Central Pacific Financial Corp. (NYSE:CPF) Q4 2015 Earnings Conference Call January 28, 2016 1:00 PM ET
David Morimoto - EVP and CFO
Catherine Ngo - President and CEO
Lance Mizumoto - President and Chief Banking Officer
Joe Morford - RBC
Alex Morris - Sandler O’Neill
Don Worthington - Raymond James
John Moran - Macquarie Capital
Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp Fourth Quarter 2015 Conference Call. During today's presentation all parties will be in listen-only mode. Following the presentation, the conference will be opened for questions. 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 and Chief Financial Officer. Please go ahead sir.
Thank you, Alisha, and thank you all for joining us as we review our financial results for the fourth quarter of 2015. 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.
Thank you, David, and good morning everyone. We are pleased to report that net income in the fourth quarter of 2015 was $10.9 million and net income for the year of 2015 was $45.9 million or an increase of 13.4% over 2014. Loan and deposit growth continued to be strong in the quarter as well as on a year-over-year basis. Our asset quality at year end improved significantly over the same period of last year. David Morimoto will provide the financial details later on the call.
Overall, we ended the year on a solid position financially and are confident in meeting the challenges going forward. The company’s share repurchase program to return excellent capital to our shareholders was successfully executed throughout the year fueled by consistent profitability. Approximately 4.1 million shares of CPF stock was repurchased throughout 2015 representing a buyback of 11.7% of the total outstanding and issued shares of common stock as of December 31, 2014.
Since we started our share repurchase program in the fourth quarter of 2014, we have repurchased approximately 11.2 million or 26.5% of outstanding common shares as of December 31, 2013. Our capital ratios continued to remain in excess of the regulatory well capitalized minimum levels designated under Basel III.
Our board of directors yesterday approved 2016 share repurchase program for up to $30 million going forward. Our strategic focus for 2016 continued to revolve around the relationship banking and our customers’ experience. The key initiatives in our 2016 business plan are designed to support this strategy in addition to strengthening our information management capabilities and streamlining operational efficiencies. Our entire CPB team is committed and dedicated to achieving the critical milestones necessary to continue moving our company forward.
We are encouraged by the continued positive improvements in the economic and business conditions in Hawaii. Having a stable economic tailwind will allow us to better execute on our business plan initiative. Growth in the visitor industry has been surprisingly strong during the past year. As of November 2015, the year-to-date visitor arrivals were up by 4.2% over the same period in the previous year and visitor expenditures were up 2.2% to $13.6 million.
The construction fund was currently in full swing and the total value of building permits year-to-date as of November 2015 was up by 24.2% over the same period of the previous year primarily driven by residential construction projects. Labor position continued to improve throughout 2015.
The unemployment rate in Hawaii dropped to its lowest levels since January 2008 at 3.2% in December compared with the national unemployment rate of 5%. Job growth and [indiscernible] income also continued to expand by 1.5% and 4.0%, respectively, year-over-year as of November 2015. Other key projects for 2015 over the previous year include increases of real GDP by 3.4% and the inflation rate by 0.6%.
At this time, I would like to ask David Morimoto, our Chief Financial Officer, to review the highlights of our fourth quarter and 2015 financial performance.
Thank you, Catherine, and good morning, everyone. Net income for the fourth quarter of 2015 was $10.9 million or $0.34 per diluted share compared to net income $12.2 million or $0.38 per diluted share reported last quarter while net income and EPS declined sequential quarter, the quality of earnings improved in the fourth quarter as the credit provision declined.
Our return on average assets in the fourth quarter was 87 basis points and return on average equity was 8.68%. Full year 2015 net income was $45.9 million or $1.40 per share compared to $40.5 million or $1.07 per share. Year-to-date return on assets was 92 basis points and return on equity was 8.91%.
Net interest income increased by $0.4 million or 1% sequential quarter as average loan balances increased by roughly $70 million. Net interest margin was relatively stable at 3.30% in the fourth quarter and has now been in the 3.30% range for the past two years. The recent 25 basis point heightening by the Federal Reserve is not expected to have a material impact on our net interest income or net interest margin as it impacted a similar amount of assets and liabilities.
During the fourth quarter we recorded a credit to the provision for loan and lease losses $2 million compared to a credit of $3.6 million recorded in the prior quarter. Net charge-offs in the fourth quarter totaled $1.4 million, compared to net recoveries of $3.4 million in the third quarter. Our allowance for loan and lease losses at year end was $63.3 million or 1.97% of outstanding loans and leases.
Other operating income was $9.8 million in the fourth quarter and was relatively unchanged. Other operating expense increased by $0.4 million or 1.2% sequential quarter. The efficiency ratio was relatively unchanged at 67.8% versus 67.6% in the prior quarter. Our year-to-date efficiency ratio was 69.6% down from 78.9% in 2014. In the fourth quarter our effective tax rate of 37.2% was slightly insulated by some tax true up adjustments. We expect our normalized effective tax rate to approximate 35% to 36% going forward.
