Central Pacific Financial Corp (CPF) 2015 Q1 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. first-quarter 2015 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 at the Company's website at www.CentralPacificbank.com.

I would 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 first quarter of 2015. Highlights and comments will be provided by John Dean, Chairman and Chief Executive Officer; Lance Mizumoto, President and Chief Banking Officer; and Dennis Isono, Executive Vice President and Chief Financial Officer. Also present and available for questions are Catherine Ngo, President and Chief Operating Officer; and Bill Wilson, Executive Vice President and Chief Risk 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. The overall financial performance for our Company in the first quarter of this year was on track with our business plan, resulting in net income of $10.4 million. Loan and deposit balances continue to grow at a stable rate quarter over quarter as we maintained our focus on expanding our client relationships and supporting the business activity in our marketplace.

Our credit risk profile has remained stable, and we were again able to report a credit to our provisions for loan losses in the quarter. Dennis Isono and Lance Mizumoto will provide more details later in this call.

I'm pleased to report that we made good progress in our stock repurchase program, which we initiated in 2014 as part of our strategy to deploy excess capital for the benefit of our shareholders. Last year, we reduced the total number of issued and outstanding CPS shares by 16.7%, which included purchases of 3.4 million shares by auction, 2.8 million shares via private transactions and almost 860,000 shares in the open market.

In the first quarter of this year, we purchased nearly 475,000 shares in the open market. On April 1 of this year, we closed on the purchase of approximately 3.3 million shares for $75 million from our two largest shareholders as part of their underwritten secondary offering to sell an aggregate total of 7.6 million shares.

This $75 million stock repurchase further reduced our total issued and outstanding shares by 9.4% and will be reflected in our next quarterly financial reporting. The remaining share buyback authorization in our current stock repurchase program is $29.2 million, and we project our capital ratios to remain in excess of the regulatory, well-capitalized, minimum levels as designated by Basel III, which became effective in the first quarter of this year.

In addition to the stock repurchases, we increased our quarterly cash dividend twice in the past six months, by 25% in September 2014 and by 20% in March 2015. This month in April, our Board of Directors maintained a quarterly dividend of $0.12 per share, payable in June of this year.

Turning to Hawaii's economy, the positive growth reflected in key economic indicators during 2014 is expected to continue into 2015. Visitor arrivals increased in 2014 by 1.3% over the previous year and are projected to increase by 2.1% in 2015. Similarly, visitor expenditures, which increased in 2014 by 2.3%, are projected to increase by 3.4% this year.

Labor conditions in Hawaii continue to improve in 2014 and are forecasted to maintain a stable growth rate this year. The state's unemployment rate is projected to be at 3.9% for 2015 compared to 4.3% last year and more than 4.1% for the first three months of this year. The overall number of non-agricultural jobs expanded by 1.2% last year and is expected to increase by 1.5% this year.

For the construction sector, job growth is forecasted to increase by 5.1% in 2015. Total commitments to build, measured by private sector permits and government contracts, totaled $4.4 billion in 2014, up by 5.6% over the previous year.

At this time, I'd like to ask Dennis Isono, our Chief Financial Officer, to review the highlights of our first-quarter financial performance. Dennis?

Thank you, John. In the first quarter of 2015 we reported net income of $10.4 million, or $0.29 per diluted share, compared to net income of $13.3 million, or $0.37 per diluted share, reported last quarter. The sequential quarterly decline in net income was primarily due to a lower credit to the provision for loan and lease losses of $2.7 million in the current quarter compared with $5.4 million credit recorded last quarter.

Net interest income for the quarter remained relatively unchanged from last quarter at $36.2 million. Our net interest margin decreased to 3.28% from 3.33% last quarter. The sequential quarterly decrease in our net interest margin was primarily due to increases in yields on interest-earning assets. In the quarter, the taxable equivalent yield on our investment securities portfolio declined 3 basis points to 2.61%. The taxable equivalent yield on the loan and lease portfolio declined 4 basis points to 3.90%. Our loan and lease portfolio ended the quarter at $2.97 billion, an increase of $35.6 million from the end of the fourth quarter. The growth primarily came from our commercial and industrial and residential mortgage loan portfolios. Lance Mizumoto will provide more insight into the loan portfolio later in this call.

