Central Pacific Financial Corp (CPF) 2015 Q3 法說會逐字稿

Good afternoon and welcome to the Central Pacific third-quarter earnings call. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to David Morimoto, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Kate, and thank you all for joining us as we review our financial results for the third quarter of 2015. With me this morning are Catherine Ngo, President and Chief Executive Officer; Lance Mizumoto, President and Chief Banking Officer and Anna Hu, Senior Vice President and Interim 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 refer to our recent filings with the SEC.

Now I 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 $12.2 million and diluted earnings per share of $0.38. Strong loan and deposit growth continued throughout the quarter as well as a significant improvement in asset quality. David Morimoto will provide the financial details later on this call.

We are also pleased to announce that our Board of Directors declared an increase in the Company's quarterly cash dividend by 16.7% or to $0.14 from $0.12 per common share. In addition, the Board approved a special cash dividend of $0.32 per share and both dividend payments will be payable on December 15 to shareholders of record as of November 30 this year.

The Company's consistent profitability and strong capital position have also enabled us to enhance shareholder value through our successful share repurchase program. Year to date as of the end of the third quarter, we repurchased approximately 11.7% of our outstanding and issued common shares.

Since the start of our share repurchase program in the first quarter of 2014, we have repurchased over 25% of our outstanding stock. Our current capital ratios remain in excess of the regulatory well capitalized minimum levels designated under Basel III.

We attribute the improvement to our balance sheet and our credit risk profile primarily to the dedication and commitment of our entire CPB team. Our continued focus on expanding and strengthening customer relationships is taking us in the right direction not only for the quarter but for building a longer-term foundation for our organization.

We are also fortunate to have some tailwind from a favorable economic climate in Hawaii. Key sectors including our visitor industry and construction are on the upswing and will help fuel better labor market conditions and household incomes.

Through the first eight months of this year, visitor arrivals increased by 4.1% and visitor spending increased by 3.1% compared to the same period last year. Visitor arrivals are on track for a record year in 2015.

The upturn in construction activity is now well-established driven primarily by new residential units. The value of building permits increased by 27% in the first half of 2015 over the same period in 2014 and is projected to reach $5.5 billion in 2015.

The unemployment rate for the state of Hawaii in September 2015 was 3.4% compared to 5.1% nationally and reflected the lowest rate in Hawaii since March 2008. Non-agricultural jobs also as of September expanded by 1.4% over the same period last year.

Other key projections for 2015 over the previous year include increases in real property income by 2.9%, real GDP by 2.8%, and Honolulu inflation rate by 0.6%.

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

Thank you, Catherine. Net income for the third quarter of 2015 was $12.2 million or $0.38 per diluted share compared to net income of $12.3 million or $0.39 per diluted share reported last quarter.

While net income declined slightly sequential quarter, the quality of earnings improved in the third quarter as the credit provision was $3.6 million as compared to a credit provision of $7.3 million last quarter.

Return on average assets in the third quarter was 0.98% and return on average equity was 9.91%. Net interest income increased by $0.5 million or 1.4% sequential quarter as average interest-earning assets increased while the yield on average interest-earning assets remained relatively stable.

While reported net interest margin declined to 3.31% from 3.32% last quarter on a normalized basis, the core NIM was relatively flat at roughly 3.30% over the last two quarters.

Noninterest income increased by $1.7 million or 21% sequential quarter. The increase was primarily driven by the $1.9 million pretax loss [seen] in last quarter on the investment portfolio repositioning.

Total noninterest expense was relatively flat sequential quarter. Salaries and employee benefits increased by $2 million as last quarter we had the $2.4 million reversal of an accrual for a former executive's retirement benefits.

The $2.2 million sequential quarter decline in the other category was primarily driven by the $2 million decline in charitable contributions. In the second quarter, we made a $2 million contribution to the CPB Foundation.

The efficiency ratio improved to 67.55% from 71.47% last quarter as a result of the nonrecurring items noted above, noted previously.

Our effective tax rate in the third quarter was 36.1% versus 39.2% last quarter. 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 $3.6 million compared to a credit of $7.3 million recorded in the prior quarter. The credit to provision for loan and lease losses was primarily attributable to improving trends in credit quality during the quarter.

