Central Pacific Financial Corp (CPF) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Second Quarter 2017 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.

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

Thank you, Brandon, and thank you all for joining us as we review our financial results for the second 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 pleased to report on another solid quarter of financial performance, with net income of $12 million and diluted earnings per share of $0.39. Net income for the quarter included a significant credit to the provision for loan losses, which was offset by a one-time loss realized from repositioning our securities investment portfolio for improved deals in the longer-term and higher income taxes. David will provide more details later in this call.

Loan growth continued at a stable rate, with increases of $46 million or 1.3% on a sequential quarter basis. The primary drivers of loan growth from the previous quarter were the residential mortgage, home equity and consumer auto loan portfolios.

On a year-over-year basis, loans increased by $187.8 million or 5.5%. From a year ago, Hawaii loan balances increased by 8.6%, while Mainland loan balances declined by 14.4%.

Deposit growth continued to be very strong, with increases of $108.9 million or 2.3% on a sequential quarter basis and $481.2 million or 10.9% year-over-year.

Our continued focus on building and strengthening customer relationships has resulted in a truly strong core deposit growth of $132.7 million or 3.5% over the previous quarter and $370.4 million or 10.4% over the same period last year. The primary driver of our deposit growth was the non-interest-bearing demand deposit portfolio.

Asset quality remains strong at a more normalized level with nonperforming assets at 0.16% of total assets. We continue to be adequately reserved for future loan losses, with our ALLL at 1.5% of total loans and leases.

The Board of Directors for both our holding company and base subsidiary was expanded from 10 to 11 members in June of this year, with the addition of Paul Yonamine. Paul was born and raised in Hawaii and previously served as Managing Partner of KPMG Hawaii operations, as well as Senior Adviser to the mayor of the city and county of Honolulu. He is currently an Executive Adviser and Board Member of IBM Japan, where he recently served as its President and Country General Manager until March of this year. He's currently the Executive Chair of GCA Corporation, the largest independent M&A firm in Japan.

We look forward to Paul's contributions to our company's strategic direction with his depth of knowledge and experience in the technology and global business arenas.

The economic outlook for Hawaii continues to be generally positive for the remainder of this year, primarily with steady performances in our visitor industry, labor market conditions and personal income growth.

Year-to-date, as of the month of May, visitor arrivals increased by 4.2% over the same period last year. Visitor spending during the same period increased by 9.8% to $6.9 billion.

Job growth remains steady, with an increase in May of 1.3% over May of last year. Employment also increased by 1.9% during the same period. For the month of June, 2017, the Hawaii unemployment rate was 2.7% compared to the national unemployment rate of 4.4%.

Real personal income is projected to increase in 2017 by 2.4% over 2016. Hawaii's GDP is forecasted to increase by 3.7% this year compared to the previous year, and the Consumer Price Index here in Hawaii is expected to be 2.5% higher in 2017 over 2016.

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

Thank you, Catherine. Net income for the second quarter of 2017 was $12.0 million or $0.39 per diluted share compared to net income of $13.1 million or $0.42 per diluted share reported last quarter.

As mentioned by Catherine, there were 2 large nonrecurring items that negatively impacted our second quarter results. Firstly, during the second quarter, we executed an investment portfolio repositioning strategy, where we sold roughly $98 million of available for sale securities and reinvested a similar amount in slightly longer duration higher-yielding securities.

While the overall reinvestment had a slightly longer duration, it included a barbell strategy that will outperform in a flattening yield curve environment. The repositioning incurred a $1.6 million pretax loss and will increase prospective annual net interest income by roughly $0.7 million.

Secondly, our second quarter income tax expense included a onetime increase of $0.9 million related to the payout of a former executive's supplemental executive retirement plan.

Return on average assets in the second quarter was 0.88%, and return on average equity was 9.32%.

