Central Pacific Financial Corp (CPF) 2011 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 2011 conference call. During today's presentation, all parties will be in a 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 of the Company's website at www.CentralPacificBank.com. I'd now like to turn the call over to Mr. David Morimoto, Senior Vice President Investor Relations.

Thank you all for joining us as we review our financial results for the fourth quarter of 2011. With us today are John Dean, President and Chief Executive Officer; Denis 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. While we believe our assumptions are reasonable, these statements are subject to risks that may cause actual results to differ materially from those projected.

These risks are detailed in our filings with the SEC. Forward-looking statements are made as of today, and we do not update any forward-looking statements. Now, I'll turn the call over to our CEO, John Dean.

Good morning, everyone. I'm pleased to report that we recorded our fourth consecutive quarter of profitability. Our earnings continue to benefit from the significant progress we've made in improving our asset quality and credit risk profile throughout the year. This improvement allowed us to substantially reduce our allowance for loan and lease losses throughout 2011. Reflecting on last year, our management employees did an outstanding job in the turnaround efforts of our Company.

In the first quarter of the year, we acquired new capital through private investors, and raised our capital ratios beyond regulatory well-capitalized levels. We also returned to profitability after three years of incurring annual net losses. Our [rights] offering to legacy shareholders was fully subscribed and executed in the second quarter of last year.

As a result of our progress, the regulatory consent order that was in place since December of 2009 was terminated in May of 2011. The numerous accomplishments during a pivotal year for our Company would not have been possible without the team effort of our entire organization and the continued support of our customers and shareholders.

Turning to our local economy. The encouraging increase in visitor arrivals and expenditures at the beginning of 2011 was dampened by the natural disaster in Japan and by the European crisis. However, with the strong increase in visitors from countries other than Japan and the US, the year-over-year increase of 2.1% in visitor arrivals is projected for last year.

While post-quake arrivals from Japan have been rebounding, the continued uncertainty of the US economy has resulted in a forecast of 2.7% increase in visitor arrivals for this year by the University of Hawaii Economic Research Organization. Construction activity is projected to remain soft throughout 2012 after a projected 2% increase for last year.

Public sector construction on Oahu is expected to carry the weight of new projects or the state, and includes the governor's New Day Work Projects for infrastructure improvements and the Oahu Mass Transit Projects. Annual job growth in Hawaii is expected to increase by 1.2% in 2011, and by 1.7% in 2012.

The unemployment rate hovered above the 6% level last year and is expected to improve to 5.5% by the end of this year. We continue to be cautiously optimistic of modest growth projected gross for 2012. At this time, I would like to ask Denis Isono, our Chief Financial Officer, to review the highlights of our fourth quarter financial performance. Denis?

For the fourth quarter of 2011 we reported net income of $12.1 million, or $0.29 per diluted share, compared to net income of $11.6 million or $0.28 per diluted share reported last quarter. As John mentioned, we benefited from a significant reduction in our allowance for loan and lease losses, resulting in a credit to the provision for loan and lease losses of $11.2 million. As we have seen throughout 2011, the reduction in our allowance is primarily due to improvements in our credit risk profile, as our loan portfolio continues to show signs of stabilization.

During the quarter, non-performing assets were reduced by $27.7 million to $195.6 million at December 31. Non-performing assets were $223.3 million at September 30, 2011. Our ALLL, as a percentage of total loans, decreased from 7.0% at September 30, 2011 to 5.9% at December 31, 2011. Similarly, the ratio of our ALLL to non-performing assets decreased slightly from 64% at September 30 to 62% at December 31, 2011. Bill will provide more details about our credit position later in this call.

Net interest income for the quarter was $30.8 million, compared to $29.8 million in the previous quarter. Our net interest margin was 3.25% and 3.05% for the same respective quarters. We are seeing gradual improvement in both our net interest income and net interest margin as we continue to redeploy our excess liquidity into higher-yielding assets and reduce our overall funding costs.

The reduction in our funding costs was largely due to the previously-reported prepayment of $121 million in long-term borrowings at the Federal Home Loan Bank of Seattle in the third quarter. Those borrowings carried a weighted average interest rate of 4.36%.

During the quarter, we increased our investment securities portfolio by $26 million to approximately $1.5 billion. We continued to use an investment strategy which concentrates on the purchases of agency debentures and the MBS of securities with relatively short durations.

Non-interest income for the quarter totaled $15.2 million, up from $11.5 million in the previous quarter. The sequential quarter increase was primarily due to higher gains on sales of residential mortgage loans of $2.5 million, and the recognition of a $1 million gain on the sale of investment securities. This was partially offset by lower unrealized gains and outstanding interest rate locks of $1.1 million.

