Central Pacific Financial Corp (CPF) 2018 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Second Quarter 2018 Earnings 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 now like to turn the call over to Mr. David Morimoto, Executive Vice President, Chief Financial Officer. Please go ahead.

Thank you, Phil, and thank you all for joining us as we review our financial results for the second quarter of 2018. 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. I'm pleased to report on another solid financial performance for the second quarter of this year. On a year-over-year basis, net income improved by 18.3% and earnings per share by 23.1%, which included a positive impact of the tax reform legislation. David will provide more details of our net income components.

Loan growth remained stable during the quarter as well as in the first half of the year. Total loans increased by $55 million or by 1.7% over the previous quarter end and by $290 million or 8.1% from the same period a year ago. Loan growth was distribution across all loan types and led by resi mortgages and commercial mortgages.

Asset quality remained strong, with nonperforming assets at 0.6% of total assets. Total deposits growth remained flat on a sequential quarter basis and increased by 1.9% year-over-year. Competitive pricing for deposits in our local market has been elevating and has contributed to a compression in our net interest margin. The consistency of our profitability and strong capital position has allowed us to continue with our capital plan and returning shareholder value through our stock repurchase activity and cash dividend, the latter of which increased by 10.5% in the previous quarter.

Turning to the economic outlook for Hawaii. The forecast remains positive for the remainder of 2018 and 2019 based on the performances of the key leading indicators that includes tourism industry, favorable market conditions and growth of personal income and tax revenue. In the first 5 months of this year, visitor arrivals outpaced the number of visitors in the same period a year ago by 9.1%. Visitor expenditures increased by 10.9% over the same period last year. The projected increases in visitor arrivals and expenditures for 2018 over the previous year are 6.0% and 8.6%, respectively.

The unemployment rate in Hawaii for the month of June was 2.1% compared to 4.0% nationwide. The forecast of Hawaii unemployment rate for the year 2018 is 2.2%. Job growth is projected to increase by 1.2% and real personal income by 1.7% year-over-year.

The Honolulu Consumer Price Index is expected to increase in 2018 by 2.6%, and Hawaii's real GDP is projected to increase by 1.9% over the previous year.

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

Thank you, Catherine. Net income for the second quarter of 2018 was $14.2 million or $0.48 per diluted share compared to net income of $14.3 million for the same $0.48 per diluted share reported last quarter.

Return on average assets was 1.00%, and return on average equity was 11.83%.

Our second quarter 2018 results include a $0.6 million onetime income tax benefit resulting from a tax accounting method change, which accelerates certain deductions in 2017 tax year under the higher corporate tax rate.

Our first quarter 2018 results also included a onetime income tax benefit of $0.7 million related to a refinement to the estimate of the revaluation of the net deferred tax assets. We continue to expect our normalized effective tax rate to be in the 23% to 25% range over the coming quarters.

Net interest income increased by $0.4 million, and the net interest margin declined by 1 basis points to 3.20% on a sequential quarter basis.

We continue to see some spread compression, as interest-bearing deposit costs increased slightly faster than our loan yields.

Our Asset/Liability Committee is continuing to implement several balance sheet strategies to improve prospective net interest margin and net interest income.

During the second quarter, we recorded a provision for loan and lease losses of $0.5 million compared to a credit of $0.2 million recorded in the prior quarter.

Net charge-offs in the second quarter totaled $1.6 million as compared to net charge-offs of $0.6 million in the prior quarter. At June 30, our allowance for loan and lease losses was $48.2 million or 1.24% of outstanding loans and leases. We are closely monitoring Kilauea lava eruptions in the Puna district on the Big Island of Hawaii. In the Puna district, we have a total of 37 residential mortgage and home equity loans with a total outstanding balance of $4.3 million. Within that portfolio, we are aware that 6 residential mortgage properties with an aggregate outstanding balance of $1.6 million have been destroyed. We have confirmed that all 6 of these properties have adequate insurance coverage.

Second quarter 2018 other operating income totaled $9.6 million. Other operating expense for the second quarter slightly increased to $33.7 million. The sequential quarter increase was primarily driven by annual merit salary increases.

The efficiency ratio for the second quarter was 64.5%, which was an improvement from the 65.4% reported in the prior quarter.

During the second quarter of 2018, we repurchased roughly 270,000 shares of common stock at an average cost per share of $29.54. We've also repurchased an additional 53,000 shares of common stock month-to-date in July at an average cost of $29.22.

