Central Pacific Financial Corp (CPF) 2009 Q2 法說會逐字稿

Welcome to the Central Pacific Financial Corporation Second Quarter 2009 conference call. (Operator instructions) This conference is being recorded and will be available for replay shortly after its completion on the company's website at www.centralpacificbank.com.

I'd now like to turn the call over to Mr. David Morimoto, Senior Vice President, Investor Relations.

Thanks, Andrea. With us today are Dean Hirata, Vice Chairman and Chief Financial Officer, Blenn Fujimoto, Vice Chairman, Hawaii Market, and Mary Weisman, Executive Vice President and Chief Credit Officer.

Today's call will refer to a slide presentation that can be found on the investor relations page of our website, at CentralPacificBank.com

Dean and Mary will begin by reviewing our second quarter results, and then we'll open the call to questions from analysts. During the course of today's call, Management may make forward-looking statements. While we believe these statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to forward-looking statements, please see our second quarter earnings release and our other recent documents filed with the SEC.

And now I'll turn the call over to Dean.

Thank you, David. Good morning. Unfortunately, Ron Migita, our Chairman, President, and Chief Executive Officer, is unable to be on the call today due to a scheduled back surgery earlier this week. Ron's recovery is going well, and we expect him to be back in the office next week, Monday.

This presentation contains forward-looking statements and please refer to slide two regarding the potential risks associated with these statements. I'll now begin the formal portion of the presentation on slide three.

As we navigate through these challenging and uncertain times, our key management priorities continue to be one, reducing credit risk. Two, strengthening our capital position. And three, enhancing balance sheet liquidity. As we proceed with this presentation, we will address each of these priorities in connection with our review of the second quarter 2009 financial results.

Specifically, we will first illustrate our commitment to reduce credit risk and discuss the steps we have taken and continue to take to improve our asset quality. Second, we will provide you an update on our capital raising efforts. And third, we will discuss our disciplined approach to managing our balance sheet, highlighted by significant improvement we have made in recent quarters to solidify our liquidity position.

Slide four provides an overview of our second quarter 2009 results. We reported a net loss of $34.4 million, or $1.27 per diluted share. The quarterly results were impacted by total credit costs of $79.9 million, which included a provision for loan and lease losses of $74.3 million. During the quarter, we increased our allowance for loan and lease losses as a percentage of the total loan portfolio to 4.5% at June 30, 2009, from 3.2% at March 31, 2009. The quarterly net loss, net loss per diluted share, total credit cost, and allowance for loan and lease losses as a percentage of total loans and leases were all within the ranges that we announced earlier this month.

We continue to improve our liquidity and funding positions. During the current quarter, we grew core deposits by $202 million, or 7% over the first quarter of 2009, and improved the loan-to-deposit ratio to 93% at June 30, 2009. We remain the leading originator of residential mortgages in Hawaii, with second quarter originations totaling $558 million, on top of $598 million in the first quarter of 2009. All of these loans were sold in the secondary market, primarily to Fannie Mae and Freddie Mac.

Finally, at June 30, 2009, the Company continues to exceed the capital ratios required to be well-capitalized for regulatory purposes, with Tier 1 risk-based capital of 13.28%, total risk-based capital, 14.57%, and a leveraged capital of 10.61%. The tangible common equity ratio was 5.76%.

Turning to slide five, as reported yesterday, we have postponed the previously announced public stock offering. Given the number of authorized but unissued common shares, combined with the current price level of our common stock, we were unable to raise the additional capital we targeted. While we remain well-capitalized for regulatory purposes, we continue to believe that proactively raising additional capital is appropriate and prudent, and we intend to seek shareholder approval to increase the number of authorized common shares to provide us with increased flexibility as we proceed with our capital-raising efforts. As stated earlier, on June 30, 2009, the company's capital ratios continued to exceed the levels required to for a regulatory designation of well-capitalized. As you can see from the graph, our capital ratios also compare favorably to a group of our peers.

Turning to slide six, for the second quarter of 2009, net interest income totaled $46.1 million, compared to $46.5 million for the first quarter of 2009. As shown in the table, the net interest margin was 3.77% in the second quarter, compared to 3.82% in the previous quarter. The sequential quarter compression was primarily due to higher reverses of interest on non-accrual loans, and lower loan yields. Excluding the effects of interest reversals and non-accruals loans, the net interest margin was 3.89% for the current quarter, compared to 3.9% in the previous quarter.

