Jan 31, 2013
Executives
David Morimoto - SVP and Treasurer John Dean - President and Chief Executive Officer Denis Isono - EVP and Chief Financial Officer Bill Wilson - EVP and Chief Credit Officer Lance Mizumoto - EVP and Chief Banking Officer
Analysts
Aaron Deer - Sandler O'Neill & Partners Joe Morford - RBC Capital Markets Jackie Chimera - KBW
Operator
Good day and welcome to the Central Pacific Financial Corporation Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode.
(Operator Instructions). Please note this event is being recorded and I would now like to turn the conference over to David Morimoto, Senior Vice President and Treasurer.
Please go ahead.
David Morimoto
Thank you, Emily. And thank you all for joining us as we review our financial results for the fourth quarter of 2012.
With us today are John Dean, President and Chief Executive Officer; Denis Isono, Executive Vice President and Chief Financial Officer; and Bill Wilson, Executive Vice President and Chief Credit Officer. During the course of today's call, management may make forward-looking statements.
While we believe these statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to forward-looking statements, please see our recent filings with the SEC.
And now I'll turn the call over to John.
John Dean
Thank you, David, and good morning everyone. We're pleased to report that we continue to make significant progress towards a full recovery of our company in the fourth quarter of 2012.
Since our company's recapitalization we have attained eight consecutive quarters of profitability and are encouraged that our earnings in 2012 reflected a 30% increase over our earnings in 2011. In the fourth quarter, we continue to strengthen our balance sheet with a substantial reduction in nonperforming assets.
The continued improvement in our credit risk profile again resulted in a reduction of our allowance for loan and lease losses and a positive impact to earnings. With the stabilizing market conditions in Hawaii together with our efforts to increase market share we realized strong loan growth during the quarter as well as a solid increase in our core deposit base.
Our capital position remained strong, supported by two years of profitability and the improvements in our asset quality and as a result of our stable financial performance the memorandum of understanding that we entered into with the regulators in May 2012 was terminated on October 26, 2012. Turning to Hawaii's economic indicators.
The trend has been generally positive. Our visitor industry has led the way with a banner year in 2012 supported by expanded airline capacity.
Visitor arrivals in 2012 were up by 9.6% over 2011 to nearly 8 million visitors. Visitor spending also increased by 18.7% over the previous year to 14.3 billion.
The unemployment rate in Hawaii dipped to 5.2% in December, which is the lowest it has been in the past four years. The construction industry is also showing signs of recovery.
Private building permits increased by 39% in 2012 over the previous year, which will help offset the delays expected in the construction of the rail transit system on Oahu. Overall with the improving economic and market conditions in Hawaii we have confidence that we are well positioned to execute on our business plans in the coming year.
This time I'd like to ask Denis Isono, our Chief Financial Officer to review the highlights of our financial performance for the fourth quarter and for 2012. Denis.
Denis Isono
Thank you, John. For the fourth quarter of 2012 we reported net income of $12.4 million or $0.29 per diluted share compared to net income of $10.7 million or $0.26 per diluted share reported last quarter.
For the year ended December 31, 2012 we've reported net income of $47.4 million or $1.13 per diluted share compared to net income of $36.6 million or $3.31 per diluted share in 2011. Our net income per diluted share in the previous year included the impact of a onetime accounting adjustment form the exchange of our preferred stock, issued to the U.S.
treasury department for common stock as part of our recapitalization. As John previously mentioned, our quarterly earnings continue to benefit from our improving credit risk profile, as we have done during the past several quarters, we again reduced our allowance for loan and lease losses, which resulted in a credit to the provision for loan and leased losses of $2.3 million.
In the previous quarter, we had a similar credit of $5.0 million. The reduction was a result of continued improvement in our asset quality as evidenced by a $50.3 million decrease in our non-performing assets during the quarter and continued improvement in the historical quarterly charge-off data used to calculate the allowance.
Bill Wilson will provide more details about our credit risk profile later in this call. Net interest income for the quarter, was $29.4 million compared to $29.6 million in the previous quarter.
Our net interest margin was 3.00% and 3.02% for the same respective quarters. The sequential quarter decrease was primarily due to lower yields on our interest earning assets resulting from the depressed interest rate environment that we continue to operate in.
We expect to see continued pressure on our net interest margin in 2013 as rates remain at these low levels. During the quarter our investments securities portfolio increased by $35.3 million, to approximately $1.7 billion.
In an effort to improve the yield on our investment portfolio, we continue to evaluate various investment opportunities and strategies to strengthen our net interest margin. At December 31, 2012 our municipal and corporate securities accounted for approximately 18% of our investments securities portfolio compared to approximately 12% at September 30th, 2012.
