Central Pacific Financial Corp (CPF) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. And welcome to the Central Pacific Financial Corp. , third quarter 2010 conference call.

(Operator Instructions)

This call is being recorded and will be available for replay shortly after it's completion on the Company's website at www.centralpacificbank.com.

I would now like to turn the call over to Mr. David Morimoto, Senior Vice President of 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 third quarter of 2010.

With us today are John Dean, Executive Chairman of the Board, Larry Rodriguez, Executive Vice President and Chief Financial Officer, and Bill Wilson, Executive Vice President, Special Credit.

Today's call may include forward-looking statements. These statements are subject to risks and uncertainties that may cause result actual results and events to differ materially from those expressed in the forward-looking statements. These risks and uncertainties are detailed in Central Pacific Financial Corp's filings with the Securities and Exchange Commission. Forward-looking statements made during today's call are made only as of this date 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 Larry Rodriguez, Executive Vice President and Chief Financial Officer, who has been engaged by our Company as a consultant since January of this year, and appointed CFO on August 26. Larry has over 40 years of experience in the financial services industry. Most recently, as managing partner of Ernst and Young's Hawaii office. We are fortunate to have someone of his caliber on our team. He will be providing a overview of our Company's financial results for the quarter, followed by Bill Wilson, Executive Vice President Special Credits, who will provide more details on the Company's credit situation.

Turning to my remarks, I'm pleased to announce that we have reached an agreement with the private equity investor on the material terms for an investment of $98 million of a contemplated $325 million capital raise. And are in the process of finalizing the definitive agreement by the end of the week. We are also in negotiations with another private equity investor for a similar amount. While there are no assurances that definitive agreements will be executed, we are encouraged by the progress made to date. The investments are subject to the remaining balance of the capital being raised, regulatory approvals and other conditions.

Regarding the financial highlights of the third quarter -- Our Company has made significant progress in reducing both our credit risk exposure and our non-performing assets while increasing loss reserves and maintaining liquidity. While we know it will take time to work through our credit issues, we have been heading in the right direction since the start of this year. We are also making progress on our recovery plan and exceeding some of the targets established earlier in the year.

Net losses over the past two quarters narrowed considerably compared to the same six-month period a year ago. The third quarter net loss of $72.5 million is due to a provision for loan and lease losses of $79.9 million. The loss provision reflects an incremental increase to our allowance for loan and lease losses related to our commercial and residential mortgage loan portfolios, and was made after considering various factors. Allowance for loan and lease losses increased to 9.2% of total loans and leases, and to 58.4% of non-performing assets.

We are confident that we have our arms around our credit risk exposure and continue to make significant progress in selectively reducing our construction and commercial real estate loan portfolios. This includes a bulk loan sale comprised of construction and commercial real estate loans on the Mainland, with an aggregate book value of $124.1 million, and net proceeds of $110.8 million.

Non-performing assets decreased for the past three consecutive quarters, including a significant drop of $94.5 million in the third quarter.

The Company's liquidity position remains strong and improved in the quarter as a result of reductions to our loan portfolio and maintaining our deposit base. Compared to the previous quarter, total deposits decreased slightly, core deposits increased, cash and cash equivalents increased and the loan-to-deposit ratio declined to 74.2%.

We would like to thank our employees who have done a stelar job, staying close to our customers while furthering our marketing efforts, which have been successful in acquiring new core deposit relationships.

Management's top priority has been exploring all avenues to meet our regulatory capital requirements, in addition to preserving our existing capital resources. We have made significant progress in our capital raising plan as earlier mentioned.

Overall, we continue to make progress on our recovery plan and remain focused on our core business here in Hawaii. We lead the Hawaii market in residential mortgage originations, with $333.5 million in the third quarter and $752.3 million year-to-date.

In addition, over the past five years, we have cumulatively made more small business administration loans than any other bank in Hawaii across all categories. We are proud to have been awarded the SBA's Lender Of The Year award for 2010 in category two.

Turning to our economy -- Key lending indicators for our state reflect a stabilization of economic conditions, and we remain cautiously optimistic for a continued slow recovery with modest growth well into 2011. In August visitor arrivals increased by 11.8% over the same month last year. And visitor expenditures increased by 30%. For the first eight months of this year, visitor arrivals were up by 7% and visitor expenditures were up by 12.7%, or by $7.5 billion.

