Central Pacific Financial Corp (CPF) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp third-quarter 2016 conference call and webcast. 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 on the Company's website at www.centralpacificbank.com.

I'd like to now turn the call over to Mr. David Morimoto, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Alison. And thank you all for joining us as we review our financial results for the third quarter of 2016.

With me this morning are Catherine Ngo, President and Chief Executive Officer; Lance Mizumoto, Vice Chair and Chief Operating Officer; Anna Hu, Executive Vice President and 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. The economic and market conditions in Hawaii continued to be favorable throughout the third quarter of this year and have supported us in sustaining a positive momentum in loan and deposit growth.

Reported net income for the quarter was $11.5 million, which included a significant lower credit to loan loss provision compared to both the previous quarter and the same quarter a year ago.

Our business development efforts have been effective across all lines of businesses, particularly in the lending areas of commercial mortgages, construction loans, and home equity lines of credit. Our deposit growth included a strong increase in non-interest bearing demand deposits. On a year-over-year basis, total loans increase by 10.9% and total deposits increased by 6.8%.

Asset quality continued to improve, and our operational efficiencies continued to head in the right direction. David will be providing more details in his financial highlights.

We have also been active in executing on our 2016 share repurchase plan, which authorized share repurchases of up to $30 million for the year. During the third quarter, we repurchased 144,000 shares of common stock. And year to date as of September 30, we have repurchased approximately 637,000 shares, or 2% of the total common stock outstanding as of December 31, 2015.

The remaining stock repurchase authority for the year as of the end of the third quarter was approximately $15.9 million. A quarterly cash dividend of $0.16 per share was also declared by our Board of Directors and is payable on December 15 to shareholders of record as of November 30. We are pleased to be in a position to return shareholder value as a result of our Company's profitability and strong capital position.

The economic forecast for Hawaii remains positive throughout the remainder of the year and into 2017. In the first eight months of this year, visitor arrivals increased by 2.6%, and visitor expenditures increased by 3% over the same period last year. The forecasts for 2016 are year-over-year increases of 1.9% in visitor arrivals and 3.2% in visitor expenditures.

Construction activity is likely to peak in 2016 based on the 19% increase in private and public permits issued in 2015 with an estimated value of $5.5 million. While building permits are projected to decline by 8.2% in 2016, job growth in the construction industry is projected to increase by 10.9% in 2016 and 1.7% in 2017.

The outlook for overall job growth in Hawaii and real personal income continues to be positive for 2016 with a projected 1.8% growth in jobs and a 2.8% increase in real personal income compared to 2015.

Hawaii's unemployment rate for the month of September was 3.3% compared to the national unemployment rate of 5% and is projected to be at 3.2% for 2016. Hawaii's real GDP is forecast to increase by 1.9% in 2016 following an increase of 2.0% in 2015.

At this time, I'll turn the call over to David to review the highlights of our third-quarter financial performance. David?

Thank you, Catherine. Net income for the third quarter of 2016 was $11.5 million, or $0.37 per diluted share, compared to net income of $12.1 million, or $0.39 per diluted share reported last quarter. While net income and EPS declined slightly, pre-tax, pre-provision net revenue improved modestly sequential quarter.

Our return on average assets in the third quarter was 0.87%, and return on average equity was 8.81%. Our loan portfolio grew by $36 million, or 1% sequential quarter. The third quarter growth was led by growth in the commercial mortgage and home equity portfolios. As predicated, we did experience some slowing of loan growth from the pace achieved in the first half of 2016. However, we continue to expect full-year 2016 loan growth in the high-single-digit percentage range.

Total deposits increased $113 million, or 2.6% sequential quarter. Deposit growth was broad based with the largest increases in non-interest bearing demand and government time deposits. At September 30, 2016, our loan to deposit ratio was 76%.

Net interest income decreased by $0.2 million sequential quarter, and our net interest margin declined by 4 basis points to 3.25%. Both decreases were primarily due to an increase in premium amortization on the MBS investment portfolio, which impacted the NIM by about 4 basis points. We expect the net interest margin to remain in the 3.20% to 3.30% range over the next couple quarters.

During the third quarter, we recorded a credit to the provision for loan and leases losses of $0.7 million compared to a credit of $1.4 million recorded in the prior quarter. Net charge-offs in the third quarter totaled $0.6 million compared to net charge-offs of $3,000 in the second quarter. Our allowance for loan and lease losses at quarter end was $59.4 million, or 1.73% of outstanding loans and leases.

Other operating income decreased by $0.7 million, and other expense decreased by $0.9 million sequential quarter. The other operating income decline was primarily the result of the one-time BOLI benefit received in the second quarter. And the other operating expense decline was primarily driven by a decrease in the amortization expense on our mortgage servicing rights. The efficiency ratio improved to 66.0%.

