Central Pacific Financial Corp (CPF) 2013 Q2 法說會逐字稿

Good afternoon, and welcome to the Central Pacific Financial Corporation second-quarter 2013 conference call. All participants will be in listen only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to David Morimoto. Please go ahead, sir.

Thank you, Maureen. And thank you all for joining us as we review our financial results for the second quarter of 2013. With us today are John Dean, President and Chief Executive Officer; Denis Isono, EVP and Chief Financial Officer; Lance Mizumoto, EVP, Chief Banking Officer; and Bill Wilson, EVP 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 forward-looking statements please see our recent filings with SEC. And now I will turn the call over to John.

Thank you, David, and good morning, everyone. We are pleased to report another solid quarter of performance for Central Pacific Bank. Earnings for the quarter increased significantly over the same period a year ago. Meaningful improvements continue to be made to our credit risk profile including further reductions in nonperforming assets.

In addition, recoveries on interest from loans previously held as nonaccrual loans have had a positive impact to our net interest margin and net income for the quarter. Loan growth continues to be positive as well as core deposit growth. Our efforts to expand customer relationships have continued to make a difference towards further strengthening our balance sheet. With our Company's strong capital position and earnings consistency over the past ten quarters, our Board of Directors declared a quarterly cash dividend of $0.08 per share payable on September 16 of this year to shareholders of record at the close of business on August 30.

Dividend payments on common shares were suspended in the first quarter of 2009. And we greatly appreciate the support of our shareholders while we navigated through a financial turnaround and recovery. Part of the Company's recovery plan, we initiated several major projects and investments to enhance our information technology systems this year, which will create sales and service efficiencies in the future and better position our Company for growth.

These initiatives include outsourcing our core IT systems operations, implementing a data warehouse and installing a customer relationship management system or, CRM. These enhancements are expected to be completed in early 2014. And as a result we expect our total other operating expense to be in the range of $34.5 million to $36 million per quarter over the next several quarters.

Turning to Hawaii's economy, we are encouraged by improving market conditions, which have been reflected in renewed commercial activity and consumer loan demand. Key indicators point toward a sustained growth for the remainder of the year.

The visitor industry continues to lead our economic expansion and is expected to remain robust throughout the year, supported by additional airline capacity. Visitor arrivals and spending in the first quarter of this year increased by 6.5% and 7.5% respectfully over the same period last year and are projected to increase 6.6% and 10.0% in 2013 over 2012. The surge in building permits by 45% last year will fuel construction activity in 2013 and generated an increase of 8.8% in construction jobs in the first quarter of this year over the previous year.

Presales activity for residential projects has been indicative of a solid demand for new housing. General excise tax revenues increased in the first quarter by 6.6% over the same period last year. Hawaii's unemployment rate dropped to 4.6% in June compared to the national unemployment rate of 7.6%. This is the lowest level employment in our state since September 2008, nearly five years ago.

With the improving economic and market conditions in Hawaii we are confident moving forward with our business plans to increase quality lending and improve core earnings. At this time I would like to ask Denis Isono, our Chief Financial Officer, to review the highlights of our financial performance for the second quarter of this year. Denis.

Thank you, John. For the second quarter of 2013 we reported net income of $14.3 million or $0.34 per diluted share compared to net income of $137.3 million or $3.25 per diluted share reported last quarter.

As we previously announced, our net income for the first quarter of 2013 included a non-cash income tax benefit of $119.8 million related to the reversal of a significant portion of a valuation allowance that we previously established against our net deferred tax assets. Excluding this income tax benefit our net income for the first quarter of 2013 was $17.5 million or $0.41 per diluted share.

Net income for the quarter was $33.2 million -- net interest income for the quarter was $33.2 million compared to $30.7 million in the previous quarter. Our net interest margin was 3.23% and 3.06% for the same respective quarters. The sequential quarter increase in both our net interest income and our net interest margin was due to the recovery of interest on loans previously placed on nonaccrual status totaling $1.7 million and an overall increase in our interest earning assets which included net increases in our loan and investment securities portfolios of $98.5 million and $69.4 million respectively.

We are again encouraged by the fact we were able to meaningfully grow our loan and lease portfolio despite seeing an $11.8 million reduction in our nonaccrual loan balances. Lance Mizumoto will provide more insight into the loan growth later in this call.

