Central Pacific Financial Corp (CPF) 2010 Q1 法說會逐字稿

Welcome to the Central Pacific Financial Corp. first quarter 2010 conference call.

(Operator Instructions).

This call is being recorded and will be available for replay shortly after its completion on the company's website at www.CentralPacific bank.com. I would now like to turn the call over to David Morimoto, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Amy, and thank you all for joining us today to review the financial results of Central Pacific Financial Corp. for the first quarter of 2010. With us today, are John Dean, Executive Chairman of the Board, and Reid Gushiken, Senior Vice President and Controller. Today's presentation and comments may include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially from those expressed in the statements. These risks and uncertainties are detailed in Central Pacific Financial Corp.'s filings with the SEC. Forward-looking statements made during today's call are made only as of the date of this conference call, and we undertake no obligation to update any forward-looking statements. At this time I would like to turn the call over to John.

Thanks, David, and good morning everyone. It's been a busy five weeks since joining the Company. While I'm encouraged by the progress our Company is making, I recognize the challenges that still remain. We've taken several key steps to position our Company for recovery, specifically, we improved our credit risk profile by further reducing our commercial real estate and construction loan portfolios. We strengthened our liquidity position, by increasing cash, and cash equivalents. And we moved to restructure our business model to operate as a more focused, streamlined institution. We have been working hard to reposition management, and recruit key executives to implement our recovery plan. This includes seeking a CFO, as well as a permanent Chief Credit Officer, to replace our interim Mary Weisman who resigned, and will be leaving in June.

Our results for the first quarter of 2010 were negatively impacted by a non-cash goodwill impairment charge. However, this charge does not impact our tangible equity or regulatory capital ratios. And when you exclude this nonrecurring charge, our net loss for the quarter was significantly lower than the previous quarter. In addition to lower credit costs, our net chargeoffs were significantly reduced from the previous quarter. And our core deposit base remains fairly stable despite our current challenges. Consistent with our strategy of exiting the mainland market by 2012, we closed two of our four commercial loan offices in California on March 31st, and plan to close a third later this year.

At the end of this month, we also consolidated branches in close proximity of each other in two locations in Honolulu, and extended the business hours at these consolidated branches to improve customer service. These actions together with the Company-wide restructuring are intended to provide significant cost savings for our Company going forward. While we selectively downsized our balance sheet,, we plan to remain highly competitive in our core businesses, of supporting small business and originating residential mortgages in the state of Hawaii. During the first three months of this year, we originated almost a $0.25 billion in residential mortgages, and continue to originate more Small Business Administration loans than any other institution in the state. We believe the actions we are taking are critical steps to better position our Company to raise capital, and to improve our financial condition. At this time, Reid will review our Company's financial results.

Thank you, John. For the first quarter of 2010, we reported an adjusted net loss of $57.5 million, or $1.97 per diluted share. The adjusted net loss excludes a noncash goodwill impairment charge of $102.7 million. Including the goodwill impairment charge, we recognize a net loss of $160.2 million or $5.36 per diluted share, compared to a net loss of $98.8 million or $3.33 per diluted share reported in the fourth quarter of 2009. As John previously mentioned, the goodwill impairment charge had no impact on our cash flows, tangible equity, or regulatory capital ratios. And as of March 31, 2010, we had no goodwill remaining on our books. Included in the quarterly loss, were total credit costs of $66.5 million. This amount was comprised of a provision for loan and lease losses of $58.8 million, foreclosed asset expense of $5.5 million, and increases to the reserve for unfunded commitments of $1.4 million, and writedown of a loan held for sale totaling $0.8 million.

In comparison, total credit cost during the previous quarter were $109.5 million. At March 31, 2010, we increased our allowance for loan and lease losses as a percentage of total loans and leases to 7.44%, from 6.75%, at December 31, 2009. Net interest income for the quarter was $35.1 million, compared to $38.5 million in the previous quarter. Our net interest margin was 3.2%, compared to 3.3%, in the previous quarter. Our quarterly net interest income amount was negatively impacted by reversal of interest on nonaccrual loans totaling $1.6 million. Excluding the impact of these reversals, our net interest margin for the quarter was 3.34%. Noninterest income for the quarter totaled $12.8 million, up from $11.7 million in the previous quarter.

The sequential quarter increase was primarily due to the recognition of net gains on the sale of investment securities totaling $0.8 million, and the recognition of higher unrealized gains on outstanding interest rate loss of $1.5 million. These amounts were partially offset by lower service charges on deposit accounts of $0.7 million. Noninterest expense for the quarter totaled $149.2 million. Excluding the previously mentioned goodwill impairment charge, noninterest expense totaled $46.5 million, compared to $43.9 million in the previous quarter. The sequential quarter increase was attributable to higher foreclosed asset expense of $4.8 million, and higher FDIC insurance expense of $1.1 million. These amounts were partially offset by lower writedowns of loans held for sale of $2.9 million, and lower personnel costs of $1 million.

