Central Pacific Financial Corp (CPF) 2015 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp.'s second-quarter 2015 conference call. (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.

At this time I would like to turn the conference over to David Morimoto, Executive Vice President and CFO. Please go ahead.

Thank you, Laura, and thank you all for joining us as we review our financial results for the second quarter of 2015. With me this morning are Catherine Ngo, President and Chief Executive Officer; Lance Mizumoto, President and Chief Banking 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'll turn the call over to Catherine.

Thank you, David, and good morning, everyone. We are pleased to report on another solid quarter of financial performance which resulted in net income of $12.3 million. While there were significant one-time income and expense items during the quarter, our core net income remained strong. David Morimoto will provide more color on these items later on this call.

Our continued focus on expanding and strengthening our customer relationships has generated meaningful growth in both loans and core deposit balances over the previous quarter. Our asset quality has also improved, with a significant reduction in nonperforming assets. The overall strengthening of our balance sheet has contributed to an improved net interest income quarter over quarter.

At the beginning of the quarter on April 1 we completed a $75 million stock repurchase in connection with an underwritten secondary offering made by our two largest shareholders. Combined with additional shares that were repurchased on the open market, approximately 3.5 million shares were repurchased during the quarter, which was reflected in the increased earnings per share for the quarter. Since the first quarter of 2014 our Company repurchased a total of 11 million shares, representing over 25% of our common shares issued and outstanding.

Our current capital ratios remain in excess of the regulatory well-capitalized minimum levels designated under Basel III, which was implemented earlier this year. Our Board of Directors also maintained a quarterly cash dividend of $0.12 per share payable in September of this year.

The economic conditions in Hawaii continue to be favorable, as evidenced by a stable rate of growth in key economic indicators. Visitor arrivals to Hawaii increased by 1.3% in 2014 over the previous year and are on track to increase by 2.5% in 2015. Visitor expenditures are projected to reach $15.1 billion by the end of this year, representing an increase of 2.0% over 2014.

Construction activity continued to ramp up in the first half of the year and appears promising throughout 2016, with building permits valued at $4.7 billion in 2015 and forecasted at $5.2 billion in 2016. The median home price has returned to an all-time high at $700,000 for single-family homes as of June of this year and is projected to reach $710,000 by year-end.

The labor market also continued to expand throughout the first half of 2015. Job growth increased by 1.1% in 2014 and is expected to increase by 1.2% in 2015.

The Hawaii unemployment rate has held steady at 4.1% throughout the first five months of the year and declined to 4.0% in June, compared to 5.3% nationally, and is forecasted to decline to 3.9% by year-end.

At this time I would like to ask David Morimoto, our newly appointed Chief Financial Officer, to review the highlights of our second-quarter financial performance. David?

Thank you, Catherine. Net income for the second-quarter 2015 was $12.3 million or $0.39 per diluted share, compared to net income of $10.4 million or $0.29 per diluted share reported last quarter. We will provide color on a few nonrecurring items that impacted our second-quarter results.

Return on average assets in the second quarter was 1%, and return on average equity was 9.93%. Net interest income increased by $1.1 million or 2.9% sequential quarter, as average interest-earning assets and average loan yields both increased. The sequential quarter increase in loan yield was primarily driven by a $400,000 increase in loan fees and a $200,000 increase in loan prepayment penalties.

Net interest margin increased to 3.32% from 3.28% last quarter. And again, this was positively impacted by the increases in loan fees and prepayment penalties.

In the second quarter we executed an investment portfolio restructuring, where we sold roughly $120 million of available-for-sale securities yielding 1.35% and reinvested the proceeds in a like amount of new securities yielding roughly 2.70%. The repositioning will increase net interest income by roughly $135,000 a month going forward.

At June 30, 2015, the investment portfolio weighted average life was 5.5 years. The overall balance sheet remains neutral to slightly asset sensitive.

Net interest income decreased by $3.1 million or 27.4% sequential quarter. The decrease was primarily driven by the $1.9 million pretax loss on investment security sales related to the investment portfolio repositioning, and a net $0.7 million decrease in unrealized gains/losses on loans held-for-sale and interest rate locks.

Noninterest expense decreased by $1.6 million or 4.6% sequential quarter. The decrease was primarily attributable to a one-time $2.4 million reversal of an accrual for a former executive's retirement benefits that will not be paid; lower legal and professional services fees of $0.6 million; and lower amortization of mortgage servicing rates of $0.5 million. These decreases in expense were partially offset by a $2 million contribution to the CPB Foundation.