Catherine mentioned that the board yesterday authorized a new $30 million in share repurchase program, so unlike the fourth quarter in 2015, we do expect to return to open market share repurchases beginning this quarter.
That completes the financial summary and now I will turn the call over the Lance.
Thank you, David, and good morning, everyone. Overall, we realized strong growth in our loan deposit portfolios from the previous quarter as well as on a year-over-year basis. Our focus on strengthening client relationships and on market segmentation has been supported by the continued positive economic and markets conditions in Hawaii.
As of December 31, 2015, total loans increased by $110.1 million or by 3.5% from the end of the previous quarter and by $279.3 million or by 9.5% on a year-over-year basis. The sequential quarter growth in loan balances was distributed across all loan types including increases of 12.6% in construction loans, 3.7% in residential mortgages, 3.2% in commercial mortgages and 2.9% in both commercial and consumer loans. On a year-over-year basis, the 9.5% total loan growth comprised of increases in commercial loans of 12.4%, residential mortgages of 12.0%, consumer loans of 11.6% and commercial mortgages of 8.2%. Construction loans declined by 25.9% due to the loan pay downs in selected new business bookings.
Total deposits as of December 31, 2015 realized significant growth from the previous quarter increasing by $202.9 million or by 4.8%. This growth included an increase in core deposits by $180.8 million or by 5.3%. On a year-over-year basis, both total deposits and core deposits increased by 7.9% and 8.3% respectively.
The key initiatives of our 2015 business plan have been successfully executed throughout the year and is as a result of our total team effort. We have made meaningful progress in applying technology applications to expand customer relationships and to create new business opportunities. This month, we completed the consolidation of one of our braches into another branch located within a half a mile due to its lease expiration and an opportunity to improve operational efficiencies. While there is more work to be done in the coming year, we are encouraged by the commitment of our entire CPB team and the improving business climate in Hawaii.
That completes my summary and I will now turn the call back to Catherine for the closing remarks. Catherine?
Thank you, Lance. We believe our company is well positioned for market share growth and improved efficiency for 2015. We are prepared for the challenges that will come along with making continued progress, including an anticipated reduction in credits to our loan loss reserve as our asset quality normalizes. I would like 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.
[Operator Instructions] And our first question will come from Joe Morford from RBC. Please go ahead.
Thanks. Good morning, everyone. Question first on loan growth. It was particularly strong the past couple of quarters and fairly broad-based as well. So just kind of curious how you’re feeling about the sustainability of that issue heading into 2016, and just kind of general expectations for growth this year? And as part of that, do you expect to do any portfolio purchases or much in the way of participations in Shared National Credits?
Okay. Let me turn that question over to Lance. Lance?
Hey, Joe, this is Lance. I think we had a - again, we had a very strong fourth quarter and as I look at the pipeline going into 2016, at least for the first quarter, I think we are cautiously optimistic about healthy loan growth going forward. The growth that we realized in the last two quarters was very healthy and something that’s probably not sustainable. Some of that loan growth was due to some timing differences in fundings. So again, I don’t think fourth quarter is sort of indicative of the growth rate that we are going to realize in 2016. But going into 2016, I do anticipate given the pipeline that our growth will probably be in the high-single digit range.
Okay. That’s great.
As far as loan purchases, we are going to look at those in an opportunistic basis, so that if there is some churn in our Mainland portfolios, we will try to exceed opportunities to maybe offset some of the churn. But we are not looking to see that as like a big driver of growth. If you look at the fourth quarter numbers, bulk of our loan growth was organic, I would say about a $101 million of it was local and about $90 million was on the Mainland.
Okay. Great. That's very helpful, Lance. Thank you. I guess the other question was just kind of more broadly speaking, just as you look at 2016, any kind of bigger initiatives that the bank is looking at? As I recall at one point you were talking about maybe something on the retail side, whether it's sales model or just service emphasis or things like that. Any kind of big picture thoughts for 2016?
Sure, let me take that question Joe. We are pleased to report, and this was in our prepared remarks that we completed our Encore branch conversion in 2015 and that’s our end-to-end system for our branches, and then of course utilized by our back office groups. Related to that, there are a number of process improvements and thinking about the end-to-end process. So we will continue to focus on being more efficient and leveraging that Encore system.
The other thing is in an earlier call, we talked about our enterprise data warehousing, so we are continuing to focus on leveraging the warehouse including the build-out of the analytics, which really is the power behind that platform. They are understanding our customers, so that we can appreciate their needs and sell into those needs.
Okay. Thanks a lot.
Our next question will come from Aaron Deer from Sandler O’Neill. Please go ahead.
Good morning, everybody. This is actually Alex Morris on for Aaron. Just a quick follow-up question on the expenses, and I apologize if I missed this in the prepared remarks. But with the occupancy expense ticked up, was there a like a lease termination associated with the branch consolidation that you mentioned in the fourth quarter or something that drove the increase in occupancy?
David, would you take that question?
Yes, thanks, Catherine. Hey, Alex. There was about $350,000 of non-recurring expenses related to a build-out of a new branch. And so it’s actually unrelated to the branch closure, but there was about $350,000 in non-recurring expenses in occupancy line this quarter.