Non-interest expense for the quarter totaled $45.2 million, down from $48.8 million at previous quarter. The sequential quarter decrease was primarily attributable the recognition of a $6.2 million prepayment penalty related to the previously-mentioned pay-down of Federal Home Loan Bank borrowings in the third quarter, a lower growth for our contribution to the Central Pacific Bank Foundation of $1.5 million, and the settlement of a class-action lawsuit related to our previous policies for assessing overdraft fees totally $1.2 million, also in the third quarter.

Partially offsetting these items were increased net credit related charges, which includes changes in the reserve for unfunded commitment, foreclosed asset expense and write-downs of loan held for sale of $4.6 million, and higher salaries and employee benefits of $1.5 million in the fourth quarter.

Our adjusted efficiency rates for the quarter, which excludes foreclosed asset expense and write-downs of loan held for sale, was 92%, compared to 99.1% 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 expense for the quarter.

At December 31, 2011, our tier 1 risk-based capital, total risk-based capital and leveraged capital ratios all improved to 22.94%, 24.24% and 13.8%, respectively. This compares to 22.63%, 23.94%, and 13.19%, respectively, at September 30, 2011. Our capital ratios continue to be well in excess of the minimum levels required by both the memorandum of understanding that we entered into with our regulators, and the levels required for a well-capitalized regulatory designation. This complete our financial summary.

I'd like now to turn the call over to Bill, who will provide additional background relating to our credit risk position.

We continued to realize significant improvements to our credit risk profile in the fourth quarter of 2011. Net charge-offs totaled $10.1 million in the fourth quarter, as compared to $4.4 million in the third quarter of 2011 and $25.2 million in the fourth quarter of 2010.

Non-performing assets totaled $195.6 million at the end of the fourth quarter, compared to $223.3 million in the third quarter of 2011, and $302.8 million in the fourth quarter of 2010, or a year-over-year decrease of 35.4%. The fourth quarter decrease was attributable to $26.3 million in repayments, $6.2 million in restored-to-accrual status, $5.2 million in charge-offs, and partially offset by $11.9 million of additions to non-performing assets.

Non-performing construction and development loans totaled $123.1 million at the end of the fourth quarter, which represents 62.9% of total non-performing assets, and decreased from $146.5 million in the third quarter of 2011. Total construction and development loans were one $148.4 million at the end of the fourth quarter, or 7.2% of the total loan portfolio.

This represented a decrease of $32.9 million from the third quarter of 2011 and a decrease of $151.5 million from the fourth quarter of 2010, or a year-over-year decrease of 50.5%. A $21.9 million allowance for loan and lease losses in this portfolio segment was held at the end of the fourth quarter, representing 14.8% of the total construction and development loan balance.

Troubled debt restructurings totaled $84.4 million for the fourth quarter, an increase of $3.9 million from the third quarter of 2011. Of this, $76.1 million, or 90% of our TDRs, were in non-accrual status. Our TDRs are comprised of $41.6 million in residential mortgages, $41.8 million in Hawaii commercial real estate, and $1 million in other loans.

Loans delinquent for 90 days or more, still accruing interest, totaled $28,000 in the fourth quarter, compared to $40,000 in the third quarter of 2011. Loans delinquent for 30 days or more, still accruing interest, increased to $5.4 million in the fourth quarter from $4.5 million in the third quarter of 2011.

The allowance for loan and lease losses, as a percentage of total loans and leases, decreased to 5.91% at the end of the fourth quarter from 6.96% in the third quarter of 2011. The allowance for loan and lease losses as a percentage of non-accrual loans was 100% at the end of the fourth quarter, compared to 89.3% at third quarter of 2011, and 91.8% at fourth-quarter 2010.

Our ongoing program to reduce non-performing assets and reduce our construction and development credit risk exposure continued to show positive progress through the fourth quarter. In 2012, we remain focused on maintaining our progress on improving our credit risk profile. That completes our credit quality review, I would now like to turn the call back to John.

In summary, the progress achieved by our organization last year provides a strong momentum to meet the challenges that lie ahead in this new year. We look forward to 2012 with a continued focus on strengthening our customer relationships, developing new business, and improving core earnings. At this time, we'd be 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.

Good morning, everyone and, John, congratulations on all the improvements you made last year.

Thanks, Joe.

Two questions, first just on the outlook for the margin; obviously you had a nice pop this quarter, but you've now deployed a lot of your excess liquidity, maybe you have a bit more FHLB advances maturing, but your funding costs are already down a lot while earning asset yields continue to erode. So you think you can hold us level for the margin or might we see some gradual compression through 2012?

I'm going to pass it over to Denis, Joe, if I may, our CFO. Denis?

Yes, Joe, we're expected to pretty much told where we are. We see a little bit of opportunity to lower our cost of funds a little bit, but it's pretty much going to hold right about where we are now.