The efficiency ratio for the quarter declined slightly to 71.47% compared to 71.73% in the previous quarter. The efficiency ratio in the second quarter was negatively impacted by the nonrecurring loss on investment security sales and CPB Foundation contribution, partially offset by the nonrecurring salary and employee benefit accrual reversal.

Our effective tax rate in the second quarter was 39.2% versus 35.7% in the first-quarter 2015. In the current quarter, our effective tax rate was inflated by an additional $0.6 million in nonrecurring income tax expense related to a reduction of our deferred tax liabilities for FHLB, Federal Home Loan Bank, stock dividends. We would expect our normalized effective tax rate to approximate 35% to 37% going forward.

During the quarter, we recorded a credit to the provision for loan and lease losses of $7.3 million, compared to a credit of $2.7 million recorded in the prior quarter. The credit for the provision for loan and lease losses was primarily attributable to improving trends in credit quality during the quarter.

Nonperforming assets declined by $8.7 million or 21.2% sequential quarter. And we also recorded net recoveries of $2.8 million during the second quarter.

As mentioned by Catherine, during the second quarter we repurchased roughly 3.48 million shares of common stock at a total cost of roughly $80 million. The average cost was $0.2301 per share repurchased. At June 30, 2015, the remaining buyback authority under the share repurchase program was approximately $24.2 million.

That completes the financial summary, and now I'll turn the call over to Lance.

Thank you, David, and good morning, everyone. Overall, we remained on track with our business development initiatives and continued to benefit from the improving market and economic conditions in Hawaii. As of June 30, 2015, compared to the end of the previous quarter, total loans increased by $38.3 million or by 1.3%.

The sequential quarter growth was driven by the consumer segment, with consumer loan balances increasing by $23.2 million or 6.6%, and residential mortgages increasing by $51.7 million or 4%. While the production of commercial and business loans were on track with our projections, net loan growth was impacted by the timing of payoffs, with the larger payoffs related to construction projects. Commercial and industrial loan balances as well as commercial mortgages remained relatively flat.

Construction loan balances declined by $29.2 million or by 25.9%, and we project that our construction loan balances will be relatively stable throughout the remainder of the year. Loan growth was also impacted by the timing of some loans that we anticipated would close during the second quarter that will now close during the third quarter.

Total deposits on a quarter-over-quarter basis remained relatively flat, declining slightly by 0.2%. However, we realized a significant shift from time deposits to core deposits, primarily driven by our efforts to expand core relationships with our customers.

Noninterest demand account balances increased by $37.6 million or by 3.6%. Interest-bearing demand increased slightly by $1.3 million or by 0.2%. Savings and money market account balances increased by $13.9 million or 1.1%.

These increases were offset by a reduction in time deposit balances, $59.2 million or 5.4%. On a year-over-year basis, total deposits were up by $179.7 million or by 4.5%. Core deposits increased by $208.8 million or 7.1%, and time deposits declined by $29 million or 2.7%.

From a service delivery perspective, we are making good progress in expanding and integrating our channels. Enhanced online bill payment features were launched on June 1, which included same-day bill payment and an expedited person-to-person, or P2P, payment function. CardValet, a customer-controlled security monitoring application for debit card users, was introduced on July 1.

We are also scheduled to begin reissuing EMV chip embedded debit cards to our customers in August, as well as to go live with Apple Pay for our mobile banking customers. That completes my summary on our business development activity, and I will now turn the call back to Catherine for her closing remarks. Catherine?

Since the recapitalization of our Company in 2011, we have continued to make great progress as reflected in 18 consecutive quarters of profitability, the successful execution of our stock repurchase program, and the reestablishment of our market presence in Hawaii. I am personally grateful for having had the opportunity to participate in the Company's turnaround under the leadership of John Dean, who is continuing to support our endeavor to become a high-performing bank as Exec Chair and Board Chair of both our Bank and Holding Company.

As the newly appointed CEO of our Company, I am focused on continuing our mission of building a quality institution around our customers and to continue supporting the businesses and residents of our community through quality relationships. I would like to take this opportunity to thank our shareholders, customers, and employees for their continued support and confidence as we work toward achieving our goals.

At this time we'll be happy to address any questions you may have.

(Operator Instructions) Joe Morford, RBC Capital Markets.

Thanks. Good morning, everyone. I guess first question was just on credit. It's great to see the improvement this quarter. The recoveries in particular seemed a little outsized.

Was this just a timing issue? Are using some kind of broader improvement in credit trends overall? And I guess related to that, how should we be thinking about the pace of negative provisions or reserve releases going forward?