Our investment securities portfolio ended the quarter at $1.55 billion, an increase of $86.8 million from the end of the fourth quarter. During the quarter, we chose to reinvest investment cash flow and grow the portfolio slightly to support net interest income. Non-interest income for the quarter totaled $11.2 million, up from $10.2 million in the previous quarter. The increase in other operating income from last quarter was primarily due to higher unrealized gains on loans held for sale and interest rate loss of $600,000, higher service charges and fees of $300,000, the additional recovery of a counterparty loss on a financing transaction of $300,000 and higher net gains on sales of residential mortgage loans of $200,000.

Non-interest expense for the quarter totaled $34.0 million, up from $32.7 million in the previous quarter. The increase in other operating expense was primarily due to higher amortization of mortgage servicing rights of $700,000, higher computer software expenses of $400,000, and higher legal and professional fees, primarily due to the accrual of $500,000 of legal and professional fees related to the underwritten public offering of our common stock by our two largest shareholders.

Our efficiency ratio for the quarter increased to 71.73% compared with 70.59% in the previous quarter. The increase in our efficiency ratio was due primarily to the higher amortization of mortgage servicing rights, higher computer software expense, and higher legal and professional fees.

In the first quarter of 2015, our income tax expense remained relatively unchanged from last quarter at $5.8 million. The effective tax rate for the quarter was 35.7%. Our income tax expense and effective tax rate in the first quarter was impacted by the previously mentioned $500,000 accrual and costs related to the underwritten public offering, which are not tax-deductible. As of March 31, 2015, our net deferred tax assets totaled $94.3 million.

During the quarter, we recorded a credit to the provisions for loan and lease losses of $2.7 million compared with a credit of $5.4 million recorded in the previous quarter. The credit to the provision for loan and lease losses was primarily attributable to improving trends in credit quality during the quarter.

Non-performing assets ended the quarter at $40.8 million, a decrease of $1.2 million from $42 million reported in the last quarter. The net decrease was due to $1.7 million in repayments, $900,000 in sales of foreclosed property, $300,000 in charge-offs and write-downs, and $200,000 in accounts returned to a closed status.

These reductions were offset by the addition of $1.9 million in non-accrual loans. The allowance for loan and lease losses as a percentage of total loans and leases decreased to 2.41% at March 31, 2015 from 2.52% at December 31, 2014. Our allowance for loan and lease losses as a percentage of non-performing assets was 175.21% at March 31, 2015, compared with 176.14% at December 31, 2014.

During the quarter, we repurchased 473,829 shares of common stock at a total cost of $9.3 million under our share repurchase program. The average cost was $19.54 per share repurchase. In January 2015, our Board of Directors increased the share repurchase authorization by $25 million. In March 2015, our Board of Directors increased the share repurchase authorization by an additional $75 million, and we promptly deployed the enhanced repurchase authority on April 1, 2015 with the repurchase of an additional 3,259,452 shares of common stock at a purchase price of $23.01 per share. The repurchase was done in connection with the underwritten public offering. Our remaining buyback authority under the share repurchase program as of today is $29.2 million.

Lastly, at March 31, 2015, our capital ratios exceed the levels required to be considered a well-capitalized institution for regulatory purposes under Basel III. Our leverage capital ratio, tier 1 risk-based capital, total risk-based capital and the new common equity tier 1 capital ratios were 12.79%, 17.29%, 18.54% and 14.78%, respectively. At December 31, our leverage capital ratio, tier 1 risk-based capital, total risk-based capital ratios were 12.03%, 15.97% and 18.24%, respectively.

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, Dennis. And good morning, everyone. As John mentioned, our business development initiatives remained on track with our plan that continues to be supported by the strength of the business and economic activity in Hawaii. As of March 31, 2015, total loans increased by 10%, or by $270.3 million, on a year-over-year basis.

During this same period, construction loan balances were up by 30%. Commercial and industrial loans as well as our consumer loans were up by 15%, and residential mortgages increased by 10%. Compared to the prior quarter-end balances, commercial and industrial loans increased by 8%, and residential mortgages were up 1.4%. Commercial mortgage loans were relatively flat, as we experienced some challenges during the first quarter with heightened level of loan payoffs. The overall loan growth was offset by a decline in consumer loans by 4%. However, we remain committed to achieving our growth targets going forward.