Okay. And the other question was on expenses. I guess, can you talk about the reason for the increased mortgage put-back provision this quarter? And going forward, excluding some of the noise we saw the fourth quarter, what would be a good run rate to build off of for the total level of expenses in the first quarter?

I'm going to turn it to Bill, if I can, Joe.

I can speak to the mortgage repurchase, I think I will pass it over to Denis to talk on the last part of your question. On the mortgage repurchase provision, the provision amount itself actually was a small reduction quarter-on-quarter. The increase in the provision reflected the charge-offs that were taken from the provision in the quarter.

The second part, Joe, again of the question?

It's just what is a good run rate for total level of expenses in the first quarter, given some of the noise we saw this quarter?

So we're looking at a run rate between $36 million and $38 million.

Okay. Great, thanks so much.

Joe Gladue, B. Riley.

I guess I'd like to follow up on one of Joe's questions about the net interest margin a little bit more. You're still generating a good amount of deposits, and I guess in the third quarter, most of that really replaced the Home Loan Bank borrowings that you repaid. If you continue to generate that amount of deposits, just wondering what the outlook is for deploying those deposits at decent margins?

Yes, I will start and then pass it over to Denis. I don't think we're dissimilar from any of the financial institutions in the country today, Joe, in the sense of it just where the yield curve is. So, I think anyone's going to struggle in terms of good margin, at least for the near future; this year and probably through 2013. So we continue to see growth in our core deposits and obviously we will look at either redeploying them, not just into what I would say loan assets, but also in terms of the investment portfolio. So I don't have -- maybe Denis has a prediction in terms of what that might be or the specific impact on the margin, but obviously we're challenged as are all other financial institutions, given where we average this yield curve. Denis?

That's pretty much it, Joe. There's not much more we can add. We'll look at deploying as much of it as we can into loans, and as we fall back into the investment portfolios as we can't liquidate or can't find the volume in loan.

Okay. All right. Speaking of loans, again, you had another nice decrease in the construction segment but still managed to show some overall growth in the portfolio. Just wondering if, as the constructor portfolio gets smaller and smaller, when you think that segment will flatten out and allow for more noticeable growth in the overall portfolio?

You have to look at the NPAs in that portfolio and Bill can probably give you the specifics of that. But while we are continuing to do see NPAs which will continue to reduce that sector of the loan portfolio, we're still looking for business in construction and development. So while there is not the [supposity] of letting opportunities in the sector in Hawaii, doesn't mean there won't be some that we won't be able to participate in.

So growth in the other portfolio, I think we showed good progress last year. Appreciate we were out of the market for two, three years, and it takes time to rebuild relationships in terms of being proactive and calling and looking not only for new business but looking for opportunities to our existing client base. So while you don't see the numbers growing significantly, in fact we were just up a little bit over third quarter, I believe, I think we'll show relative to the market this year, some good progress. And with that, do you want the specific numbers from Bill? Bill, do you wan to, in terms of the NPAs, with regard to maybe just -- I don't know if you have Hawaii there and Mainland?

I just got the details. This is actually out of the presentation up on the website, but most of our NPAs on the construction side in Hawaii, on the residential construction, books very clean on the commercial construction side. As John mentioned, it's really more a reflection of the levels of business activities in the current environment.

Okay. All right. I guess I'd also like to follow-up on Joe's other question, just about expenses. Just a question about the contributions to the charitable fund. Should we consider that more of an ongoing quarterly event? Or is that something that's going to regress to more of a once-a-year kind of thing?

I want to use Joe Morford's comment earlier, a lot of noise fourth quarter. If you look at the four quarters, there's a lot of noise in the numbers as we reposition the bank. So wherever we could, we invested last year, in this year and years to come. So obviously the foundation is an asset that will benefit the bank as it remains involved in the community here. But look to that asset as primarily, as one where we are looking on terms of the yield on those, that foundation, in terms of giving back to the community. So I don't see us necessarily making the kind of contributions this year that we made last year.

And it wasn't just the foundation in third and fourth quarter, you go back to third quarter, we prepaid the Federal Home Loan Bank of Seattle, what was it, $136 million? $130 million? $120 million, excuse me. I was close there. But we prepaid that. I think it was a charge of $6.2 million $6.3 million in the third quarter. So a lot of one-time hits. So what I'm trying to you with is we're positioning, not just for 2012, but for 2013 and 2014. And the contribution this past fourth quarter and third quarters were part of that overall positioning the bank for the future.

Okay. All right, I'll ask one more and then step back. Just wondering if you could tell us what the 30 day to 89 day delinquencies were at the end of the quarter?

The 30-?

30 to 89.

The 30 to 90 were $5.4 million.

All right, thank you.

Aaron Deer, Sandler O'Neill & Partners.

Good morning and I also want to extend my congratulations on the really remarkable turnaround you guys manage this past year.

Thanks, Aaron.