Turning to slide seven, for the second quarter of 2009, other operating income totaled $14.6 million, compared to $15.7 million in the first quarter of 2009. The decrease was primarily due to the recognition of an other-than-temporary impairment, or OTTI charge, totaling $2.6 million in the second quarter of 2009, and a $3.6 million gain related to the sale of a parcel of land in the first quarter of 2009. These gains were partially offset by higher non-cash gains related to the ineffective portion of a cash flow hedge totaling $2.5 million, and higher gains on the sale of residential mortgage loans, income from bank-owned life insurance, and service charges on deposit accounts.

The OTTI charge was the result of our assessment that a portion of the principal and interest payments due on three non-agency collateralized mortgage obligations may not be collected, as a result of credit weakness in the underlying collateral. All three securities are current and continued to perform as of June 30, 2009.

Turning to slide eight, for the second quarter of 2009, other operating expense totaled $45.8 million, compared to $37.7 million in the first quarter of 2009. The increase was primarily due to higher FDIC insurance expense, totaling $3.2 million, and higher credit-related charges, totaling $2.6 million. The increase in FDIC insurance expense was primarily due to a special assessment charge imposed on all FDIC-insured institutions, totaling $2.5 million, or 5 basis points of Central Pacific's total assets minus Tier 1 capital as of June 30, 2009.

The efficiency ratio was 65.6% for the second quarter of 2009, compared to 57.9% in the first quarter, 2009. Excluding the impact of the FDIC's special assessment charge, the efficiency ratio would have been 61.8% for the second quarter.

As we move to slide nine, I will now turn it over to Mary to discuss the proactive steps we have taken and continue to take to reduce our credit exposure. Mary?

Thank you, Dean. Given the financial crisis that all banks across the nation are managing through, reducing credit risk and improving asset quality remains a top priority for us. We first identified weakness in our mainland loan portfolio during the second half of 2007. We took immediate action to reduce this exposure, and continue to take numerous steps to strengthen and solidify our credit risk management function.

I was appointed Chief Credit Officer in June, 2009, and have 28 years of credit administration and risk management experience, the majority of which has been in the Hawaii market. We have expanded our Special Credits group to 12 professionals, with dedicated teams in Hawaii and California. Both of these teams have extensive knowledge and expertise in their respective markets.

Our approach to credit risk management is to be as proactive and transparent as we can. We have enhanced our credit risk management system, monitoring and reporting, and continue to refine our analytics. We have instituted detailed monthly asset quality portfolio reviews, enhanced our asset quality forecasting process, and have established problem asset resolution and reduction goals.

For example, first, we were one of the earliest banks to execute a bulk loan sales of mainland residential construction loans.

Second, we have already recorded $235 million in net chargeoffs, asset writedowns, and losses on sales of loans since the beginning of 2008.

And third, we continue to strengthen our allowance for loan and lease losses, which now stands at 4.5% of our total loan and leased portfolio, as of June 30, 2009.

Turning to slide 10, this table depicts the composition of our loan portfolio by geographic region and loan type. For each category, this table shows outstanding balances, its percentage of our total portfolio, the amount of non-accrual loans, non-accrual loans as percentage of outstanding balances, delinquencies, and cycle-to-date net chargeoffs, writedowns, and losses.

At June 30, $2.7 billion, or 74% of our total portfolio, was located in our core Hawaii market, with the remaining $972 million or 26%, located on the mainland.

While we have a current large component of non-accrual assets, our current level of delinquent loans is low. I will provide further insight into these balances, as well as the delinquencies, in the next couple of slides.

So, turning to slide 11. This table shows a detailed breakdown of delinquent loans still accruing interest by loan category. As you can see, total delinquent loans decreased significantly, from $108 million at March 31, 2009, to $21 million, or 57 basis points, at June 30, 2009. Accruing loans delinquent for 90 days or more also showed a substantial decrease from $20 million at March 31, to $4.4 million at June 30. These decreases illustrate the proactive approach that we've been taking to identify and deal with potential problem loans.

Turning to slide 12, this table shows a breakdown of our non-performing assets by category at June 30, 2009, comparing with March 31, 2009, and December 31, 2008. Our total non-performing assets have increased over the past few quarters and now stand at $261.2 million.

