Central Pacific Financial Corp (CPF) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by, and welcome to the Central Pacific Financial Corp. second quarter 2012 conference call. (Operator Instructions). This call is being recorded and will be available for replay shortly after completion on the Company's website at www.CentralPacificBank.com. I would now like to turn the call over to Mr. David Morimoto, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Laura, and thank you all for joining us as we review our financial results for the second 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 statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to forward-looking statements, please see our recent filings with the SEC. And now I will turn the call over to John.

Thank you, David, and good morning, everyone. In the second quarter, we continue to make solid progress toward our business objectives. I am pleased to report a sixth consecutive quarter of profitability since the recapitalization of our Company. Significant improvements continue to be made to our credit risk profile resulting both in further reduction of our allowance for loan and lease losses, and in the positive impact to our earnings.

Although there are several large nonrecurring expense items in the quarter which will be covered in more detail in our financial report to follow, core earnings improved over the same period last year. We also achieved solid growth on our balance sheet, both in loans and deposits, and our capital position remains strong. Overall, we are well on track with our business plan for 2012 throughout all areas of the bank. Our management and employees continue to focus on rebuilding our organization toward a full recovery.

Turning to our local economy, our visitor industry has been the driver of Hawaii's economy as it begins to gain momentum. We are encouraged by the increasing visitor industry activity and expanding airline capacity, which has occurred since the beginning of the year, particularly in the international market. Year-over-year increases and total number of visitors to Hawaii returned to double-digit percentages in the three-month period from March to May, With gains of 12.9%, 11.3%, and 12.2% respectfully. Visitor spending increased likewise in the same period by 18.9%., 26.7%, and 17.5%.

The unemployment rate in Hawaii has increased slightly to 6.4% from 6.3% in the prior month, but was down from January of this year was at 6.5%. With the surfacing of new mixed-use construction projects in Kaka'ako, and residential developments in West and Central Oahu, together with the $5 billion elevated rail system and the positive trends in our visitor industry, the unemployment rate is expected to decline for the remainder of the year.

A recent forecast by the state's Department of Business, Economic Development & Tourism had the following year-over-year increases in 2012 -- 6.5% for visitor arrivals, 9% for visitor expenditures, 1.7% for real personal income, 1.5% for job growth and 2.2% for real GDP.

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

Thank you, John. For the second quarter of 2012, we reported net income of $10.8 million, or $0.26 cents per diluted share compared to net income of $13.5 million, or $0.32 cents per diluted share reported last quarter. A sequential quarter decrease was due to the recognition of a few nonrecurring charges to noninterest expense during the quarter. I will provide further details on these items later in this call.

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 $6.6 million, compared to a credit of $5.0 million in the previous quarter. The result in our allowance -- the reduction in our allowance was the result of continued improvement in the historical quarterly charge (Inaudible) needed used to calculate the allowance, and an overall improvement in the Company's credit risk profile, as evidenced by the fact we reduced our nonperforming assets by $35.3 million during the quarter. Bill Wilson will report more details about our credit risk profile later in this report.

Net interest income for the quarter was $30.3 million, compared to $30.5 million in the previous quarter. And our net interest margin was 3.17% and 3.23% for the same respective quarters. The sequential quarter decrease was primarily due to lower yields on our interest earning assets. During the quarter, our investment securities portfolio decreased by $14 million to approximately $1.6 billion due primarily to maturities offset by purchases of municipal and corporate securities totaling $86.3 million.

At June 30, 2012, our municipal and corporate securities accounted for less than 8% of our investment securities portfolio. However, we expect to gradually increase our investments portfolio allocation to investment grade municipal and corporate securities over the coming quarters as we continue to look for opportunities to improve the overall yield on our investment portfolio. Noninterest income for the quarter totaled $13.6 million, up from $13.2 million in the previous quarter. The sequential quarter increase was primarily attributable to higher gains on sales of residential mortgage loans. Noninterest expense for the quarter totaled $39.7 million, up from $35.2 million in the previous quarter. The sequential quarter increase was attributable to an accrual totaling of $1.8 million related to the settlement of a legal proceeding against us.