Our adjusted efficiency ratio for the quarter, which excludes writedowns of loans held for sale, and foreclosed asset expense was 83.6%, compared to 77% in the previous quarter. The sequential increase was the result of higher reserve for unfunded commitments, higher FDIC insurance expense, and lower net interest income as discussed above. Because we have established a full valuation allowance against our net before tax assets, we did not recognize any income tax benefit during the quarter. On March 31, 2010, our Tier 1 good faith capital, total risk based capital, and leverage capital ratios were 8.99%, 10.32%, and 5.78%, respectively.

As John previously mentioned, despite reporting a quarterly loss, we made progress with our efforts to implement our recovery plan and streamline operations. Specifically, we sold approximately $440 million in investment securities at a net gain of just under $1 million. As a result of these sales, we significantly reduced our remaining exposure to nonagency, MBS, and municipal security portfolios to $18,000 and $0.8 million respectively as of March 31, 2010. We continue to maintain high liquidity level with cash and cash equivalents totaling $865.4 million at March 31, 2010, compared to $488.4 million at year-end 2009. As of March 31, 2010, our loan to deposit ratio of 85% was virtually unchanged from the previous quarter. As John mentioned, we also initiated steps to reduce operating costs by restructuring business model, closing two mainland loan production offices, and consolidating retail branch locations in two Honolulu locations. That completes our financial summary. I would now like to turn the call back to John to provide additional background related to credit.

Thank you, Reid. In keeping with our strategy to reduce our credit risk profile, we reduced our total loan and lease portfolio to $2.8 billion at March 31st of this year. This represents a decrease of $198 million from the previous quarter, and a decrease of $975 million from the same period last year. More importantly, we reduced our total commercial real estate outstandings to $1.75 billion, at March 31st of this year. This represents a decrease of $147 million from the previous quarter, and a decrease of just under $1 billion from our peak levels in the third quarter of 2007.

Since year-end 2009, our mainland loan portfolio decreased by $84 million, and our Hawaii commercial construction and commercial real estate portfolios decreased by $65 million. Net charge offs for the quarter were $52.5 million, down $52.4 million, from the $104.9 million in net chargeoffs we had in the prior quarter. During the first quarter, we completed a sale of 11 commercial real estate loans, six in the mainland, and five from Hawaii. Nonperforming assets declined by $6 million, after having increased by $81.3 million, and $157.3 million in the fourth and third quarters of 2009 respectively. Other real estate own properties increased to $31.6 million, up from $4.6 million on a sequential quarter basis. The banks other real estate owned properties include 11 mainland construction properties, one Hawaii commercial construction property, and six Hawaii residential properties. Loans past due more than 90 days and still accruing interest totaled $7 million, up $3.7 million, on a sequential quarter basis. However, one mainland commercial construction loan totaling $6.5 million, was refinanced in mid April.

Delinquent loans 30 to 89 days decreased quarter-over-quarter, to $22.8 from $48.2 million. In the first quarter, we increased our allowance for loan and lease losses from 6.8% to 7.4% of total loans and leases. We remain focused on resolving our credit issues, and continue to pursue measures to improve the credit quality of the bank. As our our financial results indicate we work through credit challenges in a soft economic environment. We have made progress over the previous quarter, and are prepared to make the tough decisions necessary to turn our bank around. We are committed getting back to basics, returning to profitability, and to continue supporting our customers and communities with service levels, second to none. At this time, we would be happy to answer any questions you may have. David?

Amy, we are ready to open it up for questions.

(Operator Instructions).

First question comes from Joe Morford at RBC Capital Markets.

Good morning, John. Our paths have crossed again, it's nice to see you back in the banking world.

How are you doing? It's been a few years, Joe.

It has. I guess first just be curious, John, I just wondered if you could talk a bit about why you took the assignment, and what is it you see as the long-term value and opportunity with this franchise?

I guess the primary reason for taking it, is just given the background my background, you're familiar with, Joe, is that I thought it could add some value here. It's a great organization. And I think you know that I spent a good deal of time in Hawaii with the home here for the last ten, or 12 years, or more. And it's got a unique place and the community here, Central Pacific. I think it's a bank that's needed in the community, and if I can play a part in returning to us profitability, I would feel good about that.

And I guess you touched on little bit the interest, and looking for new CFO and Chief Credit. Maybe more broadly speaking, can you talk about your plans for building out the management team and filling some positions, including CEO role as well.

