Central Pacific Financial Corp (CPF) 2012 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp. first quarter 2012 conference call. During today's presentation, all participants will be in the listen only mode. Following the presentation the conference will be open for questions. This call is being recorded and will be available for the replay shortly after its completion on the company's website at www.centralpacificbank.com. I'd like to turn the call over to Mr. David Morimoto Senior Vice-President, Investor Relations. Please go ahead.

Thank you Amy, and thank you all for joining us as we review our financial results of the first quarter of 2012. 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.

During the course of today's call, management may make forward-looking statements. While we believe these statement are based on reasonable assumptions, they involve risks that may actual results to differ materially from those projected. For the complete discussion of the risks related to forward-looking statements, please see our recent filings with the FCC. And now I'll turn the call over to John.

Thank you David. And good morning everyone. I'm pleased to report that the positive momentum we generated in the 2011 was sustained in the first quarter of this year. We recorded our fifth consecutive quarter of profitability since the Company's turnaround began with its recapitalization a year ago. The continued stabilization of our credit risk profile allowed us to further reduce our allowance for loan and lease losses, which resulted in a positive contribution to our net income for the quarter. Our balance sheet has shown stable growth in both total loans and total deposits, and especially in our core deposit base. Our capital position remains strong and well in excess of the minimum regulatory levels of a well-capitalized financial institution. The US Department ofthe Treasury, recently announced the sale of their remaining common stock held in our Company. And as a result we have exited the Troubled Asset Relief Program, or TARP, earlier this month. Our management team and employees continue to perform in an outstanding level throughout all areas of our organization. We could not have made such significant progress in the Company's turnaround without their commitment to our customers and dedication to a total team effort.

Turning to our local economy. The activity in our visitor spiked at the end of 2011, and year-over-year visitor arrivals increased by 3.5%. And visitor spending by 15.6%. Through the first two months of 2012, visitor arrivals increased 6.7% and visitor spending increased 11.4% over the same period last year. The growth in arrivals has been primarily driven by visitors from Canada and other international segments, Australia, New Zealand, Korea and China. We expect the steady economic recovery in Hawaii to continue primarily due to moderate increases in visitor arrivals and spending. Construction activity is projected to pick up in 2012, led by high-rise condominium projects, rail construction and infrastructure improvements. The total value of real, non-residential permits is expected to grow by 40% over last year. To more than $1.4 billion.

Construction jobs count -- counts and income are projected to increase by 2.1% and 3.1% in 2012 respectfully, and further increase in the next three years. Hawaii's unemployment rate was 6.4% in March and is projected today remain flat throughout the year. A slow economic recovery is expected for the state with payroll jobs increasing by 1.8%, real personal income increasing by 1.8%, and real GDP by 2.3%. We continue to be cautiously optimistic of the modest growth projected in 2012. At this time I would like to ask Denis Isono, our Chief Financial Officer to review the highlights of our first quarter financial performance. Denis?

Thank you John. For the first quarter of 2012 we reported net income of $13.5 million with $0.32 per diluted share, compared to net income of $12.1 million or $0.29 per diluted share reported last quarter. As John previously mentioned, we benefited from a reduction in our allowance for loan and lease losses which resulted in a credit to the provision for loan and lease losses of $5 million,compared to a credit of $11.2 million in the previous quarter. The reduction in our allowance was primarily impacted by three elements. First, lower net charge-offs of $2.8 million for the quarter compared to the $10.1 million. Second, the trailing eight quarters of charge-off data used to allocate the reserve for loan and lease losses continues to improve. And finally improving in our -- other factors of our overall risk profile such as declining troubled debt restructuring, continues to improve. All three factors contributed to the reduction in our allowance. Bill Wilson will provide more details about our credit risk profile later this call.

