David Morimoto – SVP, IR
Ron Migita – Chairman, President and CEO
Dean Hirata – Vice Chairman and CFO
Mary Weisman – Chief Credit Officer
Central Pacific Financial Corp. (CPF) Q4 2009 Earnings Call Transcript January 29, 2010 1:00 AM ET
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Central Pacific Financial Corp. fourth-quarter 2009 conference call. During today's presentation, all parties will be in listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) 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 now like to turn the conference over to Mr. David Morimoto, Senior Vice President, Investor Relations. Please go ahead, sir.
Okay, thank you, Andrea, and good morning, everyone. Today's call will refer to a slide presentation that can be found on the investor relations page of our website at centralpacificbank.com. 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 earnings release and our other recent documents filed with the SEC. And now I'll turn the call over to Ron Migita, Chairman, President, and CEO.
Thank you, David, and thank you all for joining us today to review the financial status of Central Pacific Financial Corporation for the fourth quarter of 2009. I will be highlighting the key issues pertaining to our fourth quarter, focusing on actions we are taking to position our company for recovery and providing our outlook for 2010. Our Chief Financial Officer, Dean Hirata, will provide a detailed report of our financial performance; and Mary Weisman, our Chief Credit Officer, will discuss our asset quality status. Also with us on this call are Denis Isono, Vice Chair and Chief Operations Officer; Blenn Fujimoto, Vice Chair, Hawaii Market and Lance Misomoto, [Ph] Executive Vice President, Commercial Market. We will be happy to address any questions you may have at the end of our report.
For the quarter ended December 31, 2009, the Company recognized a net loss of $77.8 million. This loss included a $32 million increase in the valuation allowance against net deferred tax assets, compared to an increase in the valuation allowance of $61.4 million in the previous quarter. Credit costs for this quarter totaled $88.5 million compared to $145.1 million in the previous quarter and were primarily comprised of a provision for loan and lease losses of $84.3 million as compared to $142.5 million in the third quarter of 2009.
Our allowance for loan and lease losses was increased to 6.7% of total loans and leases as of December 31, 2009, from 5.9% on September 30, 2009. Total loans and leases decreased by $394.7 million from the end of the third quarter and by $967.3 million for the full year. We have made good progress in reducing our commercial real estate loan concentration in the fourth quarter. A total of $204.4 million in CRE loans were sold in the quarter, which included $53.1 million of nonperforming assets at an aggregate discount of 18.9% from their book value at the time of sale.
At December 31, 2009, our exposures in mainland and Hawaii CRE loans were reduced by $167.8 million and $175 million respectively from September 30, 2009.
As we indicated in previous quarterly earnings call, we expected our Hawaii commercial real estate loan portfolio to further deteriorate and credit cost to remain at elevated levels in the fourth quarter due to the prevailing economic conditions in our marketplace.
Quarter-over-quarter, the combined non-performing assets in the Hawaii and Mainland markets increased by $102.3 million. However, in the fourth quarter compared to the previous quarter, loans delinquent for over 90 days declined from $27.7 million to $3.3 million.
We are continuing to pursue additional loan sales as well as other measures to improve asset quality. Despite our credit challenges, our deposit base has remained relatively stable. Our loan-to-deposit ratio has improved to 85.8% at December 31, 2009, from 89.6% at the end of the previous quarter and from 103% at the same period a year-ago.
Total loans declined by $342.7 million on December 31, 2009, compared to a year-ago, which included a reduction in broker deposits from $188.1 million to $8.3 million and a conversion of $226 million in government time deposits to repurchase agreements.
More importantly, the average balance of our core deposits has increased by 10.7% or approximately $300 million in 2009 compared to 2008. We initiated a bank-wide effort to deliver second-to-none customer service to retain and attract core deposit customers into our Bank, supported by innovative marketing campaigns throughout the year.
The Company's capital ratios as of December 31, 2009, were 10.16% for Tier 1 risk-based capital, 11.47% for total risk-based capital, and 7.23% for leveraged capital. Raising additional capital is a top priority, and we have made progress. We are exploring all capital raising options, including private equity placements and public offerings and are currently in discussion with potential investors.
Looking forward into 2010, we continue to anticipate challenging economic conditions for our customers and our Company. Based on our December 18, 2009, economic forecast by the University of Hawaii Economic Research Organization, the Mainland U.S. and Japan economies are showing signs at the bottom may be behind us, although recovery in 2010 is expected to be gradual, at best.