I think focusing first on the CFO, and Chief Credit Officer, we have searches going on for both positions. Those we started -- when some work had been done before I arrived, but obviously that's been a primary focus of mine. So we do need to strengthen the team here. Those are two positions we need to fill, and we are actively pursuing both of those needs. I would like to spend a minute though, as I think we have also a strong team inside. And you have worked with folks here, including David and Reid and others, I think you know the strength that also exists -- has existed in this organization. So I don't want to leave you with there's a whole a new team coming in, that team we will be from the outside, but also from within this organization.

I think you seen or worked with me in the past, Joe, in terms of situations like central Pacific. We do have the challenges. But if you look at the numbers, if you look at the credit numbers, obviously they are trending in the right direction. We haven't returned to profitability. but if you look at a lot of the ratios, we are least heading in the direction that we would like to. There is a lot of other work to be done in terms of operating efficiency, and going back to the basics. I think key is that, there is a franchise value here. You can already see it in the strength of our client base that has stayed with us in very very difficult times. As you dig, as I dig deeper in to the organization, I continue to be impressed by the core that has made this Company a great institution, and that can bring us back to where we once was -- once were.

I guess lastly, what additional plans do you have for shrinking the balance sheet at this point, and over what period?

We done some over this quarter. The finance group has worked very quickly, and they can spend a minute, David or Reed, in terms of investment securities. And that's allowed us to move very very quickly. I think the other opportunity for us. will be in the mainland. we publicly committed to exiting that market. And if you look at the size of the portfolio there, the loans and the OREO, that would also significantly get us back more to the core. And while we do have challenges in Hawaii, we also have core base of assets of clients. So some things can move quickly, or more quickly than others. But frankly, others will take some time. And we just got to recognize the need, that we are going to maximize the value of the portfolio, that we are going to have to have some patience, in terms of some of the assets that we now hold, that are in special credits.

Okay, thanks so much, and I wish you well.

Thanks, Joe, good to talk to you again.

The next question comes from Joe [Glodue], from B. Riley -- Gladue, sorry.

Gladue -- John Gladue. John, let me talk about -- I guess you just mentioned having some patience, and shrinking the balance sheet, and realizing some of the value there. But I guess, while you showed improve in a lot of asset quality measures this quarter, I guess capital is getting thinner, I guess tangible capital, tangible common equity ratio down there fully two basis points. Just one thing, I guess, a, how much time the regulators can give you? And b, if you can touch on the plans for raising capital?

Well I'm not going to speak to the regulators, but we obviously have in our plans to raise capital we need to raise capital. I think before we can raise capital, we had to get a better sense of the challenges in the credit portfolio. I think we have a very good sense of that portfolio on the mainland. That went first in terms of the challenges and the difficulty. We are getting pretty close here. My focus, the folks here, the focus is going to be on firming up our sense of what we have, and what it will take to clean up that portfolio. I think we have to get a better sense of the franchise value. We are working on a analytical, quantitative approach. And we need to go back to the market, and see the interest level that might be there. And our plans are over the next few months, is to test that market. And to extent there is interest, obviously to move very quickly in raising additional capital for this institution.

Okay. Particularly on the main land, are you seeing interest in the loans and OREO properties that you are trying to sell? And are you able to sell them without much additional loss versus your carrying value?

Couple of three data points for you. One would be appreciate this is in part from discussions here with the team. But we have had significant increase in interest in acquiring our properties, our loans on the mainland, an increased interest here in Hawaii. Now obviously we got to vet those proposals. And there is always a distance between interest and consummating a transaction. So I want to make sure you realize there is much work to be done, and analysis done. But having said that, as we look at more proposals coming in, I think others would speak to this, that the difference, the spread between the bid and the ask is starting to narrow. And I think that's a good sign. And we will just have to see if it's at a level that creates an opportunity for this organization, and then for any potential buyer. So we are positive of increased interest. We are positive in terms of the bid and ask, as we look at it seems to be narrowing. And I guess those are two key points, I would say not just from the mainland, but interest in certain of our assets here in Hawaii.

Okay. I guess and just lastly, I will ask operating expense run rate, you mentioned closing branches and recently done staff reductions. I imagine a good part of those cost savings weren't fully reflected in the first quarter results. But just wondering how much further you think you can cut expenses, or what you think a good run rate is?

If you look at other institutions that I've been involved, and looked at the efficiency ratio, I think you know that -- least I'm a firm believer -- that it's a key indicator of the strength of an institution and it's ability to compete in the marketplace. We did have a reorganization of the bank. We did eliminate several positions many positions, and not all of them were filled. But there will be a continued operating efficiency opportunities, in over the next 12, 18, 24 months. And while we don't anticipate another reduction in force -- again we will continue to look in this organization this year, next year. And if past experience is correct, I think we are going to continue to find ways to make us a stronger more efficient organization.

