Central Pacific Financial Corp (CPF) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corporation first quarter 2011 conference call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. (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'd now like to turn the call over Mr. David Morimoto, Senior Vice President, Investor Relations. Please go ahead sir.

Thank you, Edna, and thank you all for joining us today as we review the financial results of the Central Pacific Financial Corp. for the first quarter of 2011. With us today are John Dean, President and Chief Executive Officer; Larry Rodriguez, Executive Vice President and Chief Financial Officer; and Bill Wilson, Executive Vice President and Chief Credit Officer.

Today's 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 our filings with the Securities and Exchange Commission. Forward-looking statements made during today's call are made only as of the date of this call, and the Company does not update any forward-looking statements. At this time, I'd like to turn the call over to John.

Thank you, David, and good morning, everyone. It's certainly nice to report on our first profitable quarter since the first quarter of 2009. More importantly, we are encouraged by the continued improvement in our Company's financial condition. The $4.6 million in net income in the first quarter was primarily due to the reduced credit cost, driven by an improvement in our asset quality. As our credit risk profile continued to improve, our provision for loan and lease losses for the quarter was a credit of $1.6 million, instead of a charge.

We remain appropriately reserved, with an A triple-L that's 8.6% of total loans and leases, and at 62.5% of non- performing assets. Our liquidity position continues to be strong, and we have started redeploying cash into higher yielding investments. Cash and cash equivalents were reduced. Outstanding borrowings with the Federal Home Loan Bank were reduced, and we increased our investment portfolio during the quarter.

Total deposits remain relatively stable, at $3.1 billion, and included a decrease in interest-bearing demand accounts and increases in non-interest-bearing demand, savings, and time accounts. Our loan-to-deposit ratio was lowered to 65.7%. Larry and Bill will provide more details of our financial highlights and asset-quality progress for the quarter later in our report.

Our recapitalization plan is near completion, and will conclude with the expiration of our rights offering on May 6 of this year. As you may know, the private placement transaction for $325 million of new capital and the exchange of the US Treasury's TARP preferred stock to common stock closed on February 18 of this year. As a result, we are now well-capitalized, and our capital ratios exceed the heightened levels required by our regulatory consent order.

As we move forward to build a stronger financial institution, we were pleased to announce last week that Crystal Rose was appointed Chair of the Boards of Directors, both for our bank and for our holding company. Crystal joined our Board in 2005 and has contributed to our Organization with her strong leadership and commitment, most recently as a Lead Director. We look forward to Crystal's continued guidance, as the Company moves ahead with a solid capital foundation.

Turning to our local economy, the projected modest recovery throughout 2011 is likely to be adversely impacted by the recent natural disasters in Sendai, Japan, as 17% of our visitor arrivals are from there. Our visitor industry fared well in 2010, with a year-over-year increase of 8.7% in visitor arrivals. And the positive trend continued for the first two months of 2011. While it's too early to forecast the economic impact of the Japan disaster to Hawaii, the state's Council on Revenues, at their March 29 special meeting, revised their projected general fund tax revenues to reflect a decrease of 1.6% for the year.

Hawaii's unemployment rate has remained stable for the past four months at 6.3%, while job creation has remained relatively flat over the past 18 months. The construction of the Oahu rail transit system is moving forward, with an agreement finalized by our governor and the Federal Transit Administration. Overall, the Company continues to make significant progress in reducing our credit risk exposure and maintaining customer relationships. We maintained a market leadership position among Hawaii banks in residential, first-mortgage originations, with $220 million in the first quarter of this year.

We have strengthened our consumer loan infrastructure to aggressively compete in the home equity loan market. Our committed employees continued to demonstrate our core values, in providing superior customer care. I believe that our Company is well-positioned to compete in our marketplace going forward. At this time, I would ask Larry Rodriguez, our Chief Financial Officer, to review the highlights of our first-quarter financial performance. Larry?