So Hawaii's economic engine is fueled largely by visitors from the US and Asia. Total visitor arrivals are projected to expand by 3.7% in 2010. Arrivals from Japan are projected to grow by 4.9% with increased spending resulting from a strong yen. While total visitor counts are expected to remain below the 7 million mark until 2012, statewide hotel occupancy rates are projected to return to 70% by 2011.
Job growth is projected to decline by 1% in 2010 and increase by 1.3% in 2011. Hawaii's unemployment rate, which is current among the lowest, 30% in Asia, should stabilize in 2010 at 7.3% compared to 7% in 2009, and decrease to 6.7% in 2011. Private sector employment is expected to resume growth in the second half of 2010 with the exception of the construction industry which may lag by at least a year.
State and local government job losses began in mid 2009 and a severe budget deficit would likely result in moderate job losses in the public sector throughout 2010. Inflation adjusted personal income is forecasted to be flat in 2010 with private sector labor and proprietor income projected to drop by 5.4% offset by paid increases among know their personnel. While there is signs of economic recovery in Hawaii this include additional fall out from the state and local government fiscal crisis in a possible stall in a global economic upturn.
However, despite the absence of significant economic growth in our marketplace we are implementing a number of initiatives to reduce cost and position our company for recovery, in addition to reducing our credit risk exposure and raising additional capital as discussed earlier.
Our market opportunities continue to be -- our leadership and supporting small businesses and home ownership in Hawaii. We ended 2009 with more small business administration loans then all major Hawaii banks combine. We also originated $1.9 billion in residential mortgage loans in 2009 up 24.3% from 2008, which was more than any Hawaii based bank. We’re poised and committed to continue these successes in the coming year.
In addition, the market opportunities to increase our debit card fee income and home equity loan production based on our current activity compared to peer group averages. We have also positioned our business development teams and online support to attract the growing number of international residential in Hawaii particularly from Japan and Korea.
We believe our valued proposition strongly appeals to this customer base. While we are not projecting growth on our balance sheet in 2010, we have focus on continuing to provide the best customer service in the (inaudible) and in an active [ph] choice relative to large banks for highly concentrated marketplace.
As we leases out two of our branches in Honolulu expire this year, we will consolidate these branches in late April subject to regulatory approval and to branches that are in close proximity. At the same time we will extend the business hours at our consolidated branches, including Saturday banking at one of these branches in order to provide an improved customer service and reduce overhead costs. Additionally, we will close two commercial loan offices located in Pasadena and Roseville, California on March 31st of this year as part of our previously announced plan to exit the California market by 2012.
The annualized cost savings resulting from the branch consolidations and loan office closures will be approximately $1.9 million. Hawaii is a unique market with highly concentrated banking services and an acute customer awareness of service quality and corporate citizenship. We believe in and are fully committed to serving the needs of Hawaii's residents as champions of small businesses and home ownership just as the bank’s founders recognized and met those needs in the post World War II era providing out alternative to the large banks with a service culture that makes a difference to our customers, has been our trademark and basis for success since 1954.
Our strategic initiatives for the immediate future revolve around this value proposition as the (inaudible) team addresses the key issues of capital adequacy, asset quality and liquidity I am confident in the dedication that every employee has been servicing and caring for our customers.
We believe that this sets the foundation for a positive future.
At this time, Mary Weisman and Dean Hirata will provide the details of our financial performance for the fourth quarter and 2009. So, I would like to ask Dean to start off with the financial highlights.
Thank you, Ron. Our financial presentation starts on slide3. Our near-term objectives continue to be reducing credit risk, maintaining strong liquidity and raising additional capital for preserving and building our core bank franchise. In addition to reviewing our fourth quarter 2009 financial results, we also provide details regarding the steps we have taken to reduce our credit risk maintain our strong liquidity and grow our core bank franchise.
With respect to capital, as Ron previously stated, we continue to pursue all capital raising options including private equity placements and public offerings, and are currently in discussions with potential investors. As a publicly traded company, we are legally prohibited from providing further details of our capital raising efforts at this time.
Turning to slide 4, which provides a brief overview of our quarterly results, I won't go through the items here, Ron has covered this previously. So moving to slide 5. For the third quarter of 2009 net interest income totaled $38.5 million compared to $43.5 million for the third quarter of 2009. And as you can see from the table our reported net interest margin was 3.30% in the fourth quarter of 2009 compared to 3.56% in the previous quarter.