Net interest income increased by $0.4 million sequential quarter and our reported net interest margin declined by 1 basis point to 3.29%. The sequential quarter comparisons were impacted by $0.4 million and $0.9 million in net interest recoveries on nonaccrual loans recognized in the second and first quarters of 2017, respectively. Excluding loan interest recoveries, the normalized second quarter NIM was 3.25% as compared to the normalized first quarter NIM of 3.22%.

During the second quarter, we recorded a credit to the provision for loan and lease losses of $2.3 million compared to a credit of $0.1 million recorded in the prior quarter.

Net charge-offs in the second quarter totaled $0.3 million as compared to net charge-offs of $1.2 million in the prior quarter.

At June 30, our allowance for loan and lease losses was $52.8 million or 1.47% of outstanding loans and leases.

Second quarter 2017 other operating income totaled $7.9 million and was negatively impacted by the previously mentioned investment portfolio repositioning. Other operating expense for the second quarter totaled $32.3 million.

The reported efficiency ratio for the second quarter was 65.3%. Normalizing for the nonrecurring investment portfolio repositioning and net interest recoveries would result in a normalized efficiency ratio for the second quarter of 63.8%.

In the second quarter, our effective tax rate was 38.2% and was inflated by the previously mentioned SERP payout. We expect our normalized effective tax rate to approximate 34% to 36% going forward.

During the second quarter of 2017, we repurchased roughly 249,000 shares of common stock at an average cost per share of $30.89. We've also repurchased an additional 71,000 shares month-to-date in July at an average cost of $31.53.

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

Thank you, David. Through the first half of the year, we remained on track with our 2017 business plan, which has resulted in building our core deposit base and generating quality credit. Our continued focus going forward will be on enhancing our customers' experience, 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. Thank you.

(Operator Instructions) The first question comes from Brett Rabatin with Piper Jaffray.

First, I guess, I was just curious, can you talk about the mortgage banking results in the quarter? How many loans you sold? And then, just thinking about the outlook for the back half of the year in terms of production, sales and kind of how you see [accounts], margins turning?

Sure. Let me turn that question over to David on the details.

Brett, during the second quarter, we originated roughly $170 million during the second quarter, which was about a 20% sequential quarter increase over the first quarter. If you recall, the first quarter was a slightly down quarter from the fourth quarter. Fourth quarter was the quarter when we had a few projects complete. So we did have a nice increase relative to the second quarter -- relative to the first quarter, excuse me.

Okay. But the gain on sale margins are obviously a little bit off relative to 1Q. Can you maybe talk about, is that a function of the refi/purchase mix? And what do you think about the back half of the year?

The gain on sale margins in the second quarter did show us a slight decrease, and it was a function of what we put into the portfolio and a function of the loans, the amount of loans that were sold, servicing [released].

Okay. And then, just thinking about the margin going forward and your cost structure, I noticed the jumbo CD cost was up 19 basis points linked quarter. Can you talk about how you're thinking about deposit betas and what you're doing to manage cost of funds? And then, if the margin kind of remains stable at these levels based on what you see repricing?

That's a lot of questions, Brett. We'll start off with the overall margin. I think, the guidance for the margin remains unchanged from the prior quarter. We do expect to be able to keep the margin in the 3.20% to 3.30% range. You did point out the increase in the cost on large CDs. And that portfolio has a relatively high beta. Fortunately, it's a pretty relatively small portfolio. And again, as Catherine mentioned, we did have nice growth in non-interest-bearing DDA balances during the quarter. As far as deposit betas, I think that, that guidance is still the same. I think, the core deposit beta is roughly about 15% and the total deposit beta is just under 30%.

Our next question comes from Aaron Deer with Sandler O'Neill & Partners.

It's actually Alex Morris on for Aaron. Just a kind of follow-up question on the margin. I understand that guidance you guys are sticking to on the 3.20% to 3.30%, just wondering if in the third quarter, might we see some pull-through benefit on the securities repositioning? I guess a better way to ask that, was the positioning done beginning, kind of middle or end of the quarter?

I think, it was done around in the middle of the quarter, Alex. And yes, it should benefit us prospectively by about 1 basis point on the NIM.

