Central Pacific Financial Corp (CPF) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp fourth-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.CentralPacificBank.com.I would like to turn the call over to Mr. David Morimoto, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Sue, and thank you all for joining us today to review the financial results of Central Pacific Financial Corp for the fourth quarter of 2010. With us today are John Dean, Executive Chairman of the Board, Larry Rodriguez, Executive Vice President and CFO, 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 and events to differ materially from those expressed in the forward-looking statements. These risks and uncertainties are detailed in CPF's filings with the Securities and Exchange Commission. 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'll turn the call over to John.

Thanks, David. Good morning, everyone.

Let me begin with an update on the progress of our recapitalization plan. As we previously disclosed, our $325 million private placement is fully subscribed, and the US Treasury has agreed to exchange its TARP-preferred stock in accrued and unpaid dividends to common stock, subject to the closing of the private placement transaction. I'm pleased to report that we continue to move forward and expect the transactions to close sometime next month, subject to the requisite regulatory approvals, completion of our planned 1-for-20 reverse stock split, and other customary closing conditions. More details of the proposed recapitalization can be found on the Company's Form 8-K filings with the Securities and Exchange Commission.

The reverse stock split was approved by our shareholders in May of 2010, and we plan to effectuate the reverse stock split this coming week, subject to acceptance of our Charter amendment filing by the Hawaii Department of Commerce and Consumer Affairs. The reverse stock split will provide us with sufficient authorized and unissued common shares to complete our recapitalization. Following the private placement and exchange, and as part of our recapitalization, we will conduct the rights offering of up to $20 million to shareholders of record on the business day immediately preceding the closing date of the private placement and exchange. Eligible shareholders will receive transferable rights to purchase common stock at the same $0.50 per share price offered in the private placement, or $10.00 per share after the reverse stock split.

More information on the rights offering will be included in the Company's Form S-1 to be filed following the close of the private placement and exchange. Assuming the successful completion of our recapitalization plan, the Company's capital ratios are expected to exceed the minimum requirements of our regulatory consent order, and be at well-capitalized levels. The new capital will establish a solid foundation for our near-term credit challenges and better position our Company to execute on its recovery plan.

Turning to the highlights of our fourth quarter financial performance, we recorded a net loss of $2.1 million. This represented a significant reduction in net losses compared to the previous quarter, as well as the fourth quarter of a year ago, primarily due to reduction in total credit costs to $4.6 million. We also recognized several large nonrecurring items and adjustments during the quarter, which largely offset each other. This included a gain on the sale of our Kaimuki Business Plaza Building, a one-time loss incurred with the prepayment of long-term borrowings at the Federal Home Loan Bank of Seattle, and an increase in our reserve for repurchased residential mortgage loans. Larry will provide more details in his financial report to follow.

Asset quality continues to improve. As of December 31, 2010 compared to the prior quarter, non performing assets decreased by $70 million, or 19%. And net charge-offs decreased by $39 million or 60%. Our construction and development loan portfolio declined by $155 million from the previous quarter and by $501 million from the same period a year ago, or by 34% and 63%, respectfully. As of the end of the fourth quarter, allowance for loan and lease losses was 8.9% of total loans and leases and 63.7% of non performing assets. Bill will be providing more details of our asset quality and credit risk profile later on this call.

The Company's liquidity remains strong, with $791million in cash and cash equivalents at the end of the fourth quarter. While total deposits declined, our checking and saving deposits increased as we focused our efforts on expanding core deposit relationships. Our loan to deposit ratio also declined 270% as of December 31, 2010.

Overall, we continue to make significant progress in reducing our credit risk exposure, maintaining customer relationships, and moving forward in our recapitalization plan. While 2010 was a challenging year, we are encouraged by the positive trends as we enter 2011. I would like to recognize the tremendous efforts of our employees who collectively worked to preserve and build upon our core franchise throughout the year. As a result, our demand deposit customer base has expanded, particularly in the retail segment. Our leadership position in residential forced mortgage lending was maintained in 2010 with $1.2 billion in loan originations, more than any other Hawaii institution. We're proud to have been named the US Small Business Administration's Lender of the Year for our size category in 2010. We've worked hard to support small businesses in Hawaii, and cumulatively over the past five years, our bank has made more SBA loans than any other institution in Hawaii.