Let me turn the question over to Bill. Bill?

Good morning, Joe; this is Bill Wilson. I think the larger recoveries are the residual of our more challenging times in the past. We would expect to see those diminish as we move into the future.

In general with the provision, I think we've enjoyed a fairly sustained period of continued credit quality improvement. That's been reflected in the declining reserve ratio, which has provided for credit releases.

So all things being equal, I would think that trend would likely continue, and we would probably continue to move closer in the direction of our peer group.

Okay. Then I guess the other question was probably for Lance. Just trying to get a little better handle on what to expect for loan growth in the back half of the year. I understand the outsized construction paydowns this quarter, and you expect it to be stable.

But just looking at some of the other portfolios, maybe the pace of growth that you might expect. And are you looking to supplement that at all with any purchases or increased participations?

Hey, Joe; this is Lance. I'm cautiously optimistic about the third quarter, because it's hard to project out for the next six months. But I think in the near future, again we're optimistic that our growth will be pretty robust.

As I look at the pipeline going into the third quarter, we do have a number of loans that should be closing. As I mentioned earlier we had some loans that for timing reasons didn't close in the second quarter that will close and fund in the third quarter.

And these are commercial real estate related, not construction; more income property related type product, as well as some C&I loans that we expect to close. So again, I'm pretty optimistic about the third quarter.

Okay. Thanks so much. I'll step back.

Aaron Deer, Sandler O'Neill.

Hi, good morning, everyone. I was wondering if I could just get a little color on what you guys are seeing in the mortgage business. I know there was some noise in those lines this quarter from the rate changes, but just wonder what you're seeing amongst your customers, in terms of what kind of originations and sale activity we might see in the back half of the year.

Let me turn the question over to Lance. Lance?

Hey, Aaron. We're seeing a little bit of slowdown in the applications, but I think our production has been pretty stable. On the HELOC side, were pretty encouraged by the number of referrals we're getting from our branches and other lines of business. So when you put together the residential mortgage and the HELOC production, I'm pretty optimistic going forward that we'll have some good production.

Okay. Then, Catherine, with the -- you guys appear to have continued to be active with the share repurchases even beyond the big repurchase done at the beginning of the quarter. What are your thoughts on capital management going forward? Should we expect to see a similar pace of open market repurchases, or what are you thinking there?

Yes, so, the thinking is we will continue on our pace with dividends. So dividends will continue to be in what I think of it as a peer range, so a payout ratio in the 40% range, and yield 2% to 2.5%.

Then on top of that, we do plan on an ongoing repurchase program to eliminate the incremental annualized retained earnings. But I don't think you will see the kind of repurchases that you say in Q1/Q2 of 2014 and then earlier this quarter, so those more significant repurchases. I don't -- we don't currently plan for those kinds of repurchases as opposed to an ongoing repurchase program to eliminate retained earnings.

Okay. Then, David, not to let you off the hook, I just wondered if you could provide some color behind the repositioning of the securities this quarter. What was the, I guess, earnback on that trade and just the thinking behind it?

Sure, thanks for not letting me off the hook. But over the last year, from an asset liability standpoint, we have been focused on trying to add to the loan portfolio a little more asset sensitivity. So we did see a -- we have seen a pickup in home equity loan originations. We signed to portfolio a greater percentage of adjustable-rate mortgages in the residential mortgage area.

We have seen a pickup in construction and business lending. And then, finally, we obviously have a small allocation to Shared National Credits.

All of those loan categories are variable categories. So we have been increasing our asset sensitivity, and what we saw in the second quarter was an opportunity to enhance profitability with a small repositioning of the investment portfolio.

So $120 million, roughly 2% of the assets, we did extend duration on that portion of the balance sheet. It's going to add roughly $130,000, $135,000 per month going forward. The earnback is about 14 months.

Okay. Good stuff. Thanks, guys.

John Moran, Macquarie.

Hey. Good morning, guys. One more follow-up on the repositioning there. When in the quarter was that completed? I guess what I'm getting at is, if it was late in the quarter, is there a margin impact to think about going forward?

Good question, John. If I recall correctly, I think it took place in late April. So we have had it in the quarter for two or three months.

Okay. Then the other one, margin-related -- and I'm sorry if I missed it in the prepared remarks. But the new money loan yields, if you guys could run through where those are coming on at.

In the second quarter, John, it was on the lower end. Again, there was some focus on the adjustable, variable-rate loan originations. So the weighted average new loan origination yield was roughly 3.60% in the second quarter.