Thank you, John. For the first quarter of 2011, we reported net income of $4.6 million, compared to a net loss of $2.1 million reported in the fourth quarter of 2010. Our net income per diluted share for the first quarter of 2011 was $4.58, which included the impact of a one-time accounting adjustment totaling $85.1 million, resulting from the exchange of our preferred stock issued to the US Department of Treasury for common stock as part of our recapitalization. Excluding this one-time adjustment, which did not impact our reported net income of $4.6 million, our net income per diluted share was $0.18.

As John previously mentioned, included in the first-quarter net income was a credit provision for our loan and lease losses of $1.6 million, compared to a charge of $400,000 in the fourth quarter of 2010. The decrease was due to continued improvement in our credit risk profile, as evidenced by declines in nonperforming assets and net charge-offs during the quarter. During the first quarter, we reduced total loans and leases and nonperforming assets by $102.1 million and $18 million, respectively, from December 31, 2010.

Our allowance, as a percentage of total loans, decreased slightly from 8.9% at December 31, 2010, to 8.6% at March 31, 2011. Our allowance, as a percentage of nonperforming assets, also decreased slightly, from 64% at December 31, 2010, to 62% at March 31, 2011. Bill Wilson will provide more details about our credit risk position later in this call.

Net interest income for the quarter was $28.2 million, compared to $27 million in the previous quarter; and our net interest margin was 3.03%, compared to 2.76% in the previous quarter. The sequential quarter improvement in our net interest income and the net interest margin was largely due to reduced borrowing costs, resulting from prepayment of $107 million worth of long-term borrowings at the Federal Home Loan Bank of Seattle in December 2010, and maturities of an additional $250 million in outstanding borrowings with the FHLB during the current quarter.

Also contributing to the improvement was the redeployment of some of our excess liquidity into higher yielding investment securities. During the quarter, we increased our investment security portfolio from $705 million at December 31, 2010, to just under $1.1 billion. All the current quarter purchases were short-duration agency debentures or agency mortgage-backed securities. We continue to use an investment strategy which concentrates on the purchase of agency debentures and mortgage-backed securities. The reallocation of our excess liquidity into our investments in loan portfolios is expected to continue over the next several quarters.

Non-interest income for the quarter totaled $12.5 million, down from $19.9 million in the previous quarter. The sequential quarter decrease is primarily due to the recognition of a $7.7 million gain on the sale of our Kaimuki Plaza building in the previous quarter, and lower gains on the sales of residential mortgages of $1 million. These decreases were partially offset by higher income from our bank-owned life insurance of $500,000 and higher unrealized gains on outstanding interest rates locks of about $400,000.

Non-interest expense for the quarter totaled $37.6 million, down from $48.6 million in the previous quarter. The sequential quarter decrease was attributed to a $5.7 million charge on the early extinguishment of debt in the previous quarter, a lower provision for repurchases on residential mortgage loans totaling $4.6 million, and lower net credit-related charges of approximately $700,000. Our efficiency -- our adjusted efficiency ratio for the quarter, which excludes writedowns of loans held for sale and foreclosed asset expense, was 81.2%, compared to 79.8% in the previous quarter. Because we continued to have a full valuation allowance established against our net deferred tax assets, we did not recognize any income tax expense during the quarter.

During the quarter, we maintained a strong liquidity position, with cash and cash equivalents totaling $601.2 million at March 31, 2011. However, as previously mentioned, we have begun to redeploy our excess liquidity into higher yielding investment securities. We also lowered our loan-to-deposit ratio during the quarter, from 69.2% at December 31, 2010, to 65.7% at March 31, 2011. At March 31, 2011, our tier 1 risk-based capital, total risk-based capital, and a leveraged capital ratios significantly improved to 21.34%, 22.67% and 12.64%, respectively; compared to 7.64%, 8.98%, and 4.42%, respectively, at December 31, 2010.

Our capital ratios now exceed the minimum levels required by the consent order, and are also above the levels required for a well-capitalized regulatory designation. That completes our financial summary, and I will now like to turn over the call to Bill Wilson, who will provide us additional background related to our credit risk position.

