Central Pacific Financial Corp (CPF) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to Central Pacific Financial Corp. First Quarter 2016 Conference Call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will 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'd now like to turn the call over to Mr. David Morimoto, Executive Vice President, Chief Financial Officer and Treasurer. Please go ahead, sir.

Thank you, Emily, and thank you all for joining us as we review our financial results for the first quarter of 2016. 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.

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 to start the year with net income of $11.2 million and diluted earnings per share of $0.35. The positive momentum in loan and deposit growth that was realized throughout 2015 has continued into the first quarter of this year and resulted in meaningful balance increases in the sequential quarter as well as on a year-over-year basis.

Other key areas that have improved in the first quarter include our net interest margin, efficiency ratio and asset quality. David Morimoto will be providing more detail and color on our company's financial results later on the call. Our Board of Directors declared a cash dividend of $0.14 per share payable on June 15 to shareholders of record as of May 31 of this year.

As part of our 2016 share repurchase plan of up to $30 million for the year, we repurchased close to 234,000 common shares in the open market for approximately $4.7 million in the first quarter. This purchase represented 0.7% of the common shares outstanding as of December 31, 2015. Going forward, we intend to continue deploying our retained earnings to repurchase our company's stock in alignment with our 2016 repurchase plan to the extent possible and feasible.

In 2016, we are positioned to leverage the investments we have made in our information management systems to-date. Our branch automation platform, which went live in the previous quarter, provides not only operational efficiencies but an opportunity to strengthen our relationship banking focus, with increased engagement with our customers. Customer data analytics will begin to play a larger role in our customer acquisition and retention programs.

New process improvement opportunities have also surfaced with the enhancements made to our information management capabilities. We are encouraged by the advancements made within our organization as well as the continued improvement of the economic and business conditions in Hawaii.

The economic outlook continue to be positive for 2016 in the key areas for our state, including our visitor industry, labor market, personal income and tax revenues. Visitor arrivals increased by 4.1% in 2015 over the previous year and are expected to increase by 1.9% in 2016. Visitor expenditures increased by 2.3% last year to $15.2 billion and are projected to increase by 2.4% this year.

Job growth increased in 2015 by 1.5% and is expected to continue in 2016 with an increase of 1.3%. The unemployment rate in Hawaii of 3.1% for the month of March was the lowest rate since February 2008 and compares favorably to the national unemployment rate of 5.0% of the same period.

Inflation-adjusted personal income increased by 3.6% in 2015, and is forecast to increase by 3.0% by the end of the year. Hawaii's economy overall, as measured by real GDP, is forecast to increase by 2.3% in 2016, following an increase of 2.0% in 2015. The positive economic tailwind will allow us to better execute on our business plan initiatives.

At this time, I would like to ask David to review the highlights of our financial performance for the first quarter of the year. David?

Thank you, Catherine, and good morning, everyone. Net income for the first quarter of 2016 was $11.2 million or $0.35 per diluted share compared to net income of $10.9 million or $0.34 per diluted share recorded last quarter. In addition to the recorded increase in net income, the quality of earnings continued to improve as the credit provision declined by $1.2 million sequential quarter.

Our return on average assets in the first quarter was 87 basis points and return on average equity was 8.85%. Net interest income increased by a solid $1 million or 2.7% sequential quarter as average loan balances increased by over $100 million and the average yield on interest-earning assets also increased by 5 basis points.

Net interest margin expanded slightly to 3.33% in the first quarter and has now been in the 3.30% range for over two years. We do expect the slight increase in premium amortization on the MBS investment portfolio in the second quarter 2016, and that will exert some downward pressure on our NIM, all else being equal. Having said that, we expect the NIM to remain in the 3.30% range over the next couple of quarters.

During the first quarter, we recorded a credit to the provision for loan and lease losses of $0.7 million compared to a credit of $2.0 million recorded in the prior quarter. Net charge-offs in the first quarter totaled $0.4 million compared to net charge-offs of $1.4 million in the fourth quarter. Our allowance for loan and lease losses at quarter-end was $62.1 million or 1.88% of outstanding loans and leases.

Other operating income increased by $0.3 million or 3.3% sequential quarter while other operating expense was relatively unchanged. The efficiency ratio declined to 66.6% from 67.8% last quarter. This was the lowest quarterly efficiency ratio since the third quarter of 2009. In the first quarter, our effective tax rate was 35.2% versus 37.2% in the fourth quarter.

We expect our normalized effective tax rate to approximate 35% to 36% going forward. In addition to the shares that we repurchased in the first quarter 2016, we have repurchased 114,000 shares at a total cost of roughly $2.4 million thus far in April.

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

Thank you, David, and good morning, everyone. Overall, our business development efforts have been successful across all lines of businesses during the quarter. We have been able to make good progress in selected target markets, the small business segment and the consumer segment.

Total loans and leases increased by $97.4 million or by 3% on a sequential quarter basis and by $341.2 million or 11.5% on a year-over-year basis. Going forward in 2016, we remain comfortable that by year-end our loan growth will be in the high single-digit percentage level over the previous year.