Okay, 3.60% in 2Q. Okay, that's helpful. But again, there was a little bit of a mix shift there, too. And it sounds like some of the deals that you guys had that were lined up for 2Q that kind of dragged into 3Q are probably sitting in buckets that might be a little bit north of that yield. Is that fair to say, or am I reading too much into that?

It might be slightly higher.

All right. Then the last one that I had was just on the OpEx run rate. Kind of ticked down pretty good, and I know that there are some moving pieces and noise in this. But on a core basis, kind of ticked down from where we were running in the first quarter.

There's probably some seasonality in that, too. But if you could just give a quick update on the outlook there and then where you are in the tech initiatives.

I can start on the OpEx run rate. The guidance there is pretty similar to what it has been. We are targeting a range of $32 million to $34 million per quarter on OpEx.

And in regards to just specifically on the tech initiative, so the one we spoke about last quarter, the Encore system, which is our front-end branch teller platform and also supporting our back-office, the pilot is underway. We actually commenced with the second pilot last week, and things are looking very good, so we do currently expect a full rollout before the end of the year.

Then on the other significant project that we've talked about in earlier calls, the enterprise data warehouse, we continue to make significant progress on that and expect to see deployment of data porting to the new warehouse, key information, before the end of the year. But in the meanwhile -- and I believe we've talked about this in earlier calls -- we've already started applying our analytics to our existing warehouse, and we are seeing lift from the analytics work on our loan and deposit portfolio.

Terrific. Thanks very much, guys.

Don Worthington, Raymond James.

Good morning, everyone. In terms of the reduction in CDs during the quarter, was that something that you intentionally wanted to do, was allow some of those deposits to roll off, or not to pay up to keep them?

David?

Yes, hey, Don. That was -- some of it was on the government, the municipal deposit side. So those deposits tend to be a little more volatile. And actually -- so we did see that run off right at quarter end, and some of those large CD balances have already returned.

So it was more just a little bit of volatility in the large CD area. It wasn't part of any type of asset liability strategy.

Okay, great; thank you. Then it looks like a portion of the reduction to the NPAs was due to a sale, like about $8.3 million. Just curious if there's any more color on what that was.

Let me turn the question over to Bill.

Good morning, Don. There was one large loan that we were fortunate enough to exit. So the bulk of it was a single asset.

Okay. All right, great. Thank you.

(Operator Instructions) Jacque Chimera, KBW.

Hi, good morning, everyone. Bill, as I look at the remaining NPAs, which you've done incredible work here getting these down to where they are, how much of that $32 million that's left is legacy credits, just a percentage, versus what's just general, operating, normal-to-see NPAs?

Sure, let me turn that question over to Bill.

Good morning, Jacque. Of the remaining $32 million, all of it is in Hawaii. About $10 million is in the residential mortgage business which is -- it ebbs and flows. And then the balance is just more traditional community bank C&I type business, so more what I would consider our normal activity in the NPA bucket.

Okay, so is it fair to say that all remaining NPAs are now just general and ongoing, and this quarter took care of the last of workouts from the crisis?

Yes, I think most of the -- it's fair to say that the legacy credits have largely worked through the system, and that we still see some opportunity for improvement but we're getting close to a normal run rate.

Okay. Congratulations on that; that's a huge accomplishment. You should feel really, really good about that.

Thank you. We do.

My next question, this one's probably for Lance. If I understood you correctly, you expect construction balances to be flat for the next quarter. If that's the case, I'm just wondering why we wouldn't see any other fundings or growth there.

What happens -- it's hard for us to control the timing of fundings and paydowns. Again, while we anticipate some activity on the construction side, there are some chances that we might see some paydowns on some existing projects.

So net-net we may not see growth in that construction area. And we're more focused on income property type lending, so I think we're more optimistic and want to focus on both the C&I and commercial or income property front.

Okay; that's really good color. Thank you. Then just lastly the consumer growth in the quarter. Was that the HELOC production that you had talked about, or were there some other portfolios that increased in there too?

Part of it was HELOC production. The other part was a campaign that we did on the preapproved consumer terminal campaign that we've done over the past few years. And then we did take advantage of an opportunity to purchase an auto loan portfolio.

Okay. Was the purchase relatively large to the growth?

Yes, it was about $28 million.

Okay, great. Thank you all very much.

Joe Morford.

Actually my other two questions were just answered. Thanks so much.

Okay, Joe.

This does conclude our question-and-answer session. I would like to turn the conference back over to Catherine Ngo for any closing remarks.

Thank you very much for participating in our earnings call for the second quarter of 2015. We look forward to future opportunities to update you on our progress.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.