Rural gross domestic product in Hawaii is forecasted to increase by 1.2% in 2010, compared to increases in the Mainland by 2.9% and in Japan by 3.1%. Hawaii's unemployment rate in September was 6.3%. Slightly down from the previous month, and well below the national unemployment rate of 9.6%. Inflation adjusted personal income is projected to remain stable in 2010. Compared to decreases in 2009 and 2008 of . 3% and . 6% respectively.

As we look forward, we remain focused on executing our recovery plan, completing our capital raise, further reducing our credit risk and exposure, regaining loan and deposit market share in Hawaii and re-establishing our bank's profitable business model with a focus on core lines of business in Hawaii.

At this time I would like to ask Larry to provide the highlights of our Company's third quarter financial results. Larry.

Thank you, John. For the third quarter of 2010, we reported a net loss of $72.5 million, or $2.46 per diluted share, compared with the net loss of $16.1 million, or $0.60 per diluted share, reported in the second quarter of 2010.

As John previously mentioned, included in the third quarter net loss was a provision for loan and lease losses of $79.9 million which primarily reflects increases to our allowance of our loan and lease losses related to our commercial and residential mortgage loan portfolios as of September 30, 2010.

During the third quarter we reduced total loans and leases and non-performing assets by $258.1 million, and $94.5 million, respectively, in June 30, 2010. Contributing to these reductions was the completion of the sale of Mainland commercial and real estate construction loans with an aggregate book value of $124.1 million, of which $42 million -- $41.2 million were non-performing at the time of the sale. Our allowance as a percentage of total loans increased significantly from 7.7% at June 30, 2010, to 9.2% as of September 30, 2010. Our allowance as a percentage of non-performing assets also increased significantly from 43% at June 30, 2010, to 58% at September 30, 2010.

Bill Wilson will provide more details about our credit risk position later in this call.

Net interest income for the quarter was $27.4 million, compared to $29.2 million in the previous quarter, and our net interest margin was 22.74% compared to 2.90% in the previous quarter. Our net interest margin continues to be negatively impacted by our on going efforts to maximize balance sheet liquidity by maintaining elevated levels of cash and cash equivalents, and further reductions in our commercial real estate loan portfolio.

Non-interest income for the quarter totaled $11.7 million, down from $12.7 million in the previous quarter. The sequential quarter decrease was primarily due to recognition of reduced unrealized gains on our outstanding interest rate locks of $1 million, and reduced income from our bank owned life insurance of $800,000. These reductions were partially offset by higher gains on sales of residential mortgage loans of $700,000.

Non-interest expense for the quarter totaled $31.7 million, down from $37.6 million at June 30, 2010. The sequential quarter decrease was attributed to lower credit related charges totaling $4.9 million and lower legal and professional services of $2.1 million.

Our adjusted efficient ratio for the quarter which, excludes writedowns of loans for sale and foreclosed asset expense was 81.7% compared to 86.5% in the previous quarter.

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. We continue to improve our liquidity position with cash and cash equivalents totaling $924.4 million at September 30, 2010, and to lower our loans-to-deposit ratio from 81.8% at June 30, to 74.3% at September 30, 2010.

At September 30, 2010, our tier one risk-based capital, total risk-based capital and leverage capital ratios were 7.23%, 8.57%, and 4.39%, respectively, compared to 9.08%, 10.41% and 6.07%, respectively, at June 30, 2010.

This completes the financial summary, and I'd now like to turn the call over to Bill Wilson to provide additional background related to credit.

Thank you, Larry. Net charge-offs totaled $64.3 million for the third quarter. As compared to $30.1 million in the second quarter of 2010. And $103.7 million in the third quarter of 2009. The increased levels of charge-offs in the third quarter were primarily attributable to a $37.7 million related to Mainland commercial mortgage and construction loans and $24.3 million in Hawaii construction loans.

Non-performing assets totaled $372.7 million at the end of the third quarter, compared to $467.2 million in the second quarter of 2010, and $418.5 million in the third quarter of 2009. The decrease was primarily attributable to $106.5 million in repayments and loan sales.

Non-performing construction and development loans totaled $201.2 million at the end of the third quarter, which comprised 54% of the total non-performing assets and declined from $254.5 million for the second quarter of 2010.

Total construction and development loans were $454.5 million at the end of the third quarter, or 19.2% of the total loan portfolio. This represented a decrease of $135.4 million from the second quarter of 2010, and a decrease of $523.6 million from the third quarter of 2009. An $87.5 million allowance for loan and lease losses was held at the end of the third quarter, representing 19.3% of the total construction and development loan balance.

Trouble debt restructuring totaled $83.7 million for the third quarter, as compared to $128.3 million for the second quarter of 2010. Of this decrease, $31.6 million was attributable to loan sales.