Finally, I'd like to close the financial summary by summarizing some of the highlights of our second quarter results. Solid year-over-year net income growth of 18% and EPS growth of 23%. Strong asset quality and capital ratios. Net loan growth of 8% year-over-year, and our efficiency ratio continued to improve and trend towards our low 60% target by the fourth quarter of 2018.

Thanks, and now I'll return the call to Catherine.

Thank you, David. I remain confident in achieving our goals set forth for 2018 in our business plan built upon operational improvements, technology and strengthening customer relationships. We've taken measures to address challenges in the areas of continued loan growth, cost of funds and monetizing investments and information technology. I would like to express my appreciation to our employees, customers and shareholders for their continued support and confidence in our organization as we work towards attaining our 2018 milestones.

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

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

I wanted to ask -- my phone was cutting out for a second there. I -- but I thought I heard you say 8% growth for the full year. Is that for the -- still for the guide?

The...

That was the year-over-year growth.

Right. And then as far as year growth for the year, it's in the single -- mid-single-digit range.

Okay. All right. And then, David, I guess, I'm just curious on the margin. You mentioned some -- a little more pressure on the funding cost side of the equation. Does the margin reach a floor here you think in the back half of the year? And are you looking at doing anything different in the securities portfolio going forward?

Yes, Brett. The guidance on the margin is flat to -- there could be some slight additional pressure in the back half of the year, as you mentioned. We're hoping that that's the conservative guidance. So right now, we're kind of looking at maybe 3.10% to 3.20% range, and we're hoping that that's conservative. As far as the investment portfolio, we are looking -- ALCO is considering shrinking the investment portfolio somewhat as you saw in the second quarter. So we are looking to take the investment portfolio down and continue to reallocate assets into the higher-yielding loan portfolio.

Okay. But no strategic repositioning, that's [active]? It's more cash flow?

At this point in time, that's the plan, Brett.

Okay. Okay. And then just lastly around the expenses. I mean, it sounds like you're still looking for kind of a flattish outlook in the back half of the year, just want to make sure that was right.

Yes. So for the expenses, we're expecting it's a range in the $33 million and $34 million range.

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

David, I guess, following up on the kind of balance sheet strategy thoughts. The -- I guess one question would be just what might have caused the decline in the average yields on investment securities in the quarter? And then to the extent that you are looking to reposition or redeploy those cash flows off of that booking into loans, is it your expectation that you can continue to see, call it, 2% to 3% growth in net interest income going forward?

On the first question, Aaron, on the investment portfolio yield, it was a little bit of an aberration. Late in the second quarter, we had an unexpected paydown on a commercial -- an agency in commercial MBS. So it was (inaudible) on a delegated underwriting servicer bond. So these securities are backed by a single multifamily property. So we got a pay -- an unexpected payoff, and so we have to accelerate about $180,000 of premium amortization late in the quarter. So when you analyze that, it's about 5 basis points on the investment portfolio yield. So if you look backed that out, then -- or if you normalize for that, the sequential quarter investment portfolio you would -- actually would have increased. So on that particular security, it was still in the yield maintenance period, and we're actually currently doing some research into whether a prepayment penalty is forthcoming on that or not. It's my understanding that if the property were to be destroyed by fire then I don't think a prepayment penalty is forthcoming. But some research still needs to be done there. And then, on the second question regarding the reallocation. Yes, we are looking to reallocate from the investment portfolio into higher-yielding loans. We're doing it on cash flow basis right now. And then one thing that we're kind of taking into consideration in that process is just the cost of the government portfolios/borrowings. So that will also play into the decision.

Okay. And then I guess trying to get a little bit more into the dynamics, the impact on the margin. The -- can you remind us kind of what -- within the loan book itself, what percentage of that is floating? May be what percentage reprices within a year? And then also where is the average rate on new production coming on relative to what we've seen in recent quarters?

So I'll speak to the consumer loan yields, and then I'll turn it over to David to talk about the floating rate portfolio. But in the second quarter, the new loans came in at 4.03%, and that compares to our average loan portfolio yield of 4.04%.

And then, Aaron, on the existing loan portfolio repricing, about 1/3 of the portfolio reprices within 1 year in.

Okay. So it sounds like the new loan yields are kind of flat with where the portfolio is now. Is that because of mix shift in terms of what the production was this quarter? It seems like the single-family residential contributed a fair bit of that, or are you just not seeing much lift from the higher rate environment?

Well, there is some improvement, Aaron. If you compare the new loan origination yields in the first quarter of this year, that was at 3.80%. And so we do expect going forward as we continue to focus our loan officers -- excuse me -- on relationships and pricing for the value that we're adding, we do hope to see some lift in the next couple of quarters.

