Central Pacific Financial's (CPF) CEO Catherine Ngo on Q1 2016 Results - Earnings Call Transcript

| About: Central Pacific (CPF)

Central Pacific Financial Corp. (NYSE:CPF)

Q1 2016 Earnings Conference Call

April 28, 2016 1:00 PM ET

Executives

David Morimoto – Executive Vice President and Chief Financial Officer and Treasurer

Catherine Ngo – President and Chief Executive Officer

Lance Mizumoto – President and Chief Banking Officer

Analysts

Aaron Deer – Sandler O'Neill & Partners

Jackie Chimera – KBW

John Moran – Macquarie Capital

Don Worthington – Raymond James

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to Central Pacific Financial Corp's First Quarter 2016 Conference Call. During today’s presentation all parties will be in listen-only mode. Following the presentation, the conference will open for questions. This call is being recorded and will be available for replay shortly after its completion at 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 and Treasurer. Please go ahead, sir.

David Morimoto

Thank you, Emily, and thank you all for joining us as we review our financial results for the first quarter of 2016. With me this morning are Catherine Ngo, President and Chief Executive Officer; Lance Mizumoto, President and Chief Banking Officer; and Anna Hu, Senior Vice President and Interim 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 will turn the call over to Catherine.

Catherine Ngo

Thank you, David, and good morning everyone. We are pleased to report on a solid course to start the year with net income of $11.2 million and diluted earnings per share of $0.35. The positive momentum in loan and deposit growth that was realized throughout 2015 has continued into the first quarter of this year, and resulted in meaningful balance increases in the sequential quarter as well as on a year-over-year basis.

Other key areas that have improved in the first quarter include our net interest margin, efficiency ratio and asset quality. David Morimoto will be providing more detail and color on our company's financial results later on the call.

Our Board of Directors declared a cash dividend of $0.14 per share payable on June 15 to shareholders of record of May 31 of this year. Part of our 2016 share repurchase plan of up to $30 million for the year, we repurchased close to 234,000 common shares in the open market for approximately $4.7 million in the first quarter. This purchase represented 0.7% of the common share outstanding as of December 31, 2015.

Going forward, we intend to continue to deploying our attained earnings, repurchase our company's stock in alignment with our 2016 repurchase plan to the extent possible and feasible.

In 2016, we are positioned to leverage the investment we had made in our information management systems to-date, our branch automation platform which went live in the previous quarter provides not only operational efficiencies, but an opportunity to strengthen our relationship banking focus with increased engagement with our customers.

Customer data analytics will begin to play a larger role in our customer acquisition and retention program. New process improvement opportunities have also surfaced with the enhancements made to our information management capability.

We are encouraged by the advancement within our organization as well as the continued improvement of the economic and business condition in Hawaii. The economic outlook continues to be positive for 2015 in key areas for say including our visitor industry, labor market, personal income and tax revenue.

Visitor arrivals increased by 4.1% in 2015 over the previous year and are expected increase by 1.9% in 2016. Visitor expenditures increased by 2.3% last year to $16.2 billion and presented to increase by 2.4% this year.

Job growth increased for 2015 by 1.5% and is expected to continue in 2015 with an increase of 1.3%. The unemployment rate in Hawaii of 3.1% for the month of March was the lowest rate since February 2008, and compares favorably to the national unemployment rate of 5.0% for the same period.

Inflation adjusted personal income increased by 3.6% in 2015 and is forecast to increase by 3.0% by the end of the year. Hawaii's economy overall as measured by real GDP is forecast to have stayed [ph] 2.3% in 2016 following an increase of 2.0% in 2016.

The positive economic tailwind will allow us to better execute on our business plan initiatives.

At this time, I would like to ask David to review the highlights of our financial performance for the first quarter of the year. David?

David Morimoto

Thank you Catherine and good morning everyone. Net income for the first quarter of 2016 was $11.2 million or $0.35 per diluted share compared to net income $10.9 million or $0.34 per diluted share reported last quarter. In addition to the reported increase in net income, the quality of earnings continued to improve as the credit provision defined by $1.2 million sequential quarter.

Our return on average assets in the first quarter was 87 basis points and return on average equity was 8.85%.

Net interest income increased by a solid $1 million or 2.7% sequential quarter as average loan balances increased by over $100 million and the average yield on interest earning assets also increased by 5 basis points.

Net interest margin expanded slightly to 3.33% in the first quarter and has now been in the 3.30% range over two years. We do expect the slight increase in premium amortization under MBS investment portfolio in the second quarter of '16 and that will exert some downward pressure on our NIM all else being equal. Having said that, we expect the NIM to remain in the 3.30% range over the next couple of quarters.