Okay, great. And just kind of related to that as a follow-up. Saw a bit of an uptick in advertising expense, was there kind of a new initiative that was put forth in the fourth quarter, something that drove that?
I'll take that question. Yeah. That was, well, I think it was a one-time expense and it’s related to an advertising campaign that's actually going to be launching in the next week or so. So it's the production expense that's related to that ad.
Sure. That's great. Thank you for that. And then just to follow up on the loan question that came, and you guys showed great growth this quarter, and you mentioned about opportunistically looking at some loan purchases in the quarter, were there any purchases this quarter that supplemented the strong growth that you guys showed?
Lance, can you take that?
Hey, Alex, this is Lance again. As I mentioned in the fourth quarter, about 101 million was organic and about 9 million represented mainland purchases.
Okay. I apologize. Yes, you did say that. All right, well, that's all for me. I'll step back. Thank you for answering my questions.
Our next question comes from Don Worthington from Raymond James. Please go ahead.
It looks like you had a really strong core deposit growth in the quarter, anything in particular behind that in terms of how you are being able to generate those balances?
Sure. Good morning, Don. And I think part of our growth was driven a little bit by some real estate sales and that liquidity flowed into our deposit base. We did see one significant 1031 exchange deposit that took place at the end of the year, but the bulk of our increase in deposits really was the efforts of our people and focusing in on getting core deposit growth.
Okay, great. And then in terms of capital deployment, how would you kind of prioritize? I would guess organic loan growth would be first, but just trying to maybe get a little more color on timing of executing on the buyback?
Sure. Maybe, I'll start by talking about the buyback. So you had expected us with where our stock is trading today, plus we back out in the market in Q1 rather aggressively. And then David, anything to add in regard to capital deployment
Don, I think the capital plan is consistent with what you've seen over the last couple of years. So we’ll obviously pay the regular cash dividend with a yield and payout ratio comparable to our peers, but we will augment that with an ongoing share repurchase program as Catherin mentioned and we’re obviously looking to take advantage of the recent downturn in the two valuations, so we will be back in the market in the first quarter.
Okay, great. Thank you. And then I noticed a gain on sale of mortgages was down a little bit linked quarter, was that volume driven or based on, say, narrowing premiums?
David, can you take that?
Yeah, sure, you're right. It was down slightly, 1.6 to 1.3 million sequential quarter and it was primarily volume driven. So the gain on sale margin was relatively stable for the two quarters, but we did see volume decrease by roughly 7% sequential quarter.
[Operator Instructions] Our next question will come from John Moran from Macquarie Capital. Please go ahead.
Just two kind of quick bigger picture sort of macro questions and just kind of curious if you've seen any sort of early signs of a slowdown in visit or spend, given some of the international turmoil and dollar strength? And then the second one unrelated, but with ASP in First Hawaiian and some of the things that's out there in the press, are you seeing any change in the competitive environment?
Maybe I'll start and then I’ll turn it to Lance to talk about the competitive environment. Hawaii is perhaps a bit of a microcosm in regard to how to think about the national economy and so in fact, the tourism numbers that we saw for last year were a record for us and the spend remained high.
So currently for it - as we think about 2016, we’re expecting a strong year, I mentioned the unemployment number that were announced recently for December of 3.2%, which is the lowest rate in eight years. So we’re expecting a strong economy here in Hawaii as we think about the tourism numbers and also as we look at construction state. Lance?
Good morning, John. I think with regards to the two banks, I’ll take maybe American Savings first. I think they've been doing business as usual, they've been focusing on their activities, and we haven't seen any significant change in their efforts thus far. I think for First Hawaiian Bank, it's really early to tell if there is going to be any or there has been any significant changes in the way they operate their business. As you know, they did make that announcement late December. So, given the market conditions and given the fact that it’s again very early in the ballgame, I just think it's too early to tell what kind of moves they’re going to be making going forward.
Sure. Okay, that's helpful. And then just wanted to kind of circle back on maybe margin outlook a little bit. I understand that you guys aren’t sort of wildly asset sensitive or so and it sounds like David, you’re expecting pretty stable NIM. But if you could help kind of tease out a little bit in terms of maybe new money yields on - and replacement yields in the securities book and on the loan side of things and sort of give us a flavor of where you see things penetrating over the next quarter or two?
Sure. So John on the new volume yields on the investment side, we have been investing - in fourth quarter, we did commented on the duration scale slightly. So new volume investment yield has probably averaged about 2% in the fourth quarter relative to the portfolio yield that was more like 260. On the loan side, it was a lot better story, much closer - new volume yields were much closer to the overall portfolio. Overall portfolio yield, overall new volume yields was about 370, weighted average of 370 versus the portfolio yield of roughly 385.
This will conclude our question-and-answer session. I would like to turn the conference back over to Ms. Ngo for closing remarks.
Thank you, Allison. Thank you very much for participating in our earnings call for the fourth quarter of 2015. We look forward to future opportunities and update you on our progress.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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