Turning to our local economy, we continue to expect a slow recovery throughout 2011. Our visitor industry has fared well in 2010, with an increase of 8.7% in visitor arrivals, compared to a decrease of 4.4% in 2009. Visitors spending increased by 16.2% to $11.4 billion in 2010 compared to $9.8 billion in 2009. While the primary engine for Hawaii's economy improved dramatically in the last year, job creation has lagged and remained relatively flat over the past 14 months. Hawaii's unemployment rate has remained stable since July of 2010 at 6.4%, considerably lower than the national average of 9.4%. For 2011, the economic research organization of the University of Hawaii forecasted modest growth, with increases of 6.1% in visitor arrivals, 1.3% in payroll jobs, 2.3% in real personal income, and 2.7% in real GDP.

Our priority in 2011 is to execute on our recovery plan, including the successful completion of our recapitalization plan, further improvement in asset quality, growth in our core customer base, deployment of excess liquidity, and a return to profitability. At this time, I would like to ask Larry Rodriguez, our Chief Financial Officer, to review the highlights of our fourth-quarter financial performance. Larry?

Thank you, John.

For the fourth quarter of 2010, we reported a net loss of $2.1 million, or $0.14 per diluted share compared to a net loss of $72.5 million or $2.46 per diluted share recorded in the third quarter of 2010. As John previously mentioned, included in the fourth-quarter net loss was a provision for loan and lease losses of $400,000 compared to a $79.9 million provision in the third quarter. The significant decrease was due to an overall improvement in our credit risk profile, as evidenced by declines in non performing assets and net charge-offs during the quarter, and reduced exposure to certain troubled real estate markets in both Hawaii and on the mainland. During the fourth quarter, we reduced total loans and leases and non performing assets by $197.9 million, and $69.9 million respectively from September 30, 2010.

Our allowance as a percentage of total loans decreased slightly from 9.2% at September 30, 2010 to 8.9% at December 31, 2010; however, our allowance as a percentage of non performing assets increased from 58% at September 30, to 64% at December 31, 2010. Bill Wilson is going to provide more details about our credit risk position later in this call. Net interest income for the quarter was $27 million compared to $27.4 million in the previous quarter, and our net interest margin was 2.76% compared to 2.74% in the previous quarter.

Although our net interest margin increased slightly from the previous quarter, it continues to be negatively impacted by our ongoing 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. In December 2010, we prepaid $106 million worth of long-term borrowings at the Federal Home Loan Bank of Seattle, with a weighted average interest rate of 4.78%. The prepayment of these borrowings resulted in the recognition of a one-time charge on the early extinguishment of debt of $5.7 million. Non-interest income for the quarter totaled $19.9 million, up from $11.7 million in the previous quarter. The sequential quarter increase was primarily due to the recognition of a $7.7 million gain on the sale of the Kaimuki Plaza Building, and higher gains on the sale of residential mortgage loans of approximately $1.1 million.

Non-interest expense for the quarter totaled $48.6 million, up from $31.7 million in the previous quarter. The sequential quarter increase was attributed to higher credit-related charges totalling $7.9 million, and the $5.7 million charge for the early extinguishment of debt that I referred to earlier, plus an increase in our reserve for repurchase residential mortgage loans totalling $4.6 million. The increase to our reserve for repurchased residential mortgage loans was necessary in light of the increased focus associated with higher loan repurchase activity that we, along with many other banks across the country, have been experiencing over the past few quarters.

Our adjusted efficiency ratio for the quarter, which excludes the loss on the early extinguishment of debt right down to the loan sales for sale and foreclosed asset expense, was 79.8% compared to 81.7% in the previous quarter. Because we continue to have a full valuation allowance established against our net deferred tax asset, we did not recognize any income tax benefit during the quarter. During the quarter, we maintained a strong liquidity position with cash and cash equivalents of $790.7 million. We lowered our loan to deposit ratio from 74.3% at September 30, to 69.2% at December 31. At December 31, 2010, our Tier 1 risk-based capital, total risk-base capital, and leverage capital ratios improved from, or improved to 7.64%, 8.98%, and 4.24%, respectively, compared to 7.23%, 8.57%, and 4.39%, respectively, at September 30, 2010.

This completes the financial summary. Now, I would like to turn over the call to Bill Wilson, who will provide additional background related to our credit risk proposition.

Thank you, Larry.

