Central Pacific Financial Corp (CPF) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. 2017 First Quarter Earnings Conference Call and Webcast. (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.

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

Thank you, William, and thank you all for joining us as we review our financial results for the first quarter of 2017.

With me this morning are Catherine Ngo, President and Chief Executive Officer; and 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 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 off to a strong start for the new year, with net income in the first quarter of $13.1 million and diluted earnings per share of $0.42. The current quarter did not include a large price to the provision from loan and lease losses. However, the quarter did include a couple of nonrecurring revenue items. David will provide more details on our financial results later in the call.

Deposit growth for the quarter was very strong, which reflects our focus on building stronger relationships with our customers. Total deposits increased by 3.7% on a sequential quarter basis and by 6.2% on a year-over-year business. Total loans increased 5.6% over the previous quarter and by 7.2% year-over-year.

During the first quarter, we grew the Hawaii loan portfolio by $45.1 million, which was partially offset by a $24.3 million reduction in the Mainland loan portfolio. We continue to expect net loan growth for the full year in 2017 to be in the mid to high single-digit range. Asset quality continued to improve, albeit we have reached the near normalized level in outstanding nonperforming assets.

On April 14, 2017, we entered into memorandums of understanding with each of the 6 regional banks in Japan that comprises TSUBASA Alliance, which was established to explore advanced IT technologies in fintech industry. The agreement with the Japanese banks, which range in size from $47 billion to $118 billion in assets, opens a venue for mutual business development and a sharing of business referrals and contacts between Hawaii and Japan. Although the full engagement of these relationships will take some time to develop, we are optimistic of the potential for new business, both for our bank and for the State of Hawaii.

I'm also pleased to report that our Board of Directors declared a quarterly dividend of $0.18 per share, payable on June 15, 2017, to shareholders of record as of May 31. This represents an increase of 12.5% from $0.16 per share declared in the previous quarter. The overall outlook for economic and market conditions in Hawaii remain generally positive in 2017, with the expectation of some deceleration following 7 years of sustained growth. The visitor industry continued to expand at a record-setting pace in the first 2 months of this year, with visitor arrivals up by 3.3% and visitors spending up by 9% from the same period a year ago.

The labor market remains healthy with a projected job growth of 1.2% in 2017. Construction activity peaked at the end of the first quarter in 2016 and has remained stable with the expectation of continued strong activity for the remainder of the year. Real personal income is forecasted to increase by 2.4% in 2017.

The unemployment rate in Hawaii for the month of March 2017 dipped to 2.7% from 2.8% in the previous month, representing the lowest unemployment rate since June 2007. The national unemployment rate also declined to 4.5% in March compared to 4.7% in the previous month. The Honolulu Consumer Price Index is projected to rise by 2.4% in 2017, and real GDP is expected to increase by 1.8% this year.

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

Thank you, Catherine, and good morning, everyone. Net income for the first quarter of 2017 was $13.1 million or $0.42 per share compared to net income of $12.2 million or $0.39 per share reported last quarter. Return on average assets in the first quarter was 0.96%, and return on average equity was 10.24%. Net interest income increased by $1.6 million in sequential quarter and our net interest margin rose by 8 basis points to 3.30%. The sequential quarter increases in net interest income and net interest margin were primarily the result of $1 million in interest recoveries on nonaccrual loans and a $0.7 million decrease in premium amortization on investment securities. Excluding the nonrecurring loan interest recoveries, the normalized first quarter 2017 net interest margin was 3.22%.

During the first quarter, we recorded a credit to the provision for loan and lease losses of $0.1 million compared to a credit of $2.6 million recorded in the prior quarter. Net charge-offs in the first quarter totaled $1.2 million. At March 31, our allowance for loan and lease losses was $55.4 million or 1.56% of outstanding loans and leases. First quarter 2017 other operating income totaled $10 million. The first quarter results included $0.6 million in debt benefit income on bank-owned life insurance. Other operating expense for the first quarter totaled $31.5 million. The reported efficiency ratio for the first quarter was 61.4%. Normalizing for the nonrecurring loan interest recoveries and bank-owned life insurance proceeds would result in efficiency ratio for the first quarter of 63.3%.

In the first quarter, our effective tax rate was 34.2% versus 34.5% in the fourth quarter. We expect our normalized effective tax rate to approximate 34% to 36% going forward. During the first quarter of 2017, we repurchased 113,750 shares of common stock at an average cost per share of $31.03. We've also repurchased an additional 60,000 shares of common stock month-to-date in April at an average cost of $29.94.

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

Thank you, David. I believe we are well-positioned to sustain our financial performance with a clearly defined business plan for 2017, as with the continued focus on strengthening customer relationships, growing quality assets and improving operational efficiencies. 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 towards achieving our 2017 goals. At this time, we will be happy to address any questions you may have.

