareholders' equity at June 30, 2007, was $753.5 million or a tangible equity ratio of 8.22%.

Yesterday we announced a new stock repurchase authorization to repurchase up to an additional 1.5 million shares. With our current stock price at such attractive levels, we see this as a great opportunity to enhance shareholder value.

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 deposit growth of 3 to 5% and a stabilized net interest margin in the 4.3 to 4.4% range. Secondly, aside from the potential impact of the two identified loans discussed earlier, we expect the provision for loan and lease losses to approximate $1 million per quarter. Third, we will actively manage overhead costs in order to sustain a strong efficiency ratio. And finally, we will take advantage of market opportunities to optimize our capital levels and enhance shareholder value. 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.

This concludes the discussion of Central Pacific Financial's financial results for the second quarter of 2007.

I'll now turn the call back over to Clint.

Thank you very much Dean. We'd be happy to entertain any questions at this time.

[OPERATOR INSTRUCTIONS] Our first question will come from Joe Morford with RBC Capital Markets.

Thanks. Good afternoon everyone.

Afternoon.

Hi, I guess just had a few follow-up questions on the mention of the problem credits that you've identified. I guess first need to clarify-- does your guidance incorporate any potential losses or increase in provisions associated with these problem credits? And I guess related to that, what is the-- currently is the expected loss content related to these credits?

Joe, this is Curtis Chinn. As Dean previously mentioned, we are evaluating our collateral with respect to these loans. So it's really premature to assess that at this point.

Okay. What-- can you tell us what the loan-to-value ratios are on these credits at all?

That's a-- loan-to-value ratios are in the 70% to 90% range.

Okay.

Not current appraisals.

Okay.

This is Dean. On your question with regards to the guidance, like I indicated aside from the current evaluation of the collateral value that we're doing with those two loans, we expect the provision to be approximately $1 million per quarter. And that provision is incorporated in the guidance of $2.75 to $2.85.

Okay. And similarly is there any-- with the margin guidance stable is there-- does that incorporate any kind of interest reversal on these credits or anything like that?

No the margin at the 4.3 to 4.4% does not incorporate any reversals. But again we would not expect that to be significant.

Okay. And then finally I guess Curtis could you just talk about beyond these two credits out of this most recent review that you've done, how do you feel about the trends in-- throughout the rest of the portfolio? If you can, any kind of color on what you're seeing and more broadly in terms of migration in the classified trends for watch list, what have you? Thanks.

Okay, I think there are about three questions there. In terms of our review of the current portfolio, all our other commercial real estate loans are performing and we do have a fairly robust portfolio review process. So, all are performing, have real estate collateral behind them, and typically have strong guarantors backing them up.

In terms of your question about migration, yes we have seen some migration in loan rates recently primarily in the residential portfolio on the mainland.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) We'll next go to Fred Cannon with KBW.

Hi and good afternoon. Just to follow up on Joe's question on construction, could you give us the construction loans outstanding at the end of the quarter? And the trend in that versus the previous-- in the previous quarter?

Yes at the-- as of 6/30/07, our construction portfolio totaled $591 million of which $391 million was on the mainland and $232 million in Hawaii. Those totals are down about $60 million from the prior quarter.

And do you have a sense that that's going to be the trends we're going to be dealing with for a while is down numbers in that segment?

I would say flat to down. The mainland is coming down. Hawaii still has a very brisk construction market. It's very strong so we could see more lift there. That could balance that out.

Okay great. And just one other question on the share buyback you guys announced. Any kind of direction you can give us in terms of the kind of the capital levels you'd like to run or the kind of the thought process behind the capital management and kind of what you're thinking in terms of managing to certain capital levels?

Fred this is Dean. Again with the announced stock buyback, the 1.5 million shares combined with what we have remaining from the 600,000 shares that was announced earlier, we have about 1.7 million. Again with the stock at these levels, it is a very attractive way to enhance the shareholder value. And we now feel that the buyback combined with our dividend-- dividend right now we have a payout ratio of about 35%. And we're targeting with the buyback about 30% return of capital to shareholders. So it's about 65% on a go-forward basis. So we now have the ability with this-- an additional tool to enhance shareholder value and to actively manage our capital going forward.

So 65% of the earnings should be returned to shareholders, is that what you said?

35, I said 35% in terms of the dividend payout ratio.

Right.

And we're targeting 30% on the buyback.

Okay. And then the rest will be used to support balance sheet growth?

Yes.

Okay. And then just one technical number. Do you have the average repurchase price for the second quarter?

Yes, it was just over $34.

Great. Alright, thank you very much.

Our next question is from Brent Christ with Fox-Pitt Kelton.

Good afternoon guys. A couple follow ups on some of the previous questions. Just in terms of the buyback and the kind of targeting the 30% there, is there any thought to maybe doing a little bit more than that sooner or front end loading any of it, just given where the stock is right now?

Yes again that's more of a long term over the next coming quarters, but yes there is that ability to increase the 30% especially like you said with the stock at these levels.

Yes, I guess the question is more directly do you anticipate being a little bit more active than that right now or is it fairly kind of spread out in terms of the pace?

We anticipate being a lot more aggressive at this time. In looking at with the stock at current levels and as high as $36 it's a very attractive investment for the shareholder.

Got you. And then secondly in terms of the two credits in California, do you have any specific reserves set aside for those at this point?

Not at this point.

Okay and then just lastly in terms of the decentralizing some of the community banking strategy, can you talk a little bit more in detail about what you're doing there? What's being decentralized? What's not?

This is Blenn Fujimoto. We've seen the Hawaii market with our community-based banking, what we're looking at is decentralizing a lot of our lending staff into the communities closer to where our customers do their banking. And some authorities would be lending authorities, marketing resources, override authorities. We hope to empower these community-based bankers to really make decision making closer to where the small businesses operate.

Got you. Okay, thanks a lot guys.

(OPERATOR INSTRUCTIONS) There are no further questions. I'd like to turn the conference bank to Clint Arnoldus for any additional or closing comments.

Thank you very much. I'd like to thank all of you for calling into today. We appreciate your interest in our company. We're going to continue to exercise the same disciplines that we have to continue this performance going forward. So, talk to you in a quarter.

This does conclude today's conference. If you'd like to listen to a audio replay of the conference, it will be available by dialing 888-203-1112 and entering an access code of 2612794. The replay of today's call will be available starting this evening at 6:00 p.m. Central Time and ending on Thursday, August 2nd at midnight Central Time. You may now disconnect.