Okay. Thank you.

Thank you.

Our next question comes from Julienne Cassarino, Prospector Partners.

Hello.

Good morning.

Good morning. If I could just get the credit metrics you disclosed in dollars, because I'm a little confused about what is included -- in the press release, what were nonaccrual loans, what was the balance in dollars?

The total nonaccruals at the end of first quarter?

Yes.

I was going to guess -- I got handed -- I'm going to be honest with the audience, I got handed a lot of information. I picked this section up for this part of our presentation just yesterday. But Reid I think has got the specific. And I don't want to guess at it.

Yes, I have the numbers. The total nonaccruals loan as of March 31, 2010, were $462.3 million.

Thanks, and what were renegotiated or trouble debt restructured loans that are still being -- that are still accruing? That are not included in the $462.3.

When you say not included in the nonaccruals, you are talking about assets held for resale?

No TDRs that are still accruing, doesn't matter if they are held for sale or investment.

We are going to have to get back with you, it's a small amount, but I don't have the number in front of me. Can we get back to you directly? Either David or Reid will follow up.

Thanks. Just a couple of other quick questions. What were 90 day plus past dues?

The 90 day plus past dues which I mentioned I believe,.

I wasn't sure if that included -- I wasn't sure what --

$7 million.

How much?

I think what I was trying to say too, one of those 90 day past dues was settled, almost all of it was settled in the middle of April

That's right.

So we got less than a million of that, unless something else came in that I am not aware of.

So it was $7 million at the end of the quarter, down to 1 million?

Less than a million I believe.

Okay. So okay. 7 down to 1.

Right.

How about the early stage 30 to 89 day past due?

Early stage.

29.7 million, as of the end of the quarter.

Okay. Great.

And that's significantly down from year-end when it was 51.5 million. And, Julienne, just getting back to your other question on accruing restructured loans, at the end of first quarter was $4.6 million.

Okay.

Which also was down from 6.3 as of year-end.

Very good. Okay. And Mr. Dean I was wondering if you own any stock?

I do not own any stock at this time.

Are there restrictions on you buying stock, or can you are there no restrictions I'm just curious.

I can only buy stock in the window which we are in now.

But you can buy outside of blackout times, right?

I can buy outside of the -- I'm looking at Glen who is with me here, Julienne, who is our General Counsel, because I'm the Executive Chairman, I don't know what the differences would be between that and being CEO. But usually it's only during the window in terms of purchases that I'm familiar with, and I wouldn't do it other wise.

July Ann, I think the issue is that we have the standard blackout windows and open trading periods for executives. But beyond that depending on the situation that the Company is in, if it is in a particular situation, there is are times where the executives can be restricted even beyond the normal trading windows.

There is nothing special, no special considerations here.

Nothing beyond what you would normally expect. If there are, unusual situations, where we might be working on something, then executives could be restricted beyond the normal trading windows.

Mr. Dean, do you live in Hawaii?

I live in (inaudible) highway.

Okay, as opposed to like a vacation home that's your permanent?

Well it's on the ocean. I'm full time there, Julienne, right now.

Great. And has there been any other changes on the board?

No changes on the board. At least since my arrival.

And the First Interstate banks that you worked at, were those connected. Or they just happen to have the same name?

Again, the question, I couldn't hear you?

The First Interstate banks that you were with previously, were they connected to each other?

Yes. Oh, yes. So, First Interstate was acquired by Wells Fargo, probably 15 years ago. So, First Interstate Oklahoma, and First Interstate Washington where I was CEO were certainly part of a holding company, First Interstate Bank Corp. And another company I started, First Interstate System was also part of that entity. Pacific First was not, of course, and then Silicon Valley Bank was a different institution.

Sure, right. Okay. And the investment fund that you are with right, do -- does that fund invest in banks, or is it just -- technology?

It does not invest -- it's invests -- investments private equity investments. And that is fully -- that fund is fully invested.

Is it -- I'm just curious, is it all technology, or does it involve financial?

No, it's primarily technology. But it also -- and can involve a financial institution, but not a -- nothing public, or nothing publicly held.

Okay. Great, thank you.

You're welcome, Julienne.

That concludes today's question-and-answer session. I would like to turn the conference back over to Mr. Dean for any closing comments.

Nothing other than to thank everyone who has come today, and to thank those who have participated in our first quarter earnings call. And hopefully we will see you in the second quarter call. And wishing you all -- wishing all of you, excuse me, a good day.

The conference is now concluded. Thank you for attending. You may now disconnect.