Central Pacific Financial Corp (CPF) 2012 Q4 法說會逐字稿

Good day and welcome to the Central Pacific Financial Corporation fourth-quarter earnings conference call. All participants will be in a listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to David Morimoto, Senior Vice President and Treasurer. Please go ahead.

Thank you, Emily, and thank you all for joining us as we review our financial results for the fourth 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.

Now I'll turn the call over to John.

Thank you, David, and good morning, everyone. We are pleased to report that we continued to make significant progress toward a full recovery of our Company in the fourth quarter of 2012. Since our Company's recapitalization we have attained eight consecutive quarters of profitability and are encouraged that our earnings in 2012 reflected a 30% increase over our earnings in 2011.

In the fourth quarter, we continued to strengthen our balance sheet with a substantial reduction in nonperforming assets. The continued improvement in our credit risk profile again resulted in a reduction of our allowance for loan and lease losses and a positive impact to earnings.

With the stabilizing market conditions in Hawaii together with our efforts to increase market share, we realized strong loan growth during the quarter as well as a solid increase in our core deposit base. Our capital position remains strong, supported by two years of profitability and the improvements in our asset quality. And as a result of our stable financial performance, the memorandum of understanding that we entered into with the regulators in May 2012 was terminated on October 26, 2012.

Turning to Hawaii's economic indicators, the trend has been generally positive. Our visitor industry has led the way with a banner year in 2012 supported by expanded airline capacity. Visitor arrivals in 2012 were up by 9.6% over 2011 to nearly 8 million visitors. Visitor spending also increased by 18.7% over the previous year to $14.3 billion.

The unemployment rate in Hawaii dipped to 5.2% in December, which is the lowest it has been in the past four years. The construction industry is also showing signs of recovery. Private building permits increased by 39% in 2012 over the previous year, which will help offset the delays expected in the construction of the rail transit system on Oahu.

Overall, with the improving economic and market conditions in Hawaii, we are confident that we are well-positioned to execute on our business plans in the coming year.

At this time I would like to ask Denis Isono, our Chief Financial Officer, to review the highlights of our financial performance for the fourth quarter and for 2012. Denis?

Thank you, John. For the fourth quarter of 2012, we reported net income of $12.4 million or $0.29 per diluted share compared to net income of $10.7 million or $0.26 per diluted share reported last quarter. For the year ended December 31, 2012, we reported net income of $47.4 million or $1.13 per diluted share compared to net income of $36.6 million or $3.31 per diluted share in 2011.

Our net income per diluted share in the previous year included the impact of a one-time accounting adjustment from the exchange of our preferred stock issued to the US Treasury Department for common stock as part of our recapitalization.

As John previously mentioned, our quarterly earnings continued to benefit from our improving credit risk profile. As we have done during the past several quarters, we again reduced our allowance for loan and lease losses, which resulted in a credit to the provision for loan and lease losses of $2.3 million.

In the previous quarter, we had a similar credit of $5.0 million. The reduction was a result of continued improvement in our asset quality as evidenced by a $50.3 million decrease in our nonperforming assets during the quarter and continued improvement in the historical quarterly charge-off data used to calculate the allowance. Bill Wilson will provide more details about our credit risk profile later in this call.

Net interest income for the quarter was $29.4 million compared to $29.6 million in the previous quarter. Our net interest margin was 3.00% and 3.02% for the same respective quarters. The sequential quarter decrease was primarily due to lower yields on our interest-earning assets resulting from the depressed interest rate environment that we continue to operate in. We expect to see continued pressure on our net interest margin in 2013 as rates remain at these low levels.

During the quarter, our investment securities portfolio increased by $35.3 million to approximately $1.7 billion. In an effort to improve the yield on our investment portfolio, we continue to evaluate various investment opportunities and strategies to strengthen our net interest margin.

At December 31, 2012, our municipal and corporate securities accounted for approximately 18% of our investment securities portfolio compared to approximately 12% at September 30, 2012.