We realized significant improvements to our credit risk profile in the fourth quarter of 2010. Net charge-offs totaled $25.2 million in the fourth quarter as compared to $64.3 million in the third quarter of 2010, and $104.9 million in the fourth quarter of 2009. Non performing assets totaled $302.8 million at the end of the fourth quarter compared to $372.7 million in the third quarter of 2010, and $499.8 million in the fourth quarter of 2009, a year-over-year decrease of 39.4%. The fourth quarter decrease was attributable to $48.8 million in repayments and loan sales, $26.8 million in charge-offs, $14.6 million of loans restored to accrual status, and partially offset by $25.2 million of additions to non performing assets.

Non performing construction and development loans totaled $236.9 million at the end of the fourth quarter, which comprised 77% of the total non performing assets of the bank, and increased from $201.2 million in the third quarter of 2010. Total construction and development loans were $299.9 million at the end of the fourth quarter, or 13.8% of the total loan portfolio. This represented a decrease of $154.6 million from the third quarter of 2010 and a decrease of $500.1 million (sic - see press release) from the fourth quarter of 2009. A $73.1 million allowance for loan and lease losses in this portfolio segment was held at the end of the fourth quarter, representing 24.4% of the total construction and development loan balance.

Troubled debt restructurings totaled $85 million for the fourth quarter as compared to $83.9 million in the third quarter of 2010. Our TDRs are comprised of $40.3 million in Hawaii residential mortgages, $40.3 million in Hawaii commercial real estate, and $1.5 million in mainland commercial real estate. Classified assets totaled $502.8 million in the fourth quarter as compared to $533.3 million in the third quarter of 2010, and $901.4 million in the fourth quarter of 2009, a year-over-year decrease of 44.2%.

Loans delinquent for 90 days or more still accruing interest increased to $8.5 million in the fourth quarter from $1.1 million in the third quarter of 2010. Loans delinquent for 30 days or more still accruing interest increased to $32.7 million (sic - see press release) in the fourth quarter from $23.3 million in the third quarter of 2010. The allowance for loan and lease losses as a percentage of total loans and leases decreased to 8.9% at the end of the fourth quarter from 9.2% in the third quarter of 2010. The allowance for loan and lease losses as a percentage of non performing assets increased to 64% at the end of the fourth quarter from 58% in the third quarter of 2010, and up from 41% at the fourth quarter 2009.

We're encouraged by the results of our program to reduce our non performing assets, and it will continue to be a major focus in the current year. The significant progress made is largely due to the outstanding performance of our team members, as well as market conditions, which have remained favorable to our efforts. While we're seeing general stability in the Hawaii economy, there remains some segments of weakness to which the bank is exposed, notably construction and development and land. We continue to proactively reveal 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, we're pleased with the progress we've made and the critical milestones we've attained in our recovery plan. While there's more work to be done, we believe we are moving in the right direction. Our core franchise remains strong; namely, our employees, our customers, and most importantly, the strong relationships that have been built between the two. We look forward to the remainder of 2011.

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

We'll now begin the question-and-answer session. (Operator instructions) Our first question comes from Joe Morford of RBC Capital Markets. Please go ahead.

Thank you. I just had a general question. Once you get the capital in the door, are we more likely to see you all pursue accelerated disposition strategies to either drop the overall level of MPAs faster, or downsize your mainland exposure faster, or just try to accelerate the workthrough?

Joe, it's John. I'm going to pass that over to Bill, but I would just say quickly on the mainland, I think we've been very successful to date. I don't know how much more there is to accelerate there. Let me pass it to Bill.

I think we'll probably -- I don't know, I don't see us necessarily accelerating, but I don't see us decreasing the pace either. I think we'll continue on the program we've had for the last couple of quarters, which has been successful for us thus far.

So, it's not that you would be more open to considering bulk sales or something, being in a better position to absorb a bigger discount to the trade-off of getting the assets off the books faster?

Yes, as you know, the third quarter of 2010, we were successful in a bulk sale. And for strategic reasons for some of the assets that were included there, what we're finding in the current market is the bulk sales are requiring a discount that is far more significant than we are realizing on the individual sales. And as our team continues to be successful in the individual sales, we'll continue that path until and if circumstances change.

And is that true kind of across different asset types, or just particular portfolios?

Well, most of our disposals have come in the construction and development side and land, and we'll continue in that effort.