The vast majority of our non-performing assets relate to our residential and construction portfolios in Hawaii and California, reflecting the continued deterioration in those real estate markets. The notable increases in our non-performing assets during the second quarter include the addition of four Hawaii residential construction loans, totaling $36.4 million, five Hawaii commercial construction loans, totaling $30.3 million, and four California commercial construction loans, totaling $25.1 million.

In the next few slides, I will highlight three sub-categories within our loan portfolio to provide additional insight, as well as a detailed breakdown of these exposures in these fluid segments.

The first of these is the Hawaii high-end resort segment, which is detailed on slide 13. Our total exposure to this segment was $150 million at June 30, 2009. This balance was comprised of 15 loans with an average loan size of just under $12 million. The pie chart on the left provides a breakdown of this portfolio by property type and the chart on the right provides a breakdown by geographic location.

Single-family residential properties account for 55% of this portfolio, with townhouses and condominiums accounting for the remaining 34% and 11%, respectively. The largest geographic exposure is on the big island of Hawaii, with 47% of the total. Maui, Kauai, and Oahu account for the remaining 24%, 14%, and 15%, respectively.

The second of the sub-categories is the mainland retail restaurant property segment, which is detailed on slide 14. Our total exposure in this segment was $353 million at June 30, 2009, or approximately 36% of our mainland portfolio. The balance is comprised of 62 loans with an average loan size of just under $6 million. The current average LTV for this portfolio was 74%. Term loans account for 67% of the outstanding balance, and our largest geographic exposure was in Los Angeles County, with 43% of the balance.

Turning to slide 15, the third sub-category is the mainland office property segment. Total exposure to this segment was $268 million as of June 30, 2009, or approximately 28% of our mainland portfolio. The balance is comprised of 43 loans, with an average loan size of just under $7 million. The current average loan-to-value for this portfolio was 72%. Term loans account for 53% and vertical construction loans account for 40% of the outstanding balance in this portfolio.

Geographic exposure is relatively well-diversified, with largest exposures being in Sacramento, at 28%, Washington State, at 18%, and San Diego and Los Angeles Counties at 13% each.

Although I will not be specifically addressing each, there is additional detailed information regarding other segments of our portfolio which can be found in the appendix of the presentation.

As we move to slide 16, I will now turn the presentation back to Dean.

Thank you, Mary. In addition to reducing credit risk and strengthening our capital position, enhancing balance sheet liquidity is another one of our key management priorities. We have a disciplined approach to liquidity and proactively manage our balance sheet with a keen awareness of the current operating environment. As I stated earlier, our liquidity has improved significantly during the first half of 2009, and in particular, during the second quarter of 2009. This improvement was driven by strong growth in core deposits during the second quarter, of over $200 million, up 7% from March 31st, 2009. Through the first six months of 2009, we grew core deposits by approximately $375 million.

The following key points further evidence our strong liquidity position as of June 30, 2009. First, deposits fund 72% of our total assets. Secondly, a 93% loan-to-deposit ratio. Third, a nominal amount of brokered CDs, and lastly, over $1.2 billion in available borrowing capacity.

Turning to slide 17, this slide depicts our loan-to-deposit ratio in comparison to a peer group, and as you can see, as a result of our proactive management of our balance sheet, from a high of 110% at March 31st, 2008, we have significantly improved this ratio to 93% at June 30, 2009.

Turning to slide 18, one of our core attributes is our strong deposit franchise. Our team of experienced commercial and retail bankers, commitment to deliver high-touch, personalized service, innovative products and a convenient branch network, has resulted in a large, stable base of core deposits. At June 30, 2009, our total deposits totaled $4 billion, of which $3.2 billion, or 80%, represent core deposits. Brokered CDs account for a nominal 3% of our total, and CDs over $250,000 account for only 4% of the total. Our average deposit cost for the current quarter was down to 1.18%.

Turning to slide 19, while reducing credit risk, strengthening capital, and enhancing liquidity remain near-term priorities, overlaying all of this is our refocus on strategic growth opportunities in our core Hawaii market. We have an established and attractive market position here in Hawaii. We have operated in Hawaii for 55 years and are one of the largest financial institutions in the state, with a deposit market share of more than 13% among banks and thrifts. We are uniquely positioned in this market as a local community bank that is large enough to provide a broad sweep of innovative products and services, yet small enough to deliver it with a high-touch, personalized customer service.

We continue to focus our efforts on expanding our business operations in Hawaii and through our community-based banking strategies, we see significant opportunity to increase our market share, specifically in the retail and small business sectors. We also will continue to leverage our position as the number-one residential mortgage lender in Hawaii.