Higher amortization expense resulting from a $900,000 writeoff of certain intangible assets, higher credit related charges of $1.1 million and higher salaries and benefits of $1 million. These amounts are partially offset by a lower provision for repurchased residential mortgage loans of $1.4 million.

Our adjusted efficiency (Inaudible) for the quarter, which excludes foreclosed asset expense and the amortization of certain intangible assets, was 80.4% compared to 75.0% in the previous quarter. Our deferred -- our net deferred tax asset balance at June 30th totaled $155.1 million. Because we continue to have a full valuation allowance established against this entire amount, we did not recognize any income tax expense for the quarter.

At June 30, 2012, our capital ratios continued to exceed the minimum levels required by both the memorandum or understanding that we entered into with our regulators, and the levels required for well- capitalized regulatory designation. Our tier 1 risk base capital -- total risk base capital and leverage capital totals were 23.04% percent, 24.32%, and 14.12% respectively. Compared to 22.83%, 24.13%, and 14.03% respectively at March 31, 2012.

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

Thank you, Denis. We continue to realize improvements in most areas of our credit risk profile in the second quarter of 2012. Nonperforming assets totaled $170.3 million at the end of the second quarter, compared to $205.6 million in the first quarterof 2012, and $249.3 million in the second quarter of 2011, or a year-over-year decrease of [31.7%]. The second quarter decrease in nonperforming assets was primarily attributable to $38.9 million in reductions, which were partially offset by $3.7 million in additions. The reductions are represented by $24.4 million in repayments, $5.9 million returned to accrual status, $3.1 million in sales of foreclosed properties, $1.6 million in write downs, and $4 million in charge offs.

Non-performing construction and development loans totaled $103.3 million at the end of the second quarter, which comprised 60.7% of total non-performing assets, and decreased from $126.3 million in the first quarter of 2012. Troubled debt restructuring totaled $67.6 million for the second quarter, a decrease of $13.2 million from the first quarter of 2012. Our TDRs are comprised of $38.9 million in residential mortgages, $22.5 million in Hawaii commercial real estate, and $6.2 million in other loans.

Net charge offs totaled $3.9 million in the second quarter, as compared to $2.8 million in the first quarter of 2012, and $2.3 million in the second quarter of 2011. Loans delinquent for 90 days or more still accruing interest totaled $505,000 in the second quarter, compared to $208,000 in the first quarter of 2012. Loans delinquent for 30 days or more still accruing interest decreased to $3.8 million in the second quarter, from $6.2 million in the first quarter of 2012.

The allowance for loan or lease losses as a percentage of total loans and leases decreased to 4.94% at the end of the second quarter from 5.49% in the first quarter of 2012. The allowance for loan and lease losses as a percentage of nonaccrual loans was 93.9% at the end of the second quarter, compared to 80.4% at the first quarter 2012, and 80.8% at the second quarter 2011.

As noted earlier in my remarks, our ongoing program to reduce nonperforming assets and reduce our construction development credit risk exposure, demonstrated positive progress in the second quarter with a $35.3 million net decrease in nonperforming assets and a $41.1 million net decrease in construction and development loans. 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.

Thank you, Bill. In summary, we continue to make significant progress since the recapitalization of our Company, and are well on track to completing our 2012 objectives. Our priorities continue to include further improving our credit risk profile, enhancing our information management systems, maintaining a highly competitive sales and service structure, and expanding core earnings.

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

Our first question comes from Joe Morford of RBC Capital Markets.

Thanks, good morning, everyone.

(Multiple Speakers) Good morning, Joe.

I guess first a couple questions on credit, unless I missed it. Can you tell us what the classified assets did in the quarter, and then maybe update us on the status of the larger mainland loan that went into [nonperformer] last quarter?

Sure. Classified assets are down about $50 million in the quarter. And the large asset that moved to nonperforming in the first quarter is currently in negotiations with a potential settlement prior to year end.