Our loan and lease portfolio increased by $93.8 million during the quarter and now stands at $2.2 billion at December 31, 2012. We're encouraged by the fact that we're able to meaningfully grow our loan and lease portfolio despite seeing a $13.6 million reduction in our non-accrual loans.
We continue to evaluate and pursue opportunities to grow our loan portfolio and attempt to improve our overall asset yields. Non-interest income for the quarter totaled $13.0 million down from $15.9 million in previous quarter.
This sequential quarter decrease was primarily attributable to lower unrealized gains on interest rate [locks] of $2.1 million, lower investment securities gains of $800,000, lower rental income from foreclosed properties of $600,000 and lower service charges on the deposit accounts of $500,000. These were partially offset by higher gains on sales of residential mortgage loans of $1.3 million.
Non-interest expense for the quarter totaled $32.2 million down from $39.8 million in the previous quarter. The sequential quarter decrease was primarily due to lower foreclosed asset expense of $6.3 million resulting from gains realized on the sale of certain REO properties during the quarter.
Our adjustment efficiency ratio for the quarter, which excludes foreclosed asset expense and the amortization of certain intangible assets was 81.7% compared to 78.5% in the previous quarter. Our net deferred tax asset balance at December 31, 2012 totaled $149.5 million.
Because we continue to have a full valuation allowance established against this entire amount, we did not recognize any income tax expense for the quarter. As we have communicated previously with this quarter's results, we have reported 8 consecutive quarters of profitability and are working closely with our auditors to determine when we will be able to reverse the valuation allowance.
At this time we anticipate being able to reduce this significant portion of it during the first quarter of 2013. At December 31, 2012, our capital ratios continued to exceed levels required to be considered as a well capitalized institution for regulatory purposes.
Our tier 1 risk-based capital, total risk-based capital and leverage capital ratios were 22.54%, 23.83% and 14.32% respectively, compared to a 23.34%, 24.63% and 14.06% respectively at September 30, 2012. That completes our financial summary and I'd now like to turn the call over to Bill, who'll provide additional background related to our credit risk profile.
Bill Wilson
Thank you, Denis. We continue to realize improvements in almost all areas of our credit risk profile in the fourth quarter of 2012 and for the entire year as well.
Nonperforming assets totaled $90 million at the end of the fourth quarter compared to $140.3 million in the third quarter of 2012 and $195.6 million in the fourth quarter of 2011 or a year-over-year decrease of 54%. The fourth quarter decrease in nonperforming assets was primarily attributable to $51.8 million in reductions, which were partially offset by $1.5 million in additions.
The reductions are represented by $38.4 million in sales of foreclosed properties, $8 million in accounts returned to accrual status, $2.9 million in repayments, $2.3 million in charge-offs and $200,000 in write downs. Nonperforming construction and development loans totaled $46.8 million at the end of the fourth quarter, representing a decrease of $42.9 million or 47.8% from the third quarter of 2012.
These nonperforming construction and development loans comprised 52% of total nonperforming assets. Troubled debt restructurings totaled $68.5 million for the fourth quarter, a decrease of $5.4 million from the third quarter of 2012.
Nonaccrual TDRs totaled $36.7 million and accruing TDRs totaled $31.8 million. Our TDRs are comprised of $35 million in residential mortgages, $28.5 million in Hawaii commercial real estate, and $5 million in other loans.
We achieved net recoveries of $1.8 million in the fourth quarter of 2012, as compared to net charges-offs of $1.9 million in the third quarter of 2012 and is compared to net charge-offs of $10.1 million in the fourth quarter of 2011. Loans delinquent for 90 days or more still accruing interest totaled $503,000 in the fourth quarter compared to $508,000 in the third quarter of 2012.
Loans delinquent for 30 days or more still accruing interest increased to $10.4 million in the fourth quarter from $5.7 million in the third quarter of 2012. The allowance for loan and lease losses as a percentage of total loans and leases, decreased to 4.37% at the end of the fourth quarter from 4.59% in the third quarter of 2012.
The allowance for loan and lease losses as a percentage of nonaccrual loans, was 121.5% at the end of the fourth quarter compared to 104.3% to the third quarter of 2012 and 100.1% at the fourth quarter of 2011. As noted earlier in my remarks, our ongoing program to reduce nonperforming assets and reduce our construction and development credit risk exposure, demonstrated positive progress through the fourth quarter with $50.3 million net decrease in nonperforming assets and $42.9 million net decrease in construction development loans.
We anticipate that we will be able to continue our progress improving credit quality in 2013. That completes our credit quality review.
I would now like to turn the call back to John.
John Dean
Thanks, Bill. In summary, we're very pleased with the financial results achieved in the fourth quarter and the significant progress made throughout last year.
We believe to be well positioned to maintain as positive momentum going into 2013, and to make further progress in enhancing our information management systems and our delivery platforms for servicing our customers. At this time, we'd be happy to answer any questions you may have.