In the third quarter, our effective tax rate was 35.8% versus 34.3% in the second quarter. The slightly higher tax rate was due to the one-time BOLI benefit in the second quarter that is non-taxable. We expect our normalized effective tax rate to approximate 35% to 36% going forward.

That completes the financial summary. And now I'll return the call to Catherine.

Thank you, David. In summary, I believe we are on target with the execution of our 2016 business plan initiative, which includes strengthening customer relationships, improving operational efficiencies, and leveraging information technology. While there is more work to be done, I am confident that we are heading in the right direction and making good progress throughout our Company.

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 our 2016 goals.

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

We will now begin the question and answer session. (Operator instructions)

Brett Rabatin, Piper Jaffray.

Hey, good morning, everyone. Wanted just to first ask, you gave the guidance for the margin to be in a 3.20%, 3.30% range going forward. Directionally, maybe you can help us a little more with just thinking about the components there. Does the premium amortization look like it's still kind of being at elevated levels, and maybe some color around the securities portfolio yield in particular?

I'm going to turn that question to David. David?

Hey, Brett. Yes, the range in the margin is we lowered it by a nickle to 3.20% to 3.30%. Couple of things going on there. First, the premium amortization in the MBS portfolio, we got to look into October, and the slowing in prepayments in October was not as great as we expected or would like.

So we are expecting somewhat elevated premium amortization in the fourth quarter. So that's leading to some compression on the investment yield. But having said that, we do expect premium amortization to be at a lower level than what it was in the third quarter. In the third quarter, it was extremely high.

Another thing that we are seeing is, we continue to see just some overall pressure on earning asset yields. New volumes of investments are probably coming on around 2.20% versus the overall portfolio yield of 3.40%. New loan yields are coming in. It varies quite significantly depending on the type of loan. But it's in that 3.50% to 3.70% range versus the average portfolio yield of 3.90%. So we just continue to see some downward pressure on new volumes relative to where the portfolios are.

Okay. I appreciate all of the color there. And then I guess the other thing is just thinking about fee income and the minutia with mortgage banking. Stronger quarter overall from that perspective. Any thoughts on -- and I assume seasonality will be a little slower in the fourth quarter -- can you give us some color on mortgage?

Sure. So let me start, and then I will turn it over to David. So we do continue to be optimistic about the mortgage production in the fourth quarter. So not only benefiting from the joint ventures that we have with developers and retail brokerage firms here in Honolulu, but we have a couple of condominium projects in Honolulu that will be completed in the fourth quarter, and expect a nice production volume from the purchasers of those condo units in the completed projects.

Okay, appreciate that color. And then just last for me. Obviously continued strong expense management -- is the thought there that level is sustainable still? Or can you give us any color on how you think about expenses for now?

Sure. So for the next couple of quarters, we do expect to hold the operating expense line in the $32 million to $34 million range.

Okay, great. That's all for me. Thank you.

Aaron Deer, Sandler O'Neill.

Hi. Good morning, everyone. Seems like a pretty straightforward quarter, so I don't have too many questions. But I'm just curious to get maybe a little bit more color on the little bit more sluggish loan growth this quarter versus what you've been expected, and to what extent paydowns influenced that? And then kind of what gives you the confidence here going into the end of the year in terms of what your guidance remains?

So let me take that question, Aaron. For loan growth, I like to think about the year and year to date, where we are. So we had a pretty healthy first couple of quarters of the year. So each of those quarters, we showed 3% loan growth. So year to date, we are at 7% in loan growth. We still do expect to be in the high single digits in terms of loan growth for 2016.

As I look at loan growth, what I'm particularly pleased to see in the third quarter is the pace of growth in our Hawaii portfolio. So in the third quarter, we had a $65 million increase in the Hawaii portfolio, which was offset though by the reduction in balances in our mainland portfolio, about a $30 million reduction. So we continue to be optimistic about loan growth, and particularly in regards to our Hawaii portfolio.

Okay. And then maybe also related to that, with the condos that are coming to completion, it sounds like that's going to provide some opportunity on the mortgage side. Are you also then a part of the lenders on the construction side of that? So are you going to have some paydowns in that book?

Actually I'm going to put Lance one of the two, I believe. But let me let you speak to when we financed one of those two condo projects (multiple speakers) --

Aaron, this is Lance. Yes, we are involved with the construction financing on a participation basis. So we benefit both from the construction financing as well as the takeouts that will happen after the completion of the project.

Okay. And just one last one on the loan front. It didn't appear as though there was any loan purchases or participations of anything meaningful size in the quarter. Is that correct?

There were no loan purchases. So no auto, no unsecured consumer purchases in the third quarter.

Okay, good stuff. Thanks for taking my questions.

Jackie Bohlen, KBW.

Hi. Good morning, everyone. What are your thoughts as we look to the changing construction landscape given all the press that there's been around some of the single-family communities that are going to be developing? Is that something that you might be able to partake in in terms of loan growth? Or I guess, what are your thoughts overall on that?