Nonperforming assets declined by $18.1 million or 56% sequential quarter and we recorded net recoveries of $3.4 million during the third quarter.

As Catherine mentioned, we increased our regular quarterly cash dividend by 16.7% to $0.14 per share and we also declared a special cash dividend of $0.32 per share. We decided to pay the special cash dividend as we determined that Internal Revenue Code Section 382 limitations will prevent us buying back shares in the open market for the remainder of 2015. So our buyback program is on hold through the remainder of this year. IRC 382 has a provision that will allow share repurchases to resume in 2016 and we expect to reestablish our buyback program early next year.

That completes the financial summary and now I will turn the call over to Lance.

Thank you, David, and good morning, everyone. Our overall loan and deposit growth has been on track with our business plan for the quarter as well as on a year-to-date basis. We continue to benefit from the economic upturn and improving market conditions as well as the hard work of our employees.

As of September 30, 2015, total loans increased by $95.4 million or by 3.2% compared to the end of the previous quarter and on a year-over-year basis, total loans increased by 7.9% or by $226.7 million. The sequential quarter growth in loan balances was driven by increases in commercial mortgages of $41.8 million or by 6%; residential mortgages of $33.3 million or by 2.5% and an increase of $23 million or 6.2% in our consumer loan portfolio.

Our commercial and industrial loan balances increased slightly by $6.9 million or 1.4%. Construction loan balances declined by $8.2 million or 9.8% due to the timing of paydowns and new business bookings as the construction projects we helped finance have since been successfully completed.

While we continue to see robust construction activity in Hawaii, we will continue to be prudent in providing financing in this sector.

Total deposits on a sequential quarter basis increased by $48.2 million or by 1.2%. Checking and savings balances grew by $32.8 million or by 1% of which $32.3 million of this growth was in non-interest-bearing demand deposit accounts. Time deposits accounted for the remainder of our deposit growth with an increase of $15.4 million or 1.5%.

On a year-over-year basis, total deposits were up by $182.4 million or by 4.5% and core deposits increased by $124.5 million or 3.8%.

Significant milestones have been attained in enhancing our service delivery channels. The deployment of our automated teller, sales and service platform was completed at all of our 36 branches this month. The conversion of our debit cards to the EMV chip technology was also completed this month.

Going forward, we are encouraged by the improving market conditions fueled by a positive economic activity in Hawaii. The low interest rate environment continues to support real estate purchase activity and overall we are confident in achieving the objectives of our business development plan for 2015.

That completes my summary. I will now turn the call back over to Catherine for her closing remarks. Catherine?

Thank you. In closing, I would like to recognize the efforts of our CPB team in continuing to execute on our strategic plan both for business development as well as for enhancing our bank's infrastructure.

I would also like to welcome our two new directors on the CPF and Bank Board whom we announced on September 16. Wayne Kamitaki, CEO of Maui Varieties, Limited, and Saedene Ota, owner and Creative Director of Sae Design, Inc. We look forward to their valuable contributions to our mission and strategic objectives going forward

And of course our appreciation goes out to our customers and shareholders for their continued support and confidence as we work towards achieving our goals.

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

(Operator Instructions). Joe Morford, RBC Capital Markets.

Thanks. Good morning, everyone. Good solid quarter. I was just wondering looking past the near-term restrictions, how should we think about the trade-off between share repurchases and dividends in 2016? And related to that, is a special dividend likely to be considered on a quarterly basis or will it be more of an annual decision based on a targeted level of capital return?

Sure, let me take that. So what we have stated publicly before is that you can think of our dividend payments to be in the 35% to 40% range payout ratio and then the yield 2% to 2.5% range within repurchases on top of that to eliminate incremental retained earnings for the year.

The reason that we are announcing the special cash dividend for this quarter is the Internal Revenue Code 382 provision that David referenced earlier and therefore with that limiting our ability to repurchase shares in Q4.

Starting 2016, there is going to be the ability to repurchase shares and so we expect in 2016 that we will continue with that cash dividend in the range that I mentioned earlier and then repurchases. Back in the market repurchasing shares to eliminate the incremental retained earnings for the year.