Okay. That's great. And then, just looking to the back half of year, I mean, you guys showed good growth in the single-family book particularly here in the second quarter. Do you expect the kind of residential book to be a strong performer in the back half of the year as well? Or kind of any idea of what the geography of loan growth should look like in the back half of the year?

Sure. Let me take that one, Alex. So we do expect good growth in the resi mortgage portfolio in the second half. Among other things, we have a condo tower here that will be closing in the fourth quarter, and we have a nice percentage of the mortgages on the sale of the units in that condo building. And then, as far as overall loan growth for the second half of the year, we continue to be optimistic about the mid- to single-digit full year loan growth across all of our asset classes. And I would say that for the first month of the quarter, we are off to a very nice start.

That's great to hear. And then just one kind of last question, the little uptick we saw in the commercial mortgage on the Mainland, was that a kind of existing client that you guys have worked for -- worked with in the past? And any explanation or color there?

Sure. That close to $10 million in the commercial mortgage portfolio was financing for an existing customer -- actually, a customer that's been with us for more than 10 years.

Our next question comes from Jackie Bohlen with KBW.

Also in the Mainland portfolio, the auto loans that were purchased in the quarter, what rate are those at?

The interest rate?

The quarter -- yes, the second quarter is about $26.6 million in purchased auto, the weighted average rate was 4 -- in the 4.6% range.

No, but it was purchased at a premium on a net basis, Jackie. I want to say it was on the mid-2s.

Mid-2s?

Yes.

Okay. And is that just to help keep that portfolio relatively flattish?

Yes. As we stated before, we will probably need to keep the Mainland exposure relatively flat as we continue to ramp up the Hawaii portfolio. But over time, it will decline over time over the longer term. But in the near term, we're probably going to keep it flat. And as you know, the auto portfolio amortizes quickly. So it's a battle to keep it flat.

No, understood. Okay. And realizing that we're in a changing environment and things change sometimes on a daily basis, do you foresee any potential future repositioning in the securities portfolio? Or did what you did in the quarter kind of take care of everything?

Yes, Jackie. As you know, we have an asset liability committee that reviews the balance sheet positioning on an ongoing basis. So we periodically see opportunities to reposition. At this time, there are no further plans to reposition, but again, it changes with market conditions.

Okay. And understanding that it was a smaller piece of the portfolio, in the quarter, did that have much of an impact on overall portfolio duration?

On the overall, it was very small, yes. So it was [100] out of the $1.5 billion. On that piece, we did extend duration slightly but, as discussed, it was -- it extended duration slightly but it was a barbell strategy where -- that included floating rate securities, so it did change the risk profile of that portion of the portfolio. So what we sold had really exposure to the intermediate part of the yield curve on a fixed rate basis. And what we repurchased was floating rate securities on the front end and longer duration securities on -- fixed rate securities on the longer and. So it does perform, it changed the risk profile to perform better in a flattening yield curve environment.

Our next question comes from Laurie Hunsicker with Compass Point.

Just wondered if we could stay on loans here. Do you have an update as to where your SNC was? And then, what the breakdown between Hawaii and Mainland is?

The SNC portfolio number is $104 million on the Mainland. And then, David...

There's about $45 million in Hawaii, Hawaii [states].

Okay. And then, just the home equity, can you comment a little bit about that? That saw strong annualized growth this quarter, just how you're thinking about that? And was any of that purchased?

The home equity portfolio is all originated here by our lenders in Hawaii. And it continues to be a focus for the company as we think about our deepening customer relationships here. So some are referrals from our branches and some from our home mortgage loan consultants in our mortgage division.

Okay. And the 26% annualized growth, could we expect it to continue at a similar clip?

I would say that we are hopeful that we'll be able to do that as we continue to focus on deepening our relationships, and particularly in that portfolio.