Our loan and lease portfolio increased by $93.8 million during the quarter and now stands at $2.2 billion at December 31, 2012. We are encouraged by the fact that we were able to meaningfully grow our loan and lease portfolio despite seeing a $13.6 million reduction in our nonaccrual loans. We continue to evaluate and pursue opportunities to grow our loan portfolio in an attempt to improve our overall asset yields.

Noninterest income for the quarter totaled $13.0 million down from $15.9 million in the previous quarter. The sequential quarter decrease was primarily attributable to lower unrealized gains on interest rate locks of $2.1 million, lower investment securities gains of $800,000, lower rental income from foreclosed properties of $600,000, and lower service charges on deposit accounts of $500,000. These were partially offset by higher gains on sales of residential mortgage loans of $1.3 million.

Noninterest expense for the quarter totals $32.2 million, down from $39.8 million in the previous quarter. The sequential quarter decrease was primarily due to lower foreclosed asset expense of $6.3 million resulting from gains realized on the sale of certain REO properties during the quarter.

Our adjusted efficiency ratio for the quarter which excludes foreclosed asset expense and the amortization of certain intangible assets was 81.7% compared to 78.5% in the previous quarter.

Our net deferred tax asset balance at December 31, 2012 totaled $149.5 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. As we have communicated previously with this course results, we have reported eight consecutive quarters of profitability and are working closely with our auditors to determine when we'll be able to reverse the valuation allowance.

At this time we anticipate being able to reduce a significant portion of it during the first quarter of 2013.

At December 31, 2012, our capital ratios continue to exceed levels required to be considered as a well-capitalized institution for regulatory purposes. Our Tier 1 risk-based capital, total risk-based capital, and leveraged capital ratios were 22.54%, 23.83%, and 14.32% respectively compared to 23.34%, 24.63%, and 14.06% respectively at September 30, 2012.

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

Thank you, Denis. We continued to realize improvements in almost all areas of our credit risk profile in the fourth quarter of 2012 and for the entire year as well. Nonperforming assets totaled $90 million at the end of the fourth quarter compared to $140.3 million in the third quarter of 2012 and $195.6 million in the fourth quarter of 2011 or a year-over-year decrease of 54%.

The fourth-quarter decrease in nonperforming assets was primarily attributable to $51.8 million in reductions which were partially offset by $1.5 million in additions. The reductions are represented by $38.4 million in sales of foreclosed properties, $8 million in accounts returned to accrual status, $2.9 in repayments, $2.3 million in charge-offs, and $200,000 in write-downs.

Nonperforming construction and development loans totaled $46.8 million at the end of the fourth quarter, representing a decrease of $42.9 million or 47.8% from the third quarter of 2012. These nonperforming construction and development loans comprised 52% of total nonperforming assets.

Troubled debt restructurings totaled $68.5 million for the fourth quarter, a decrease of $5.4 million from the third quarter of 2012. Nonaccrual TDRs totaled $36.7 million and accruing TDRs totaled $31.8 million. Our TDRs are comprised of $35 million in residential mortgages, $28.5 million in Hawaii commercial real estate, and $5 million in other loans.

We achieved net recoveries of $1.8 million in the fourth quarter of 2012 as compared to net charge-offs of $1.9 million in the third quarter of 2012 and as compared to net charge-offs of $10.1 million in the fourth quarter of 2011. Loans delinquent for 90 days or more still accruing interest totaled $503,000 in the fourth quarter compared to $508,000 in the third quarter from 2012. Loans delinquencies for 30 days or more still accruing interest increased to $10.4 million in the fourth quarter from $5.7 million in the third quarter of 2012.

The allowance for loan and lease losses as a percentage of total loans and leases decreased to 4.37% at the end of the fourth quarter from 4.59% in the third quarter of 2012. The allowance for loan and lease losses as a percentage of nonaccrual loans was 121.5% at the end of the third quarter -- at the end of the fourth quarter compared to 104.3% in the third quarter 2012 and 100.1% at the fourth quarter of 2011.

