Central Pacific Financial Corp (CPF) 2014 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 2014 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 its completion on the Company's website at www.CentralPacificBank.com. I would like to turn the call over to Mr. David Morimoto, Senior Vice President, Investor Relations. Sir, please go ahead.

Thank you, Amy. And thank you all for joining us as we review our financial results for the first quarter of 2014. On today's call 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 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 refer to our recent filings with the 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 financial performance to begin the new year with net income of $9.8 million. Our continued efforts to strengthen client relationships and to streamline operations have resulted in consistent earnings and improved operational efficiencies. With the support of improving market conditions in Hawaii, our balance sheet growth has been solid with an 18.6% increase in total loans and a 5.9% increase in total deposits compared to March 31 of last year.

In the first quarter of 2014 net interest margins continued to improve due to loan growth, increased yields in our securities portfolio, and a continued shift in assets from securities investments to higher-yielding loans. Our credit risk profile remains stable, and we recorded a credit to our provision for loan losses for the 13th consecutive quarter. Nonperforming assets remained at 1% of total assets.

Since the recapitalization of our Company three years ago, our earnings consistency and the significant progress made in improving our asset quality have allowed us to achieve our recovery targets ahead of schedule. For this reason we elected to repurchase $125 million of our common stock and completed the transaction a few weeks ago. On March 28 we purchased 3.4 million shares through a modified Dutch auction tender offer for $20.20 per share. This transaction is reflected in our first-quarter financial results. On April 7 we purchased 2.8 million shares from our two largest shareholders through private purchase agreements at the same price per share set in the tender offer.

This transaction will be reflected in our second quarter financial results. A total of 6.2 million shares or approximately 15% of our total outstanding shares was repurchased for a total of $125 million. We are also pleased to announce that our Board of Directors declared a dividend of $0.08 per share payable on June 16 to shareholders of record as of May 30.

Turning to Hawaii's economy, the current pipeline for construction progress -- projects in the state is encouraging. As of the end of 2013 there were $2.7 billion in approved private building permits and $1.2 billion in public contracts awarded, excluding the Honolulu rapid transit project, for a total of $3.9 billion in building permits. The total commitments to build in 2014 are forecasted to reach $4.7 billion.

Visitor arrivals increased by 2.6% in 2013 and is forecasted to increase by 1.7% this year. Visitor expenditures increased by 2% last year and is projected to increase by 3.4% this year.

Jobs and real personal income increased by 1.3% and 2.2%, [respectively], in 2013 and are projected to increase by 1.8% and 2.8% in 2014. Hawaii's seasonally adjusted unemployment rate in March was 4.5%, the lowest level since August 2008, compared to 6.7% on the mainland.

With robust construction activity and stable visitor arrivals, 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 first-quarter financial performance. Denis?

Thank you, John. For the first quarter of 2014 we reported net income of $9.8 million or $0.23 per diluted share compared to net income of $10.3 million or $0.24 per diluted share reported last quarter. Net interest income for the quarter was $35.8 million compared to $35.5 million in the previous quarter.

Our net interest income was 3.31% and 3.29% 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 grew by $41.3 million. The growth was reflected in the average loans, which increased by $112.3 million, offset by a decrease in our average investment portfolio of $42.8 million.

The sequential quarter improvement in net interest margin was also at your attributable to an increase in the yield of the investment securities portfolio. Our loan and lease portfolio ended the quarter at $2.70 billion, an increase of almost $67 million from $2.63 billion at the end of the fourth quarter.

We continue to be encouraged by our ability to meaningfully growth our loan and lease portfolio. Lance Mizumoto will provide more insight into the loan portfolio later in this call.

Our investment securities portfolio ended the quarter at $1.66 billion. The taxable equivalent yield on our investment portfolio improved to 2.62% from 2.43% reported for the fourth quarter. The increase in yield was primarily driven by the continued slowing of premium amortization on mortgage-backed securities and higher yields from the nonagency CMBS and RMBS corporate bonds and agency CMBS that were purchased in the prior quarter as part of a bond [swap] strategy.

Noninterest income for the quarter totaled $10.1 million, down from $12.2 million in the previous quarter. The decrease was primarily attributable to the one-items recorded in the prior quarter, including a $1 million gain from that extinguishment of $10 million in trust preferred debt and $0.5 million gain on sales of investment securities.

Additionally, gains on sales of residential mortgage loans continues to slow and decreased by $0.3 million from the prior quarter to $1.2 million. Noninterest expense for the quarter totaled $31.9 million, down from $35.3 million in the previous quarter. The sequential quarter decrease was primarily attributable to lower salaries and employee benefits of $2.9 million, lower charitable contributions of $0.4 million. The decrease in salaries and benefits was primarily due to severance, early retirement, retention benefits of $1.8 million recognized in the prior quarter compared with $400,000 in the current quarter. In the second quarter we expect a similar amount of severance, early retirement, and retention benefits.