During the first quarter we recorded a credit to the provision for loan and lease losses $0.7 million compared to a credit of $2.0 million recorded in the prior quarter. Net charge-offs in the first quarter totaled $0.4 million, compared to net charge-offs of $1.4 million in the fourth quarter. Our allowance for loan and lease losses at quarter end was $62.1 million or 1.88% of our outstanding loans and leases.

Other operating income increased by $0.3 million or 3.3% sequential quarter, while other operating expense was relatively unchanged.

The efficiency ratio declined to 66.6% from 67.8% last quarter. This was the lowest quarterly efficiency ratio since the third quarter of 2009. In the first quarter our effective tax rate was 35.2% versus 37.2% in the fourth quarter. We expect our normalized effective tax rate to approximate 35% to 36% going forward.

In addition to the share that we repurchased in the first quarter of 2016, we have repurchased 114,000 at a total cost of roughly $2.4 million thus far in April.

That completes the financial summary and now I will turn the call over the Lance.

Lance Mizumoto

Thank you, David, and good morning, everyone. Overall, we our business development have been successful across all line of businesses during the quarter. We have been able to make good progress in selected target markets, the small business segment and the consumer segment.

Total loans and leases increased by $97.4 million or by 3% on a sequential quarter basis and by $341.2 million or 11.5% on a year-over-year basis. Going forward in 2016, we remain comfortable that by year end our loan growth will be in the high single digit percentage level over the previous year.

Construction loan balances increased by 19.4% over the previous quarter, however decreased by 10.1% from the first quarter a year ago. The large variances in our construction loan growth rates were not unexpected due to the varied timing of development projects in the robust market.

The loan categories continue to expand at a stable rate of growth. Balancing increases on a sequential quarter basis included consumer loans at 7.8% and commercial and industrial loans at a 2.7% in both commercial mortgages and residential mortgages at 1.6%.

On a year-over-year basis consumer loans increased by 25.6%, residential mortgages by 12.2%, commercial mortgages by 10.2% and commercial and industrial loans by 6.9%. Total deposits also realized solid growth with an increase of $63.2 million or 1.4% from the previous quarter and an increase of $308 million or 7.4% from the first quarter a year ago.

Core deposits which represent 81.5% of total deposit, they exclude timed deposits larger than $100,000 increased significantly by $81.7 million or 2.3% from the previous quarter and by $333.8 million or 10% of the same quarter a year ago.

Over year-over-year basis, timed deposits decreased by 4.7% plus savings and money markets accounts increased by 17.5% and non-interest demand and interest bearing demand accounts increased by 9.4% and 5.4%, respectively.

We remain confident in the execution of our 2016 business plan initiatives, backed by the favorable business and economic conditions in Hawaii, our continued focus on strengthening customer relationships will be supported by a coordinated process improvement effort and enhanced information management capabilities.

That completes my summary. And I will now turn the call back to Catherine for her closing remarks. Catherine.

Catherine Ngo

Thank you, Lance. In summary, we do have more work ahead in 2016 particularly in leveraging our investment technology and improving our operational efficiency. However, we believe that our organization is well positioned for continued growth and meeting the challenges going forward including an anticipated reduction in credit to our loan loss reserves as our asset quality is on the line [ph].

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 goals in the coming year.

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

Question-and-Answer Session

Operator

Thank you, we will now begin the question and answer session. [Operator Instructions]. Our first question is from Aaron Deer of Sandler O'Neill & Partners. Please go ahead.

Aaron Deer

Good morning guys.

Catherine Ngo

Good morning, Aaron.

David Morimoto

Good morning.

Aaron Deer

Looks like it's pretty strong loan growth and spread across lot of the portfolios this quarter. I'm wondering -- I'm guessing that some of the growth in the consumer was probably some, either auto or student loan purchases. Can you give us some details on that, if there is any other participations or purchases that contributed to the growth?

Catherine Ngo

There was a purchase. I'm going to turn it to Lance to share more information.

Lance Mizumoto

Good Morning Aaron. This is Lance. We did take advantage of an opportunity in the first quarter by purchase of an auto loan portfolio and we did have participation in commercial real estate loan on the Mainland as well. Other than that, again our organic growth continued to remained strong, and I think going forward as I mentioned before, we're seeing, we're looking at Mainland purchases more as an -- on an opportunistic basis rather than our focus, and we are still focused on organic growth.

So, I don't anticipate going forward that we're going to be actively looking for somewhat Mainland purchases unless again the opportunity represents itself and it offers us an opportunity to reduce the churn in our portfolio.

Aaron Deer

So just to kind of backfilling, the consumers, it runs down?

Lance Mizumoto

Correct.

Aaron Deer

And then the loan and the actually the investment securities yields as well were, were both up nicely in the quarter. How much of the improvement there stems maybe from the rate hike or there other things in terms of the mix that helps contribute to that improvement?

