Central Pacific Financial Corp (CPF) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Third Quarter 2017 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'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, Phil. And thank you all for joining us as we review our financial results for the third 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.

Overall, we realized another solid quarter of financial performance that resulted in net income of $11.8 million and diluted earnings per share of $0.39.

Net income on a year-to-date basis of 2017 was ahead of the first 3 quarters in 2016 by $2.1 million or by 6.1%. David will provide more details in his financial summary.

Loan and deposit growth continued to be stable with a favorable economic and market conditions in Hawaii, together with our focus on asset quality. On a sequential quarter basis, total loans increased by $44.6 million or by 1.2%, which was primarily driven by our commercial mortgage and resi mortgage portfolios. On a year-over-year basis, total loans increased by $196.7 million or by 5.7%. Hawaii loan balances increased by 8.5% from a year ago, while Mainland loan balances declined by 14%. Asset quality remains strong and nonperforming assets declined to $6 million or 0.11% of total assets, from $9 million in the previous quarter.

Total deposit growth was also stable, with increases of $41.1 million or 0.8% on a sequential quarter basis, and $408.9 million or 9% year-over-year.

Our capital plan and share repurchase program were on track after the first 3 quarters of this year. Of the $30 million share repurchase authority for 2017, we have bought back just under 700,000 shares year-to-date at a total cost of $21.3 million, which represented 2.3% of the total shares outstanding as of December 31, 2016.

The board declared a quarterly cash dividend of $0.18 per share, which is consistent with the previous quarter, and payable to shareholders on December 15, 2017.

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.

For the first 8 months of this year, visitor arrivals increased by 4.7% to 6.3 million, and visitor spending increased by 8.5% to $11.3 billion compared to the same period a year ago.

Construction activity in Hawaii remains robust; however, the pipeline of new projects have been easing after several years of rapid expansions. The total value of building permits issued in the first 8 months of this year was 5.8% higher than in the same period a year ago; however, the total outstanding permits are projected to decline by 3.4% to $4.7 billion in 2017 compared to 2016.

Job growth in the civilian labor force remained relatively flat in August compared to the same period a year ago, with an increase of 0.1%. For the month of September 2017, the Hawaii unemployment rate was 2.4%, which matched the historic low for the State of Hawaii.

The current forecast for other economic indicators in 2017 compared to the previous year include an increase in real property -- excuse me, real personal income by 1.7%, GDP growth by 1.4%, and a higher Honolulu consumer price index by 2.5%.

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 2017 was $11.8 million or $0.39 per diluted share compared to net income of $12 million or $0.39 per diluted share reported -- recorded last quarter.

Return on average assets in the third quarter was 0.85%, and return on average equity was 9.16%. Net interest income increased by $0.4 million sequential quarter, and our recorded net interest margin declined by 4 basis points to 3.25%. The sequential quarter increase in net interest income was primarily the result of increases in loan balance and loan yields. The sequential quarter decline in net interest margin is attributable to an increase in the costs of large time deposits, particularly public fund CD balances.

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

Net charge-offs in the third quarter totaled $1.5 million as compared to net charge-offs of $0.3 million in the prior quarter. At September 30, our allowance for loan and lease losses was $51.2 million or 1.41% of outstanding loans and leases.

Third quarter 2017 other operating income totaled $9.6 million, and other operating expense for the third quarter totaled $33.5 million. Current quarter other operating expense was negatively impacted by $0.6 million nonrecurring expense for a core deposit campaign and $0.4 million in nonrecurring salary and benefit expense. The efficiency ratio for the third quarter was 65.0%, while the efficiency ratio for the first 9 months of 2017 was 63.90%.

In the third quarter, our effective tax rate was 35.0%. We expect our normalized effective tax rate to approximate 34% to 36% going forward.

During the third quarter of 2017, we repurchased roughly 335,000 shares of common stock at an average cost per share of $30.13. We've also repurchased an additional 45,000 shares of common stock month-to-date in October at an average cost of $32.41.

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

Thank you, David. On a year-to-date basis, after 3 quarters, we realized meaningful growth in loans and deposits, primarily driven by the favorable economic conditions in Hawaii and by our focus on strengthening customer relationships and booking quality assets. Our continued efforts to improve operational efficiencies through streamlining and technology advancements will also play a key role in the remainder of this year and beyond.