Our margin was negatively impacted by interest reversals on nonaccrual loans totaling $1.9 million, declining loan yields, and an increase in our balance sheet liquidity. Excluding the effects of the interest reversals, the fourth quarter margin was 3.46% compared to 3.72% in the previous quarter.
Turning to slide 6, for the fourth quarter 2009 other operating income totaled $11.7 million compared to $15.4 million in the third quarter 2009. The decrease was primarily due to lower unrealized gains on outstanding interest rates locks totaling $1.6 million. Lower gains related to the ineffective portion of the cash flow hedge totaling $1.3 million and lower gains on sales of residential mortgage loans totaling $1.1 million.
Moving to slide 7. For the fourth quarter of 2009 other operating expense totaled $43.9 million compared to $89.5 million in the third quarter of 2009. The decrease was primarily due to $50 million non cash goodwill impairment charge recorded in the previous quarter. And lower credit related charges totaling $1.2 million and these are partially offset by higher reserves for un-funded commitment of $2.8 million and higher legal and professional services cost of $2.5 million.
As we move to slide 8, I’ll now turn it over to Mary to discuss our credit risk and asset quality. Mary?
Thank you, Dean. Credit quality remains weak as real estate projects continue to experience slow sales and lease absorption, rising vacancies coupled with declining lease rate and lower property valuations especially in Hawaii. Net chargeoff for the fourth quarter were $83.9 million down $19.8 million on a sequential quarter basis. Fourth quarter losses included $38.2 million associated with the sale of $204.4 million in Hawaii and California commercial real estate loans.
For the full year, net chargeoffs were $242.4 million compared with $142.5 million in 2008. Mainland commercial real estate losses were $140.8 million, up $3.8 million year-over-year; and Hawaii commercial real estate losses were $72.4 million, up $69.7 million in 2009.
Nonaccrual loans, including loans held for sale, increased to $493.8 million, up $96.4 million on a sequential quarter basis. Quarter-over-quarter, mainland nonaccruals decreased $15.5 million to $177.5 million; and Hawaii nonaccruals increased $111.9 million to $316.3 million. 78% of total nonaccruals including loans held for sale were related to commercial land and construction loans, both on the mainland and in Hawaii.
Nonperforming loans totaled $520.8 million, an increase of $102.3 million from the third quarter. The quarterly provision for loan and lease losses totaled $84.3 million, resulting in an allowance for loan and lease losses of $205.3 million or 6.7% of outstanding loans and leases. The full-year 2009 provision was $327.8 million, and the allowance increased by $85.4 million during the year.
Turning to slide nine. Since the beginning of the year, total outstanding balances have decreased 24% or $967 million to $3.1 billion. Outstandings on mainland real estate loans have decreased $339 million to $701 million; and loans in Hawaii have declined $628 million to $2.4 billion.
Turning to slide 10. During the fourth quarter, we successfully completed the sale of 58 commercial real estate loans that had a book carry value of $204.4 million at the time of the sales. Seven loans or $53.1 million sold were on nonaccrual. However, an additional four loans totaling $48.3 million were to be placed on nonaccrual in December, if not sold. The aggregate loss on the sales was $38.2 million or about 19%. The effective net book loss after consideration of $22.7 million in reserves held on these loans was 7.6%.
Turning to slide 11. This table shows a breakdown of our nonperforming assets by category at December 31, 2009, with comparative balances over the preceding four quarters. All nonaccrual loans were reviewed for potential impairment, and shortfalls in collateral were charged off.
Nonperforming loans increased quarter-over-quarter by $102.3 million to $520.8 million. We did see a reduction in mainland commercial real estate nonperforming loans this quarter. However, this was largely offset by an increase to Hawaii commercial real estate nonaccrual loans. Additions to nonperforming assets in Hawaii included $57.3 million in Hawaii residential construction loans and $49.5 million in Hawaii commercial construction loans.
The increase in Hawaii nonaccrual residential construction loans largely included one condominium project on Oahu and three high-end development projects on the neighbor islands, two on Maui and one on the Big Island.
The increase in Hawaii nonaccrual commercial construction loans included loans for two shopping centers
one on Kauai and the other on the Big Island; two self-storage facilities located on Oahu; and one industrial land loan located on Oahu. There were four Hawaii properties that were transferred to Other Real Estate loans in the fourth quarter totaling $9.8 million. Three of those properties were sold in January for $5.3 million.
Turning to slide 12. Delinquent loans decreased quarter-over-quarter from $53.7 million at September 30 to $51.5 million at December 31. Included in the 30 to 59 day delinquencies of $37.7 million were two Hawaii commercial mortgage loans totaling $21.3 million for two shopping centers on Maui.