Yes. And, Aaron, I might add. Yes, we are starting to see an uptick in new loan origination yields relative to the last several quarters. Some of that is related to we have about a $165 million, $170 million portfolio that's based off the bank base rate. And if you recall, the Hawaii banks didn't follow Wall Street Journal Prime all the way down. And so as Wall Street Journal Prime started to come -- started to rise, we didn't really see the benefit on the Hawaii bank base rate portion of the portfolio until the first quarter of this year. And now with every subsequent increase in the prime rate, it is helping the bank base rate portfolio. So that's helping. And we are seeing an increase in just -- pretty much across the board other than the loan categories. New loan origination yields are better than they were, say, 6 months ago. And then -- I just remembered your second question was about net interest income. And I think it was whether we believe we can still drive sequential quarter net interest income increase similar to what we saw in the second quarter. And that definitely is the objective.

The next question comes from Jackie Bohlen with KBW.

Touching on the liabilities side. You had mentioned that public funds and then other sources of borrowing would play into how you're thinking about securities? Can you just provide an update on the fluctuation of public deposits this quarter and what you're seeing in that market? And how you're thinking about positioning going forward?

I'll turn that question to David. David?

Jackie, so total government time at 6/30 was $727 million. So it was a slight increase, I think about a $25 million increase sequential quarter. And that was just a function of pricing. There -- we have seen some normalization of pricing in government time, and it was cheaper. It was cheaper than overnight or cheaper than wholesale borrowings, and we'll lean on the public time. The weighted average rate of the $727 million was 1.85%. And the new volumes, the new volumes that were booked in the second quarter had a weighted average rate of 1.93%.

Okay. And is that the main driver of the movement in your time deposit costs? Or are you seeing other pressures from retail to (inaudible) as well?

In the large time deposits, it's primarily the public funds. And then again, when we look at the investment -- well, when we look at the deposit portfolio, I think the best way -- or the way that we would like everyone to look at it is to segment the $5 billion into $4 billion core portfolio and roughly $1 billion large CD portfolio. And if you look at it that way, the $4 billion core portfolio currently has a weighted average rate of 9 basis points, and it's exhibited a rate beta over the last 12 months of 3%. So very low rate beta. The large CD portfolio by contrast in the second quarter had a weighted average rate of 1.46% and a rate beta over the last 12 months of 88%.

So when your team is evaluating just in terms of the balance sheet strategies you mentioned and how you're thinking about securities, does the discussion of any potential balance sheet shrinkage ever come up?

We've taken a look at it. We've modeled it. Overall, balance sheet shrinkage is -- hasn't been one of the strategies that we've been focused on. We've been focused on keeping it steady, reallocating from investments into higher-yielding loans. And to the extent that we see strong enough loan growth, I think we're fine with even taking on a little more leverage and growing the balance sheet. But going the other way, shrinking really hasn't been a strategy we've been focused on. We really need to drive the top line revenue growth, and so that's where the focus has been.

The next question comes from Laurie Hunsicker with Compass Point.

I just wondered, can we follow up on Jackie's question on the (inaudible) funds. Do you, David, have a comparable cost of the $700 million in the prior quarter to the $185 million you just gave us for this quarter?

No, I actually don't have it on me, Laurie, but we can get back to you on that.

Okay. Okay. And then I guess just generally to your comment about deposit cost elevating, Catherine, can you help us think specifically about the money market that seems to be outside of CDs? That seems to be where we've seen a movement. Where is that line going? And how are you guys approaching specials? How should we be thinking about that?

So you're speaking, Laurie, to the decline in the savings money market.

Correct.

Yes. That's -- there are escrow deposits in there, so we have the benefit in earlier quarters of an uptick in those escrow deposits and also deposits related to one of the larger condominium construction projects here. So in the second quarter, there was an outflow out of those 2 accounts.

Got it. Okay. And then with respect to the jump in costs, that market reaction?

The costs...

And I'm just talking being linked -- yes, just linked quarter if we're looking at the cost of savings in money markets that went from 10 basis points to 12. Or I guess directionally, how should we be thinking about that?

Let me turn that to David.

Sure. Similar to a lot of other banks, Laurie, we're implementing some deposits, I guess you'll call it deposit segmentation strategies. So within the savings money market category, we created some higher-yield components within those categories. And we're doing that on -- more on a defensive strategy. And I think that's what you're seeing there. So it's not broad-based rate increases on all savings and [MBA] accounts. They are the pockets within those categories.

Got it. Okay. And then just putting that altogether, if we think about your margin guide 3.10% to 3.20% range, how many rate hikes had you assumed in that number?