Okay, and then I just had a question on the margin. It was encouraging to see that stable, excluding the interest reversals given the environment and still the high levels of liquidity that you're holding. How should we think about the margin going forward? I mean immediately, you've got the benefit of having prepaid the SHLB advances. Maybe talk about the impact of that. Otherwise, what would the biggest drivers, maybe once you get the capital in the door, you can start moving some of that excess liquidity into some higher yielding investments.

Hello, it's John again, but let me pass it to Larry in terms of the margins, and what we might expect going forward. I think you already know that we're not going to be aggressive going after loans, but we do have an opportunity to shift more and more into higher yielding investments. Larry?

Yes to both what you and Joe said. (Laughter)

Okay.

Anymore on that? (Laughter)

No, it's correct. We believe the net interest margin bottomed out at the end of the third quarter, and we would expect that to gradually rise from where it has been, but again, it's only going to gradually rise over the next couple of quarters. We see it moving into the 2.85% plus range to 3% over the next few quarters. But, as John also indicated, we're going to have substantially excess liquidity once we are recapitalized, and as he indicated, our intent will move that excess liquidity into high yielding investment securities.

Okay. Makes sense. Thanks for the help.

Thank you; Joe.

Thank you.

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

Well, let me follow up on that last comment a little bit. Just wondering what type of securities you have been putting on, where on the yield curve you are, and what type of rates you've been putting on? And if you intend to continue with that once you get the capital raise done?

Yes, it's pretty basic stuff in terms of the portfolio, in terms of vanilla low risk. But, let me turn to t to Larry again.

Again, I agree. The composition of our portfolio is really primarily agency diventures, and agencies mortgage-backed securities. They continue to have a relatively, in our mind, short-term duration in our portfolio. We're obviously subject to the current interest rates conditions. We believe that we're going to continue to experience that, and keep our duration to three years or less. And, again, we'll want to continue to replace or improve into our investment portfolio, the similar type securities.

Okay, and just the sort of overall balance sheet size, you expect to continue the pace of the shrinkage for a while, or when do you see that -- ?

We don't want to continue it in terms of as we've done over the last year or two years. I think we're starting to bottom out now. We're what, about $4 billion. We're down from a peak of almost, what, two or three years ago, $6 billion. $5.5 billion, David Morimoto just corrected me. So, with the recapitalization, we're going to have a lot of liquidity. We're going to move a lot of that into the investment portfolio, and we do see the economy starting to pick up here. So, we're hoping to have good quality loan growth this year, and as the economy picks up faster, hopefully that loan growth will increase with the growth in the economy.

Okay, and on the funding side, is there -- you prepaid the Home Loan Bank [advantas]. Is there much more opportunity to decrease funding costs?

Yes, over the course of this next year, we have approximately $320 million worth of FHLB advances that will come due. It will be our expectation -- I'll be working closely with our treasury department, and we'll probably pay those down as they come due rather than refinance them.

Okay, all right. Let's see. Do you know, offhand, how much the further exposure you do have on the mainland?

We'll go to Bill.

We currently have about $330 million on the mainland, and roughly $200 million of that is graded pass.

Okay, and lastly, I'll just ask on the reserve and provisioning level. I did see some release of reserve this quarter, and I still have pretty hefty reserve coverage. Of course, it's still pretty hefty nonperforming asset levels, but do you see continued release of reserves, or do you think you'll keep the reserve level flat as a percentage of loans for a couple more quarters?

Let me start and then I'll pass it to Bill. ALLL is very much driven by models and algorithms, and while there's some flexibility in that in terms of qualitative, it's going to drive a lot of what we're doing going forward and obviously, impacted us in the fourth quarter. We just don't want you to think we're making choices on a quarterly basis. Bill, do you want to --

I think I would just echo what John said, that the model and the methodology is what is what drives it. So, I think as long as we see continued stability in the economy and continued improvement in the credit quality, you would expect that over time there would be a corresponding decline in the reserve balances. But all those factors have to be in play.

Okay. I think that's it for now.

Thank you.

Thank you.

The next question comes from Yoo Chin of Capital IQ. Please go ahead.

I don't think we have her here Sue, so unless there's other questions, I think we'll, we'll wrap up. Anyone else there, Sue?

There's no more questions.

Okay. So, just let me thank everyone for participating in our fourth-quarter earnings call. We look forward to future opportunities to update you on our progress. Have a good day.

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