Thank you, Larry. We realized significant improvements to our credit risk profile in the first quarter of 2011. Net charge-offs totaled $13.3 million for the first quarter, as compared to $25.2 million in the fourth quarter of 2010 and $52.5 million in the first quarter of 2000 -- first quarter of 2010. Nonperforming assets totaled $284.9 million at the end of the first quarter, compared to $302.8 million in the fourth quarter of 2010 and $493.8 million in the first quarter of 2010, for a year-over-year decrease of 42.3%. The first-quarter decrease was attributable to a $17.3 million repayments, $14.8 million in charge-offs, which were partially offset by $16.7 million of additions to nonperforming assets.

Nonperforming construction and development loans totaled $216.9 million at the end of the first quarter, which comprised 76% of our total nonperforming assets, and decreased from $231.4 million in the fourth quarter of 2010. Total construction and development loans were $258.2 million at the end of the first quarter, or 12.5% of the total loan portfolio. This represented a decrease of $41.7 million from the fourth quarter of 2010, and a decrease of $480.2 million from the first quarter of 2010, for a year-over-year decrease of 65%. A $53.9 million allowance for loan and lease losses in this portfolio segment was held at the end of the first quarter, representing 20.9% of the total construction and development loan balance.

Troubled debt restructurings totaled $85 million for the first quarter, unchanged from the fourth quarter of 2010. Our troubled debt restructurings are comprised of $42.5 million in residential mortgages, $40.3 million in Hawaii commercial real estate, $1.4 million in mainland commercial real estate, and $700,000 in private banking assets. Loans delinquent for 90 days or more still accruing interest decreased to $500,000 in the first quarter, from $8.5 million in the fourth quarter of 2010. Loan delinquent for 30 days or more still accruing interest decreased to $15.5 million in the first quarter, from $38.2 million in the fourth quarter of 2010.

The allowance for loan and lease losses as a percentage of total loans and leases decreased to 8.6% at the end of the first quarter, from 8.9% in the fourth quarter of 2010. The allowance for loan and lease losses as a percentage of non-accrual loans was 91.5% at the end of the first quarter, compared to 91.8% in the fourth quarter of 2010, and 42.9% at the first quarter of 2010. Our ongoing program to reduce nonperforming assets and reduce our construction and development credit risk exposure continued to show positive progress in the first quarter.

We anticipate that our team members will be able to maintain this progress over the balance of 2011, aided by expected favorable market conditions. We continue to proactively monitor all segments of our loan portfolio for early warning signs. We are concerned about the potential financial impact of reduced Japanese tourism on various segments of our loan portfolio. It is too early to accurately define what that impact might be, and we have adopted a cautious approach as we collect and analyze additional information. That concludes our credit quality review, and I would now like to turn the call back to John.

Thanks, Bill. In summary, while there is more work to be done, we are on the right track to recovery, and pleased with the progress we have made and the critical milestones we have attained. With the successful recapitalization of our Company, we look forward to moving ahead and leveraging our core franchise, which is comprised of our employees, our customers, and the strong relationships that have been built between the two. At this time, we are happy to answer any questions you may have.

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

Yes, good morning. It's actually Jeanette Daroosh, on behalf of Joe. I was wondering if you could speak a little bit more to the inflows to NPAs. What types of assets are you seeing, and is the first-quarter decline indicative of potential future flows into nonperforming assets?

Good morning, this is Bill Wilson speaking. Most of the continued inflow into NPAs come out of the construction and development side of our book. We see the downward trend in migration likely to continue, based on the way we see things today and looking forward.

Okay. And then, in terms of the reserve release in the quarter, is that also something that we should expect to see on a forward-looking basis, given the improvements that you are seeing in the inflows to nonperforming assets?

I think as -- as we see continued credit quality improvement, the impact of that through the methodologies at A triple-L will cause downward pressure on the reserve factors. And so, it's really a function of continuing credit quality.

Okay, thank you very much.

