Central Pacific Financial Corp (CPF) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Central Pacific Financial Corp. third 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. 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. Now I would like to turn the call over to Mr. David Morimoto, Senior Vice President, Investor Relations. Please go ahead sir.

Thank you all for joining us today as we review the financial results of Central Pacific Financial Corp. for the third quarter of 2011. With us today are John Dean, President and Chief Executive Officer; Dennis Isono, 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 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 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.

Before we begin, I would like to welcome Dennis Isono, who was appointed Chief Financial Officer on October 1 of this year, to this earnings call. Dennis has 39 years of banking and financial management experience, and has been with our Company since 2002. We look forward to his wealth of expertise and experience in guiding us through our continued recovery efforts.

I would like to take this opportunity on behalf of our entire team to express our gratitude to Larry Rodriguez, who preceded Danny as CFO. Larry will continue to assist us as a consultant after his departure from our Company on November 30. As many of you are you know, Larry came out of retirement to help our Company's turnaround efforts. First in January 2010 as a consultant, and then as CFO, beginning in August of 2010.

Turning to the Company's financial performance for the third quarter, I am pleased to report that we recorded our third consecutive quarter of profitability. The continued improvement in our credit risk profile allowed us to reduce our allowance for loan and lease losses, resulting in a substantial credit to our provision for loan and lease losses.

We also had some significant non-recurring expenses in the third quarter. A penalty was incurred from the pre-payment of long-term federal home loan bank borrowings, which will be offset by a positive impact on our net interest margin in future quarters. We have funded the CPB Foundation, which was established in 2010. Our Company has historically been a strong supporter of the communities we serve, and building a viable, charitable foundation will allow us to continue as a strong community partner with more consistency over the long-term.

Overall, we're pleased with the progress our team is making toward a full recovery of our Company. Non-performing assets will further reduced from the previous quarter through diligent efforts in loan sales, restructurings, and paydowns. Quality loans were booked, and we are seeing steady growth in our pipeline of commercial, consumer, and residential mortgage loans. Total deposits have remained stable, with core deposits having increased over the previous quarter.

We continue to be appropriately reserved for future loan losses, and our capital ratios continue to exceed the regulatory well-capitalized levels. Operational efficiencies are being addressed, with technology solutions for faster delivery of our products and services to market, as well as enhanced customer servicing. Dennis and Bill will provide more details of our financial highlights and asset quality progress for the quarter later in our report.

Turning to our local economy, we continue to be cautiously optimistic of the modest growth projected for 2012. While visitor arrivals have made significant strides in the past 18 months, recent activity has been constrained by a week global economy, including the March 2011 disaster in Japan. For the month of September 2011, arrivals increased by 4% and visitor spending by 20% over the same period last year.

According to the University of Hawaii, economic research organization, visitor arrivals are projected to increase by 1.7% in 2011 over the previous year, and by 2.3% in 2012. Visitor spending is projected to increase by 10.2% in 2011, and by 4.4% in 2012.

Unemployment has ticked upward to 6.4% in the month of September from a range of 6% to 6.1% during the second quarter of this year. For 2012, moderate job growth of under 2% is forecasted, with the unemployment rate projected to average 5.5% for the year. While private and government construction activity is expected to reign weak in 2012, the Oahu mass transit system project is expected to result in a 5% job growth within this industry. While overall modest growth in Hawaii's economy continues to be forecast for 2012, we are mindful of the risk related to Hawaii's dependency on the US and Asian economies.

At this time, I would like to ask Dennis Isono, our Chief Financial Officer, to review the highlights of our third quarter financial performance. Dennis?

For the third quarter of 2011, we reported net income of $11.6 million, $0.28 on per diluted share. This compares to net income of $8.2 million, or $0.20 per diluted share, reported last quarter. As John previously mentioned, we benefited from a significant reduction in our allowance for loan and lease losses, which resulted in a credit to the provision for loan and lease loss of $19.1 million. This compares to a credit of $8.8 million in the previous quarter. The reduction in our allowance was primarily due to further improvement in our credit risk profile as our loan portfolio continues to show signs of stabilization.

Our non-performing assets totaled $223.3 million as of September 30, 2011, which represents a decrease of $26 million from June 30. Our allowance as a percentage of total loans decreased from 8.2% at June 30 to 7.0% at September 30, 2011. The ratio of our allowance to non-performing assets also decreased from 67% at June 30 to 64% at September 30. Bill will provide more details about our credit risk position later in this call.

Net interest income for the quarter was $29.8 million compared to $29.0 million in the previous quarter. Our net interest margin was 3.05% and 3.04% for the same respective quarters. We are beginning to see gradual improvement in both our net interest income and net interest margin as we continue to redeploy our excess liquidity into higher-yielding investment securities and manage our overall funding costs.

During the quarter, we increased our investment securities portfolio by $67 million to approximately $1.5 billion. We continue to use an investment strategy which concentrates on the purchases of agency debentures and mortgage-backed securities with relatively short durations. The reallocation of our excess liquidity into our investment and loan portfolios is expected to continue over the next several quarters.