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 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 Jackie Bohlen with KBW.

David, with the nonrecurring comp-related expense that you mentioned, the $0.4 million, was that also related to the deposit campaign in the quarter? Or was that something else?

Let me speak to that, Jackie. The nonrecurring expense included a couple of items. The first was a true-up on a medical expense and the balance is other comp and benefits, but it is a onetime nonrecurring for this quarter.

Okay. That's helpful. And then, just, I guess, looking to the deposit campaign that was run in the quarter, did any of that flow into the fourth quarter? Or was it all completed in the third quarter?

The campaign was completed in the third quarter. And it was a, yes, core deposit campaign for us.

And how did that play out for you?

We exceeded goals, so we were very pleased with the results.

Good. And so, I guess, going forward, what are your plans just in terms of core deposit generation? And will there be a lingering impact from the campaign you did in the third quarter?

So I'll say, first, in regard to the campaign and reflecting back on experience from other campaigns that we have run, the retention rate on those campaigns are very strong. Furthermore, there's the opportunity for those customers coming in on the deposit campaign to build other relationships with us. So we expect good lift and not just on the deposit front but also opportunities on the loan and fee-based income front. And then, going forward, as far as deposit, I'll turn it to David in regard to just what we expect to see in the coming quarter.

Yes. Sure, sure, Catherine. Yes, Jackie, as you saw in the results, we did have slightly greater margin compression than what we had in prior quarters. And if you look at the -- obviously, if you look at the details, it's all on the funding cost side.

So our asset liability committee is actively strategizing on some efforts to address that situation, bring in more stable core deposits and, hopefully, reduce the reliance on the large CD portfolio, which is primarily comprised of $710 million in public fund CDs.

Okay. And then, the -- it just went right out of my head, so I'm going to hop on to my next question and I'll come back if it comes back in. Sorry about that. The decline in the Mainland portfolio, were there any purchases in the quarter that offset that? Or was it all just pretty much run off?

It was all run off, there were no purchases in the third quarter.

Okay. And I know, in the past, we've spoken about keeping that a relatively stable book; was that intentional to not have purchases? Or were there just nothing attractive at the market at this time?

It's the latter, Jackie. There was nothing attractive in the third quarter. So as we think about credit quality and then also the yield on the portfolio, if I think about that Mainland portfolio going forward, we expect it to be stable as opposed to what you saw in the current quarter, which was a decline.

The next question comes from Aaron Deer with Sandler O'Neill.

Sticking with the loan kind of outlook, what -- can you talk a little bit about the pipeline, what you're seeing in Hawaii and what the growth rate is that you might be expecting heading into year-end and maybe the early part of next year based on what you're seeing today?

Sure, Aaron. In regard to Q4, we expect a strong finish to the year. As far as the percentage growth rate that we expect in the fourth quarter, I would say it would reflect a high single digit annualized growth rate.

Okay. That's helpful. And then, just going back to the deposit campaign, I guess, the -- what -- are there any specific categories of deposits that these are targeting or types of customers? And how might we see that reflected in future deposit costs going forward? Or is this going to allow for some runoff of some of those higher cost public funds as you replace that? Or what's your thinking in terms of the deposit mix and cost going forward?

Sure. So let me speak at a high level to this and then David might want to chime in on some details. But the campaign is, as I mentioned, a core deposit campaign and focused on a particular segment of the market. And it would be the segment of the market that tends to hold the higher deposit balances and also the kind of customer that is likely to need other products and services from our organization. I would say that we were particularly excited to see the number of new customers coming into the bank with this deposit campaign.

Aaron, I just might add, it was focused on a checking product. And what we've seen with these campaigns in the past is that the accounts open at a certain level, but over time, as we work with the customers, the balances tend to grow quite nicely. And so we do expect that this is one of several initiatives that our employees are focused on to increase core deposit, prospective core deposit growth, such that we can reduce the reliance on the large CD balances.

Okay. That's great. And then, forgive me, I was on another conference call at the beginning of this one, the -- so I might have missed it, but you guys have made some good progress on the capital management, your buyback authorization, I think, is getting close to being exhausted here. What -- any sense or anything you can share in terms of what the board is considering on that front, if another authorization is likely, and what else might be done on that front?