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

Congratulations on the profitable quarter.

Thank you.

Thank you.

I guess, a couple questions. Let me just start with the opportunities for loan growth and also how that relates to -- you decreased the loan-to-deposit ratio again. I'm wondering at what point loan paydowns and charge-offs are exceeded by loan originations, and when you start to increase that loan-to-deposit ratio?

John here. Let me take a crack at this. I think you can appreciate that you have to go back two years, we were in a very different mode, in terms of defensive and retaining existing clients. I think we've done an excellent job over the last six, nine months in starting to build a pipeline. But you don't grow business quickly and immediately -- or if you do, you're asking for trouble. So, I think the right actions are being taken to position us for good loan growth over the medium- to long-term.

On the corporate side, it's going to take a little bit longer, in terms of growing relationships. On the retail side, we have introduced a home equity loan product -- we've piloted that, we are rolling it out, we expect good growth this year. So, I think we are doing the right things to prudently grow loans, and I think with the rebound in the economy -- obviously, that will help not only our institution, but all of the financial institutions in the state.

Okay. Let me -- I missed it a little bit. Can you repeat what the number of the inflows to NPLs was in the quarter?

I'll pass it to Bill.

Inflows were $16.7 million.

And how does that relate to inflows in the fourth quarter?

I don't have that number right at my fingertips. Give me just one second here.

Okay.

We saw fourth-quarter inflows of $25.2 million.

Okay, thank you, that's great. Let me -- I guess -- while talking about asset quality, the reduction in TDRs, was that mostly from paydowns, or was there any migration to nonperformers?

The -- again, this is Bill. The TDRs was about the same balance in the fourth quarter, so there's not been any downward pressure. Most of the inflow to TDRs is coming out of the residential mortgage book.

Okay. All right. And, I guess, just touch on capital levels. Obviously, you are nearing the completion of the capital plan, with the rights offering. But now you have very high capital ratios. If you -- can you continue to put together a few quarters of profitability, do you then consider reinstating the dividend? I'd just like to get your thoughts on that.

I think it's a little early to start looking to reinstating a dividend. John here. It's not that we don't want to, but if -- as you look back, we have had two years of unprofitable quarters, so this is our first. It's a good quarter, it's $4.6 million in earnings, but I think we have to put more than a couple quarters together before we start considering any dividends to our shareholders.

Okay. And, all right, I guess, if you have worked down the levels of problem assets -- there's still obviously a pretty -- pretty big chunk to go. Have you any sense of -- have you gotten rid of the problem assets with the worst loss content? Or any sense of where you stand, in terms of additional losses, as you dissolve problem assets?

Joe, this is Bill again. I would like to think the answer to your question is yes, but the reality is, is we, on a quarterly basis, we are obviously marking these to market. The market has stopped falling now for probably a couple of quarters, which has allowed us to make the progress we are making. I think the other factor that's playing into the decline -- in the pace of decline, if you will, is our perception as a distressed seller still lingers for some folks.

And so, I think that as we move to dispose some of these assets, we are in a position now where we can hold our position for the true value of these assets. And so, some of the expected disposals we had in the first quarter have been pushed into the second quarter, just for that reason. So, I think it's part of a re-establishing ourselves as being a -- in a stronger position.

Okay. Just one final question. I'll touch on the net interest margin. Your funding costs have gotten down pretty low. Are there any additional opportunities to reduce those over the next couple of quarters?

With respect to our net interest margin, we would expect to continue to redeploy our excess cash into higher yielding investment securities. We are going to continue to look for decreases in our deposit cost. And obviously, the reductions in our borrowing cost relate to our -- to the FHLB. We have additional debt coming due during the latter part of this year, and as that comes due, we will pay it off with our cash -- available cash.

Okay. Thank you.

Thank you, Joe.

(Operator Instructions) With no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to John Dean for any closing remarks.

Just to thank everyone for participating in our first quarter 2011 earnings call. We look forward to future opportunities to update you on our progress.

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