In closing, on slide 20, I would like to recap the key management priorities that we know are important to you and in turn, are important to us. Reducing credit risk, strengthening capital, and enhancing liquidity.

With respect to credit risk, we have significantly bolstered our risk management infrastructure and continue to proactively and aggressively manage our credit risk.

With respect to capital, we have quantified our potential risk exposure through an in-depth stress-testing of our loan portfolio under various adverse economic scenarios. While we remain well-capitalized for regulatory purposes, we continue to believe that proactively raising capital is appropriate and prudent.

With respect to liquidity, our disciplined balance sheet management has led to significant improvement, driven by strategic reductions in the loan portfolio, combined with strong growth in core deposits, our liquidity position is strong and sustainable.

This concludes the formal portion of our presentation, and I will now open it up to questions.

(Operator instructions) Brett Rabatin, Sterne Agee.

I wanted to just start off with hopefully some color on-- I'm just looking at the level of non-performing assets you have, plus past-due loans, relative to capital and the reserve, and that's about 44%. And I know you've been aggressive this quarter, moving loans to non-accrual. But my concern is, what is the level of-- whatever you have to share with us, classified, special mention, or total [credit size] loans, and how we do know that you don't have-- that the scrub is going to be a quarterly process, essentially? Can you give us the numbers on any of the-- particularly if you just want to give us the classified loan level?

Brett, this is Mary and I'll respond to your question. We did see significant migration, specifically as we went through the portfolio review process during the month of June.

Our classified assets at presents top $700 million, of which the in flow was about $260 million just during the quarter. So we believe that given the work that we did during the second quarter, that we really have our arms wrapped around, you know, what is resident, relative to risk within the portfolio today.

OK. And as it relates to what you did recognize in the second quarter, can you give us an idea of what was a specific impairment reserve taken this quarter, or some color on the chargeoffs that obviously are going to be meaningful in 3Q and 4Q?

Brett, for the second quarter, reserve levels, and pretty significantly across all portfolios, and specifically as those that we would consider impaired, one second, and I'm going to pull that number so that I have the exact number for you--

If you need to call me back, that's fine.

No, no, I have it. It's available. Total impaired reserve totaled about $30 million for the quarter, against a balance of about $240 million.

OK. And then wanted to ask, on the offering, I'm just curious to hear, given how this turned out, were the investors that were interested in investing essentially mandate an all-or-none type of situation that precluded you from doing a reduced-sized offering?

Yes, Brett. No, we did have significant interest from investors as we went through the public offering, and again, you know, we ran into a situation, given the number of our authorized but unissued common shares, and just combined with the current stock price-- again, you know, we continue to believe that raising capital is appropriate and we will seek shareholder approval to increase the number of authorized shares to provide maximum flexibility in raising additional capital. You know, these investors, like I said, were willing to give us capital and basically, just, you know, more than we had expected. But again, you know, our plan is to postpone the offering at this time and seek shareholder approval to increase the authorized shares.

Can you give us a number for what you wish to increase the authorization to?

No, I don't have a number at this time.

OK. And just lastly, if I understand correctly, you guys have your regulatory review later this fall; is that correct?

Yes.

OK, thank you very much.

Thank you.

Joe Morford, RBC Capital Markets.

Good morning, everyone.

Good morning, Joe.

I, too, had just a quick follow-up on the offering, and that is, like, is $100 million still the right number, or after further consideration, do you feel the need to raise more capital?

You know, Brett, in coming up with the size of the offering-- excuse me, Joe -- in coming up with the size of the offering, it was based on our stress testing of our portfolio, you know, as of June 30, which included our own internal testing as well as the [SCAP] methodology and even some outside benchmarks. And again, you know, at this time, we had determined that the $100 million was a number that was prudent. But again, with the postponement of the offering and seeking the shareholder approval, and we need to continue to monitor the portfolio over this time, you know, we would continue to stress test and determine what would be an appropriate level. At such time that, if and when we come back to the market--

OK. And then, I guess, Mary, I had a couple of questions regarding the high-end resort portfolio in Hawaii. And that is, I guess, you know, first when were most of these loans originated, how many of them are participations, and what's kind of your average loan-to-value, or any kind of metrics like that.