(Operator Instructions) And our first question for today is going to be Aaron Deer with Sandler O'Neill and Partners.

The -- I had a question on the expense line. The operating expenses came in a bit below where I had anticipated. It looks like you saw lower occupancy, lower equipment and lower other costs. Is this run rate a good sustainable level to build off of? Or are were there any unusual items that were in the first quarter?

So I'll start at a high level, and then, turn it to David for some detail. But as far as what you can expect to see in the coming quarters, I would plan on, quarterly, $31 million to $33 million for other op expense.

Yes. I can answer that, Aaron. The first quarter, it was a clean quarter, so the $31.5 million was a clean number. However, there were some expenses that came in a little lumpy like, say, advertising expense. That line was a little light in the first quarter. So that's why we're sticking with the guidance of $31 million to $33 million. And I think, for the full year, it's going to probably work out to something relatively flat to the normalized full year 2016 number.

Okay. That's helpful. And then, I guess, backing out the interest recovery in the quarter, the core margin being kind of flattish, I had anticipated maybe a little bit of lift given the December rate hike. Can you talk about kind of the dynamics that we should expect going forward, particularly in light of the additional rate hike in March, and how you expect that to impact your asset yields and your liability costs?

David?

Yes, as you know, the balance sheet is positioned in a relative -- in a slightly asset-sensitive fashion, so we do expect some benefit from the rising rate environment. It's been rather muted as a result of -- we have seen some deposit cost increases, so we do have some short-term CDs that have been repricing rather quickly. But we do expect some flow through on the interest-earning asset side to help us going forward.

Okay. I guess, related to that, I saw the CD balances kicked up in the quarter. I don't know if those were public deposits or something but it was surprising, just given that you don't seem to need the funding necessarily to see kind of paying up for those deposits. Can you talk about what was happening there?

Yes, we did have a large customer deposit. So the government balances were relatively flat sequential quarter, but we did have a good relationship that we've been working with, and they did bring in a sizable CD deposit at relatively reasonable cost.

The next question for today is going to be Brett Rabatin with Piper Jaffray.

I wanted just to first ask, you talked about still thinking about mid- to high single-digit growth in the loan portfolio. Your, obviously, 1Q is a little soft, and I know that's a little bit more seasonal, but maybe you can give us some thoughts on kind of what grows in the next few quarters and where you are optimistic in the portfolio? And just back on the margin question, is the pricing getting a little better on a spread basis?

Sure. So Brett, this is Catherine. The growth in the first quarter was strong in our Hawaii portfolio. So if you look at the lines in the Hawaii portfolio, we saw growth at virtually across all asset classes. And so for the quarter, we saw a, for Hawaii, we saw a 1.4% growth, but that was offset by a decline in our mainland portfolio, and the primary driver for the decline in the mainland portfolio was in the C&I line. As far as for the year, we continue to see good loan demand here in Hawaii, so I would expect to see that continued kind of growth at the pace that we saw in Q1. As far as the mainland portfolio goals, we do expect as there are paydowns in the SNCs and other purchase portfolios, we will look at opportunities to replace that rundown. So by the end of the year, you still will see that mainland portfolio in the 11% range.

Okay. And then, the other thing I wanted to ask was just around mortgage banking, and like how -- what were the gain on sale margins for the quarter? Kind of how do you see that business trending after the first quarter, and I know, obviously, lower volumes in 1Q, but kind of does that rebound in 2Q?

So this is Catherine again, Brett. The resi production in Q1 was in the $140 million range. We do expect that production level to increase in the second quarter, it would probably be more in the $175 million to $200 million range. And as far as the gain on sale, in Q1, it was about $1.3 million, and then, for the second quarter, I would see that moving up to the $1.7 million range.

(Operator Instructions) And the next questioner is Jackie Bohlen with KBW.

The first one is just a clarification question. It was a $0.7 million linked quarter decrease in premium amortization, correct?

That's correct, Jackie.

Okay. And then, looking to the provision, this is still obviously a reverse one, but the first time in a long time that it's been as small as it's been. Have we hit an inflection point in the portfolio where we could start to see a positive level based on loan growth?

Jackie, this is Anna. I would say that, yes, we have hit an inflection point. We have, obviously, in the many several quarters in the past years, have made large provision credit. We are expecting going forward for this to be normalized and, of course, at some point, to start seeing additions again to the provision reserve.

It looks like we have no further questions, so this will conclude the question-and-answer session, I would like to turn the conference back over to Ms. Catherine Ngo, President and Chief Executive Officer, for any closing remarks.

Thank you, William, and thanks to all for participating in our earnings call for the first quarter of 2017. We look forward to future opportunities to update you on our progress.

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