Loans past due 90 days and still accruing interest totaled $3.3 million, down $24.4 million on a linked-quarter basis. A $20 million mainland commercial construction loan previously reported 90 days delinquent was brought current.
The next few slides profile various loan segments, with a focus on our Hawaii portfolios.
Turning to slide 13. The Bank's total commercial real estate outstandings at December 31 totaled $1.9 billion. This represents a $645 million reduction since the beginning of 2009.
Turning to slide 14. Construction loans were down $330 million year-over-year. At year-end 2009, the portfolio totaled $847 million, which represents about 28% of the Bank's total loan outstandings. Mainland construction related loans were 36% of the total, with Hawaii constituting the balance.
Construction loans are the Bank's highest risk segment, with nonaccruals including loans held for sale of $386 million. Land and land development loans totaled $242 million, of which 64% are Hawaii-based, with the balance on the Mainland, primarily in California. Approximately 60% of those loans are on nonaccrual.
Turning to slide 15. Hawaii construction loans totaled $544 million. This balance was comprised of 130 loans with an average loan commitment of $5 million. The composition of the construction portfolio is evenly split between residential and commercial construction. Land and land development loans represented $155 million.
Since the beginning of 2009, Hawaii construction nonaccruals have increased, as projects sales or absorption activity slowed and property values declined, most notably on the neighbor islands. At December 31, nonaccrual loans were $248 million.
Turning to slide 16. Hawaii residential construction loans totaled $268 million at December 31. This balance was comprised to 58 loans with an average loan commitment of $5 million. Single-family residential properties accounted for 57% of this portfolio, with condominiums and town homes accounting for the remaining 25% and 18%, respectively. 30% of the portfolio was in land and land development loans.
Nonaccrual loans increased during the fourth quarter to $126 million, largely due to two high-end development projects on Maui, one high-end development project on the Big Island, and one condominium project on Oahu. At year-end, total reserves for this portfolio segment were $50.8 million or 17.9% of outstandings.
Turning to slide 17. Within the Hawaii residential construction portfolio, our high-end resort housing projects, which we view to be of high risk. This market is largely supported by buyers from the Mainland and represented projects where homes retail for $1 million or more.
This portfolio totaled $102 million or 38% of the total Hawaii residential construction portfolio at December 31. It is comprised of 11 loans with an average commitment of $10 million. Most of the projects are located on the Big Island, with six loans representing about 50% of the total.
Turning to slide 18. Our Hawaii commercial construction portfolio totaled $277 million at December 31. This segment was comprised of 72 loans with an average commitment of $4 million. 60% of the exposure was located on the island of Oahu and 29% on Maui. The segment was primarily comprised of retail and industrial warehouse property types, representing 32% and 21% of the aggregate portfolio, respectively. Approximately 30% of the portfolio was for land and land development loans.
Nonaccruals increased $50 million in the fourth quarter to $122 million, principally due to two retail shopping centers which have not yet stabilized, one on Maui and the other on the Big Island; one industrial land loan in western Oahu; and two self-storage projects in various stages of lease-up on Oahu. At year-end, total reserves for this portfolio segment were $22.9 million or 9% of outstandings.
Turning to slide 19. This slide provides the details of the retail restaurant property sub-segment, which includes both construction and commercial mortgage loans, excluding owner-occupied loans. Total exposure was $186 million, of which $28 million was on nonaccrual. Several retail projects are experiencing slow lease-up activity due in large part to reduced tourist traffic.
Larger transactions include three completed retail centers on Maui totaling $60 million; one completed retail center on the Big Island totaling $13 million; and one resort shopping center on Kauai totaling $16 million.
Turning to slide 20. Our exposure in the Hawaii industrial construction segment includes 10 loans totaling $59 million. This segment is comprised of mainly land and land development loans, of which $47 million is on nonaccrual. Our exposure is primarily located in Western Oahu.
Turning to slide 21. Self-storage project risks has increased over the past couple of quarters. Currently, we have 19 loans totaling $84 million in outstandings. Nearly 90% of the exposure is on Oahu. The projects are completed, but not all are fully stabilized. Project economics have weakened due to minimal lease-up activity, and rent concessions are being offered. We currently have $43 million on nonaccruals.