OK, starting out, first part, most of the loans were made late 2006, early 2007. As indicated in the chart, most- the majority are on the big island, and we are participating with- of the 15 loans, I would say three are participations-- maybe four. Four, excuse me, Joe. OK. And loan to values right now are running, I would say in the upper 70, low 80 percentile, and that's driven off the fact that a lot of these projects are still in the A&D phase, and so because of the land aspect of it, there's been some compression in value on that standpoint.

OK. And how much of this portfolio is currently on NPA, and what sort of writedowns were taken when they moved to non-accrual?

OK, about $34 million is on non-accrual at present, and one credit transaction, when we placed it on non-accrual in June, actually, we did take a charge of about $5.8 million off of that one.

OK. And then lastly, I guess, maybe a question for Dean or Mary -- just what's your current expectations in terms of the pace of decline in the loan portfolio over the next couple of quarters?

Joe, you know, given the economic conditions, both in California, primarily, and in Hawaii, we do expect to see some further compression as it relates to valuations. We believe that we have, at present, risk-rated all of the credits appropriately. Now it's a matter of working through, with the borrowers, and making sure that we're making the right decisions relative to getting additional collateral, additional guarantees, and taking the chargeoffs that may be necessary relative to the new appraisals that we've been getting in. So going back to the one I just mentioned earlier, you know, that was premised off a current appraisal that we had just received in late second quarter.

Right, OK. I was actually kind of just curious what the size of the loan portfolio, I suspect you'll see continued runoffs of the balances?

That is our intent, yes.

OK, would we kind of a similar pace to this quarter, or--

I would expect over the next couple of quarters, it would be at the same pace.

OK, perfect. Thanks so much.

You're welcome.

Thank you.

Bobby Bohlen, KBW.

Actually two questions. The first question is, you know, thinking about long-term strategic goals for the West Coast franchise, could you just elaborate on how you see the West Coast playing a part in the total business line for Central Pacific?

Bobby, I can address this. Right now, we haven't been making any new loans on the mainland since late 2007, early 2008, as it related to commercial construction, but we haven't been doing anything in resi construction or the term loans for quite a while right now.

The portfolio in total continues to deleverage and our expectation is to reduce the portfolio in total to about $500 million by the end of 2010. Long-term view is that we would expect to, in total, reduce our overall construction and term loan mix, as it relates to the mainland, to the point where the bank's overall real estate composition reduces to somewhat lower than 40%.

OK, but you still do see the West Coast franchise as a strategic-- at a much lower level, albeit, a strategic holding for Central Pacific?

At present, but as it relates to real estate, it would be primarily with term loan type properties. We would not be considering doing much in the way construction lending.

OK. And then my second question, when do you expect to approach the shareholders regarding a vote? Is there an upcoming shareholder meeting, or would it be a special shareholder vote that would have to be held?

Bobby, in approximately three months, in terms of signing of a proxy and then calling a special shareholders meeting.

OK, so about three months from now?

Yep, approximately.

Thank you. Those were my questions.

(Operator instructions) Joe Gladue of B. Riley and Company.

Just to follow up on one of the previous questions, you know, with the expectation that the loan portfolio is going to continue to decline for the rest of the year, you know, in the second quarter, total assets still grew, but a lot of it went into some liquid investments and lower-yielding assets. Is that trend going to continue as well, or would you expect to pull back on just overall balance sheet growth going forward?

You know, as you saw during not only the second quarter but over the first half of year, you know, we have been deleveraging the balance sheet and at the same time, focused on growing our core deposits. And that would be our expectation, that as we continue to reduce our credit risk. But at the same time, we do have opportunities here in Hawaii, specifically in the small business sector, so we are making loans for that sector, but overall, we will see a continued downsizing of the loan portfolio.

And sort of what I'm getting at is expectation for average asset yields, if that mix is going towards lower yielding stuff, is that-- sounds like that's going to continue, at least to some degree.

Yes, there will be some impact in terms of the loan yields, but if you look at the net interest margin, and again, looking at it on a-- excluding the impact of the reversals of the interest on the non-accrual loans, fairly stable between the first and second quarters. So as we expect the loan yields to stabilize, in terms of the non-performings, combined with opportunities to reduce our deposit costs, we do expect the margins to stabilize at these levels.

All right, thank you. That was all I had.

Thank you.

At this time, we have no further questions. Do you have any closing (inaudible)

Well, I'd like to thank everyone for participating in our second quarter earnings and financial performance review. We appreciate your questions and interest in Central Pacific Financial Corp.

Thank you. This does conclude today's call. You may now disconnect.