Net interest income for the quarter was $30.5 million compared to the $30.8 million in the previous quarter. And our net interest margin was 3.23% and 3.25% for the same respective quarters, primarily due to lower yields on the Company's interest-earning assets. Improvement in yield on earning assets will need to come from quality loan growth, continued reduction in NPAs, and higher yields from our investment portfolio. During the quarter, our investment securities portfolio increased by $153 million to approximately $1.6 billion. While our investment strategy concentrates primarily on the purchasing of agency debentures and MBS securities with relatively short durations, during the quarter, we increased our ownership of municipal and corporate securities by $33.3 million.

At March 31, 2012, our municipal and corporate securities accounted for less than 3% of our investment securities portfolio. We will continue to look for good quality investments in this segment to improve the overall yields on our investment portfolio. Non-interest income for the quarter totalled $13.2 million, down from $15.2 million in the previous quarter. The sequential quarter decrease was primarily due to the recognition of a $1 million gain on the sale of investment securities during the fourth quarter of 2011 and lower gains on sales of residential mortgage loans of $0.7 million.

Non-interest expense for the quarter totalled $35.2 million, down from $45.2 million in the previous quarter. The sequential quota decrease was primarily attributable to lower net credit-related charges of $5.2 million and lower charitable contributions of $3.5 million. Our adjusted efficiency ratio for the quarter which excludes foreclosed asset expense and write-downs of loans held for sale was 75% compared to the 92% in the previous quarter. The significant decrease in our efficiency ratio this quarter was largely due to the recognition of the non-recurring expenses mentioned earlier in the fourth quarter, most notably a $3.5 million contribution to the Central Pacific Bank Foundation and a $2.1 million increase to the reserve for unfunded commitment.

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 March 31, 2012, our tier one risk base capital, total risk base capital and leverage capital ratios were 22.83%, 24.13%, and 14.0% respectively, compared to 22.94%, 24.24% and 13.78% respectively at December 31, 2011. Our capital ratios continue to exceed the minimum required-- minimum levels required by both the memorandum of understanding with our regulators and the levels required for well-capitalized regulatory designation. That completes our financial summary and I would like to turn the call over to Bill who will provide additional background related to our credit risk profile.

Thank you Dennis. We continued to realize improvements in most areas of our credit risk profile in the first quarter of 2011. Net charge-offs totalled $2.8 million in the first quarter as compared to $10.1 million in the fourth quarter of 2011, and $13.3 million in the first quarter of 2011. However, non-performing assets totalled $205.6 million at the end of the first quarter, compared with $195.6 million in the fourth quarter of 2011 and $284.9 million in the first quarter of 2011. Or a year-over-year decrease of 27.8%. The first quarter increase in non-performing access, was primarily attributable to $38.4 million in additions which were partially offset by $28.4 million in reductions. The reductions are represented by $15.2 million in repayments, $9.4 million in the sales of foreclosed properties, $1.8 million in write-downs, $1.3 million in charge-offs, and $600,000 return to accrual status.

The principal contributor to the NPA additions for the quarter was one of our last remaining larger construction and development exposures. It is located on mainland. We believe that this loan as with all of our loans is appropriately reserved. Non-performing construction development loans totalled, $123.1 million at the end of the first quarter, which comprised 62.9% of the total non-performing assets, and decreased from $146.5 million in the fourth quarter of 2011.

Troubled debit restructurings totalled $80.8 million for the first quarter a decrease of $3.6 million from the fourth quarter of 2011. Our TDRs are comprised of $40.9 million in residential mortgages. $33.7 million in Hawaii commercial real estate and $6.2 million in the other loans. Loans delinquent for the 90 days or more still accruing interest, totalled $208,000 in the first quarter compared to the $28,000 in the fourth quarter of 2011. Loans delinquent for 30 days or more still accruing interest increased to $6.2 million in the first quarter from $5.4 million in the fourth quarter of 2011.

The allowance for loan and lease losses as a percentage of total loan and leases decreased to 5.49% at the end of the first quarter from 5.91% in the fourth quarter of 2011. The allowance for loan and lease losses as a percentage of non-accrual loans was 80.4% at the end of the first quarter compared to 100% at the fourth quarter 2011 and 91.5% at first quarter of 2011.

