Central Pacific Financial Corp (CPF) 2013 Q4 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp. fourth-quarter 2013 conference call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. This call is being recorded and will be available for replay shortly after the completion at the Company's website at www.CentralPacificBank.com. I'd like to turn the call over to Mr. David Morimoto, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, Keith, and thank you all for joining us as we review our financial results for the fourth quarter of 2013. Joining us today are John Dean, President and Chief Executive Officer; Denis Isono, Executive Vice President and Chief Financial Officer; Lance Mizumoto, Executive Vice President and Chief Banking Officer; and finally, Bill Wilson, Executive Vice President and Chief Credit and Operations 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. Good morning, everyone. We are pleased to report on another solid financial performance in the fourth quarter, which contributed to a significantly improved year in 2013. Excluding a non-cash deferred tax asset reversal benefit that was recorded as income in the first quarter of 2013, our net income for the year increased by 8% over the previous year.

We are also pleased to announce a dividend payment to our shareholders for the third consecutive quarter since having to suspend dividends in 2009. Our Board of Directors has declared a dividend of $0.08 per share payable on March 17, 2014 to shareholders of record as of February 28.

With the improving market conditions in Hawaii and our continued focus on our business plan initiatives throughout the year, we were able to generate significant growth on our balance sheet. As of December 31, 2013, total loans and leases increased by 19.4% over the same period in 2012.

Shifting assets from securities investments to loans resulted in a positive impact to our net interest margin, reflected in a 10 basis point increase in the fourth quarter over the previous quarter. We continue to improve our credit risk profile and have come closer to normalizing our loan-loss reserve levels as we have recorded a nominal provision for loan losses in the fourth quarter after recording a credit to our provision for loan losses in the past eleven quarters.

I should now note that we are presently reviewing our methodology to consider the improving trends in recent years. Bill Wilson can speak further to this review in the Q&A section.

Nonperforming assets are down to 1% of total assets. Operational efficiencies have improved as reflected in the reduced efficiency ratio for the quarter and for the year. We continue to be focused on further improving our cost structure with our technology and process improvement plans for this year. Through a total team effort, we have made significant progress through 2013 and remain focused on expanding quality relationships with our clients.

Many of the enhancements to our information management systems will be operational in the first half of this year. We are confident that these investments in our infrastructure will deliver longer-term benefits to our customers.

Turning to Hawaii's economy, while 2012 was a banner year for economic growth, we are encouraged by the continued steady growth in the key economic indicators in 2013. As of the end of November 2013, visitor arrivals were up by 3.1% year-over-year. Increased airline capacity, including the recent entry of Air China into Hawaii this month will help expand Hawaii's presence in the Pacific Rim.

Solid growth in the construction industry is expected to continue in 2014. As of November 2013, over $2.4 billion in private building permits were in place, which included a 27% increase in the residential sector over the previous year. This pipeline is in addition to the $5.2 billion rapid transit system currently underway and other government contracts.

The seasonally adjusted unemployment rate in Hawaii steadily declined throughout the year and was at 4.5% in December 2013 compared to 5.1% a year ago. In comparison, the national seasonally adjusted unemployment rate was 6.7% in December 2013 and 7.9% a year ago. Overall job growth was 1.6% in 2013, led by the construction and hospitality industries.

With the projected stable growth in our visitor industry and robust construction activity, we are encouraged by the improving market conditions in Hawaii as we execute our business plans for 2014.

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?

Thank you, John. For the fourth quarter of 2013, we reported net income of $9.0 million, or $0.21 per diluted share compared to net income of $10.2 million or $0.24 per diluted share reported last quarter. The decrease was primarily due to an $800,000 provision for loan and lease losses compared with a credit of $3.2 million reported for the prior quarter. Positively offsetting this change were increases in net interest income and other operating income and a decrease in other operating expense. Net interest income for the quarter was $35.5 million compared to $33.8 million in the previous quarter.

