Central Pacific Financial Corp (CPF) 2010 Q2 法說會逐字稿

Good afternoon and welcome to the Central Pacific Financial Corp. second quarter earnings call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity for you to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to David Morimoto. Please go ahead.

Thank you, Lydia. Thank you all for joining us today to review the financial results of Central Pacific Financial Corp. for the second quarter of 2010. With us today are John Dean, Executive Chairman of the Board, Reid Gushiken, Senior Vice President and Controller, and Bill Wilson, Executive Vice President, Special Credit.

Today's presentation and comments may include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. These risks and uncertainties are detailed in CPF'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 the Company does not update any forward-looking statements. At this time I would like to turn the call over to John.

Thank you, David, and good morning, everyone. Let me begin by introducing a new member of our team who will later be providing an overview of our Company's credit quality. Bill Wilson, who joined us several weeks ago, has 29 years of credit underwriting and special assets management experience, and he will oversee our Special Credits group on the mainland and in Hawaii. Bill's considerable experience in dealing with special assets will further strengthen this group.

Turning now to my report, I'm pleased with the substantial improvements that we've made to our overall financial condition over the past few quarters and I'm encouraged by the positive trends reflected in our second quarter financial results. Our team has been working hard to reduce credit risk exposure, to control costs, to preserve and augment capital and to maintain our banks franchise value in the Hawaii market. We narrowed our net loss to $16.1 million in the second quarter, compared to an adjusted net loss of $57.5 million in the first quarter, and a net loss of $98.8 million in the fourth quarter of 2009. The primary impact to our earnings continues to come from elevated credit costs, that have also declined in each quarter over the same period.

We also realized improvements in our credit risk profile. Non-performing assets declined for the second consecutive quarter. Net loan charge-offs also declined in the second quarter. And the credit risk exposure in our construction and development loan portfolio was reduced. While we continued to aggressively manage our credit quality, we're encouraged by these improvements over the last two quarters, and we continue to maintain an appropriate allowance for loan and lease losses, which increased to 7.69% of total loans and leases at June 30.

Our improved liquidity position is a result of selectively reducing our loan portfolio and maintaining a relatively stable deposit base. Our employees have done an excellent job servicing our customers and in maintaining our core deposit relationships. The improved liquidity and loan to deposit ratios in the second quarter reflect the concerted efforts of our team.

Moving forward, the top priorities are to recapitalize our Company, to recapture lost market share in Hawaii and to reestablish our banks profitable business model. We continue to take all steps and explore all avenues to meet our capital requirements.

In the meantime, we continue to focus on our core business, the Hawaii market. We originated $485.2 million in residential mortgages, in Hawaii, for the first six months of this year and we are maintaining our role as a major player in this market. We also continue to be the market leader, among Hawaii banks, in the number of SBA loans made within our community.

The economy in Hawaii continues to show signs of stability, although a slow and moderate recovery remains the general consensus. Real GDP growth in Hawaii is forecasted to increase by 1.1% in 2010 and by 1.4% in 2011. The seasonally adjusted unemployment rate declined for the third consecutive month to 6.3% in June, compared to a national average of 9.5%.

Visitor arrivals have increased in recent months and are projected to be up by 2.6% this year and 4.1% in 2011. Visitor expenditures are projected to be up by 4.9% this year and 7.3% in 2011.

The steps we are taking have strengthened our financial condition and have better positioned our Company to raise capital. While we are encouraged by the progress we have made to date, we recognize that there is still much work to be done. At this time, Reid will review our Company's second quarter financial results.

Thank you, John. For the second quarter of 2010, we reported a net loss of $16.1 million or $0.60 per diluted share, compared to the previous quarters adjusted net loss of $57.5 million or $1.97 per diluted share. The previous quarters adjusted net loss excludes the impact of a non-cash goodwill impairment charge of $102.7 million. Included in the second quarters net loss were total credit costs of $21.8 million. This amount was comprised of a provision for loan and lease losses of $20.4 million, foreclosed asset expense of $0.4 million, an increase to the reserve for unfunded commitments of $0.8 million and write-downs of loans held for sale totaling $0.2 million. In comparison, credit costs during the previous quarter totaled $66.5 million.

Besides reporting a significant reduction in total credit costs, we also lowered our non-performing assets and reduced our net charge-offs during the quarter. In addition, we increased our allowance for loan and lease losses as a percentage of total loans and leases from 7.44% at March 31, 2010, to 7.69% at June 30, 2010. Bill will provide more details about our credit risk position later in this call.

Net interest income for the quarter was $29.2 million compared to $35.1 million in the previous quarter and our net interest margin was 2.9% compared to 3.2% in the previous quarter. The sequential quarter compression in our net interest margin was the result of lower yields on our interest earning assets attributable to the continued reduction in our commercial real estate loan portfolio and our ongoing efforts to maximize balance sheet liquidity by maintaining elevated levels of cash and cash equivalents.