Catherine Ngo

I'm going to turn that question to David.

David Morimoto

Again, there was some benefit to the yields from the rate hike, more on the loan portfolio than the investment portfolio. Investment portfolio is primarily fixed rate. So there was some benefit there, but we did see some offset on the public deposits on the deposit side.

On the loan side, there was some benefit and some makeshift, so the new loan volume yields were probably about 3.80% versus the portfolio yield closer to 3.90%. So the reason that the overall portfolio yields bumped up was due to the mix shift. So the run off was on lower yielding loan types.

Aaron Deer

That's helpful. I'll step back. Thank you.

David Morimoto

Thanks Aaron.

Lance Mizumoto

Thanks Aaron.

Operator

Our next question is from Jackie Chimera of KBW. Please go ahead.

Jackie Chimera

Good morning everyone one.

David Morimoto

Good morning.

Catherine Ngo

Good morning.

Jackie Chimera

David did you say the new yields were at 3.80% or 3.90%?

David Morimoto

Yeah, it was 3.80%.

Jackie Chimera

And purchased the portfolio yields at 3.90%?

David Morimoto

That’s correct.

Jackie Chimera

So how does that make loan yield go up, the new loan yield impacted a lower…

David Morimoto

Again, it's some base shifts, so we had run-off in even lower yielding…

Jackie Chimera

Okay.

David Morimoto

The overall portfolio yield has been in the 3.90% range for probably a year now, so we kind of have gotten to where a lot of the portfolio as we price, and so know it's the -- it will bounce around depending on the mix shift quarter-to-quarter.

Jackie Chimera

Thanks again. And you briefly mentioned some of the public deposits, is that's what drove the increase in CDs?

David Morimoto

That's correct.

Jackie Chimera

The cost of the CDs, Okay.

David Morimoto

Yes.

Jackie Chimera

Do you see more of that going forward if rate stay steady or does that pretty much even itself out during the quarter?

David Morimoto

The majority of the public deposit portfolio is 90 days, and so we've seen a majority of that re-pricing occur in the first quarter.

Jackie Chimera

And you have the premium amortization amount in this quarter versus last quarter?

David Morimoto

[Indiscernible] is probably flat, so it was $3 million in the fourth quarter and $2.9 million in the first quarter, so it's roughly flat, but we are seeing -- we do expect a little bit of an uptick in the second quarter?

Jackie Chimera

Are you talking a large magnitude or…

David Morimoto

No.

Jackie Chimera

So just probably something that would impact by a couple of basis point nothing too meaningful?

David Morimoto

Yes, where we're seeing that maybe a basis point of net.

Jackie Chimera

Then, one of your last comments, Catherine that you had made was credit to the reserve. Are we getting near an inflection point where you may start positive provisioning again this year?

Catherine Ngo

So what you saw this quarter and in the earlier quarters is just reflection of the improvement in credit quality. So, what we're seeing with the reserve is to actually contend that with that improvement. I would expect in the coming quarters assuming that we continue to have a strong credit quality that there could be additional credits to the provision?

Jackie Chimera

Meaning continued reverse provisioning, so I guess [indiscernible] credits confused?

Catherine Ngo

That's right. But of course subject to a lot of things of course the, outside of content [indiscernible] a lot of input into where we are, but yes, that's right. And also of course we have to consider loan growth, and so all of those things will be factored in, of course there will be calculation.

Jackie Chimera

Thank you. That's helpful. I'll step back know.

Catherine Ngo

Thank you, Jackie.

Operator

Our next question is from John Moran of Macquarie Capital. Please go ahead.

John Moran

Hey, how it's going.

Catherine Ngo

Good morning.

David Morimoto

Good morning.

John Moran

Just OpEx was a pretty good outcome this quarter and I'm just wondering is the sort of $32 million, $33 million level sustainable for you guys, and do you have sort of longer term efficiency targets defined at this point?

Catherine Ngo

Hi John, this is Catherine. So the OpEx, you can expect in the coming quarters that we will be in the $32 million to $34 million range. And then in regard to your question on efficiency ratio, as you expect it something that we are very focused on and of course we were pleased to see the efficiency ratio headed in the right direction this quarter. And I would think for the rest of the year, we -- as we continue to focus on growing revenues and holding expenses, that will continue to see improvement in the ratio, half trending more to the mid-60s.

John Moran

Okay, so mid 60s by kind of end of this year?

Catherine Ngo

By Q4 is what we would hope to see.

John Moran

Then kind of a bigger picture question on the mix shift and maybe over time, but I know coming out of kind of the recap and you guys were, I think curious were 40% or better in terms of earning assets as a percentage of the balance sheet , that's been worked down pretty good. I think it's 30% or so in this quarter.