Sure. Let me turn that over to David.

Yes, Aaron. The management is currently having discussions regarding the capital plan and the capital strategy as we look forward to '18. There is very likely to be another authorization. The timing and size of that authorization is still to be determined.

(Operator Instructions) The next question comes from Laurie Hunsicker with Compass Point.

I wanted to just go back to expenses for a minute, I want to make sure that I've got all this. So the entertainment and promotions line of $818,000, that $0.6 million of that is coming out, so that's going to be like to a $200,000, $250,000 run rate per quarter going forward?

That's about right. Yes.

Yes.

Okay. And then, same thing, the salaries and benefits combined with the computer software, that's going to be another $200,000 or so savings off of where you were this quarter?

Yes. There was $600,000 nonrecurring in the promotions and entertainment, and roughly $400,000 nonrecurring in the salaries and employee benefits line.

$400,000 in the salaries and employees benefits line.

That's correct.

Okay. And then, you had advertising that had another $200,000 nonrecurring.

Yes, that one is really timing. We basically incur our advertising expenses as they're built. And during the core deposit campaign, there was an uptick, but we didn't really call it nonrecurring, it is just timing.

Okay. All right. I guess, I'll ask a different way, your advertising expense, I mean, what should that run? About $400,000 or so per quarter?

Yes. I think that's a good number.

Okay. So there's $200,000 there. And then -- so that's a total of $1.2 million of nonrecurring costs that ran through your operating expense line, is that correct?

Maybe the $200,000 on advertising, I guess. The $600,000 is high, but again, it's just timing. And so maybe the $400,000 is not like the core run rate. It's just -- it depends when our advertising campaigns run, Laurie.

Okay. All right. So maybe $1 million. But -- so round numbers, the $33.5 million or so that you reported really should be $32.5 million if we just look at that on a core basis?

Exactly.

I think that's better so as thinking about an aggregate $1 million, Laurie. That's right.

Okay. And then -- and I know that Jackie and Aaron touched on this, but just going back to how we think about or we should be thinking about then your core deposit growth. As we look here, your core deposits, if we strip out all your CDs, you're 77% costing 5 basis points. How does that number grow going forward? And is the cost of that going to be changing because of this campaign?

Yes. I can take that, Laurie. The cost of the core deposit book will not change as a result of the campaign. There was no interest rate element to the core deposit campaign. So it was a onetime...

There was no cheese there. Okay.

Yes. There was no rate piece of the core deposit campaign.

I think, when we look at our deposit book, I think, a good way to look at it is to segment the core deposit portfolio from the large CD portfolio. But at $930 million, the core deposit portfolio, as you mentioned, $3.9 billion, we did average rate of roughly 7 basis points. And we calculated the rate beta for that $3.9 billion over the last 12 months and it has a rate beta of 1%. So that portfolio is performing extremely well.

Offsetting that is the large CD portfolio, that $930 million, totaled just under $1 billion, $950 million, weighted average rate of 1.02%. That portfolio has a rate beta of 85% over the same 12 months. So the way we look at it is the key takeaway is the $3.9 billion core deposit portfolio is performing extremely well.

Our asset liability committee, again, is focused on initiatives -- several initiatives, core deposit campaign being one of them, to address that large CD portfolio, find ways to increase the pace of growth in core deposits and reduce our reliance on the large CD portfolio.

Got it. Okay. And so just to go back to your core deposits for a minute, because I'm also stripping out your time deposits under $100,000, round numbers, that's an average of $187 million. So you're including your $187 million in the core deposit campaign, that was...

No. We're including it in our definition of core deposit.

In your definition of core, right. So I guess -- so my question is, I mean, which of the categories was the most focused on for this deposit campaign?

DDA.

DDA. Okay. That answers my question. Okay. And then, I just wonder if you can also update us on the latest with respect to internal controls, what you're seeing there?

Yes. Sure. That is in regards to the material weakness that was reported in the first quarter of this year, great progress has been made in addressing all of the issues raised in the first quarter. And so we are well on our way to elimination of that assessment that was made earlier in the year.

At this point, it's a matter of testing those controls for Q4. And we fully expect, given the resources and then also the infrastructure that we put in place, we fully expect that we will have an elimination of that material weakness in the first quarter of '18.