Non-interest income for the quarter totaled $12.7 million, down slightly from $12.8 million in the previous quarter. The sequential quarter decrease was primarily due to the recognition of lower net gains on the sale of investment securities totaling $0.8 million and lower gains on sales of residential mortgage loans of $0.6 million. These reductions were partially offset by higher income from bank-owned life insurance of $0.7 million and the recognition of higher unrealized gains and outstanding interest rate loss of $0.7 million.

Non-interest expense for the quarter totaled $37.6 million down from $149.2 million in the previous quarter. The sequential quarter decrease was attributable to the previously mentioned non-cash goodwill impairment charge of $102.7 million and lower credit-related charges totaling $6.4 million.

Our adjusted efficiency ratio for the quarter was 86.5% compared to 83.6% in the previous quarter. Our efficiency ratio excludes write-downs of loans held for sale, foreclosed asset expense and the previous quarter's goodwill impairment charge.

Because we continue to have a full valuation allowance established against our net deferred tax assets, we did not recognize any income tax benefit during the quarter. In addition to reducing our quarterly net loss and improving our overall credit risk position, we also maintained strong liquidity. At June 30, 2010, we had cash and cash equivalents totaling $916.7 million and lowered our loan to deposit ratio from 85.3% at March 31 to 81.8% at June 30.

Despite reporting a net loss, we were able to improve all three of our regulatory capital ratios during the quarter. At June 30, 2010, our Tier 1 risk-based capital, total risk-based capital and leverage capital ratios were 9.08%, 10.41% and 6.07% respectively, compared to 8.99%, 10.32% and 5.78% respectively at March 31. Consistent with our recovery plan, we were able to improve our regulatory capital ratios by restructuring our balance sheet through the sale of investment securities, strategic reductions in our loan portfolio over the past several quarters and by maintaining elevated levels of cash and cash equivalents. These actions contributed to sequential quarter reductions in both our risk weighted assets and average assets, which in turn lead to the overall improvement in our regulatory capital ratios as of June 30.

That completes our financial summary, and I'd now like to turn the call over to Bill who will provide additional background related to credit.

Thank you, Reid. Net charge-offs decreased to $30.1 million in the second quarter as compared to $52.5 million in the first quarter of 2010 and $30.5 million in the second quarter of 2009. The decrease from the first quarter was primarily attributable to a $14.3 million decline in Hawaii commercial real estate net charge-offs. The Hawaii retail portfolio continued to perform well although we did recognize $5.2 million in net charge-offs in residential mortgages, representing 95% of all retail net charge-offs for the quarter. This compares to retail net charge-offs of $3.3 million in the first quarter of 2010, of which residential mortgages comprised $2.7 million.

Non-performing assets totaled $467.2 million at the end of the second quarter compared to $493.8 million in the first quarter of 2010 and $261.2 million in the second quarter of 2009. Additions to non-performing assets for the second quarter declined to $28.6 million from $112.7 million for the first quarter of 2010 and $140.5 million for the second quarter of 2009.

Non-performing construction and development loans totaled $371.8 million at the end of the second quarter, which comprised 80% of total non-performing assets and declined from $402.4 million in the first quarter of 2010. Total construction and development loans were $589.9 million at the end of the second quarter, or 22.5% of the total loan portfolio. This represented a decrease of $148.5 million from the first quarter of 2010 and a decrease of $482.7 million from the second quarter of 2009. A $90.4 million allowance for construction and development loan and lease losses was held at the end of the second quarter, representing 15.3% of the total construction and development loan balance.

Troubled debt restructurings totaled $128.3 million for the second quarter as compared to $111.8 million in the first quarter of 2010. This increase was primarily attributable to a $14.5 million increase in residential mortgages. Classified assets totaled $688.8 million in the second quarter as compared to $750.9 million in the first quarter of 2010 and $740.7 million in the second quarter of 2009. The second quarter 2010 decrease in classified assets is primarily attributable to a $90.8 million decrease in Hawaii construction and development loans and offset by a $17.6 million increase in residential mortgages.

Loans delinquent for 90 days or more still accruing interest decreased to $1.9 million in the second quarter from $7 million in the first quarter of 2010. Loans delinquent for 30 days or more still accruing interest also decreased to $12.9 million in the second quarter from $29.7 million in the first quarter of 2010. The allowance for loan and lease losses as a percentage of total loans and leases increased to 7.69% at the end of the second quarter from 7.44% in the first quarter of 2010. The increase is primarily attributable to a $218.8 million decrease in the loan portfolio and a $20.4 million provision for loan and lease losses offset by net loan charge-offs of $30.1 million.

Reducing our non-performing assets is a major focus and the results of the second quarter are encouraging. Our continued success in this effort is greatly influenced by the prevailing market conditions which are presently favorable to our efforts. The economy seems to have stabilized at present and we are seeing signs of improving credit quality. However, general economic conditions remain weak and we are rigorously reviewing our loan portfolio for early warning signs. That completes our credit quality review. I would now like to turn the call back to John.