If I may add, Joe, as we roll forward, that trade-off between open market repurchases versus special cash dividends will be an ongoing evaluation and obviously the decision would be a function of market valuation dependent upon where the stock is trading that will really determine which way we go.

Okay, understand. And then I guess a question for Lance. Did the quarter include any purchases on the loan side and how does the pipeline look going forward? And just in general, how are you feeling about the competitive environment on the lending side?

Good morning, Joe. I think we had a few purchases on the Mainland front. There was about a $25 million purchase of an auto loan pool and again these represent more opportunistic situations and then the balance of that came from a couple of syndicated credits.

I would like to add though that on a year-to-date basis that 88% of our loans were originated in Hawaii and only 12% came from the Mainland. So I think we need to put that in perspective.

As I look at the pipeline going forward, I am cautiously optimistic again about our volume and I think we had a strong quarter in the third quarter that was better than the two quarters combined for the first half of the year. I am looking for further strengthening of the pipeline in the fourth quarter.

And then any comments competitively, Lance, of what you are seeing?

Yes, it continues to be a very competitive environment both with respect to pricing and in some cases structure. But I think again we have been competing effectively and retaining our customers and adding new prospects.

Great. Thanks so much.

John Moran, Macquarie.

So maybe just following up on that, do you guys happen to have, Lance, the new production yields and then any movement in the securities book? And obviously you have done a pretty good job on a core basis hanging into the 3.30 level on margin. But if you could give us a little help on the expectation our outlook there?

I would say overall in the third quarter that our yields have been trending downward. I think I will defer to David looking at the specific percentages for rates on both the loan portfolio and investment portfolio.

John, in the third quarter, the weighted average rate on new loan origination was about 340 which is quite significantly below the portfolio yield. I would say that the third quarter origination did tend to be shorter duration, more adjustable rate origination than has been the norm. I wouldn't say that 340 is an indication of what we would expect going forward. It was just a type of lending that we saw in the third quarter.

The investment portfolio, we basically had a couple of purchases generally reinvesting cash flow. The new purchase weighted average yield there was probably about 250 which is probably about 10 basis points below the portfolio average.

And then I think overall on the net interest margin, we were pleased with the relative stability in the margin and again what is helping us is the growth, obviously the growth in the loan portfolio and the ability to reallocate assets from investments into higher-yielding loans.

That is helpful. And then the other one that I had was just around the OpEx run rate. I think last quarter we had discussed a $32 million to $34 million kind of quarterly target, a bit better than that on a core basis here this quarter. Do you guys see the room to kind of continue to whittle down there and do you have any efficiency target kind of longer-term?

So on the OpEx expense, that expense you can expect that to be in the $32 million to $34 million so in line with what we have communicated earlier.

What was the second question? Thank you. So on the efficiency target, the Q4 number that we expect to be is the mid- to high 60% range and longer-term of course we expect to bring that down as we continue to grow revenue and then leverage the investments that we have made in technology and other efficiencies.

So the one project that Lance mentioned, the rollout of our branch system, that is utilized by our tellers on the front line but also our centralized ops groups. We do expect to see efficiencies coming out of that initiative. That was just completed this quarter so the full rollout to the 36 branches completed this quarter.

Terrific. Thanks very much.

Jacque Chimera, KBW.

Good morning, everyone. Catherine, where do you stand on the infrastructure and efficiency project? What is the (technical difficulty)

I didn't catch the question.

I'm sorry, Jackie, could you repeat the question again?

The efficiency and the infrastructure project that you have, where do we stand on those and what is left to complete after what was done in this quarter?

Sure. So as I mentioned, the branch project is complete and rolled out to our branch network and the operations group. The other project that we have talked about in earlier calls is our enterprise data warehouse and that build continues on and will be completed sometime next year.

However, the analytics that we have been applying since probably three, four quarters back, we will continue to invest in and continue to use in the coming quarters even pending rollout of the completed enterprise data warehouse.

Do you have maybe some examples of just -- I know it is hard quantify efficiency improvements that you are seeing from that but maybe one-off examples of how the growth in that project is benefiting the overall organization?