Classified assets totaled $533.3 million in the third quarter, as compared to $688.8 million in the second quarter of 2010, and $902.6 million in the third quarter of 2009. The third quarter of 2010 decreased in classified assets is primarily attributable to $61.5 million decrease in the Hawaii construction and development loans, and the $69.8 million decrease in Mainland commercial mortgages.

Loans delinquent for 90 days or more still accruing interest decreased to $1.1 million in the third quarter, from $1.9 million in the second quarter of 2010. Loans delinquent for 30 days or more still accruing interest increased to $22.2 million in the third quarter, from $11 million in the second quarter of 2010.

The allowance for loan and lease losses as a percentage of total loans and leases increased to 9.19% at the end of the third quarter, from 7.69% in the second quarter of 2010. The increase was primarily attributable to a $37.8 million additional provision related to commercial and residential mortgages.

Reducing our non-performing asset remains a major focus and the results of the third quarter are encouraging. Our continued success in this effort is greatly influenced by the prevailing market conditions which are presently favorable to our efforts. As noted in earlier comments this morning, the economy seems to have stabilized at present, however general economic conditions remain weak and we continue to rigorously review our loan portfolio for early warning signs.

That completes our credit quality review, and I would now like to turn the call back to John.

Thank you, Bill. In summary, while we're pleased with the progress that's been made at Central Pacific, we know that additional work remains in order to successfully complete our recovery plan. The improvements in our asset quality and operational efficiencies, together with the strong management team that we have brought together, have better positioned our Company to raise capital and move the bank forward.

At this time, we'd be happy to answer any questions you may have.

(Operator Instructions)

Our first question comes from Joe Gladue at B. Reilly.

Good morning.

Good morning, Joe.

Let me start with the liquidity. Obviously you've been building up a lot of liquidity and as you complete the capital ratio you'll have even more funds coming in. Just wondering, given the current interest rate environment, when and how do you think you'll be able to deploy all of those funds and sort of reduce the drag on the net interest margin?

John, here, I'll start. Larry might want to join in. I think there is a lot of opportunities and we're not in a rush to deploy. So if you want to look at the overall institution it's not just quickly deploying liquid assets. I think there is significant operational efficiencies that we'll be able to garner in our organization over the next several months, well into 2011. I think there is opportunities to grow, to bring clients back and to grow existing relationships that have been diminished over the past 12 to 18 months.

So there is no plan here that we need to quickly deploy that liquidity, and I think that just by some basic -- what I call blocking and tackling -- we'll be able to show significant progress in the coming quarters.

I think you've described what our plan is -- we're not in a rush to deploy the liquidity, we're looking for the appropriate (inaudible) term investments, but we'll continue to stick to our business plan with the deployment of our liquidity.

And just along those lines, is there any higher cost debt that you plan on reducing that could help at least on the funding side?

Not at this time. As our debt matures, we'll be liquidating it accordingly. But that's the only plan we have now for repayment of our debt.

Okay. Let me ask a little bit about the loan sales in the third quarter. It looks like, if I understood correctly, that you took about a roughly 10% or 11% discount to the carrying values on those sales. Is that -- should we expect similar discounts going forward? Or, have the rest of the loans from the Mainland pretty much been marked down further now to sort of reflect those type of discounts?

Joe, this is Bill, I'll see if I can respond to that. The 10% is probably applicable to the Mainland portfolio sale. And included in that were a couple of larger credits that strategically we had targeted to try and dispose of sooner rather than later. In general, as the balance of our asset sales we're dealing with individual assets, we are achieving disposals very close to, sometimes in excess, of our carrying values. So I wouldn't read that 10% into a total measure as we go forward.

Okay. Thanks, that's helpful. And you also, in the prepared remarks, mentioned, and in the press release, that there was some increase in the reserve for residential mortgages. And just wondering if you could expand on what the dynamics are going on in that segment of the portfolio.

Sure. Let me see if I can address that. During the quarter we adjusted certain factors that we used to calculate the general reserves for the commercial mortgage portfolios, both in Hawaii and the Mainland, as well as our residential loan mortgage portfolio, which includes the owner-occupied investor in the home equity segment. Our decision to increase the general reserves established for these loan categories remain after considering various quantitative and qualitative factors. These considerations included recent loss history, current economic trends, and input from our regulators, based on a more conservative deal of existing market conditions and the potential negative impact that a weak commercial and residential real estate market might or could have on the loan portfolios. So that was the thinking behind that decision.