As noted earlier in my remarks, our ongoing program to reduce non-performing assets and reduce our construction and development and credit risk exposures, continue to show positive progress through the first quarter despite the net increase in non-performing assets. We anticipate that we will be able to continue our progress improving asset quality over the balance of the coming year. That completes our credit quality review, and I would now like to turn the call back to John.

Thanks Bill. In summary, our entire organization is proud of the significant milestones achieved in 2011 and in the first quarter of this year. While it will take some time, we are committed to returning this bank to a high performing institution that it once was. We look forward to the challenges ahead with the continued focus on strengthening customer relationships, developing new business, and improving core earnings. At this time we would be happy answer any questions that you may have.

(Operator Instructions) Our first question comes from Joe Morford at RBC Capital Markets.

Thanks, good morning everyone .

Good morning, Joe

I guess first couple of questions are (inaudible) for Bill. If you could talk a little bit more about the inflows this quarter it sounds like it was largely concentrated in one mailing credit, but what exactly, happened this quarter? Did you take any additional write downs? And what's the prospect for resolution? And then more broadly speaking, know you don't comment directly on classified asset levels, but maybe directionally can you talk about how -- does the trend continue to improve?

I think I'll talk first to the MPA increase. It was primarily related to the single asset. As I noted in remarks the net increase -- or the gross increase was $38.8 million and the vast majority of that is represented by a single account. It is one of the last remaining large C&D exposures we had on the mainland. We have been involved in negotiations for resolution for some time. It was merely the circumstances as it stood at the end of the quarter that required the reclassification. But as I noted the we believe we are appropriately reserved for this one, for the resolution. Classified assets-- I think we now actually end up reporting those in our FCC filing, so I can tell you that they are continuing to trend downward as they have consistently over prior quarters.

Okay. And then I guess I have a question for John. It is encouraging to see the loan growth this quarter and maybe if you could just talk about your outlook for the that and do you expect to continue to broaden throughout the portfolio?

Yes, Joe I think you know that most of the loan growth that we got in the last half of 2011 was the resi mortgages. And the growth now is broadening both with C&D, but also CRE. So as you are well aware, especially on the corporate or commercial side, we had to build a pipeline and Lance Mizumoto, Chief Banking Officer and his team have worked really hard in term of building a pipeline. We are starting to see in the first quarter some of those results going forward, we're cautiously optimistic that we should be seeing modest but good loan growth coming to the bank.

Okay, thanks a lot.

Next question come from Aaron Deer at Sandler O'Neill & Partners

Good morning everyone.

Thank you.

Quick follow-up on the Joe's question with respect to the classifieds, can you provide what the classified asset ratio was at March 31st?

The classified asset ratio at March 31st .

Give him 12/31, too

was just about 38%

And at December 31st?

I think it was 45%.

Okay that is (inaudible) going in the right direction.

It is definitely moving in the right direction.

And with respect to the DTA I was wondering if you could give what the recoverable balance of that where that stood at March 31st, if your accountants or auditors had given you any sort of insight of what the timing of the full recovery might be at this point?

Yes Aaron, it's about 159 the net DTA -- the DTA. It's obviously net-to-zero on the books, but it is 159. We are still talking to our auditors about how we bring it back. So the expectation for the year is pretty much ongoing recorded as we earn it.

Thank you for the update.

The next question comes from Joe Gladue at B. Riley.

Hi, good morning. Just noticed on the mix of assets you had a pretty significant shift from cash and interest-bearing balances with banks into securities. Just wondering when that occurred and any impact in the net interest margin in that was already reflected in the first quarter, if we might see some benefit from that in the second quarter?

Joe, it's spread out pretty much during the whole quarter. It should-- we expect to see the margin stay flat where it is.

And I guess on the other side of that on the deposit side, you still have -- you still think there is much potential for declines in funding costs?

Well yes. Not significant but I guess one or two basis points makes a difference. It is getting out to pretty low levels.