Our investment securities portfolio increased by $69.4 million during the quarter and totaled approximately $1.8 billion at June 30, 2013. We continue to evaluate various investment opportunities and strategies to improve the yield on our investment portfolio and strengthen our net interest margin. During the quarter we purchased [$]60 million in non-agency commercial and mortgage-backed securities, our municipal, corporate and non-agency mortgage-backed securities grew to approximately 21% of our investment securities portfolio at June 30, 2013, from 19% at March 31.

We also reported improvement in the taxable equivalent yield to 2.12% from 2.8% -- 2.08% for the quarter. In an effort to further improve our net interest margin going forward, we recently repurchased outstanding trust preferred securities totaling $10 million with a floating rate interest of 3.25% over the three-month LIBOR rate at a discount. We expect to recognize a $1 million gain related to this transaction during the fourth quarter of 2013, the next available date that these securities can be called.

In addition to repurchasing a portion of our outstanding trust preferred securities, we also repurchased the remaining outstanding warrants previously issued to the US Treasury as part of our participation in the TARP program. This repurchase resulted in a gain of 76,000 during the quarter and upon completion of this transaction the US Treasury the longer owns any outstanding shares or any warrants to repurchase shares of our common stock.

Noninterest income for the quarter totaled $17.8 million, up from $13.0 million in the previous quarter. The sequential quarter increase was primarily due to higher net gains in sales of foreclosed assets of $7.1 million, partially offset by lower unrealized gains on interest rate [locks] of $1.3 million and lower gains on sales of residential mortgage loans of $1.2 million reflecting the recent change in longer-term interest rates.

Noninterest expense for the quarter totaled $35.0 million, up from $32.8 million in the previous quarter. The sequential quarter increase was primarily attributable to a higher provision for repurchased residential mortgage loans of $1.6 million and higher net credit-related charges which includes changes in our reserve for unfunded commitments and foreclosed asset expense of $1.1 million.

Our adjusted efficiency ratio of for the quarter, which excludes net gains on sales of foreclosed assets, foreclosed asset expense and the amortization of certain intangible assets, was $76.7 million -- excuse me, 76.7% compared to 72.7% in the previous quarter. In the second quarter of 2013, we reported income tax expense of $1.9 million, which was attributable to the income tax liability generated from the previously mentioned gain that we recognized on the sale of foreclosed property. As of June 30, 2013, our net deferred tax assets totaled $144.1 million.

In addition to reporting another strong quarter of profitability, we also continue to make progress in our ongoing efforts to improve our credit risk profile. During the quarter we recorded a credit to the provision of loan losses of $0.2 million compared to a credit of $6.6 million in the previous quarter. The credit was a result of continued improvement in our asset quality as evidenced by a $14.4 million decrease in our nonperforming assets from $75.3 million at March 31, 2013 to $60.9 million at June 30, 2013.

The decrease in nonperforming assets was attributable to $18.3 million in reductions which were partially offset by $3.9 million in additions. Besides reducing our nonperforming assets we also reported net recoveries during the quarter of $500,000 compared to net charge-offs of $3 million last quarter.

The allowance for loan and lease losses as a percentage of total loans and leases decreased to 3.67% at June 30, 2013, from 3.82% at March 31, 2013. Despite this decrease the allowance for loan and lease losses as a percentage of nonaccrual loans increased to 163% at June 30, 2013 from 133% at March 31.

Lastly, at June 30, 2013 our capital ratios continued to exceed the levels required to be considered a well-capitalized institution for regulatory purposes. Our Tier 1 capital risk-based capital, total risk-based capital and leverage capital ratios were 21.55%, 22.83% and 14.24% respectively. Compared to 22.16%, 23.43% and 14.36% respectively at March 31, 2013.

That completes our financial summary. And I'd now like to turn the call over to Lance Mizumoto who will provide additional background relating to our banking activity.

Thank you, Denis. As Denis mentioned earlier, we are encouraged by the continued growth in our loan balances which increased by $98.5 million in the second quarter over the first quarter of this year. Our loan production this quarter resulted in increases of $60.4 million in residential mortgages and $48 million in consumer loans. Our commercial loan balance was relatively flat due in part to reductions in nonperforming loans and pay downs of existing loans. Approximately $11.8 million in non-accrual loans were reduced from our loan portfolio which had to be offset by loan production.