Turning to slide 22. The Hawaii commercial mortgage portfolio is comprised of 630 loans with an average loan size of $1 million. Total outstandings are $680 million, down from $768 million on a sequential quarter basis, partially due to a loan sale totaling $47.5 million in loans. Approximately $425 million of the loans are for investor properties, with a current weighted average loan-to-value of 67% and debt service coverage of 1.4 times. Six loans totaling $17 million are on nonaccruals, three of which are self-storage properties. Over 65% of the loans were made in 2006 or earlier.
The commercial mortgage portfolio also includes approximately 244 loans totaling $255 million that are owner-user properties. For these loans, we principally rely on business cash flow for repayment. The average loan size is $1 million. Over 60% of those loans were made in 2006 or earlier, and we have two loans totaling $1.8 million that are on nonaccrual. For the aggregate commercial mortgage portfolio, maturity risk over the next three quarters represents only 6% of the total portfolio.
Turning to slide 23. The Hawaii residential mortgage portfolio is comprised of first mortgage loans totaling $626 million and home equity loans totaling $107 million. Residential mortgages on nonaccruals increased $9 million quarter-over-quarter to $33 million. Over 50% of our residential mortgage loans were made to investors or second home buyers, principally from California. Most of the risks relates to these types of properties on the neighbor islands, which have seen greater real estate value declines than Oahu.
Approximately $110 million is outstanding to neighbor island investors second home buyers of which $12 million are on nonaccrual. The home equity portfolio has performed consistently well throughout 2009 with nominal delinquencies and chargeoffs. In addition, updated credit scores remain favorable.
Turning to slide 24. The C&I portfolio totaled $227 million and the consumer portfolio totals $136 million. 2009 losses within the C&I book included the sale of two mainland loan participations. The combined loss on sale was approximately $6 million.
Turning to slide 25. We are focused on resolving our credit issues. As such, we will continue to pursue loan sales and other measures to improve credit quality of the Bank. I will now turn the discussion back to Dean.
Thank you, Mary. Maintaining strong liquidity is also one of our top priorities, as you see on slide 26. The following points demonstrate our strong liquidity position at December 31, 2009, a loan-to-deposit ratio under 86%. Deposits fund 73% of our total assets. Brokered CDs of only $8 million or less than 0.2% of all our total deposits. Cash and cash equivalents greater than $488 million and over $620 million in available borrowing capacity.
Moving to slide 27. Our deposit base is the foundation of the value in our core bank franchise. But in spite of these trying times, our deposit base has (inaudible) up relatively well, which is a testament to our loyal customers and the strength of our deposit franchise. At December 31, 2009, our total deposits totaled $3.6 billion, of which $3 billion or 83% represent core deposits. As I mentioned on the previous slide, brokered CDs account were a nominal 0.2% of our total deposits, and CDs over $250,000 accounts for only 2.9% of the total.
We reduced our average cost of deposits for the current quarter to 83 basis points compared to 1.02% in the previous quarter.
Turning to slide 28, while credit, capital, and liquidity remain our near-term priorities, we are also focused on preserving and building our franchise in our core Hawaii market. Our commitment to exceptional customer service was validated by favorable results from third-party surveys and our strong core deposit retention ratio of 87% in 2009, up from 77% in 2008.
We originated more SBA loans in 2009 than the three largest banks in Hawaii combined, and we are recognized as the SBA lender of the year in our category for the fifth consecutive time. We also had record originations of $1.9 billion in residential loans during 2009, which was more than any Hawaii-based lender.
I will close the formal portion of our presentation on slide 29, by recapping our near-term objectives. With respect to credit, we have made progress in reducing our commercial real estate exposure through loan sales and are pursuing additional loan sales along with other measures to improve our asset quality and further reduce credit risk going forward.
With respect to liquidity, driven by a strong and loyal core deposit base, combined with reductions in our loan portfolio, we were able to maintain a strong position. With respect to capital, we continue to make progress. We are exploring all capital raising options including private equity placements and public offerings, and are currently in discussions with potential investors.
We continue to work through these near-term challenges without losing focus of our core franchise, our loyal customers, and the important and relevant role we play in the communities we serve. This concludes our presentation and we will now open it up to questions.
(Operator Instructions) At this time we have no questions. I would like to turn the conference back over for any closing remarks.
Okay, well, thank you. On behalf of our Company, thank you for your participating this morning on our earnings call. As we move forward with the immediate issues and lay the groundwork for the longer term, I would like to take this opportunity to express our appreciation to our staff, customers, and shareholders for their continued support during these challenging times. Thank you very much, everybody.
This concludes today's conference. Thank you for attending. You may now disconnect.