As noted earlier in my remarks, our ongoing programs reduced nonperforming assets and reduced our construction and development credit risk exposure, demonstrated positive progress through the fourth quarter with a $50.3 million net decrease in nonperforming assets and a $42.9 million net decrease in construction development loans.

We anticipate that we will be able to continue our progress in improving credit quality in 2013.

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

Thanks, Bill. In summary, we are very pleased with the financial results achieved in the fourth quarter and the significant progress made throughout last year. We believe we will be well-positioned to maintain this positive momentum going into 2013 and to make further progress in enhancing our information management systems and our delivery platforms for servicing our customers.

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

(Operator Instructions). Aaron deer, Sandler O'Neill and partners.

Good morning. If I could start I guess, Denis, I want to go back to the DTA. Could you repeat the number? I didn't hear if it was 139.5 for 149.5.

$149.5 million.

Okay, so that's actually an increase from the prior quarter. Is that right?

No, it's not.

Sorry, I must have the wrong number then. Okay, then with respect to capital, your TCU is obviously very strong as are your regulatory ratios, and I'm just curious with the expectation now that we are getting closer to a full BPA recovery and the impact that's going to have on capital, what is the expectation we might see a reinstated dividend or start seeing some share repurchases at some point this year?

I'm going to take that one -- John Dean here. Right now there's going to be a substantial inflow of capital. Not all of that DTA will be realized. I think Denis mentioned that earlier so just to confirm but the majority of it we believe will be in this first quarter.

What we are looking at as you would expect is the reinstatement of a quarterly dividend. We're looking at a one-time large dividend and we're looking at the repayment of the TruPS, so we are looking at all three and anything else we might see that can better position the bank going forward. But at this time, no decision has been made.

Okay, then with respect to the mortgage activity in the quarter, what were the -- what was kind of the mix of purchase versus refi activity and what was the volume -- dollar volume of the loans that were sold?

I've got Lance Mizumoto with me and -- who is Chief Banking Officer, and so I'm going to do is pass it over to Lance and see if he has got the data and if not, we will get back to you later in the day.

Good morning, Aaron. This is Lance Mizumoto. A proportion of purchase activity, the refinance activity, we saw about let's say 40% purchased and about 60% refinance.

Okay. Do you have the dollar volume of loans sold? And then also just maybe your thoughts going forward if origination volumes hold up, do you expect to be selling at a similar level going forward?

Let's see, a little over $286 million was sold.

And the question is whether the mix of purchase versus refi is going to change this year? Because obviously purchase will be going up versus the refis just because of where we are with rights. So we expect to be even better this coming year because we are typically stronger in the purchase market.

Okay, so is it reasonable to assume then that your sale -- your loan sale activity is probably going to continue at a similar pace?

We would think so.

Okay, great, thanks for taking my question.

Joe Morford, RBC.

Thanks, good morning, everyone. Just given the relatively positive economic trends, what kind of expectations do you have for loan growth in the year ahead and do you see the mix coming from kind of the same categories as we saw this quarter?

I'm going to turn it to Lance, Joe. John here and I'm going to turn to Lance in a minute. But obviously we had an excellent fourth quarter led by Lance and his team and the market is doing better as I will refer back to my earlier comments not just with tourism being at all-time highs at the end of last year but also as we look at this year going forward. If you look at permits in the pipeline, there should be a good deal of construction going forward and better this year than last year but maybe with that as background, Lance, do you --? Don't give specifics, though.

No, that's okay. Feel free.

As we look at the pipeline, I think we are encouraged on several fronts. Clearly on the residential mortgage side we are still continuing to see a very healthy activity and then we are also encouraged by the strengthening of the whole economy. So I think C&I activities is continuing to grow.

Are you seeing any increase in the line utilization rates on that C&I side?

I think there's some pick up but some of that has been seasonal. What you see then is a downturn toward the middle of the year. But I think we have been encouraged by the activities of our officers in securing not only lines of credits but term loans as well.