Following up on the outlook for growth, can you give any kind of sense of where the pipeline for new business stood at the end of the year relative to where it was at September 30?

Well, I think best to comment on the pipeline is that if you compared the pipeline at CPB at the end of last year versus 12 months ago, I think we've made significant progress. But again, appreciate, and those familiar with just we're in the, especially corporate lending, the time it takes to reposition an institution that was primarily focused on survival, and in working the NPAs out of the bank. So Bill, and then Lance who heads up Corporate Banking for us, Lance Mizumoto, would tell you that last year and we expect into this year, we will see account offers rolling of Bill's departments and back into the line.

So you're not going to see it in the numbers that we're releasing, obviously, but I'd leave you with excellent progress made, and refocusing the bank from a defensive position. And when I say offensive, I'd say cautiously but proactive now in the market, and calling. But we can only do so much in terms of that portfolio. Obviously, it's going to be a function of the economy, it is going to be a function of loan demand. And again, as the rest of the country, this day too, a struggling in terms of loan growth.

Sure, okay that's helpful. And then in terms of the margin, I was just trying to reconcile the guidance, it looked a bit flattish going forward. I'm curious about, in the fourth quarter, the yield on your taxable securities dropped I think over 30 bps, which sequentially is obviously pretty steep. I'm wondering if there was some premium amortization or something in there that might decline here going forward or what kind of yields you are getting on new investments in that book?

I'm sorry, Aaron, could you -- for some reason we're having a bit of trouble hearing you. Could you repeat the question?

Sure. I'm curious about the yield on your taxable securities. It was down pretty meaningfully in the fourth quarter. I'm wondering if there was premium amortization or something that caused that to be a steeper drop than we might have seen otherwise? And then going forward, could you give us a sense of what kind of yields you are getting in that portfolio now?

Sure. Let me pass it over to David, who is with this, David Morimoto, our Treasurer.

Hey, Aaron. In the fourth quarter, we did see a pick-up, like most banks did, in the amortization on the MBS and CMO portfolio. During the fourth quarter, we also executed a bond swap trade where we went down in coupon where we tried to better manage the premium amortization risk going forward. So we think the down-in-coupon trade will help mitigate that risk going forward. So we're pretty comfortable that we can try to stabilize the investment portfolio yields at its current level as far as new purchases. They are coming in pretty close to where the portfolio yield is currently. We are in the low 2% range on new purchases on average.

Does that answer it, Aaron?

Yes, it sure did. And then just one final question. If you can give us an update on where the recoverable value of the DTA allowance stood at year-end?

At year-end, it's $162 million.

Okay, very good. Thanks for the update.

Jackie Chimera, KBW.

Just looking to, I know others have touched on the non-interest expense, but looking to the run rate in the salaries, was that a true-up at year-end? Or did that also incorporates some salary increases for employees?

I'm going to turn it over to Denis in terms of the question. Denis?

Yes, that was just a true-up on some of the incentive plans that we have.

Okay, so is the roughly $14.5 million, $15 million level that was in prior quarters more of a go-forward level?

Yes, that's probably closer to where we will be.

Okay. And then, I know you have $50 million in FHLB borrowings that are set to mature in the next year, I believe. What's the current rate on those?

The remaining FHL Federal Home Loan bank borrowing?

Yes.

I'd say -- David?

Jackie, there's $50 million that was on the books at year-end, but it actually matured in January, earlier this month. It was yielding about 60 basis points.

Okay. Great. And then just one last question. I wanted to see, just given the fluctuation in the gain on sale income that you had in between the two quarters, and I know in the prior quarter you'd made the decision to portfolio a lot of loans that you might have otherwise sold. What plays into that decision to portfolio versus sell?

I think as you manage the balance sheet in terms of yields, and again I'm going to go back to what I said earlier, it was an earlier question, which is everyone's challenged today in terms of the overall yield curve. And I should have said earlier, it's a challenge, not just the yield curve, but as you go out on the yield a pick up any additional or better pricing, obviously you get more and more duration risk. So I don't know if Denis has something to add to it or not, but obviously, we are in the process of trying to continue to position the bank, not just for this year, but over the next two, three years, managing both the risk in the portfolio but also to include duration risk. Denis?

Really not much more to add to that. During the quarter though, Jackie, just to give you some numbers, we originated about $337 million, and we portfolioed just $66 million. And we sold the rest, and that's what drove the gain on sale up.

So you originated $337 million? I'm sorry, you kept how much?

$66 million.

$66 million. Do you happen to have those numbers from the prior quarter? Originations and what you kept?

Yes, the third quarter originations was $258 million, and the portfolio was $114 million. So we portfolioed a lot more in the third quarter.

Okay. Great, thank you very much.

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

Just to thank everyone for participating in our fourth quarter 2011 earnings call. And 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.