In September, long-term borrowings from the Federal Home Loan Bank totaling $121 million with a weighted average interest rate of 4.36% were prepaid. The pre-payment of these borrowings resulted in a recognition of a 1-time loss on the early extinguishment of the debt totaling $6.2 million. As John mentioned, this should improve our net interest margin going forward.

Non-interest income for the quarter totaled $11.5 million, up from $10.9 million in the previous quarter. The sequential quarter increase was primarily due to higher unrealized gains on outstanding interest-rate locks of $0.8 million at the end of the quarter.

Non-interest expense for the quarter totaled $48.8 million, up from $40.5 million in the previous quarter. This sequential quarter increase was attributed to 3 large 1-time expenses, the $6.2 million loss on the early extension of debt, the accrual of $5 million contribution to the Central Pacific Bank Foundation that John discussed earlier, and finally, the settlement of a class-action lawsuit related to our previous policies processing overdraft fees totaling $1.2 million. These non-recurring items were partially offset by lower net credit related charges of $1.4 million, lower FDIC insurance expense of $1.3 million, and a lower provision for repurchased residential mortgage loans of $1 million.

Our adjusted efficiency ratio for the quarter, which excludes foreclosed asset expense and write-downs of loans held for sale, was 98%, compared to 94.3% in the previous quarter. The sequential quarter increase was directly attributable to the previously mentioned 1-time expenses. Because we continue to have a full valuation allowance established against our net deferred tax assets, we do not recognize any income tax expense for the quarter.

At the end of the quarter, cash and cash equivalents totaled $299.9 million, compared to $453.5 million at June 30. The decrease between quarter-ends reflects the previously-mentioned offer to deploy excess liquidity into higher-yielding investment securities. We also lowered our loan to deposit ratio during the quarter from 63.4% to 61.5% at September 30.

At September 30, our Tier 1 total risk base capital total and leveraged capital ratios improved to 22.63%, 23.94%, and 13.19% respectively, compared to 22.48%, 23.80%, and 13.13%, respectively, at June 30. Our capital ratios continued to exceed the minimum levels required by both Memorandum of Understanding that we entered into with our regulators and the levels required for a well-capitalized regulatory designation.

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

We realized significant improvements to our credit risk profile in the third quarter of 2011. Net charge-offs totaled $4.4 million in the third quarter, as compared to $2.3 million in the second quarter of 2011, and $64.3 million in the third quarter of 2010. Non-performing assets totaled $223.3 million at the end of the third quarter, compared to $249.3 million in the second quarter of 2011, and $372.7 million in the third quarter of 2010, or a year-over-year decrease of 40.1%. The third quarter decrease was attributable to $27.5 million in repayments, $5 million in charge-offs, and partially offset by $11.1 million of additions to non-performing assets.

Non-performing construction and development loans totaled $146.5 million at the end of the third quarter, which comprised 45% of the total non-performing assets and decreased from $165.1 million in the second quarter of 2011. Total construction and development loans were $181.3 million at the end of the third quarter, or 8.8% of the total loan portfolio. This represented a decrease of $45.2 million from the second quarter of 2011 and a decrease of $273.2 million for the third quarter of 2010, or a year-over-year decrease of 60.1%. A $27.3 million allowance for loan and lease losses in this portfolio segment was held at the end of the third order, representing 15% of the total construction and development loan balance.

Troubled debt restructurings totaled $80.5 million for the third quarter, a decrease of $4.4 million from the second quarter of 2011. Our TDRs are comprised of $43.8 million in residential mortgages, $36.2 million in Hawaii commercial real estate, and $0.5 million in other loans. Loans delinquent for 90 days or more still accruing interest totaled $40,000 in the third quarter, compared to $4000 in the second quarter of 2011. Loans delinquent for 30 days or more still accruing interest increased to $4.1 million in the third quarter from $3.5 million in the second quarter of 2011.

The allowance for loan and lease losses as a percentage of total loans and leases decreased to 6.96% at the end of the third quarter from 8.16% in the second quarter of 2011. The allowance for loan and lease losses as a percentage of non-accrual loans was 89.3% at the end of the third quarter, compared to 80.8% the second quarter of 2011 and 69.4% at the third quarter of 2010. Our ongoing program to reduce non-performing and reduce our construction and development credit risk exposure continue to show positive progress through the third quarter. We anticipate that we will be able to maintain this progress over the last quarter of 2011.

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

In summary, our team has worked diligently to sustain the Company's turnaround to an eventual full recovery. While there is more work to be done, we are pleased with the significant progress being made, particularly in reducing our credit risk exposure, maintaining strong customer relationships, and achieving positive core earnings. I believe we are well-positioned to compete in our marketplace going forward.

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

(Operator Instructions) Joe Morford, RBC Capital.

I was encouraged with the loan growth this quarter, and I see a lot of it came from residential mortgages. How are you feeling about the pipeline and demand going into fourth quarter? Do you see the mix broadening out at all? And perhaps paydown activity is starting to slow at all in some of the commercial real estate portfolios?