Thanks, Bill. Since joining Central Pacific Bank in March, I'm encouraged by the progress the Company has made in improving both its financial performance and its financial condition. Our credit risk exposure has been reduced over the last few quarters and with the recapitalization of Central Pacific, we should be in a strong position to return the Company again to an active and strong participant within the Hawaii market and community. At this time, we're happy to answer any questions you may have.

We will now begin the question-and-answer session. (Operator Instructions) Your first question is from Joe Morford of RBC Capital Markets. Please go ahead.

Actually, this is Dave King for Joe. Good morning, guys. I guess first off, I thought the reduction in non-performers in the quarter was encouraging. Bill, it looked like you had a fair amount of new in-flows. It seems like a lot of that came from the Hawaii portfolio, meanwhile loans outstanding in Hawaii shrunk a fair amount, at least more in the mainland. Look can you talk about what kind of broader trends you're seeing in the local market and what's driving some of this?

I think what we're seeing in general is a-- the lag effect when the economic conditions shift from the mainland to Hawaii, our trends would seem to support that, that the curves in the charge-offs and the migration are trailing the mainland.

And then any specific kind of-- it sounded like some of that might have been just residential mortgages was where the new in-flow kind of stuff was coming from and then maybe construction was getting better, or did I mishear that?

Well, I think that the increase in the residential mortgages is a trend that we're watching closely. The modifications are starting to flow through, although the reports from the line are that they think that we're past the large part of the wave I guess is the way it was described to me. It's an area that we're continuing to look closely at.

Okay, that's helpful. And then just one follow up. There's a bank here in California announced this week that it can move forward with the capital plan without getting tenders from some of the trust preferred holders. I guess does this give you any additional encouragement? And then maybe along those lines more generally, what details can you share about the-- about your capital plan at this point and what sort of timeline you're targeting?

John Dean here. And so-- and I think in my comments, top priority for us is to raise additional capital and we're looking at all sources in the marketplace today and to include private placements. I think at this time it's a little early to share details of that other than we're committed to raising capital. We're actively engaged in the market and we're looking forward to continue to improve the bank that we've seen over the past two quarters. And we're looking forward, or at least we're cautiously optimistic, in terms of raising capital in the marketplace either by the end of this year or early next year would be our focus.

Okay, fair enough. That's helpful, thanks.

The next question is from Joe Gladue of B. Riley. Please go ahead.

Good morning.

Good morning.

Let me just ask a question about the mainland loan portfolio. It seems that real estate values may have leveled off and just wondering what your view if you think I guess most of the valuation down grades we've seen in the past, do you think we're pretty much through those and that the values can stay pretty stable?

This is Bill, Joe. I would think I would agree. What we're seeing in the market is leveling off is probably a good description of the values. We're obviously-- over the last six quarters the bank has been very aggressive in bringing the asset values on the books down to the market. And we're seeing some early signs of NPA disposal that supports that, so we're very encouraged by the results.

Okay, and I was just going to follow that up with what level of interest you're seeing. Are you seeing interest from sort of I don't know, strategic buyers where they probably can get the value it's marked down to in terms of disposing of those?

We're seeing interest ranging from institutional to all the way down to individual buyers for different packages and of course they all have different interests and different levels, but I think the key thing we're seeing is there's interest.

Okay. Wanted to ask about I guess the liquidity on the balance sheet. Obviously that's going to have some impact on the net interest margin and just curious how-- do you think you need to build that up more or how long you'll need that on the balance sheet?

Hi, Joe, it's David. Yes, obviously we have built up a lot of liquidity on the balance sheet, I think it's approaching 30% of total assets. At this point, we think it's more than sufficient to deal with any potential liquidity situations. We are actually looking at ways to begin redeploying some of that excess liquidity back into higher yielding assets. As we move through the year and as we make progress on the capital front, we need to start redeploying some of that into higher yielding assets.

Okay and I guess just one related question. Net interest income a little over $29 million this quarter but I guess operating expenses of over $37 million, so I guess the net interest income is not even covering operating expenses. Is there much opportunity for reducing expenses even before you can start to increase the net interest margin?

Yes, Joe. Again, I think it's more a problem, well not a problem but an opportunity, with net interest income and other operating income more than the expense side of the equation as a result of us maintaining the excess liquidity on the balance sheet, we obviously have been diminishing net interest income. So again as we redeploy the excess liquidity into higher yielding assets, we'll be able to get the net interest income back to more normalized levels and it will be more than sufficient to take care of the expenses.

Okay, all right, thank you.

And, gentlemen, I'm showing no other questions in the queue. I would like to turn the conference back over to John Dean for any closing remarks.

Just to thank everyone for participating in our second quarter financial call. We do look forward to future opportunities to update you on our progress here at Central Pacific. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.