The year-over-year increase in total deposits was 5.1%, or $203 million, of which $155 million was in core deposit growth. Non-interest demand deposits increased by 11%. Interest-bearing demand deposits increased by 8%, while savings and time deposits increased by less than 2%. Compared to previous quarter-end balances, total deposits were up by 1.9%, or by $78.3 million. The growth in our loan and deposit balances is a reflection of our continued focus on strengthening customer relationships and generating quality new business.

We have made good progress in and enhancing our supporting infrastructure in areas of delivery channel integration, customer data analytics and operational efficiencies. While there is more work to be done, we are confident that these initiatives will progressively add value to our business development efforts throughout the 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, we are pleased with the consistency and progress being made by our Company, as reflected in the first-quarter financial results. We will continue to focus on our 2015 business plan and our long-term strategic initiatives, which are premised on strengthening relationships with our customers, streamlining operational efficiencies and expanding our balance sheet with quality assets going forward.

I would like to take this opportunity to thank our shareholders and customers for their continued support and confidence as we work toward achieving our goals.

At this time, we would be happy to address any questions you may have.

(Operator Instructions) Joe Morford, RBC Capital Markets.

I guess first question is for Lance on the loans. It seemed like a little bit slower growth this quarter was attributed to some of the paydown activity on the CRE side. Do you see that activity continuing, or was this largely tied up with just a couple larger credits? And just in general, how does the pipeline look going forward in the loan portfolio?

There were a couple of mortgage loans that did pay down during the quarter. What we are seeing in the second quarter will probably be some paydowns on drawdowns of construction loans that were made in the prior year. But we are still pretty confident and cautiously optimistic that our loan pipeline is robust enough that we will see further growth in the second quarter.

And do you see any need to do any more of the purchases or increased syndicated participations that you have done in the past to get to that year-end -- or full-year target?

We will look at those purchases as an opportunity arises. But we are focused on organic growth. As you noticed in the first quarter, 100% of our growth was organic.

Right. Okay, that's great. The other question is just on the margin. A little bit weaker this quarter; it looked like mostly due to mix issues. But I was just kind of curious. How do you feel about your ability to continue to hold the margin here through the balance of the year? Are you expecting any greater compression? Thanks.

I'm going to pass this one to David, if I may -- David Morimoto.

Yes, in the first quarter we did experience a little bit of compression on the net interest margin. It was both on the investment portfolio and on the loan portfolio, as Dennis mentioned. We did have sequential declines in both.

We are hopeful that with additional loan growth that we can remix the balance sheet from investment, start to remix the balance sheet from investments to loans again. And we are hopeful that will support the net interest margin going forward. In the first quarter, we did grow the investment portfolio slightly. We are hopeful that we can keep it at this pace, at this level, or shrink it from here with incremental loan growth.

Okay, that's helpful. Thanks very much.

Aaron Deer, Sandler O'Neill.

If I can follow up on Joe's line of questioning with respect to the margin, Denis, I know you have provided some indication in terms of what the basis point movement was on the average yields on the loans and securities. Could you give us a sense of where the new loans, maybe even amongst the various types, were onboarded during the quarter, at what rates or yields relative to the existing portfolio?

Lance should take it (inaudible).

During the first quarter, weighted average new loan origination yield was 3.77%.

And that was on the new production?

Correct.

If I might add, so on the loan side it was 3.77% on the new loan origination, and that compares to the end-of-quarter loan portfolio yield of 3.90%. On the investment portfolio, the new purchases during the quarter at a weighted average rate of 2.35%, which compares to the end-of-quarter portfolio yield of 2.60%. So while the new earning assets were coming in at lower yields levels, the disparity is quite close. And that's another reason that gives us comfort or hope that we can stabilize the net interest margin as we roll forward through the year.

Well, I would think, too, that, given the volume of growth this quarter that came from C&I, that those credits probably have lower yields, being what I presume are variable-rate products. No?

Yes, that's correct.