Okay. And then, just going over something that Brett touched on, as we look at your jumbo deposit costs, they were up 19 basis points this quarter, they were up sharply last quarter, too, how should we be thinking about that portfolio going forward? I mean, that portfolio as a percentage dropped, just linked quarter, 22% down to 20%. Are we going to expect to continue to see that run down? And what is your goal on that?

Let me turn that over to David. David?

Yes. So a large percentage of the jumbo time deposit portfolio is public deposits. So that's a portfolio that has a relatively short duration and it's pretty market-based and that's really what drives the high beta. So that portfolio will continue -- to the extent that the Fed continues to tighten, that portfolio will reprice to market pretty, pretty quickly. So going forward, we have the ability to manage the size of that portfolio, that's all in the pricing, but we have the ability to manage the size of that portfolio, and that's really going to be a function of what we can accomplish on the core deposit front. So in the second quarter, we had exceptional performance on the core deposit front and that did allow us to shrink the public deposit portfolio slightly.

Okay. And so just again, as we think about where the time deposits may sit, particularly going into potentially another rate hike at the end of the year, I mean, could we expect to see that line item at some point be down 16%, 17% of your total deposits, assuming that the growth is there on the core side, is that reasonable?

Yes, Laurie, it's going to be a function of what we're able to accomplish on the core side, that's correct.

Okay. And then, I know I ask you this every quarter, but as we think about your loan loss provisioning, obviously your credit is now pristine, your reserves to loans sitting at $147 million, but you had a very big loan loss provision reversal. I mean, if we think about the provision build, is it possible that starts occurring in the third quarter? And then, if you can just sort of refresh us a little bit where you're thinking on a reserves to loans as a target?

Sure, Laurie. I'm going to turn that question over to Anna. Anna?

We are expecting normalizing, barring any significant recoveries in the coming quarters. I would say that we don't set a target level, as you know, and really, we will continue to analyze our loan portfolio mix, asset quality as well as the economy to determine what that reserve level will be on a quarterly basis going forward.

Okay. Just last question, internal controls in your remediation plan, can you just give us an update there?

Yes. We are continuing to execute on our remediation plan. And we don't anticipate fully remediating the material refits as we do have some key controls that are annual controls. So those will be performed and tested at year-end.

Okay. So full resolution will probably be spring of next year, assuming all goes as planned?

Correct.

(Operator Instructions) We have a follow-up question from Brent Rabatin with Piper Jaffray.

I just wanted to ask on the expenses, just thinking about the increase in personnel costs this quarter. Is that a good run rate going forward? And then, are you doing anything else expense-wise? Or do you have anything that you're needing to invest in, technology, et cetera, that might change things in the back half?

I'll take that question, Brett. In regards to the other operating expense line, you can continue to think about $31 million to $33 million on a quarterly basis. And then, specifically on your question on compensation expense, it should be in the range of $17.5 million to $18.5 million. In the second quarter, we had a couple of things that bumped up that compensation line. So the first is we did have the effect of the merit increases for all of our employees in the second quarter. And then, further, there was a onetime adjustment to our incentive compensation accrual.

Okay. So no real change to the guidance on expenses for the year? It doesn't sound like you're needing to do anything else that would change the path of that?

That's correct. The guidance I just gave is where we expect to be for the next couple of quarters.

Okay. And then, just last question around the loan portfolio yields. I'm just curious, the originations that you're putting on, I don't know if you have an analysis that shows quarter by quarter, but are you being able to originate loans at better yields in the portfolio? Or can you give us any color on where things might trend post the June hike?

Sure. I'll turn that question over to David.

Brett, the second quarter was actually a good quarter on that front. New volume loan originate -- weighted average new volume yields were roughly in the 3.90% range, which is very close to the overall portfolio to yield of 3.95%. So that's the closest we've been in this rate cycle. However, I will say that new loan origination yields tend to be a little volatile, it does bounce around a bit. So I think, it's a little early to say that we've hit a trough here. But the second quarter was a good quarter.

This concludes our 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 very much for participating in our earnings call for the second quarter of 2017. 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.