Okay, as the loans grow, are you likely to let investments run down such the overall earning asset growth will be a lot less but obviously get the improved mix?

We anticipate that the investment portfolio would go down. We are hopeful or encouraged by the amount of again loan activity and volume.

Okay, then lastly I was just curious if the expiration of the tag at year end was anything of note one way or the other?

No. We went out proactively, talked to our clients and we have not seen any significant changes as a result of the expiration of the tag.

Okay. Thanks, everyone.

(Operator Instructions). Jacque Chimera, KBW.

Good morning, everyone. I had a question about the provision expense in the quarter. You obviously continue to have excellent improvement in the NPAs and just with the continuing decline in NPLs in the recovery booked in the quarter, I was surprised there wasn't more of a relief I guess you could say. How do you think about that going forward into 2013 assuming credit continues to improve?

Jacque, I'm going to pass that one to Bill Wilson.

Good morning, Jackie. It's Bill. It's not so much how we think about it, it's just the consistent methodology that we've been applying now for two years. And as we go through the methodology and then put the historical factors and some of the economic factors, it guides us as to what the level of the allowance should be.

Does the quarter's loan growth play an impact in that?

It does a little bit. If you think about new lending, would require some level of provisioning and so to the extent that there might have been with no low growth, there might have been a larger release, that is part of it.

Once we -- I'm just trying to understand the rolling methodology of the historical charge-offs that you look at. Once we get into 1Q 2013, does that roll off on a quarter basis or is it an annual basis?

We roll off on a quarterly basis. We have different periods for real estate-based transactions and non-real estate-based transactions and as we continue to move forward, we lose some of our history.

That's good color, thank you. Just one question on the purchase refi percentage. Your purchase percentage, it's very impressive in this environment and it's much higher than some of your peers. Just kind of your thoughts on what you do that might be a little different to drive that strong purchase volume.

Let it pass it back to Lance, Lance Mizumoto.

Jackie, this is Lance. I think we are encouraged again by the growth in the economy, in Hawaii's economy, that is, and I think what we anticipate is more real estate activity in the way of purchases and sales taking place.

Okay, just lastly, I wanted to see if there might be any color that you could provide on the word majority with DPA just because I realize that you are still talking to the accountants but if you have --

The question again please?

With the return of the majority of the DTA, I think when we talked in the past I know that there's a section of the California portion of that that draws into question. I just wondered if you had any sort of very general guidance that you might be able to give on what portion you think may remain with an allowance against it just generally?

Jacque, we are probably in the same spot we were originally with the California deferred assets not being recognized. So we haven't -- that story hasn't changed very much but we just want a make sure that it's clearly not all of it.

Okay, those were my questions. Thank you.

A follow-up from Aaron Deer, Sandler O'Neill & Partners.

Actually follow-ups on Jacque's questions. With respect to the DTA and the portion in California, is the expectation there just that you've got less of a presence now in California so there's less income being derived there from -- which to offset the allowance?

Aaron, this is Denis. That is exactly right. There's just less revenue expected to be generated in California.

Okay, then going back to the reserve methodology, Bill, if you can give some color maybe on what the look back period is on that and if that's going to leave us with any possible big releases coming up here over the next several quarters as some of those more challenging quarters drop out?

The look back period for real estate-based transactions is two years, so you can look at our history and see what that would suggest.

Okay, then one last question on the deposit service purchase in the quarter, those came down so I'm just wondering if that's a shift in your overdraft fee methodology and if that's going to be a permanent kind of reduction, if you will, going forward?

I will start and, Lance, jump in. The answer is we have changed our policy there and that will impact us going forward this year.

I would echo the same thing. We anticipate that change to at least continue throughout the year.

Okay, great. Thanks again for taking my questions.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Dean for any closing remarks.

Thanks, Emily. Just thank you very much for participating in our earnings call for the fourth quarter 2012 and then we look forward to future opportunities to update you on our progress. Have a good day.

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