Our solid growth in total deposits of $91 million was primarily due to increases in non-interest bearing and interest-bearing checking as well as government time deposits. Core deposits increased by $30.7 million from the end of the previous quarter largely as a result of our efforts to strengthen our relationships with existing customers.

Going forward we remain optimistic for further growth in our loan portfolio evidenced by our strengthening commercial loan pipeline, as well as the increased startup activity in private commercial and residential development projects in Hawaii. We are seeing the activity in these projects pick up since the last quarter as they transition from the permitting phase to construction.

As interest rates increase we expect a reduction in residential mortgage refinance activity which will impact our gain on sales and servicing fee income related to these loans. Overall as the economic and market conditions and Hawaii are improving, we are confident that quality credit opportunities will be increasing as well. We are working hard to expand our base of customer relationships going forward. That concludes my remarks and I will turn the call back to John for his summary at this time. John.

Thanks, Lance. To summarize, we are pleased with the Company's financial performance in the second quarter, as we systematically progress toward a full recovery of our bank. We are confident the initiatives being executed to improve the information management, operational processes and overall efficiencies will better position us for quality growth in the future. We are also pleased to be back in a position to reinstate cash dividend payments and would like to again express our appreciation to our shareholders for their support and confidence. Thank you.

(Operator Instructions). Aaron Deer, Sandler O'Neill.

John, you gave some helpful guidance on what your expectations are for non-interest expenses here. I'm curious if you can give us a sense of how much of the current expense load might be related to consultants or duplicative tax spend and that sort of thing that is going to go away once these initiatives are completes so we can get a sense of (multiple speakers)?

I appreciate where you going, Aaron. I can't give you specific dollars, but obviously those costs you mentioned are embedded in what I shared with you in terms of as we make investments on the IT side to include the CRM and looking for other operational efficiencies. It may be best if I just tell you where we are headed over the next few years and that's a target efficiency ratio of 65%. And obviously that is our focus and we have many initiatives underway where we think that is very attainable.

Okay, that's helpful. And then I was curious, the -- if you could talk a little bit about the variables that fit into the reserve calculation this quarter. I guess I was a little surprised that given the very favorable improvement that you had in credit metrics that we didn't see a larger reserve release. I wonder if you could speak to that.

Sure, and that is why we have our Chief Credit Officer and Head of Operations, Bill Wilson, with us. Bill.

I think and the methodology, which has remained consistent, I guess two of the bigger factors I think that influenced the current quarter would be the loan growth. And then if you consider our NPAs to total loans, while it's certainly improved markedly from where it had been a couple of years ago it still remains elevated relative to our peer group. I think those are probably a couple of the driving factors that got us the result we are.

Okay, I will step back and come back in if other questions don't get addressed.

Joe Morford, RBC Capital Markets.

I wonder if you could just talk about the decision to reinstate the dividend relative to perhaps say a share buyback program. And how should we think about your capital allocation priorities going forward beyond supporting organic growth?

We look at the restatement of the cash dividend, Joe, as a first step, not a -- so the beginning of a process. We still have a high level of NPAs. So we are not rushing in terms of -- to look for deploying our excess capital. But we have under consideration we will continue to work towards. I think as I mentioned earlier, one would be the repayment of TruPS, I think you are aware we did pay I think $10 million we bought, $10 million of TruPS last quarter.

The other areas that we are looking at and under consideration would be a one-time cash dividend and that is still on the table. And then lastly would be the purchase of shares going forward, but we wouldn't be able to begin that until February of next year. And that is a result of the DTAs, the deferred tax asset and making sure that we protect that. And if you have details on that one I'm going to turn it over to Denis, our CFO. Does that answer the question?

No, that answers it fine. Thanks very much. The other question was just if you could talk a bit more about the loan growth in the quarter, the residential mortgage activity, the types of products you're portfolioing, and also maybe a little more color on the commercial loan activity, which you suggest the pipeline is building there.

Sure. I'm going to turn it -- Joe, over to Lance Mizumoto, who heads up all of our lending functions.

Again most of our portfolios of loans are in the jumbo type loans, and I think most of them are fixed rate, we have some adjustable-rate mortgages portfolio'd as well, but it is a very small amount. And in terms of the commercial one pipeline, while we were flat again this past quarter, we anticipate with the construction activity I alluded to both in residential and commercial construction that we would see opportunities going forward.