Okay. And then related to that, Lance, maybe you could talk a little bit about the strength that you did see in C&I this quarter. What -- if there were any larger credits that helped drive that what types of businesses supported that growth?

There were a couple of larger credits that we saw that we were fortunate enough to originate. But we did have also a number of small loans that helped drive growth.

Okay. Great. Thanks for taking my questions.

John Moran, Macquarie Capital.

Just a real quick question on the OpEx run rate. I think last quarter you guys had referenced and expect a decrease in the comp line, and I think things maybe came in a little bit heavy. And then related to that, just if you could divide a quick update on the IP initiatives, the spend versus the cost saves that you might expect as the quarters progress here in 2015.

I'm going to pass that one to Catherine, if I may.

On the OpEx on -- so, as you noted, on comp expense, we did see a decline from the prior quarter and then also from a year ago, so Q1 of 2014. And we expect that comp expense line to pretty much hold at what you are seeing at Q1, so in that $17 million range.

In regard to the software expense, we did see an increase over prior quarter and over the prior year. As we've mentioned in earlier calls, we have made significant investments in technology in the prior quarter, most significantly in our enterprise data warehouse. We are confident that we will see the benefit from the technology investments. Lance spoke to that a bit earlier. But certainly, with our better understanding of our customers -- and that is with the enterprise data warehouse pulling information from all of the disparate systems across the organization, we do expect in the coming quarters to see the lift.

Okay, that's helpful. But then that computer software expense line at 2-1 or so -- it would be fair to say that that's going to stay around that level for the rest of this year?

That is fair to say because the expense, of course, is being amortized over the coming quarters.

Got you. And the only other one that I had was just a housekeeping item. And I'm not sure if you guys mentioned it or not, but it looked like in the fee lines some income on mortgage banking looked a little bit stronger, linked quarter. Wondering -- obviously, rates doing what they had done over the course of the quarter, if you guys saw a benefit from refi. And, if you had, what the split was in terms of refi versus purchase.

I'm going to pass it to Lance, John.

Our purchase activity compared to refinance activity, the split was about 55% to 45%. So 55% purchase, 45% refi.

Great. Thanks very much, guys.

Don Worthington, Raymond James.

I just noticed that borrowings were up a little over $30 million in the quarter. I'm not trying to trace the dollars, but it looks like it may have been used to support the growth in securities, so just curious about that increase and the type of borrowing that it was.

David?

Yes, you are correct. During the first quarter, we did add a little bit of wholesale leverage to the balance sheet to support the dollar net interest income. And again, we saw an opportunity. The majority of the purchases that were investment purchases that were done in the first quarter were -- the purchases were focused during the month of February, where we did see an uptick in rates.

So I think when we took a look at -- when we looked back on our purchases, two-thirds of our investment purchases were done when the five-year treasury was north of 1.45%, which was the average for the first quarter. So there was a little bit of wholesale leverage added to the balance sheet.

But again, we don't anticipate that to be continuing in future quarters. We expect to be running that down over time.

Okay, great. Thank you. And then also saw that performing TDRs were down about $10 million. It looks like it was pretty much all in the commercial real estate area. Was that due to a payoff, or did something move back to a performing status?

Bill Wilson?

That is actually -- the movement was represented largely by a single transaction that was moved out of that category after a sustained performance.

Okay, great. Thank you.

(Operator Instructions) Jacque Chimera, KBW.

As I'm looking out at the provision expenses for the quarter, was there an impact from the roll-forward from 4Q into 1Q?

We will go to Bill again, Jacque.

I'm not sure that I understand the question.

Was there any period of time that perhaps fell off between the 4Q and the 1Q roll-forward that would have had an impact on the provision? or was it very similar to the methodology in 4Q?

Well, the methodology was the same. The large driver in quarter-on-quarter change was just improvement in the economic factors we use as qualitative factors in the methodology.

Okay. So it was driven more by current factors than it was by any change in historical charge-offs?

Right, exactly. It is current improvement and then those national economic factors that we employ.

Okay, great. Everything else I have was already asked, so thank you very much.

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

Thanks, Keith. I'd like to thank everyone who joined us today for participating in our earnings call for the first quarter of 2015. And we look forward to future opportunities to update you on our progress. Thank you.

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