Bottom line Joe, we are encouraged in the sense of, if you look at the portfolio today, and obviously with the good work that Bill and his team have been doing in terms of reducing NPAs, a very positive, obviously it's reducing our overall size-of-loan portfolio. In spite of that, we've have had some good net new business coming to the bank. What I would advise is it takes a while. So Lance Mizumoto, David Hudson, both in the corporate retail side, have been working hard. We think the pipeline looks good, I think this is the first quarter we've had where we've actually had net loan growth overall for the portfolio. So while we are looking forward to continued growth, it's going to be a function, as you know, of the Hawaii market. Hawaii, like the rest of the United States, is experiencing very little loan growth today.

And then maybe if you could talk a little more specifically about your expectations for the margin from here, both in fourth quarter and also going into 2012. I recognize you have deployed a lot of your access liquidity and deposit costs are getting down to low levels, but you're obviously have the FHLB advances coming off and are starting to see some loan growth or at least stabilize the portfolio.

What I'm going to do, Joe, just pass it to Dennis Isono, if he wants to comment in terms of our margin and margin going forward.

So we expect the net interest income to stabilize between $30 million and $31 million over the next several quarters, so the margin will stabilize right around where it is, I think, but modest growth over time.

Joe Gladue, B. Riley.

Let me just start out with deposits, good growth in deposits, but a little bit of decline in non-interest-bearing deposits. Most banks these days are having a pretty easy time of generating them, just wondering if there was anything specific going on there, were they shifted to other accounts or what's causing the weakness in that segment?

Don't see any weakness, and there is nothing to report that's significant or negative in terms of trends. So I would look at it on a longer-period basis. We feel good in terms of overall, not looking just at the quarter but over the last several quarters, in terms of deposit growth, as you have seen it. I'm talking more on the core side obviously. We've gotten much closer right on the market, as you look at CDs in terms of pricing to the competition, and there's been some impact there. These are CDs both under $100,000 and I don't think we have anything over $100,000 right now in the CD area. If we do, it's very little.

And I will ask Bill to repeat 1 number. Correct me if I'm wrong, but I think you said the inflows to non-performers were $11.7 million in the quarter?

That's correct.

I will ask about the outlook for the DTA valuation allowance. Maybe a little bit early, but continue to generate profits. What's the outlook?

In terms of deferred tax asset, we don't we see anything obviously this year and next year. And that's going to be more a function of working with our accountants, but from what we have been advised, we're going to have to show several more quarters of sustained earnings, I think, before a good case can be put forward in terms of bringing that back onto the balance sheet.

Aaron Deer, Sandler O'Neill.

Dennis, congratulations on your appointment.

Thank you.

Following up on Joe's questions with respect to the DTA, I was wondering if you give an updated balance as to what the recoverable portion of that, where that stood at quarter end?

At quarter-end it is $167 million.

And did I hear correctly, were there some loan sales in the quarter? And if so, can you give a sense of what the pricing was on that? And then maybe relative to what the carrying value was?

This is Bill speaking. There were no specific loan sales, just asset dispositions.

And then where does the reserve stand today in terms of the allocated versus the on unallocated portion?

It's almost exclusively FAS 5, unallocated. I don't have it right in from of me. I want to say it's like $3 million of FAS 114 reserves.

Jackie Chimera, KBW.

I have a question on the deferred interest payments on the trust preferred. Have you had an update on whether or not you will be able to bring those current?

Not to date, and obviously we are still under an MOU. So given the Memorandum of Understanding, I think it would be premature for us to be thinking about -- we have reserved, as you are aware, in terms of on the balance sheet, but in terms of making those payments, those have not been made yet.

And then my math might be a little bit off, but it seemed as though you we're getting close to the I believe it's 8 quarters of deferrals that are permitted under the paperwork behind the trust preferreds? Is that something that could potentially be an issue over the next quarter or 2?

Jackie, it's David. Under the trust preferreds, our pooled trust preferreds, we can defer up to 20 consecutive quarters without a default.

I have no idea where I got the 8 from.

The TARP preferred had a shorter trigger but the trust preferred we can defer up to 20 consecutive quarters. And you're right, I think we are at about 8 or 9 currently. So we have a ways to go.

And looking to the charitable contribution that was made in the quarter, is that something that we should expect on an annual basis going forward?

No, not necessarily. Obviously, we've had some good earnings, strong earnings, and very strong part related to the release of the reserves. So we look at it on a quarter-to-quarter basis, and we saw an opportunity to be able to really fund the Foundation, which we haven't been able to do since it was initially established in 2010.

So this is more of a funding contributions then?

A funding contribution, we are not expecting to draw that all down in the coming year, but it's a way for us, on a more balanced way, to participate, to give back to the community. Both when we are, I would say, in difficult times, we are in an economy where all companies are struggling because of the downturn in the economy, that's the most difficult time to give back, but it's also the most important time to give back to a community and helping out. So we're looking at it as an investment over the long-run in terms of our commitment to the community.

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

Just to thank everyone for participating in our third-quarter 2011 earnings call. We look forward to future opportunities to update you on our progress. Have a good day.

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