Our efficiency ratio for the quarter, which is no longer adjusted for nonrecurring items, decreased to 69.5% compared to 73.99% in the previous quarter. Our cost improvement initiatives from 2013 are beginning to have an effect on the efficiency ratio as we continue to work on further improving our efficiency ratio with our IT outsourcing and other changes that are expected to be completed during the year.

In the first quarter of 2014 we recorded and income tax expense of $5.5 million compared to $3.4 million in the previous quarter. With the reversal of the reserve against the DTA completed last year, tax expense will no longer be influenced by the reversals. Our effective tax rate was 36% for the quarter. As of March 31, 2014, our net deferred tax assets totaled $125.3 million.

We also continued to make progress in improving our credit risk profile. During the quarter we recorded a credit to the provision of the loan and lease losses of $1.3 million, the same amount recorded in the previous quarter. Nonperforming assets ended the quarter at $54.0 million, an increase of $7.3 million from the $46.8 million reported at the end of last year. The increase was primarily due to the addition of two mainland commercial loans to a single borrower totaling $13.6 million. Although classified as nonaccrual, we believe the loans were underwritten well and loss exposure is limited.

The allowance for loan and lease losses as a percentage of total loans and leases decreased to 3.08% at March 31, 2014, from 3.19% at December 31, 2013. Our allowance for loan and lease losses as a percentage of nonperforming assets was 153.87% at March 31, 2014, compared to 179.29% at year end.

Lastly, at March 31, 2013, our capital ratios continued to exceed levels required to be considered a well-capitalized institution for regulatory purposes. Our tier 1 risk-based capital, total risk-based capital, and leveraged capital ratios were 18.63%, 19.90%, and 12.62%, respectively, compared to 20.30%, 21.57%, and 13.68%, respectively, at December 31, 2013. The decline in our capital levels from prior quarter was primarily to result of the repurchase of our common stock in the tender offer mentioned earlier mentioned earlier by John.

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

Thank you, Denis. The quarter-over-quarter increase in total loans and leases by $66.9 million was primarily driven by an increase of $43.5 million in residential mortgages, $37.5 million in commercial loans, and $11 million in real estate construction loans. Offsetting declines in loan balances included $19.2 million in commercial real estate loans, $5.1 million in consumer loans, and $1 million in leases.

The average balance of our total loans and leases increased by $112.3 million in the first quarter compared to the previous quarter. The year-over-year increase in total loans of $422.9 million was primarily driven by commercial loans, residential mortgages, and consumer loans. Our continued focus on strengthening our customer relationships has resulted in the growth in loan balances as well as an increase of $81.4 million in core deposit tolerances from the previous quarter. We are encouraged by the improving market conditions in Hawaii, as mentioned by John, particularly in the robust construction commitments, increasing supply of housing being placed in the market, and a growing optimism within our local business community.

We also look forward to the rollout of several technology enhancements this year that will provide us with more opportunities to deliver better experiences to our customers. Going forward, we are confident in being able to continue expanding our customer base and building our loan portfolio with quality assets.

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. Through a total team effort we have made significant progress throughout 2013 and bring that positive momentum into this year. In summary, we still have work to do, particularly in the implementation phase of our key strategic initiatives that are designed to support a relationship banking model. We are moving quickly and diligently, and I believe we are on the right tack to building a high performing bank over the longer term.

I would like to take us opportunity to thank our shareholders and customers for their continued support and confidence as we steadily progress and attain the milestones of our business plan. At this time, we will be happy to address any questions you may have.

(Operator Instructions) Joe Morford with RBC Capital Markets.

First question was for Lance. Do you think this 10% annualized loan growth seen in the quarter is a good run rate for the full year? And would you suspect less reliance this year on participations in national credits and other small purchases?

We expect continued strong growth in our loan portfolio going forward. That's partly attributable to, I think, the continued strengthening of the economy in Hawaii and the fact that we've deepened our relationships with our current customers and new prospects. So, I think our loan demand will continue to be strong. Whether that's double digits or not, I think we are cautiously optimistic about our prospects going forward.

In terms of our reliance on shared national credits, we have already seen less reliance on that and much more growth in our local customer base. So I think, going forward again, we will rely less on the syndicated market as well as some mainland purchases.

The follow-up question would be, John, with the tender offers now complete, the capital levels are still relatively robust and well in excess of the requirements. And I'm just curious about your current thoughts on options for further deployment beyond supporting organic growth, just the possibility of further dividend increases or other share buyback activity or other options.

They would be similar, Joe, to what we have discussed here in the past. And at year-end, based on earnings and what we have dividended out, we will have an opportunity there to decide if we would want to do another stock repurchase or additional cash dividend. So those are considerations that are available to us. Going forward, probably less through this year, maybe next year, managing capital levels and where we at, we would always look at it. We are still relatively high but a lot closer to a well-capitalized bank, perhaps, versus the very well-capitalized bank of a few months ago.