Okay. Great. That's helpful. And then, just jumping over here to credit. I mean, your credit is pristine. But can you help us think about the consumer book? And can you remind us, specifically, of your $447 million of consumer -- I guess this is where all your charge-offs came this quarter -- what else is in there? How much is auto? What the FICO is? Any details you can share with us on the consumer book would be great.

Okay. Let me -- so Laurie, let me take a stab at that.

So starting with the auto book, the auto book is about $250 million. $150 million of that is in Hawaii. And then, the balance, about $100 million, on the Mainland. And then, as far as credit quality or just FICOs on those books, the weighted average FICO on the Hawaii book is in the 730-ish range. And then, for the mainland book, it's in the 750-ish kind of range.

Okay. And in the charge-offs, the $1.4 million of consumer charge-offs, was that auto? Or was that something else within consumer?

The -- so on the consumer, so it's generally the unsecured consumer. And the one thing I will mention on that, Laurie, is -- and we talked about this in earlier calls in regards to our preapproved consumer loan product and the analytics that we are applying to our campaigns there, and what we are seeing is that the charge-offs on that portfolio are in the earlier vintages of those loans and charge-offs having trended down over time. So what I expect to see is improved credit quality on that unsecured consumer book with the analytics that we're using on our campaign.

Okay. And so is that -- that's the balance of your consumer book then? Round numbers, that's, I don't know, $200 million?

You know what, Anna, do you -- I'm going to have Anna speak to that as far as the balances.

The balance on the preapproved is -- so our outstanding balances on the preapproved portfolio is about $64 million.

Okay. And then, do you have balances on the SNC? How much is Hawaii? How much is Mainland?

Yes, we do, Laurie. Let me get that for you. So the SNC for Hawaii are $56 million. And then, the mainland SNC number, Laurie, is $88 million.

$88 million. Okay. So that's way down. Okay. And then, just last question, again, just sort of -- I still keep thinking about this core deposit campaign, can you help us think about how that should be playing into your margin next quarter?

Let me ask David to speak to that.

Yes. Laurie, as we stated, these -- we've run these programs in the past. The last one was actually run in 2012, so it's been a while. But we've run it even prior to 2012, and what we have seen consistently is consistent growth in these balances over time. But it's not immediate, it is over a longer time horizon. So I think the impact to the NIM in the next quarter is going to be nominal. But we do anticipate that it will help us over the longer term. And as we discussed, the ALCO committee is looking at several other initiatives that will hopefully help in the nearer term. So there's multiple initiatives going on there.

Okay. Great. And then, just one last question as it pertains to capital management. I know Aaron touched on buyback. Can you just update us around thoughts about the dividend and how you think about potentially raising that? How you approach that, maybe target payout ratios?

Yes. We benchmark ourselves against a mainland peer group and also our local peers. And we strive to pay a dividend payout ratio consistent with our peers. The mainland peers are probably in the 45% range. The local peers might be slightly higher than that. But our current payout ratio is in the ballpark, is in the 45% range. So that's pretty much how we set the dividend. So we anticipate consistently or gradually increasing the dividend as core earnings improve.

The next question comes from Don Worthington with Raymond James.

In terms of mortgage banking income that dropped in the quarter, just curious as to whether that was seasonal? Or whether you're seeing a slowdown there that we couldn't see going forward?

I'm going to turn that one to David.

Don, yes, the decline in mortgage banking income was a result of 2 things. It was product mix. So there was a slight change in the mix of originations. We saw a decline in salable mortgages and a decline in government originations. And then, the second thing is there is just some tightening in the competitive market on mortgage spread.

Okay. And then, would you expect, just deposit pricing in general, to experience a little bit higher betas if the Fed continues to tighten?

Don, I think, if we see the REIT forecast play out the way it currently is in Fed fund's futures, which currently has the tightening in December, and what tightening baked in, in 2018, if we see that type of rate forecast, I think, there -- that should probably play well towards lower rate betas. To the extent that we see an increase in the pace of rate increases, like we recently heard of one Fed governor talked about 3 increases in '18 -- to the extent we see that type of rate environment, the betas would probably trend slightly higher.

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, Phil. Thank you very much for participating in our earnings call for the third 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.