Q3 2008 Central Pacific Financial Corp. Earnings Conference Call - Final.(Broadcast transcript)

OPERATOR: Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Central Pacific Financial Corporation third quarter 2008 conference call. During today's presentation, all partys will be in listen-only mode. Following the 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 call over to Mr David Morimoto, Senior Vice President of Investor Relations. Please go ahead, sir.

DAVID MORIMOTO, SVP IR, CENTRAL PACIFIC FINANCIAL CORP.: Thank you, Ryan, and good morning, everyone, from Hawaii. With us today are Ron Migita, President and Chief Executive Officer, Dean Hirata, Vice Chairman and Chief Financial Officer, Blenn Fujimoto, Vice Chairman Hawaii Market, and Curtis Chinn, Executive Vice President and Chief Risk Officer. Today's call will refer to a Power Point presentation that can be found on our investor relations website. Ron and Dean will begin by reviewing our third quarter results and then we will open the call to questions. During the course of today's call management may make forward-looking statements with respect to the financial conditions, results of operations and the business of Central Pacific Financial Corp.. These forward-looking statements involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to these forward-looking statements, please see our earnings release issued this morning and our other recent documents filed with the SEC. And now I would like to turn the call over to Ron Migita.

RON MIGITA, PRESIDENT & CEO, CENTRAL PACIFIC FINANCIAL CORP.: Thank you, David, and thank you all for joining us today to review Central Pacific Financial Corporation's financial performance for the quarter ended September 30, 2008. I will be addressing the highlights of our Company and the marketplace, including updating you on the progress we have made in our California loan portfolio. Our Chief Financial Officer, Dean Hirata, will follow with a detailed financial report of our third quarter results. After we have completed our remarks, we will be happy to take your questions. Central Pacific Bank is a Company with strong roots in Hawaii. I've been on the job for about three months now and it is indeed an honor and a privilege to serve as CEO of Central Pacific Financial Corporation and Central Pacific Bank. I have enjoyed spending time with many of our customers to understand how we can best address their needs and concerns.

I've also been impressed by the dedication of our employees. As you all know these continue to be challenging times for our bank and the entire financial industry. Central Pacific Financial Corporation, like many financial institutions across the country, continues to be faced with formidable challenges stemming from problems in the national housing market and the ripple affect of the sub-prime lending crisis. We are pleased to announce that Central Pacific Financial Corporation has returned to profitability in the third quarter of 2008, with net income of $3 million or $0.11 per diluted share. This compares to a net loss of $146.3 million or $5.10 per diluted share in the second quarter 2008. The earnings include credit cost of $23 million for the third quarter of 2008, compared to credit costs of $116.1 million and a noncash goodwill impairment charge of $94.3 million in the second quarter of 2008.

The Company did not record a goodwill impairment charge for the third quarter 2008. CPF's return to profitability reflects a continued strength of our core Hawaii franchise and our strategy to reduce exposure to the troubled California residential construction market. As previously reported, in July 2008 the Company successfully reduced its exposure to this sector by selling assets with a combined carrying amount of $44.2 million. The Company had previously written these assets down to their sales price in the second quarter of 2008, resulting in no impact on earnings in the third quarter of 2008. We continue to address the impact of the weak California market and the slowing Hawaii economy on our loan portfolio. Hawaii is coming off a five year boom, tourism is obviously much weaker and looks to be weakening further. This will have ripple affects throughout our economy.

The turmoil and uncertainty in the financial markets and in the California real estate market is also having negative affects on Hawaii's real estate market. Central Pacific reported total assets of $5.5 billion at September 30, 2008. This reflects a decrease of $143.3 million, or 2.5% from a year ago, and a decrease of $146 million, or 2.6% from June 30, 2008. Total loans and leases of $4.1 billion at September 30, 2008 reflect an increase of $7.7 million, or 0.2% from a year ago, and an increase of $2.3 million, or 0.1% from June 30, 2008. Overall the Hawaii loan portfolio grew by $17.2 million during the current quarter, while the mainland loan portfolio decreased by $14.9 million. Total loans of $3.8 billion at September 30, 2008 reflect a decrease of $165.2 million or 4.2% from a year ago and a decrease of $143.6 million, or 3.7% from June 30, 2008.

Noninterest bearing demand, interest bearing demand, and savings and money market decreased in the current quarter by $53 million, $13.4 million, and $84.1 million respectively, while prime deposits increased by $7 million. We believe these results are probably related to the softening of the overall economy and are similar to results seen by other financial institutions. For example, Hawaii has seen slowing in a real estate market which has impacted our title and escrow deposits. Some foreign customers have also moved some of their deposits based on concerns about the overall US economy. However, we are confident that increases to the FDIC insurance, deposit insurance limits have reassured our customers and addressed concerns faced by all financial institutions during these challenging economic times.

The good news is that we are seeing a 30% increase in the number of new deposit accounts for the first three quarters of this year and we believe going forward, these new relationships will prove fruitful in the coming months and years. Although Hawaii's economy has begun to slow, we are not experiencing the challenging market conditions facing California and our Hawaii commercial and residential real estate loan portfolios continue to perform within our expected credit parameters. In addition to a decrease in credit costs in the second quarter of 2008, the Company recorded a sequential quarter decrease in net loan charge-offs and nonperforming assets. Net loan charge-offs for the third quarter of 2008 totaled $8.7 million compared to $73.9 million in the second quarter of 2008.

The Company also reported nonperforming assets of $132.6 million at September 30, 2008, compared to $145.9 million at June 30, 2008. The allowance for loan and lease losses as a percentage of total loans was 2.46% at September 30, 2008, compared to 2.11%, at June 30, 2008. We continue to be well capitalized as of September 30, 2008, with tier one risk based capital, total risk based capital, and leverage capital ratios of 10.13%, 11.39%, and 8.66%, respectively. However, given the uncertainty in the economy and the significant challenges facing the entire financial services industry, our consistent position has been to closely evaluate our capital levels. I also want to underscore that Central Pacific Financial Corporation does not hold directly or indirectly any common stock, preferred stock or subordinated debt of Fannie Mae or Freddie Mac.

We have been aware of our challenges in California since 2007 and continue to take proactive steps to aggressively deal with each problem California residential construction loan. At September 30, 2008 the Company's exposure to the California residential construction market totaled $95.4 million. This amount consisted $76.7 million in the loan portfolio, $13.1 million classified as held for sale, and two foreclosed properties totaling $5.6 million. At June 30 2008, the Company's total exposure …