Sure, I will give you one example and that is in our direct mail campaign for preapproved personal loans, these are unsecured loans and by applying analytics -- and it is not just to our customer base but also to prospects given that we have access to third-party data. We are able to apply the analytics to target the customers that of course are of acceptable credit worthiness but also that are likely to respond to the offer.

So for example in earlier preapproved campaigns, we may have been sending mailers out to individuals with very high credit ratings but did not tend to respond to the offer. And so we are able with the analytics to target such that the response rate is a much higher percentage and we have proven that in the last couple of preapproved mail campaigns with the increase in not only response rates but how we set the interest rate on those loans so it could be a far more targeted interest-rate and increasing therefore the yield on those loans.

Okay, so it sounds like benefits (inaudible) expenses and that you have a lower cost of mailing and then potentially even some NIM benefits and risk benefits as you more appropriately price the loans?

That is right.

Okay. And then recoveries, you had very sizable recoveries in the quarter and excellent improvement in credit. How many -- my question is twofold, how many recoveries do you think were made in the pool and also was the improvement -- I'm sorry if I missed this in prepared remarks -- but was the improvement due to a movement out of the bank or was it due to just a removal from nonperforming status?

Let me turn this over to Anna Hu.

On the recovery it was due to one significant large recovery from a Hawaii operating business we were able to recover from.

And do you have more that are kind of not necessarily on the books any longer but recoveries that you think you might be able to get in the future? Does that pool still exist or is that getting pretty close now?

I think it is getting pretty low.

And then the nonperforming loans, did that come down because of payoffs or did it come down because they had moved up to accrual status?

A large amount of it did come back to accrual status.

Okay, just consistent payments?

Correct.

Great. Those were my questions. Thank you very much.

Aaron Deer, Sandler O'Neill & Partners.

Good morning, guys. Unfortunately I missed your prepared remarks so forgive me if you have covered this. But David, you mentioned I think it was in response to Joe's question regarding the trade-off between repurchases versus special dividends. You mentioned a tax consideration, was that a means to protect the deferred tax asset, is that what that is?

Yes, that is correct, Aaron. Yes, we did have a short couple of sentences on it in the prepared remarks but as a result of the private equity exit earlier this year, basically their shares kind of go into what is called a new public group and so we have -- it is the same 382 limitations that we've got to be mindful of and so our tax advisors have advised us to avoid an ownership shift we should put the open market buyback program on hold through 12-31-2015. Fortunately the 382 rules do have what is called a small redemption exemption that allows us to reinstate the repurchase program in 2016. So we would anticipate that we word reinstate it in 2016 and that would allow us to continue to buy back shares next year.

Okay, helpful. Thank you. And then a question for Lance. On the purchased component this quarter, (inaudible) was the $25 million just the auto and then the two shared credits, was that something different? If so, can you give kind of the size of those and maybe what industries those were?

I think the total amount in the Mainland purchases was about $41 million for the quarter and as I mentioned before, the $25 million of that came from the auto loan portfolio. I think the two loans that we purchased from the Shared National Credit was a transportation company and one was a consumer related company.

Great. Thanks for the added color. I will step away.

Don Worthington, Raymond James.

Good morning, everyone. Just kind of getting back to provisions and reserves, is there kind of a reserves to total loans ratio that you are comfortable with? And I guess what I'm trying to get at is whether there could be more recoveries or negative provisions going forward?

Let me start and then if there is more detail that you need, I may turn it over to Anna. But so as you know in the calculation of the reserve, it is not just a snapshot of the current quarter but a reflection of trends. And so as we continue to see improvement in trends in the economy and in credit quality, I think you can expect that result to be directionally consistent with those improving trends. I would expect over the longer term that you will see our reserve be more in line with our peer groups.

Okay. Sounds good. And then, Lance, in terms of loan growth, do you think it is possible to achieve double-digit growth again next year?

That would be very challenging, Don. Despite the fact that the economy is very robust, you have seen over the past few years how strong our growth has been. It has been in the double-digit arena. I think what I am concerned about going forward is the level of again Mainland purchases as opposed to organic growth and we continue to try to manage the amount that we purchase on the Mainland. So I think the double-digit growth while it is good, I don't think it is sustainable in the long run and as we try to continue to manage Mainland purchases going forward, you won't see that same level.

Great, thank you.

That concludes 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 third 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.