Our net interest margin was 3.29% and 3.19% for the same respective quarters. The sequential quarter increase in our net interest income continues to be driven by our increasing interest earning assets, which on average grew by $82.2 million. The net growth was reflected in average loans, which increased by $114.1 million, offset by a decrease in our investment portfolio average of $36.8 million.

The interest recoveries on loans previously placed on nonaccrual status that have affected net interest income in prior quarters was only $300,000 and $600,000 for the fourth and third quarters respectively. The sequential quarter improvement in net interest margin was also attributable to an increase in the yield on the investment portfolio.

Our loan and lease portfolio ended the year at $2.63 billion, an increase of $146.3 million from $2.48 billion at the end of the third quarter. We continue to be encouraged by our ability to meaningfully grow our loan and lease portfolio. Lance Mizumoto will provide more insight into the loan portfolio later in this call.

Our investment securities portfolio decreased by $97.6 million during the quarter, ending the year at $1.66 billion. The taxable equivalent yield on our investment portfolio improved to 2.43% from 2.18% reported for the third quarter. The increase in yield was primarily driven by the slowing of premium amortization on our mortgage-backed securities and the reinvestment of cash flow into higher-yielding securities. During the quarter, we executed a bond swap where we sold lower yielding agency debentures and agency MBS and reallocated into higher-yielding nonagency CMBS and RMBS, corporate bonds and agency MBS.

Noninterest income for the quarter totaled $12.2 million, up from $11.9 million in the previous quarter. The improvement was attributed to the $1 million gain on the extinguishment of $10 million in trust-preferred debt and the investment securities gains resulting from the repositioning of the investment portfolio I mentioned earlier. This was partially offset by lower unrealized gains on loans held for sale and interest rate locks of $1.2 million.

Noninterest expense for the quarter totaled $35.3 million, down from $36.5 million in the previous quarter. The sequential quarter decrease was primarily attributable to a premium paid on the repurchase of preferred stock of two subsidiaries of $1.9 million in the third quarter, which was offset by higher salaries and employee benefits of $1.2 million. The increase in salary and benefits included severance, early retirement and retention benefits totaling $1.8 million for the quarter compared to $1.3 million in the previous quarter.

The increase in salary and benefits were offset by lower legal and professional fees of $0.5 million. As we go forward, there will be additional accruals for the severance, early retirement, and retention benefits for employees with workthrough dates extending into 2014.

Our adjusted efficiency ratio for the quarter, which includes net gains on sales of foreclosed assets and investment security, foreclosed asset expense and the amortization of certain intangible assets was 72.50% compared to 78.02% in the previous quarter. We continued to work toward improving our efficiency ratio as we progressed on executing our cost improvement initiative developed in our benchmarking project earlier this year.

In the fourth quarter of 2013, we recorded income tax expense of $2.6 million compared to $2.2 million in the previous quarter. The income tax expense was attributable to higher pretax income than was forecast when we recognized the reversal of the evaluation allowance on the deferred tax asset in the first quarter. As of December 31, 2013, our net deferred tax asset totaled $138.1 million.

We also continue to make progress improving our credit risk profile. During the quarter, we recorded provision for loan and lease loss of $800,000 compared to a credit of $3.2 million in the previous quarter. Nonperforming assets ended the year at $46.8 million, a decrease of $12.2 million from the $59 million reported at the end of the third quarter. During the quarter, the largest nonperforming loan on the mainland was paid off, lowering NPA by $11.6 million. At the end of the year, the mainland nonperforming portfolio was down to $9.8 million of total NPA.

The allowance for loan and lease losses as a percentage of total loans and leases decreased to 3.27% at December 31, 2013 from 3.43% at September 30, 2013. Our allowance for loan and lease losses as a percentage of nonperforming assets grew to 183% at December 31, 2013 compared to 144% at September 30, 2013.

Lastly, at December 31, 2013, our capital ratios continued to exceed the levels required to be considered a well-capitalized institution for regulatory purposes. Our Tier I risk-based capital, total risk-based capital and leveraged capital ratios were 20.25%, 21.52% and 13.64% respectively compared to 21.30%, 22.58% and 13.96% respectively at September 30, 2013.