Operator
(Operator Instructions) Our first question comes from Aaron Deer of Sandler O'Neill & Partners. Please go ahead.
Aaron Deer - Sandler O'Neill & Partners
Hi, good morning guys.
John Dean
Good morning.
Denis Isono
Good morning.
Aaron Deer of Sandler O'Neill & Partners
If I could start, I guess Denis just want to go back to the DPA could you repeat the number I didn't hear probably it's 139.5 or 149.5?
Denis Isono
149.5.
Aaron Deer - Sandler O'Neill & Partners
Okay, so that that's actually an increase from the prior quarter is that right?
Denis Isono
No, it's not.
Aaron Deer - Sandler O'Neill & Partners
No, okay I am sorry, I must have the wrong number then. Okay, and then with respect to capital your TC is obviously very strong as are your regulatory ratios and I am just curious with the expectation now that we're getting close to do a full DPA recovery and the impact that's going to have on capital.
What's the expectation that we might see reinstated dividend or start seeing some share repurchases at some point this year?
John Dean
I am going to take that one. I am John Dean here.
Right now there is a going to be a substantial inflow of capital not all of that DPA will be realized. I think Denis mentioned that earlier.
So just to confirm, but a majority of it, what we believe will be in the first - this first quarter. What we're looking at as you would expect is reinstatement of a quarterly dividend.
We are looking at a onetime large dividend and we are looking at the repayment of the troughs. So we're looking at all three and anything else we might see they can better position of bank going forward, but at this time no decisions have been made.
Aaron Deer - Sandler O'Neill & Partners
Okay and then with respect to the mortgage activity in the quarter, what was the, what was kind of mix of purchase versus refi activity and what was the volume dollar volume of the loans that were sold?
John Dean
Lance Mizumoto
Lance Mizumoto
Lance Mizumoto
Aaron Deer - Sandler O'Neill & Partners
Morning.
Lance Mizumoto
A proportion of purchase activity, the refinance activity, we saw about let say 40% purchase and about 60% refinance.
John Dean
Okay and do you have the dollar volume of loans sold and then also just maybe your thoughts going forward if origination volumes hold out that you expect to be selling at similar levels going forward.
Lance Mizumoto
Let's see, little over $286 million was sold.
John Dean
And the question is whether the mix of purchase versus refi is going to change this year, because obviously purchase will be going up versus the refi's, just because of where we are with rates. So we expect to do even better this coming year because we're typically stronger in the purchase market.
Aaron Deer - Sandler O'Neill & Partners
Okay so is it reasonable to assume then that your stay away that your loan sale activity is public and continued at similar pace?
John Dean
We would think so.
Aaron Deer - Sandler O'Neill & Partners
Okay, great. Thanks for taking my question.
Lance Mizumoto
You welcome.
Aaron Deer - Sandler O'Neill & Partners
Thanks Lance.
Operator
Our next question comes from Joe Morford of RBC. Please go ahead.
Joe Morford - RBC Capital Markets
Thanks good morning everyone.
John Dean
Good morning Joe.
Joe Morford - RBC Capital Markets
Just given the relatively positive economic trends, what kind of expectations do you have for loan growth in the year ahead and do you see the mix coming from kind of the same categories as we saw this quarter?
John Dean
I am going to turn it to Lance – John here and I am going to turn it to Lance in a minute, but obviously we had an excellent fourth quarter led by Lance and his team and the market is doing better as I'll refer back to my earlier comments not just with tourism being at all time highs at the end of last year, but also as we look at this year going forward. If you look at permits in the pipeline there should be a good deal of construction going forward and better this year than last year, but maybe with that as background Lance do you?
Lance Mizumoto
Yes Joe.
John Dean
Don't give specifics though.
Joe Morford - RBC Capital Markets
It's okay feel free.
Lance Mizumoto
As we look at the pipeline I think we are encouraged on several fronts clearly on the residential mortgage side we're still continuing to see a very healthy activity and then we're also encouraged by the strengthening of the whole economy so I think C&I activity is continuing to grow.
Joe Morford - RBC Capital Markets
Are you seeing any increase in line utilization rates on that CNI front?
Lance Mizumoto
I think there is some pick up but some of that's been seasonal which you see then is a downturn toward the middle of the year. But I think we've been encouraged by the activities of our offices in securing not only lines of credits but term loans as well.
Joe Morford - RBC Capital Markets
Okay. And as loans grow are you likely to let investments run down such as the overall earning asset growth would be a lot less but obviously you'd get the improve mix.
Lance Mizumoto
We anticipate that the investment portfolio would go down we're hopeful that and or encouraged by the amount of we again loan activity and volume.
Joe Morford - RBC Capital Markets
Okay. And then lastly I was just curious if the expiration of the tag at year end was anything to note one way or the other?
John Dean
Nothing, that I know of.