Hi, Jackie. So I'll start it off and then maybe turn it over to Lance. But there are a couple of significant single-family construction projects that have been approved west of downtown Honolulu.

As far as our participating on the construction of those projects, that is not clear to us at this point. However, what is going to be something we would participate in would be the purchasers of those single-family homes and building the relationship with those customers starting with a mortgage loan and then hoping to have the opportunity to expand those relationships. (multiple speakers)

Sorry. This is Lance. I would echo the same thing, that it's too early right now to say whether or not we're going to be participating in the construction financing. I don't think they're close given the permitting process.

Okay. And I would guess that the purchase of the homes itself even in first phase, we're probably still a ways away from that?

That's right, Jackie.

Okay. And then, Lance, just as we look into year end and thinking about the high-single-digit loan growth, are there any pipelines in particular that excite you as we head into 4Q, anything in particularly strong?

It's a mix. So I would say what we are particularly pleased with as we look at the pipeline is the mix of growth in Hawaii. So it really is across all asset classes including commercial, customer real estate, home equity line of credit. So pretty broad based, Jackie, I would say.

Okay, great. Thanks, guys. All my other questions were answered.

John Moran, Macquarie.

Hey, guys. I've got just one left in terms of just housekeeping. The [pre-MAM], what did that run? Do you happen to know how many basis points that knocked off in 2Q just sequentially?

Yes, the MBS premium amortization was accounted for roughly, I think it was 13 basis points on the investment portfolio yield, and 4 basis points on the overall NIM, John.

13 basis points on securities and 4 basis points on NIM. And that's for this quarter, right?

That's correct.

And do you know what it was last quarter just in terms of comparison?

It probably was maybe two thirds of that number.

Okay. And then it sounds like, if I'm understanding you correctly -- and I'm sorry to kind of belabor this one -- but it's going to be elevated in 4Q, but lower than it was in 3Q, if I got you right, I think, in one of the earlier questions?

Yes, so it was a pretty long answer, but you interpreted it correctly.

Okay, all right. Perfect. I appreciate the additional color there. Thanks.

Laurie Hunsicker, Compass Point.

Yes, hi. Good morning. Catherine, if you could just help us think about as we look to next year for loan growth? Appreciate the color as we look into fourth quarter, but how should we be thinking about 2017?

Sure. As we think about 2017, the loan growth should be in the mid to high single digits and across all asset classes. And what we hope to see, and as we've seen in 2016, is continued growth, particularly in the Hawaii portfolio.

Okay, great. And then do you have what the shared national credit portfolio was as of 3Q?

Yes, I do. So the CNI -- if you look at the CNI line for the US mainland, it's about $140 million. And so that's a reduction from the Q2 number of about $144 million.

Okay, and that's mainland. And then what's the [SNC] on Hawaii?

I'm going to get some help from Lance here. The SNC on Hawaii would be the $99 million committed. And the current outstanding on the Hawaii SNC portfolio is about $59 million.

$59 million. Okay, that's great. Okay, and then as we look to loan loss provisioning potentially for next year, can you help us think about how you see that playing out, if you have a reserves to loans target? In other words, when is it no longer recovery? Is it when your reserves to loans gets to 1.6 or 1.5, then look to start to build? Or how do you think about that?

Sure. So let me turn that question over to Anna. Anna?

Good morning, Laurie. As we look into 2017, as credit quality continues to improve and all else being equal, we do expect to be directionally consistent and, at some point, level off.

Okay. And do you have a reserves to loans target? Or how do you think about that?

No, we don't have a target. It really depends on a number of things.

Okay. But it's fair to assume that we will start to see a provision build?

On a go-forward basis, at some point we do expect that.

Okay. And then just one last question. Did you all have an MSR writeup this quarter? Was that in the numbers?

Hey, Laurie. This is David. Yes, we did not have an MSR writeup. We had a slowdown in MSR amortization.

Okay, great. That's all for me. Thank you.

Don Worthington, Raymond James.

Good morning, everyone. Just taking a look at the changes in deposit accounts during the quarter and saw the increase in time deposits of about $60 million. Was there any campaign or anything behind that increase where you're trying to increase balances there?

So you're looking at the 100,000 over time deposits?

Right.

Those generally, I believe government is a significant percentage of that. But David maybe can provide more color.

Hey, Don. Yes, that was basically opportunistic. There was an opportunity to take in some additional government time deposits. And those time deposits are -- they're advantageous from a cost perspective relative to short-term borrowings.

Okay. What was the rate on those in the term?

Generally, government deposits are in the 60- to 90-day range as far as tenure, and the rates are roughly 40 basis points.

Okay. Okay, that's all I had. Thank you.

And ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Ms. Catherine Ngo for any closing remarks.

Thank you, Alison. And thanks to everyone for participating in our earnings call for the third quarter of 2016. 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 your lines.