That completes our financial summary and I would now like to turn the call over to Lance Mizumoto, who will provide additional background related to our banking activity.

Thanks, Denis. The increase in total loans by $146.3 million in the fourth quarter over the previous quarter-end included increases of $85.1 million in consumer loans, $42.3 million in residential mortgages, and $30.5 million in commercial loans offset by a $13.7 million decrease in commercial mortgages. Year-over-year, the $426.7 million increase in total loans was also spread among our consumer, residential mortgage and commercial loan portfolios with a growth of $167 million, $204 million and $153 million, respectively.

Our focus on expanding and strengthening our customer relationships, as well as our consumer loan promotions have resulted in generating meaningful new business throughout the year. Our core deposits have remained stable and we realized a steady growth in total deposits of $255.4 million year-over-year. This deposit growth is also the result of building quality customer relationships.

Going forward, we are encouraged by the increasing construction and development activity in Hawaii. In addition to the building permits in place as John mentioned in his economical review, there is a heightened interest by developers for property acquisitions and new projects, particularly in the residential condominium market.

With improving market conditions in Hawaii, the healthy commercial loan pipeline and a stable deposit base, we are confident in continuing to expand our loan portfolio with quality assets in the coming year. That completes my summary on our business development activity. I will now turn the call back to John for his closing remarks. John?

Thank you, Lance. In summary, 2013 has been a significant milestone. It is the third consecutive year of increasing profitability since the Company's turnaround. Dividends were reinstated in the second quarter supported by our earnings consistency and strong capital position. Our asset quality has been restored to near normalized levels and we continue to have a strong inflow of quality credits.

We have started numerous projects to strengthen our information management systems, as well as to streamline our operational efficiencies. We have a lot more work ahead and I believe we are on the right track at the right pace for the long-term success of our Company. I would like to again express our appreciation to our shareholders and customers for their continued support and confidence. At this time, we will be happy to address any questions you may have. Thank you.

Joe Morford, RBC Capital Markets.

I guess just a couple of questions on the loan growth. The consumer portfolio has been very strong the last two quarters. Is that primarily home equity credits? Also, on the commercial side, is there much contribution from shared national credit participations in the quarter?

Joe, it's John. I'm going to turn it over to Lance, but, you are right. There is some what we would call national credits involved in that loan growth, but let Lance detail.

Good morning, Joe. This is Lance. In the fourth quarter, we took advantage of an opportunity to purchase a couple of auto loan portfolios. That totaled about $44 million, $45 million. But we did run a consumer loan campaign locally that generated a pretty material amount of production. Again, we are optimistic that our consumer portfolio growth going forward will continue to be healthy and we are going to try and continue to rely more on the local market than we would on the mainland market. So we just saw this as an opportunity.

On the shared national credit side during the quarter, fourth quarter, I think we generated about $21 million in shared national credits. So again, just like with the consumer loan portfolio directionally, we intend to rely less on purchased portfolios and shared national credits and rely more on the local market for growth.

I am just going to add a little bit to help you and others there, Joe, because 20% is a very, very strong growth number. And Lance can correct me, but roughly, if you look at last year, about half that growth came from local and the rest would be in the shared national credits and the purchase of some portfolios. So we think 10% double-digit local is still an excellent result for us.

And thinking about that 10% type of growth, would you be looking -- similar to what we saw in the fourth quarter -- to fund a lot of that with maturing investment securities and should we see similar declines in investment portfolios you see in growth and loans and in general, is there a certain level of the securities portfolio that you are targeting, say a certain percentage of assets or something?

On the first question, it's easy, yes. You will see some movement out of our investment portfolio and we are going to head towards averages in terms of loan to deposit ratio or a break in the -- you are going to see a continued growth in loans and a decline in the investment portfolio in the coming months and next couple of years.

Okay. Thanks very much.