Great. And then foreclosed property extends back up to $2.5 million or so this quarter. How did that break out between any loss on the OREO sales, write downs on updated appraisals, and ongoing operating expense. What do you see as a good run rate going forward for this line?

That's a tough one. We did have -- in the write downs as I mentioned earlier, we wrote down $1.6 million in OREO write downs in the quarter. The rest of the question, I just don't have that information at my fingertips.

Okay.

Can we get back to you later, Joe?

No problem. Maybe instead then, any current thoughts on the margin going forward, given the ongoing pressure on loan and investment yields and based on this quarter, looks like maybe funding costs may be starting to bottom out.

I will take that one, Joe. And just like all other banks, we're going to continue to be under pressure in terms of the margin going forward. Longer term, we see opportunities, obviously. As Bill and his team continue to do a good job in lowering our [NPAs], again [170] this quarter, that's going to help as we reinvest those monies at any rate above zero, and then loan growth. We did have, I thought, good loan growth this quarter. You've got to take into account that a large part of that loan growth is catching up on whatever Bill does to run off the nonaccruals. We've got to put that back on before we get to zero. So we think we had a good quarter. We think the pipeline is good, but like all over banks, we're going to continue to be under pressure. Just given the yield curve and the competitive nature of the market today for good credits.

Okay, makes sense. Thanks so much.

Thank you.

The next question is from Joe Gladue of B. Riley.

Good morning.

Good morning, Joe.

Let me follow-up a little bit on Joe's last question on the margin, just [seeing the] still-increasing liquidity balances on the balance sheet. Do you thing there will be enough loan growth to maybe redeploy some of the liquidity?

It is going to be a function also of the -- you have to look not just as you know the margin, but also net interest income. The balance sheet is growing, and it (Inaudible) is growing faster on the deposit side. That's going to have a neg -- on margin, it's going to have a negative impact, not necessarily in terms of net interest income. So it is hard to predict loan growth going forward, and in part it is going to be a function of the economy here. As I mention in my comments, Joe, we are cautiously optimistic in terms of what we see in the state of Hawaii. There is a lot of -- tourism is a primary engine, it looks very good right now. But, typically, you are looking for construction to follow, and that engine, while there is construction going on, it is not as strong as it has been in the past, or as we would like to see.

So, with that, we have to look for other opportunities within this market , but at the same time being prudent. So Lance, who is here on this call with us, would tell you that the pipeline looks good, a lot of work has been done, and we think we made good progress this past quarter. I am going to use the term again if I may, we are cautiously optimistic in terms of going forward, but I can't tell you to the extent we will be able to sop off -- sop up all that extra liquidity. We have also done some extra work, if you look, and what we talked about Denis, in terms beyond investment portfolio, is looking at munis and at corporates, and I think that's about 8% today. And we are going to see some growth in that which should also positively impact our margin.

Okay. Just wondering if you could, I guess, give a little more detail on the intangible writeoff during the quarter, what was that?

It is an investment we made in prior years that, obviously as we go and to clean up the balance sheet, if I may, that we don't see revenues from that to justify keeping it, and so we just accelerated the write off of that intangible.

Thank you.

Thank you, Joe.

And the next question is from Aaron Deer of Sandler O'Neil & Partners.

Hi, good morning, guys.

Good morning.

I think my questions are mostly follow-ups. On one -- you mentioned the pipeline. Can you give us a sense of where that stood at period end relative to March 31?

I apologize, and your voice -- we didn't pick up the beginning.

Sorry. Just looking to see if I could get where the pipeline stood, or stands today, maybe relative to three months ago.

In terms of the -- the pipeline?

Yes.

I am going have Lance Mizumoto, who's with us, he is our Chief Banking Officer in terms of -- he just gave me a thumbs up, but maybe, Lance, you can spend a minute on the pipeline?

Good morning, Aaron, this is Lance. If I look at the pipeline, I would say that our pipeline compared to the last quarter is higher. We have seen some runoffs or pay downs , but I think that we have seen some growth in both the commercial real estate and C&I portfolio for the pipeline.