Lance Mizumoto
We went out proactively talked to our clients and we had not seen any significant changes as the result of the expiration of the tag.
Joe Morford - RBC Capital Markets
Okay. Thanks everyone.
John Dean
Thank you, Joe.
Operator
(Operator Instructions) And our next question will come of Jackie Chimera of KBW, please go ahead.
Jackie Chimera - KBW
Hi. Good morning, everyone.
John Dean
Good morning, Jackie.
Jackie Chimera - KBW
I had the question about the provision expense in the quarter, you obviously continue to have excellent improvement in the NPAs and just with the continuing decline in NPLs and the recovery booked in the quarter, I was surprised there wasn't more of a relief I guess you could say I guess how do you think about that going forward in the 2013 assuming credit continues to improve?
John Dean
Jackie, I'm going to pass that one to Bill Wilson.
Bill Wilson
Good morning Jackie it's Bill
Jackie Chimera - KBW
Hi, Bill
Bill Wilson
It's not so much how we think about it, it's just a consistent methodology that we would been applying now for two years. And as we go through the methodology and then put the historical factors and some of the economic factors it guides us to what the level the allowance should be.
Jackie Chimera - KBW
Did the quarter's loan growth play of impact in that?
Bill Wilson
It does a little bit if you think about new lending would require some level of provisioning and so to the extent that there might have been with no loan growth there might have been larger, larger release that is part of it.
Jackie Chimera - KBW
And once we I am just trying to understand the ruling methodology of the historical charge-offs that you look at. Once we get into 1Q '13 does that role off on a quarter basis or it's on the annual basis?
Bill Wilson
We role off on a quarterly basis we have different periods for real estate based transactions and non real estate based transactions, and as we continue to move forward we [use] some our history.
Jackie Chimera - KBW
Okay. That's good color, thank you.
And the just one question on the purchase refi percentage, your purchase percentage is I mean it's very impressive in this environment and it's much higher than some of your peers. Just your thoughts on what you do that might be a little different to drives that strong purchase volume?
John Dean
Let me pass it back Jackie to Lance, Lance Mizumoto.
Lance Mizumoto
Hi Jackie this is Lance. I think we're encourage again by the growth in the economy, Hawaii's economy that is, and I think what we anticipate is more real estate activity in the way of purchases and sales taking place.
Jackie Chimera - KBW
Okay. And then just lastly I wanted to see if there might be any color that you could provide on the word majority with DPA just because, I mean I realized that you're so talking to the [account]
John Dean
The question again please, Jackie?
Jackie Chimera - KBW
With the return of the majority of the DTA I think let me talked in the past I know that there's a section of the California portion of that drives into question I just wondered if you had any -- very general guidance that you might be able to give on what portion you think may remain within allowance against it, just generally.
Lance Mizumoto
Yeah, Jackie we're probably in the same spot we were originally with the California deferred assets not being recognized we're so we haven't that story hasn't changed very much but we're just want to make sure that, it's clearly not all of it.
Jackie Chimera - KBW
Okay. Those were my questions thank you.
John Dean
Thank you, Jackie.
Operator
And our next question is a follow-up from Aaron Deer of Sandler O'Neill & Partners. Please go ahead.
Aaron Deer - Sandler O'Neill Partners
Hi, just actually follow-ups on Jackie's questions with respect to the DPA and apportioning in California is that is the expectation there just that you have got less of presence now in California so there is less income being derived there from which to offset the allowance?
Denis Isono
Yeah Aaron this is Dennis that's exactly right. There's just less revenue expected to be generated in California.
Aaron Deer - Sandler O'Neill Partners
Okay, and then the, going back to the reserve methodology. Bill, if you can give some color maybe on what the look back period is on that and if that's going to leave us with any possible big releases coming up here over the next several quarters that's different or as more challenging quarters drop out?
Bill Wilson
Sure, the look back period for real estate based transactions is two years and so you can look at our history and see what that would suggest.
Aaron Deer - Sandler O'Neill Partners
Okay and then one last question on the deposit service charges in the quarter those came down. So I just wondered if that's a shift in your overdraft feed methodology and if that's going to be a permanent kind of reduction if you will going forward?
John Dean
I will start and Lance jump in. but the answer is, we have changed our policy there and that will impact us going forward this year.
Lance Mizumoto
I would eco the same thing we anticipate that change to - continue throughout the year.
Aaron Deer - Sandler O'Neill Partners
Okay. Great, thanks again for taking my question.
John Dean
Thank you, Aaron.
Operator
Having no further questions this concludes our question and answer session. I would like to turn the conference back over to Mr.
Dean for any closing remarks.
John Dean
Thanks, Emily. Just thank you very much for participating in our earnings call for the fourth quarter 2012 and then we look forward to future opportunities to update you on our progress.
Have a good day.
Operator
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.