Aaron Deer, Sandler O'Neil.

I guess following up on Joe's question with respect to the earning assets mix -- Denis, maybe this is a good one for you, but as you kind of see that mix transition, is there any reason why we shouldn't expect to see continued margin improvement or is there any other anticipated actions or noise in the numbers that would cause it to drift lower from where we are today?

Aaron, this is Denis. Thanks for the question. No, we expect that continuing trend to lower the investment securities portfolio, growing the loan portfolio with the margins starting to grow -- continuing to grow.

Okay. And then on the expense front, I guess excluding the -- I guess it's about $1.8 million in nonrecurring, comp-related items there, taking that out, noninterest expenses are about $33.4 million. It still seems like there is probably, I'm guessing, about $1.5 million or so of outsized expenses in there. Given the various initiatives that you guys still have underway, am I thinking about that number about right in terms of what we might get back down to in terms of run rate, operating expense level?

Yes, well, for the target we have got for other operating expense is between $34.5 million and $36 million, but it's a longer-term target. There is some noise in there because for the next couple of quarters there will be incrementally more accrual for the REITs and the early retirement, as well as the reduction in force.

As Denis mentioned, Aaron, we are going to see some expenses related to the early retirement program and the [rift]. I think the other -- and it's difficult for us and why we've got sort of a range in there is that we have several technology initiatives this year. It's always easy to tell -- we know what the expenses of those initiatives are. We are outsourcing DP to Fiserv, we are building a data warehouse, we're putting in a customer relation management system. We should pick up, we think, very good operational efficiencies as we move more and more from a paper-driven to a digital-driven organization. It's really hard to be specific of how much we will pick up in savings. So while we are very optimistic, it's still going to be a little cloudy for the next 12, 18 months as to the specific savings.

Okay. That's helpful. Thank you. And then just one last question on the capital levels. I guess I know you guys are eager to rightsize where you are and obviously the organic growth that you are seeing is helping with that, but to the extent that if your private equity shareholders decided to do some sort of secondary and you took advantage of that by doing some repurchases in that, what amount do you anticipate you could repurchase? I guess when I am looking at your excess capital, it seems like you usually have $100 million to $250 million in excess there that you could use for buybacks. Am I thinking about those numbers in the right range?

As to our large equity shareholder, I am not going to speak for them, Aaron; you'll have to give them a call. But I would say, and we have been very open in prior calls, that we believe we do have an opportunity in terms of the -- I would call it excess capital that exists in the institution today. Our focus is really working with the regulators today because that does require regulatory approval with our regulators. So that's where we are today. We think we are making good progress, but really I don't have much more to share than that at the moment.

Okay. Very good. Thank you very much. I appreciate the help.

Thank you.

(Operator Instructions). Jacque Chimera, KBW.

I wanted to see if the $1 million gain on the debt extinguishment in the quarter, is there any tax treatment on that or does that all fall to the bottom line?

If I could, Jacque, I am going to pass that one to Denis.

Jacque, that's taxable income.

Okay. And then my next question, kind of digging into the loan loss reserve and how to think about provisioning going forward. My assumption is, and please correct me if I am wrong, that this small provision that was booked in the quarter was related to the substantial loan growth. I just want to know how you think about it in light of -- I know you mentioned that you are going to take a look at methodology, but you have a declining California loan portfolio. Your credit metrics continue to improve, NPAs are down and you have really strong coverage of your NPLs.

Yes, I am going to start if I can and then I'm going to pass it over to our Chief Credit Officer, Bill Wilson, but one is we did have strong loan growth. Obviously, that's going to impact the methodology and the provisioning. I think also though -- and let Bill speak to this -- is as you know, the ALLL by most institutions today is a very complex process and it's very historical-driven based on prior quarters and prior performance.

Where we are today and the progress we have made, what we are really trying to say is do we have the right methodology in place today? Are there enhancements that we could make in the methodology? That's where we are at now. With that background, Bill?