Other questions in the loans, Joe?

Maybe just a traditional C&I activity and kind of confidence a businesses there that you might see a little more activity there?

We anticipate more activity, again, as construction activity increases. There is a multiplier effect when construction activity picks up. A number of our customers that are subcontractors, for example, seek more capital financing for expansion purposes. We anticipate more of that activity picking up going forward.

Okay, understand. That makes more sense. Thanks.

Jacquelynne Chimera, KBW.

Looking at that 65% target that you have, what rate environment are you assuming?

On the specifics of it, even Denis -- I will turn it over to David, David Morimoto. But obviously with the overall rise in the treasury -- I know it is come back a little bit -- we are expecting, not at the short end, any changes going forward, but in the three, five, 10 year and in the 30-year mortgage we are projecting a pick up. And in terms of the specific rates we've forecasted over the next three years -- David?

The forecast over the next several years is pretty consensus. So it is relatively flat on the front end, so not much any monetary policy tightening, but we were forecasting a bit of a steepening of the yield curve. So I think the terminal rate over the next two to three years on the 10 year I think we have forecasted it getting close to 4%.

Okay, so that 65% target does incorporate some rate lift and NIM lift and all of that as well?

That is correct.

That is right. But I think what we have you would see, as David mentioned, is a consensus out there today.

No, definitely. We would all like to see higher rates.

It would be great.

Then I had a third, TruPS repurchase that occurred in the quarter, thinking about that from an income standpoint. And I apologize for my ignorance on this. So since the redemption happens in 4Q will it continue to be a portion of your interest expense until that point?

I'm going to turn it over to Denis, Denis Isono, Jacque.

Yes, it remains part of the accrued liability expense for the interest because it is still outstanding. We just can't redeem it until an interest call date, which is October 7.

Okay. But the gain on that was booked in the quarter?

No, it will get booked -- it hasn't been booked yet.

Oh, that books at the time of closing as well?

That is correct.

Does that answer the question?

Yes, yes it does, very well. And then I think almost everything else -- and just to clarify the taxes that were paid in the quarter that is just because you had that REO gain which caused your income to be higher than the projections you had last quarter when you did the DTA reversal?

That is exactly correct.

Okay. Great, that was all I had. Thank you.

(Operator Instructions). Don Worthington, Raymond James.

On the DTA, you mentioned what the balance was at the end of the quarter. What is the valuation allowance at the end of June?

I'm going to turn it to Denis again, Don, In terms of the balance. Denis? I think we are going to hold on for a minute. I think we are working on it.

It's $9.6 million.

$9.6 million, okay. And then in terms of loan recoveries, those have been pretty good and pretty much offset charge-offs or more than offset charge-offs this quarter. Do you expect more of that going forward or I guess what your outlook is for more recoveries?

We will turn it over to Bill, Bill Wilson.

Good morning, it's Bill. I would imagine that we would continue to see reasonable loan recoveries obviously coming out of the environment we did the last couple of years. But then with the passage of time I think that should taper off and start to look more like peer group averages.

Okay. All right, thank you.

Aaron Deer, Sandler O'Neill.

Just a quick question on the margin, it looks like the benefit from interest recoveries this quarter was somewhere around 16 basis points. I guess that puts you kind of flattish with where you were in the prior quarter, I'm curious have you been able to deploy --.

I think we got 1 basis point pickup didn't we?

Right, yes.

Well, it's hard to do today, Aaron.

No, that is fair. I'm just wondering with -- given where the rate environment has gone recently and your expectations for growth, can we continue to see some additional modest gains or what are your thoughts there?

It's going to be a function of loan growth and really a shift in the portfolio. And what I mean by that is to the extent that -- and we are cautiously optimistic in terms of the loan growth as we substitute loan assets for investment assets we think we have the possibility to continue to improve that margin.

But as you know we are all, all in financial institutions continue to be into a margin squeeze, even with the recent uptick in rates on the longer end. So cautiously optimistic, we can continue to improve, but I don't think you're going to see significant improvement in that over time. At least until there is a further strengthening on the long end of the yield curve.

Right. Okay, good, I appreciate you taking my questions.

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

Thank you. And let me just thank everyone again for participating in our earnings call for the second quarter of 2013. 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.