Yes, in the back half of '18, it's 2. So it's a pretty consensus forecast, Laurie. And I do want to reiterate that the 3.20% -- 3.10% to 3.20% we're hopeful that's pretty conservative guidance.

Okay. All right. And then just to loan growth. I saw you purchased $20 million of auto -- [Newman] auto. Can you just give us an update where your total auto book stands? And then what the breakdown in Hawaii versus Mainland? And then just how we should be thing about purchases or growth in that book?

David, do you have that numbers, the book?

The breakout?

Yes. We may -- Laurie, we may have to get back to on that one.

Okay. Okay, I mean, just generally, how are you approaching growing that? Was this kind of a one-off in terms of a purchase? Or is this something we could expect to see going forward?

The way that we look at the loan purchases, and it's really no different from the way we look at it in earlier quarters, it's really more opportunistic as we see opportunities -- so whether that be here or on the Mainland has the right yields.

Okay. Okay. And then maybe, David, can you just address the jumps in charge-offs? Was there anything -- I mean your credit is pristine. But was there anything in particular within that consumer book that -- that $1.2 million of charge-offs was there any one line items?

No, no, Laurie. It was pretty consistent. I think if you look at the gross charge-offs, gross charge-off have been pretty consistent. The net charge-offs look high this quarter relative -- that's really due to the first quarter of '18 we actually had 2 large recoveries that are within that charge-offs.

Okay. And then, I mean, in terms of your loan loss provisioning -- and obviously we're just now starting to see a ramp come back here. I mean at what point do you say, hey, our provisions at a minimum need to be covering charge-offs? Or maybe can you just refresh us on that guide you give us last quarter? Is it somewhere between $0.5 million to $1.5 million? How should we be thinking about loan loss provisioning?

I will turn that question over to Anna.

Laurie, similar to last quarter, what we directed that range to be was between $500,000 to $1.5 million. We continue to expect that going forward, of course, barring any major changes and any unforeseen changes to occur. We do expect to maintain within that range.

Okay, great. That's helpful. And then just 2 more questions. The income statement, looks like your BOLI was elevated. Did some of that include a death benefit?

Laurie, no. There were no death benefits in the second quarter. The 5 -- roughly, I think it was roughly $500,000, that's generally a good quarter run rate for BOLI income. The first quarter was actually [null]. We do have a -- 1 separate account BOLI policy that does not have a stable value wrap. That came over in an acquisition a long time ago. But because it doesn't have a stable value wrap, it's invested in fixed income securities. So when the bond market isn't doing well, that policy does not do well from an income state -- income standpoint. So the first quarter was actually low.

Okay. That's helpful. Okay. Then last question. I appreciate the detail you gave around the Puna district. Can you just remind us what your total Big Island loan exposure is?

Sure. I will take that question, Laurie. And then I actually have auto information for you. I'll come back to that. So as David mentioned in his remarks, the damage or the destroyed properties in the Puna district was at $1.6 million. And then as far as the total amount of mortgages and HELOC in the Puna district, that is $4.3 million in principal balance. And then total Big Island exposure, which would include, of course, the Puna district, is $137 million, and that represents 3.5% of our total loan portfolio.

Okay. That's really helpful. Okay. Then you said have the auto.

Yes. Let me come back to that. So the -- and I'll break it out between Hawaii and Mainland. So as of Q2 end, the Hawaii auto portfolio balances was $172 million, and then the Mainland auto portfolio balance was $116 million.

(Operator Instructions) The next question comes from Don Worthington with Raymond James.

Just 1 or 2 more. In terms of mortgage banking revenue, that's been pretty steady the first 2 quarters of the year. Would you expect that to continue at the level you had this quarter?

I'll take that, Don. So we had -- if I think about production in the second quarter for mortgages, we had $140 million. And we are expecting in the next quarter for that to be more in the $150 million range. And then if I look out beyond to Q4, we do have a couple of condo projects that are going to be completed in the fourth quarter. We do have a significant percentage of units in those buildings that we'll be closing out in the fourth quarter.

Okay, great. And then, it looks like the C&I -- Mainland C&I portfolio went up a little bit. Was that anything in particular?

That was mixed. And as I mentioned earlier in my remarks, to the extent there are opportunities for purchases, whether that be auto or SNC on the Mainland, we are going to continue to look opportunistic -- opportunistically at that. So that $8.3 million in C&I growth that you saw in Mainland in Q2 was SNC.

Seeing no further questions in the queue. This concludes our question-and-answer session. I would 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 second quarter of 2018. 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.