Okay, And I guess I'll ask one more before I step back. The increase in early stage delinquencies, 30-89 days, what segment of the portfolio was that in? Just spread around or was that more in one segment or another?

Some of that is what we call administrative delinquencies, where we have loans that are up for renewal and for varying reasons. We didn't get the documentation completed, and therefore we weren't able to book the renewal. And I would say two-thirds of the that $22 million would come under the heading of administrative delinquencies.

All right. Thank you.

Thank you.

Thank you, Joe.

The next question comes from David King at RBC Capital Markets.

Hi. Thanks, and good morning, everyone.

Good morning, David.

First up, following up on Joe's question -- What specifically drove that 11% discount? And, how should we think about that between the break out between the discount on MPA's maybe versus the discount on performing loans?

This is Bill. The 10% was applicable to the portfolio sale on the Mainland. And included in that portfolio sale were a couple of larger asset that the bank had. They were exposures that were well in excess of where we want to be in terms of individual exposure to any one borrower. So from a strategic standpoint we packaged those with some other assets in order to facilitate that sale. And that's where the 10% number comes from. But, again, to reiterate what I was mentioning to Joe, our experience on the individual sales tend to be much closer to carrying values. In some cases we're exceeding carrying values.

Okay. So I just want to make sure I understand this correctly. So it sounds like the bulk of that is coming on the -- the discount is coming on the NPA's versus on the performing stuff, or was it on the performing stuff?

No. The discounts for the most part are coming on the NPA's

Okay. And, second, I thought it was encouraging that you're in the process of filing some terms on the capital raise. I guess, Just to understand -- once it goes through, does that trigger a change in control? Will that impact the DTA at all?

It should not impact the DTA, should not trigger a change in control. John here.

Thanks John, And, along those lines on the capital plan, where are you in terms of negotiating with the Treasury on the exchange of preferred?

I think at this point what we've shared in the press release, we'll have to leave you with, Dave. I think we're going to be precluded from going beyond there. And just ask for your patience. We should be able to provide additional information in the coming days.

That's fair enough. Understandable. And then the REIT's offering that is in there, that $20 million or so, that's not included in the $325 million? Correct?

That's correct. In addition to the $325 million, there will be, or there plans to be a REIT's offering up to $20 million.

Okay, And then , finally I guess , more generally, can you talk, John, maybe a bit about the Hawaii economy? It sounds like it's showing more signs of improvement, but how should we think about that in terms of property evaluations going forward? And then maybe, if you have an appetite to do it, loan demand and all of those kinds of things?

Let me start, and then let Larry and Bill join in after I start. I shared some statistics with you. I think it's important -- if you look at Hawaii, you have to separate it from the Mainland in the sense of, obviously if you look at the unemployment rate, on the Mainland , as I mentioned upwards of around 8% to 9% versus where we are at 6% plus, so we are better off if you look at us vis-a-vis overall over all the Mainland. And more importantly, and a bit of a surprise even for the economists here, is we've had a significant increase in tourism visitors in the last several months. And that continues forward.

Part of that is related to discounts on hotel rooms. So, in part driven by some discounting that's been going on. Despite that, if you look at spending in the state through tourism, it's up significantly. So from a tourist economy, I think there is good improvement. I think what I mentioned was, though, that we're still expecting a continued but modest recovery through 2011.

A driver of tourism will obviously impact the real estate market here. So I think that will be more of a lag in terms of, as you look at the Mainland, primarily west coast, California, it will have an impact on the residential condo side. Separate from that, and sometimes not taken into consideration, is the impact of Asia. More recently, you may be aware in terms of Korea, the loss for tourist Visas have changed, similar to what is now in Japan. It's much easier. We are projecting good growth from that market, not just in the coming months but in the coming years. So an element that could be positive, more to be determined in the coming months, would be Asia and a focus on Korea. Because of a change -- not just a change in the tourism Visa, which is much easier to obtain in that country today, in terms of visiting the US, but there's also a direct flight now from Korea to Honolulu.

So, overall, for me, what is it, it's cautiously optimistic on the economy going forward. But it's not going to be rapid. It's going to be modest but continued improving growth within the state. Does Bill want to talk about the real estate at all?

I think you probably covered everything. As usual you did an excellent job.

Well thanks so much, guys for the help.

Thank you, Dave.

This concludes our question-and-answer session. I would like to turn the conference back over to John Dean for any closing remarks.

Thank you very much for participating in our third quarter earnings call. We look forward to future opportunities to update you on our progress. Good day.

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