But I mean going back kind of pre-crisis that would run as low as the teens. Is that sort of what you would target overall a multi-year kind of period at time to bring down to that level? And kind of do you have thoughts in terms what you would like the balance sheet to kind of look like in terms of earnings asset mix over time?

Catherine Ngo

So, I'm pushing it over to David.

David Morimoto

Sure. You got the history perfect John. So, yeah, the portfolio is about 29% of total assets today. Ideally, we probably would like to run it in the 15% to 20% of asset range. But it will take us, it will occur over time.

John Moran

So, 15% to 20% over time. And then I wanted to circle back on loan growth. It's been really, really good the last couple of quarters and I know that there's been some Mainland purchases in there, that sound like going forward, it will be a little bit more opportunistic. And just trying to square the growth rate of the last couple of quarters with the guidance for sort of mid-to-high single digit growth, it just kind of feels like maybe you guys have been a little bit conservative there?

Catherine Ngo

Lance?

Lance Mizumoto

Good morning John. As we mentioned in the earning calls this morning, part of the fluctuation takes place in our construction loans. And as you know construction loan balances, fluctuate because it's rather short-term in nature. So, we saw some pay downs that took place last year, there were some timing differences that allowed us to fund more construction loans this year, but we also anticipate some paydowns going to the second quarter. So, again we're cautiously optimistic about our loan growth, because it's affected in part by that volatility.

John Moran

That is helpful. I appreciate taking the questions guys. Thanks.

Lance Mizumoto

Thanks you.

Catherine Ngo

Thanks.

Operator

[Operator Instructions] Our next question is from Don Worthington of Raymond James. Please go ahead.

Don Worthington

Good morning everyone.

Catherine Ngo

Good Morning Don.

David Morimoto

Good morning Don.

Don Worthington

In terms of -- it look like you had pretty good growth across the loan portfolio. Is there any segment in the lending market that maybe is getting a little bit ahead or that you might be concerned about?

Catherine Ngo

I'm going to turn that question over to Lance.

Lance Mizumoto

Hey Don this is Lance. I don't know that we're necessarily we're not overly concerned about any specific areas. As you know, our portfolio is probably more concentrated on the residential mortgage side than any other sector.

Having said that we are optimistic about the growth in other sectors including commercial real estate and C&I, so to the extent that those balances increase over time, that allows us to continue to grow the residential portfolio. But again, given the nature of this market, it is heavily concentrated in residential mortgages not just for our bank, but for other banks in the state.

Don Worthington

Okay. Thank you. Then, it looks like loan growth outpaced -- or I'm sorry deposit growth, we're short of loan growth, so there were some borrowings in the quarter to help fund the loans on a short-term basis. I guess what type of borrowings were those?

Catherine Ngo

David?

David Morimoto

Hey Don, those were short-term borrowings from the Federal Home Loan Bank.

Don Worthington

Okay.

Don Worthington

And then in terms of loan pay offs, were those up or down this quarter compared to last quarter?

Catherine Ngo

Lance?

Lance Mizumoto

I guess I can't. I'll have to get back to you if that's possible Don. I don’t know what their payoffs look -- our payoff levels were last year or last quarter. Is that okay?

Don Worthington

That's fine. Thanks.

David Morimoto

Thank you.

Don Worthington

Thanks all I had. Thank you.

David Morimoto

Thanks Don.

Catherine Ngo

Thanks Don.

Operator

Our next question is a follow-up from Jackie Chimera, KBW. Please go ahead. And Jackie your line is live. Perhaps, it's muted on your end.

Jackie Chimera

Sorry, it was muted. Thanks for taking my follow-up. I know that last quarter had around $350,000 build out expense related to our branch, but the quarter-on-quarter decline in occupancy was a lot bigger than that and it was trending a little bit lower than what we saw last year. Is that a new run rate for us, or were there other maybe contract expenses that caused it to be lower in the quarter?

Catherine Ngo

David?

David Morimoto

You got it right Jackie. So there was some non-recurring expense in the fourth quarter. As part of the run rate going forward, we did see a benefit in the first quarter from the utility expenses. I'm not sure if that's going to necessarily be at the same level going forward. So, I guess I would probably guide to $3 million to $4 million going forward.

Jackie Chimera

Okay. And just one last quick one, was there anything usual in the drop in the net DTA [ph] in the quarter?

David Morimoto

No, nothing unusual.

Jackie Chimera

Okay. That's all I had.

David Morimoto

Thanks Jackie.

Catherine Ngo

Thanks Jackie.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Catherine Ngo for any closing remarks.

Catherine Ngo

Thank you, very much for participating in our earnings call for the first quarter of 2016. We look forward to future opportunities to update you on our progress.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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