And Joe, it's John. Just on the deposit side, we are still seeing good growth in core deposits, but as Denis mentioned, we are at levels now, you are not going to pick up that much more.

Could you remind us where the total exposure to the mainland loans stands.

Total exposure on the mainland is $281 million at the end of the quarter. And of that $60 million is non-accrual.

I guess lastly just ask if you could remind us when the next regulatory exam is and what the thoughts are on the progress towards the MOU.

There is no set date and the regulators decide that. So, but obviously a bank with an MOU they're going to be coming in at least once a year if not more frequently. We'll be seeing them again this year and we feel we have made good progress and ultimately it is going to be up it them it to decide when they're comfortable lifting the MOU. We don't see that negatively impacting us today in terms of executing under the plan. We think we are working well with the regulators. I think, if I may speak for them, that's dangerous but I think they are pleased with us raising capital and the financial improvement. I think we just have to focus on the doing the right things in the bank and eventually that MOU will go away.

Thank you that is all I had.

The next question comes from Jacque Chimera at KBW.

Hi, good morning everyone.

Morning. (multiple speakers)

I just have a quick housekeeping item. Following the government sale of your common shares, does that mean that you are no longer beholding to any of the TARP restrictions?

That is correct.

And then also, I'm sorry, Denis, I missed the amount of the unfunded commitments in your prepared remarks so this may answer my question. Excluding the effect of the charitable contribution in the fourth quarter, if I'm looking to the other expense line item in non-interest expenses, it looks like there is a substantial linked quarter decline. You mentioned some credit costs. I was wondering what credit costs were incorporated into that item.

Let him pull that number out now if you give us a minute.

Those would be write downs for OREO

That is included the category labeled "other."

Yes. And then the reserved one for the commitments. For the fourth quarter it actually went up $2.1 million, and the first quarter went down $1.7, and that is what is driving that significant different.

That makes a lot of sense. Thank you. And then lastly, I noticed that the mainland portfolio increased on a linked quarter basis, what was it that drove that?

Some new lending on the mainland to existing customers. It looks like it went up by about $9 million. It was on the commercial mortgage side.

(multiple speakers) John speaking here. While we are not looking for new business on the mainland, and I've said that publicly, obviously we made a huge investment if you look at our losses over the last three, four years in terms of lending there. But we do have a good core base, a little over $200 million, let's say, of clients that have been good clients and served us well. And we believe it's in the bank's best interest to serve those clients going forward.

Okay so it's just all existing clients that have been really strong relationships, and just keeping them happy?

That is exactly correct. There no new marketing to new -- there's no prospecting going on in the mainland by CPB today.

Okay. Great. Thank you for the color and clarity. I appreciate it.

Thank you.

As a reminder, to ask a question, you may press star then one. And our next question come from Aaron Deer at Sandler O'Neill.

Quick follow-up. Not to put the cart ahead of the horse, but you-- clearly your regulatory aberrations have come up and are continuing to come up, and I would expect them to bounce higher still once the DTA comes back. What are your thoughts, longer term? Obviously you've grown organically, but beyond that what are your thoughts in terms of how to deploy what is going to be pretty heavy level of excess capital at some point later this year or next year?

John here, Aaron. At this point in time, obviously especially when the DTA for the tax asset comes back, we're going to be well beyond well-capitalized. And at that point in time there is different choices for us that we need to consider. Obviously you know him as well as I whether we buy back shares, whether we initiate a cash dividend. So we'll look at all the alternatives out there, but to-date we're really not that focused. Again we are back to the blocking, tackling, getting the bank back to where it needs to be and getting out from under the MOU and continuing to improve earnings. So we probably would be looking at that the end of this year or early next year, roughly speaking.

Perfect. Thank you.

You are welcome.

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

If there is no other questions, let me thank you very much, everyone that is online for participating in our earnings call for the first quarter 2012. And we look forward to future opportunities to update you on our progress. Thank you.

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