Construction loan balances increased by 19.4% over the previous quarter, however, decreased by 10.1% in the first quarter a year ago. The large variances in our construction loan books rates were not unexpected due to the very timing of development projects in a robust market.

Other loan categories continue to expand at a stable rate of growth. Balance increases on a sequential quarter basis included consumer loans at 7.8%, commercial and industrial loans at 2.7%, and both commercial mortgages and residential mortgages at 1.6%. On a year-over-year basis, consumer loans increased by 25.6%, residential mortgages by 12.2%, commercial mortgages by 10.2% and commercial and industrial loans by 6.9%.

Total deposits also realized solid growth with an increase of $63.2 million or 1.4% from the previous quarter and an increase of $308 million or 7.4% from the first quarter a year ago. Core deposits, which represent 81.5% of total deposits and exclude time deposits larger than $100,000, increased significantly by $81.7 million or 2.3% from the previous quarter and by $333.8 million or 10% from the same quarter a year ago. Over a year-over-year basis, time deposits decreased by 4.7% while savings and money market accounts increased by 17.5% and non-interest demand and interest-bearing demand accounts increased by 9.4% and 5.4%, respectively.

We remain confident in the execution of our 2016 business plan initiatives backed by the favorable business and economic conditions in Hawaii. Our continued focus on strengthening customer relationships will be supported by a coordinated process improvement effort and enhanced information management capabilities.

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

Thank you, Lance. In summary, we do have more work ahead in 2016, particularly in leveraging our investments in technology and improving our operational efficiencies. However, we believe that our organization is well positioned for continued growth and meeting the challenges going forward, including an anticipated reduction in credits to our loan loss reserves as our asset quality normalizes.

I would like to take this opportunity to thank our employees, customers and shareholders for their continued support and confidence in our organization as we work toward achieving our goals in the coming years. At this time, we will be happy to address any questions you may have. Thank you.

(Operator Instructions) Aaron Deer, Sandler O'Neill & Partners.

It looks like a pretty strong loan growth spread across a lot of the portfolios this quarter. I'm wondering -- I'm guessing that some of the growth in the consumer was probably some either auto or student loan purchases, can you give us some details on that, if there was any other participations or purchases that contributed to the growth?

So, indeed there was (technical difficulty). I'm going to turn it to Lance to share more information.

We did take advantage of an opportunity in the first quarter by purchase of an auto loan portfolio, and we did have participation in commercial real estate loan on the Mainland as well. Other than that, again, our organic growth's continued to remain strong, and I think going forward, as I've mentioned before, we're looking at Mainland purchases more as an -- on an opportunistic basis rather than a focus, and we're still focused on organic growth. So I don't anticipate going forward that we're going to be actively looking for similar Mainland purchases, unless again the opportunity represents itself and it offers us enough opportunity to reduce the churn in our portfolio.

So it'd just be kind of backfilling the consumers it runs down?

Correct.

Okay. And then, the loan and the -- actually the investment securities yields as well were both up nicely in the quarter. How much of the improvement there stems maybe from the rate hike? Or is there other things in terms of the mix that helped to contribute to that improvement?

I'm going to turn that question to David.

Again, there was some benefit to the yields from the rate hike, more on the loan portfolio than the investment portfolio. Investment portfolio is primarily fixed rate. So there was some benefit there, but we did see, as you know, some offset on the public deposits on the deposit side.

On the loan side, there was some benefits from some mix shift. So the new loan volume yields were probably about 3.80% versus the portfolio yield closer to 3.90%. So the reason that the overall portfolio yield bumped up was due to the mix shift so the run-off was on lower yielding loan types.

Jackie Chimera, KBW.

David, did you say that the new yields were at 3.80% or 3.90%?

Yes, it was 3.80%.

And versus the portfolio yields at 3.90%?

That's correct.

So how did that make loan yields go up this quarter if the new loan yields were impacted (technical difficulty) there?

Again, it's a mix shift. So we had run-off in even lower yielding loans. The overall portfolio yield has been in the 3.90% range for probably a year now. So we kind of have gotten to where a lot of the portfolio has repriced. And so, now it is -- it will bounce around depending on the mix shift quarter to quarter.

Okay, thanks. And you briefly mentioned some of the public deposits. Is that what drove the increase in CDs?

That's correct.

Okay. Do you see more of that going forward, if rates stay steady? Or did that pretty much even itself out during the quarter?

Yes, the majority of the public deposit portfolio is 90 days and in. So we've seen the majority -- all of that repricing occur in the first quarter.

Okay. And do you have the premium amortization amount in this quarter versus last quarter?

They were about -- it was roughly flat. So it was $3 million in the fourth quarter and $2.9 million in the first quarter. So it's roughly flat, but we are seeing -- we do expect a little bit of an uptick in the second quarter.

Are you talking a large magnitude or --

No, no.

Okay. So just probably something that would impact by a couple of basis points, nothing too meaningful?

Yes, we're seeing that as maybe a basis point of NIM.

Okay. And then, one of your last comments, Catherine, that you had made was credits to the reserve. Are we getting near an inflection point where you may start positive revisioning again this year?