And we still have the trusts as another possibility. So, we consider and continue to look at those. I think right now the focus for this year is just let's execute. We have got the $0.08 dividend. We can look at that, too, as being another alternative towards year end. But probably through this year I think we want to execute from the base we have.

Okay, that's helpful. Thanks so much.

Aaron Deer with Sandler O'Neill Partners.

One of the real highlights of the quarter was the big drop in your operating costs. I know in recent quarters you guys have guided toward a $34 million to $36 million in quarterly expense rate, just given a lot of the initiatives that you have going on. Is this lower right now? Are we down to something that's more sustainable, or is there still some big expenses beyond the modest amount of retention bonuses that was discussed earlier?

Aaron, this is Denis. What we are looking at is -- it's actually shifted down a little bit. We are looking at a range of between $31 million and $33 million for the quarter, going forward. We will see some impact of all the initiatives that we have pursued. And so we are seeing modest improvement in that number because of that.

Sure, okay. And then you continue to remix your earning assets with more loans relative to securities. And obviously that has helped to benefit the net interest margin. I'm just curious; given the positive growth outlook that you have for the loan book and where funding levels stand now, can we expect to see some further additional improvements in the margin going forward?

Yes. We are expecting the margin to improve continuous. We are looking at the margin as a range between 330 and 340 per quarter going forward.

Okay. And then just lastly, on the single-family mortgages added during the quarter, can you talk about what type of products that is? Is that an ARM product or is it a variety of products that caused that increase?

Aaron, this Lance. We are continuing to see what we call jumbo loans, that being over the standard conforming sizes, going into the portfolio. There has been [quite] demand. And as you know, housing prices in Hawaii are quite high, so the loan amounts are correspondingly high.

Sure. Are those typically 5/1, 7/1 ARMs, 10/1s? What kind of structure do they typically carry?

Well, we are seeing ARMs in the 5- to 7-year type adjustable range.

All right, great, thanks for taking my question.

(Operator Instructions) Jacque Chimera with KBW.

Denis, is 36% a good run rate going forward for your tax rate?

Yes, we think it's going to fall between 35% and 37%, the effective rate going forward.

Okay. Just dependent on how many munis you are adding and other things?

That's right.

Okay. And in past quarters you talked about taking a look at your reserve methodology. Has that been taken care of and that is impacted in the first quarter's reserve? Or is that something that's still on the table going forward?

Jacque, John here. And we have Bill Wilson, our Chief Credit Officer, with us. So, I'm going to turn it over to Bill.

Morning, Jacque. It's Bill. We did make some enhancements in methodology, effective first quarter. Primarily, it was to extend our look-back period for real estate-secured loans from two years to six years. We will grow into that six years. It's going to take us a while. We used 2010 as a cutoff date for our historical data.

Okay. So we could see small reverse provisions continue as credit continues to improve as we move forward?

If things continue as they did in the first quarter, I would think directionally that would be correct.

Okay. And then the mainland relationship that was referenced, was that already in criticized assets?

No, that was not a criticized asset. We had -- it was criticized in -- sorry, take that back. Fourth-quarter, we had reduced that to special mention status.

Okay.

And it went nonaccrual in the first quarter. The Company is executing on its remediation plan. We expect that it should reach resolution later this year.

Would you say it's more of a one-off?

Definitely, definitely.

Okay. And then just lastly, a little bit more clarification on the expenses. So now that we are down to that $31 million, $33 million run rate instead of $34 million, $36 million, is that because initiatives are costing less than you originally set, or are you more rapidly realizing the benefit from them?

I think it's the latter. We are seeing some benefits of that and the reduction in force from the ERI, early retirement program we put forth. We are seeing the benefits of that going forward.

Okay. So have people just retired a little earlier than you were already anticipating and that is driving comp lower because of the fewer FTE?

Yes.

Okay, great. Thank you very much.

Don Worthington with Raymond James.

I noticed in the quarter short-term borrowings were up about $94 million, it looked like. That just a timing issue between the level of loan demand and the deposits? And then would we expect to see those borrowings work down as you generate more core deposits?

Yes, that's what should materialize. It's just really a pairing issue.

Are these primarily Federal Home Loan Bank advances?

Yes, they are.

Okay, okay. And then on the mortgage banking revenue, has that hit a trough? Or are you expecting any further declines in the gain on sale?

We will probably continue to see some declines in the gain on sale. Mortgage volume overall, I think, has been down compared to last year. So, we probably anticipate a corresponding decline in the gain [on] sale.

Okay, thank you.

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

Just thank you very much for participating in our earnings call for the first quarter of this year. We look forward to future opportunities to update you on our progress.

The conference is now concluded. Thank you for attending today's presentation, and please disconnect your lines.