Thanks, lance. And on the expenses, it noted the amortization. I am wondering, the legal accrual that you had this quarter, I am guessing that was a one-time thing and won't be recurring. Maybe if you can confirm that. And then absent some of those items that were discussed, the OREO expense in the quarter, the legal, and amortization -- when you back those out, you are around $32 million in the second quarter for core expenses. Is there room to bring that down at this point, or will that be flattish and you will grow into that on the revenue side? Or what are your thoughts there?

I will let Denis start.

Okay, on the legal fees, yes, that is a one-time -- one-time accrual for a liability we incurred. The expense side, we are expecting it to stay at that level once it gets down there, $32 million to $35 million, somewhere in there as we go forward.

But longer term, obviously, if you look at our efficiency ratio, it is not where it needs to be. But as Denis said, going forward this year, we don't see any significant reductions. But if you look at a lot of programs we have in place, I mentioned at the end in management information systems, automating some of the paper we have in place today, we have got a lot of work to do, in terms of approving that efficiency ratio. It is not all going to come on the expense side. It can't, as you pointed out, Aaron. We are going to have to look for revenue growth, too, to get there. To get down into the [50s\ is a long-term plan. And so over the next few years.

That's great. And then just lastly on the capital front, first any sense of timing on the DTA recapture, and when that does come back, you are going to have just -- pretty significantly over capitalized. Thoughts on how you might manage that down to a rational level, given -- aside from just growing organically.

Yes, Aaron, right now we are working on the return of the DTA. And we are looking at sometime in the first part of next year for that to happen. Likely in the first quarter. As far as the capital issues, we are huddling around to look at that and analyze that as a team and driving our way to figure out what their options are. Right now we are limited because of the regulatory orders we are under.

As Denis said, in public, we have got the MOU, but you know as well as ourselves there is obviously available to us, is the purchasing of -- back of our shares. Another would be as a large cash dividend. We will consider it, but frankly the focus has been more on getting the bank in a stronger position from a strong balance sheet, (Inaudible) balance sheet and improving earnings. It will be next year when that DTA becomes available. We think.

Thanks for taking my questions. That's helpful.

Thank you.

And the next question is from Jacque Chimera of KBW.

Hi, good morning, everyone.

Good morning, Jackie.

Just a follow-up quickly on Aaron's question on the DTA, when you -- and I know it is all speculative at this point -- but when you say 1Q13, would you expect a partial recovery at that point, or would you expect the full recovery?

We are working on that now with our accountants. We're on timing, and as we look at it forward, we are not sure how much of that will come forward, will get recognized. It could be all of it, it could be a majority of it, it could be a little of it.

We would like all of it, and we are working toward that, but as Denis said, we just don't know at this point in time.

Yes, that makes sense. I know that we have seen a smattering of many different types of that. And was there anything unusual in the salary increase (Inaudible) quarter?

I will take it. It was a true up of a bonus accrual, primarily one time. We have done well this year in the plan, and if we can hit certain hurdles -- and not until certain hurdles are hit -- would we consider a -- payouts. So that's where it is, and it is again tied to a plan we believe we will be achieving. Really it was a true up for first and second quarter.

So then third quarter would go back to more of the 1Q level, perhaps a little higher, assuming things are still moving along and you have the third quarter's bonus in there?

Assuming we do well, I would say if you take what we did in the second quarter and divide by two is what you might get in the third quarter.

Okay. And then I am not sure if you will be able to do this, but are you able to provide any very generic color surrounding the legal accrual you had in the quarter? Maybe what type of legal action.

No, I prefer not to, Jacque, other than to assure you that it is a one-time event. So it is not operating, and it should not be recurring, and it is to clean up some things in this organization that occurred in prior years.

Okay, great. Those are my questions. Thank you very much for the color.

Okay, you are welcome, Jacque.

(Operator Instructions). Showing no further questions, I will turn the conference back over to John Dean fore closing remarks.

Thank you -- thank you very much for everyone, for participating in our earnings call for the second quarter 2012, 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.