So what you saw this quarter [and then] in the earlier quarters is just a reflection of the improvement in credit quality. So what we're seeing with the reserve is directionally consistent with that improvement. I would expect in the coming quarters, assuming that we continue to have a strong credit quality, that there could be additional credits to the provision.

Meaning continued reverse provisioning? Sorry, I get debits and credits confused.

That's right. But of course, subject to a lot of things and, of course, the outlining contents have a lot of input into where we are. But yes, that's right. And yes, also, of course, we have to consider loan growth. And so all of those things will be factored in, of course, in the calculation.

John Moran, Macquarie Capital.

OpEx was a pretty good outcome this quarter. I'm just wondering is the sort of $32 million, $33 million level sustainable for you guys? And do you have sort of longer-term efficiency targets defined at this point?

So for OpEx, you can expect in the coming quarters that we will be in the $32 million to $34 million range. And then in regard to your question on efficiency ratio, as you would expect, it's something that we are very focused on. Of course, we were pleased to see the efficiency ratio headed in the right direction this quarter. And I would think, for the rest of the year, as we continue to focus on growing revenues and holding expenses, that we'll continue to see improvement in the ratio, perhaps trending more to the mid-60s.

Okay. So mid-60s by kind of end of this year?

Q4 is what we would hope to see.

Okay, perfect. And then kind of a bigger picture question on the mix shift and maybe over time, but I know coming out of kind of the recap and you guys were -- I think securities were 40% or better in terms of earning assets as a percentage of the balance sheet. That's been worked down pretty good. I think it's 30% or so in this quarter. But I mean, going back kind of pre-crisis, that had run as low as the teens.

Is that sort of what you would target over a multi-year kind of period a time to bring it back down to that level? And kind of, do you have thoughts in terms of what you'd like the balance sheet to kind of look like in terms of earning asset mix over time?

So I'm going to turn that question over to David.

Yes, sure. Yes, you got the history perfect, John. So yes, the portfolio is about 29% of total assets today. Ideally, we probably would like to run it in the 15% to 20% of asset range. But it will take us -- it will occur over time.

Okay. So 15% to 20% over time. And then, I wanted to circle back on loan growth. It's been really, really good the last couple of quarters and I know that there's been some Mainland purchases in there that sounded like going forward it'd be a little bit more opportunistic. I'm just trying to square the growth rate over the last couple of quarters with the guidance for sort of mid-to-high single digit growth. It just kinds of feels like maybe you guys are being a little bit conservative there.

Lance?

As we mentioned in the earnings call this morning, part of the fluctuation takes place in our construction loans. And as you know, construction loan balances fluctuate because it's rather short term in nature. So we saw some paydowns that took place last year. There were some timing differences that allowed us to fund more construction loans this year, but we also anticipate some paydowns going into the second quarter. So again, we're cautiously optimistic about our loan growth because it's affected in part by that volatility.

(Operator Instructions) Don Worthington, Raymond James.

In terms of -- it looks like you had pretty good growth across the loan portfolio. Is there any segment in the lending market that maybe is getting a little bit ahead or that you might be concerned about?

I'm going to turn that question over to Lance.

I don't know that we're necessarily -- we're not overly concerned about any specific area. As you know, our portfolio is probably more concentrated on the residential mortgage side than any other sector. Having said that, we are optimistic about the growth in other sectors including commercial real estate and C&I. So to the extent that those balances increase over time, that allows us to continue to grow the residential portfolio. But again, given the nature of this market, it is heavily concentrated in residential mortgages, not just for our bank but for the other banks in the state.

Okay, thank you. And then, it looks like loan growth outpaced -- or I'm sorry, deposit growth was short of loan growth. So there were some borrowings in the quarter to help fund the loans on a short-term basis, I guess. What type of borrowings were those?

David?

Those were short-term borrowings from the Federal Home Loan Bank.

Okay. And then, in terms of loan payoffs, were those up or down this quarter compared to last quarter?

Lance?

I guess, I can't -- I'll have to get back to you if that's possible, Don. I'm not sure what the payoffs -- our payoff levels were [last year or last quarter]. Is that okay?

That's fine, thanks.

Jackie Chimera, KBW.

I know that last quarter had around $350,000 build out expense related to a branch, but the quarter-on-quarter decline in occupancy was a lot bigger than that, and it was trending a little bit lower than what we saw last year. Is that a new run rate for us? Or were there other maybe contract expenses that caused it to be lower in the quarter?

David?

Yes, you got it right, Jackie. So there was some non-recurring expenses in the [fourth] quarter. As far as the run rate going forward, we did see a benefit in the first quarter from the utility expenses. I'm not sure if that's going to necessarily be at the same level going forward. So, I guess, I would probably guide to $3 million to $4 million going forward.

Okay, thank you. And just one last quick one. Was there anything unusual in the drop in the net DTA in the quarter?

No, nothing unusual.

This concludes our question-and-answer session. I'd 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 first quarter of 2016. We look forward to future opportunities to update you on our progress.

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