Thanks, John. Good morning, Jacque. I think just to echo what John was saying, the loan growth in the fourth quarter was greater than previous quarters and therefore had an associated reserve factor to it. The ALLL methodology enhancements that we made in 2010 were certainly appropriate for the portfolio at that time. Since that time, we believe we are realizing the benefits and the improvements we have made in our underwriting and portfolio management processes since 2010.

As we went through 2013, we saw increasing signs of additional enhancements to our allowance methodology maybe appropriate to better reflect the risk inherent in the more recent vintages of our lending activities. We are currently working on that analysis. So we will hope to see some results from that in the near future.

Okay. And how far back -- just based on your current methodology as it stands today, how far back is your lookback on credit losses?

We look back -- current methodology looks back eight quarters on real estate secured and four quarters on non-real estate secured.

Okay. And then I guess just lastly, I am not sure who to direct this one too, but looking at the [DTA] and your assumptions as you went into the quarter when you reversed the valuation allowance, obviously your earnings have been very strong through the year as you have had some tactical income come through. What has changed in what you were able to produce in 2013 versus what you thought you were going to do as you entered the year?

In other words, what you are saying is what caused the earnings in excess of what we originally forecast?

Basically, yes.

I think several factors. As you know, we have several initiatives in place and those were started earlier in 2013. Obviously, our margin ended up doing better than we realized. Some of that was the loan growth that exceeded the original forecast or expectations. So certainly, Lance and his team have done an excellent job this year. As you know better than I, as you move more and more of your assets from the investment securities to the loans, you've got the benefit there.

I think in the non-interest expense side, it's been lumpy for two -- I've said this before. It's been lumpy for two or three years as we have cleaned up things and I would say cleaned up the portfolio, and I think that we were fortunate in getting closer and closer sooner to what I would call a core operating run rate. Some of our operational efficiencies ended up being ahead of plan. So those were some of the factors that caused us to have earnings above our earlier estimate and I don't know if Denis wants to add to that or --.

I think that's probably it. The [elastic] margin caused the improved results.

Does that answer it, Jacque?

So basically almost every line item has exceeded expectations throughout the year versus where you stood maybe a year ago from today?

The answer is yes.

Okay.

The team sandbagged me that I shouldn't say that.

It's nice to achieve your goals, that's for sure.

We have had a wonderful year. The entire team has executed and just done a fantastic job.

Great. Thank you for the color.

Don Worthington, Raymond James.

You mentioned the decrease in NPAs was, I guess, largely attributable to one mainland property. How much was that?

I will turn it to Bill, Bill Wilson.

Sure, there was a single asset on the mainland that reduced NPAs by $11.6 million.

Okay. $11.6 million was that one property.

Correct.

Don Worthington Okay? And then in terms of charge-offs, recoveries, do you see the opportunity for, I guess, more net recoveries going forward?

It's Bill again. I would hope so. I think we saw a pretty good performance in 2013 in terms of our recoveries. Obviously, with the passage of time, you can only have your coverage to the extent that you have had charge-offs and we have reducing charge-offs. I think there may still be some to be collected in 2014.

Okay. And then I noticed you are opening a branch in Kauai. Do you have other branch plans going forward?

Hey, Don, this is Lance Mizumoto. We do have plans for another branch. We have identified another site on Oahu. So we are optimistic on further expansion, but obviously not at an aggressive pace.

That branch on Oahu would be subject to regulatory approval.

Okay, great. Thank you.

Aaron Deer, Sandler O'Neil.

Just a quick question on the tax rate. Obviously, this past year, there was a lot of noise in that line. As I kind of look at what's in the securities book and other opportunities for some tax savings, what kind of effective rate are you looking at for 2014?

We are looking at about a 35% effective rate, Aaron; this is Denis.

Okay, perfect. Thank you.

Thank you. And as there are no more questions at the present time, I would like to turn the conference back over to John Dean for any closing remarks.

Thank you very much for participating in our earnings call for fourth quarter 2013. We look forward to future opportunities to update you on our progress. Have a good day.

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