Q3 2019 Earnings Call
Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the Central Pacific Financial Corp, Third quarter 2019 conference call.
During today's presentation, all parties will be in listen only mode. Following the presentation. The conference will be open for questions. This call is being recorded and will be available for replay shortly after its completion on the company's website at www Dot Central Pacific Bank Dotcom.
I'd like to turn the call over to Mr., David Morimoto Executive Vice President Chief Financial Officer. Please go ahead.
Thank you I'd and thank you all for joining us as we review the financial results with the third quarter of 2019 for Central Pacific Financial Corp.
With me. This morning are all your enemy chairman and Chief Executive Officer.
Catherine No president.
And I know, who 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.
Well you complete discussion of the risks related to our forward looking statements. Please refer to our recent filings with the FCC.
And now I'll turn the call over to Paul.
Thanks, David and good morning, everyone.
I'm pleased to report on the company solid financial performance for the third quarter of this year as well as for the year to date performance over the past nine months.
We continue to generate strong loan and core deposit growth and maintain all in asset quality and capital ratios, both on a sequential quarter and a year over year basis.
On a nine month year to date business compared to last year, we improved our net interest income net interest margin non interest income and and efficiency ratio.
David will be providing the details of our financial highlights later on this call.
Our profitability and strong capital position enabled us to repurchased 140600 shares of CP a stock during the quarter.
Year to date, we have repurchased 631300 shares roughly 2.2% of our common stock outstanding as of the end of 2018.
Bind with cash dividends, we have returned $37.2 million in capital to our shareholders. This year.
At our last earnings call, we announced drives 2020, a comprehensive initiative to enhance customer experience drive stronger long term growth and profitability and improve shareholder returns.
Since the launch we have heard positive and an encouraging feedback from our customers and employees.
Well, it's still early in the initiative, we did successfully outsource residential mortgage servicing and the third quarter.
On deck for the fourth quarter are the launch of the new website under the CPB Dot Bank domain name the employee pilot phase of our upgraded online and mobile banking platforms and the implementation of and then commercial loan origination system.
Efforts to hit our 2020 milestones in our branch modernization and digital banking initiatives are progressing very well.
The economic conditions and key leading indicators in Hawaii are projected to grow.
At a slower rate than in previous year.
The bright spot maybe in construction activity with a robust pipeline of high rise residential buildings in urban Honolulu.
The visitor industry year to date as of August has shown solid increases in visitor arrivals from 5.2% over the same period last year.
However, visitor expenditures were down slightly by <unk>, 0.5%.
The forecasted growth in 2019 for jobs is that 0.4% real personal income at 1.2% and real GDP at 1.1%.
At this time I'll turn it over to Catherine for our balance sheet highlights.
Thank you Paul.
As our total.
Rose nearly $6 billion increased 4.3% from the same period, a year ago, our balance sheet composition happening in the right direction, especially with regard to alone and core deposit growth.
Total loans increased by $121 million or 2.8%.
In the previous quarter and by $390 million 0.9, 0.8% year over year.
On a sequential quarter basis increases were balanced across loan categories led by $42 million in resi mortgages $41 million in commercial mortgages $25 million and consumer loan and $24 million in construction financing.
On a year over year basis, the 390 million dollar among buyers, but also relatively balanced I'm on the same on categories. The solid increases on site.
Asset quality continues to be strongly nonperforming assets of $1.4 million, which represented two basis point of total assets.
Oh deposit decreased on a sequential quarter basis by 1.2% and year over year, 5.7%.
However, core deposits contributed to on this all background with a sequential quarter increased to $58 million or 1.4% led by 3.6% increase and non interest bearing demand balances.
Year over year increase in core deposits of $140 million or 3.5% was led by 6.7% increase interest bearing demand and 6% increase in savings and my market down.
Our loan to deposit ratio was at 87% as at the end of the started corner.
We had successful core deposit campaign during the quarter, including and enhance premium business checking account promotion and the execution of targeted deposit gathering strategy.
We've also initiated several business development initiative that we sale will yield meaningful results going forward.
This time I'll turn the call Liberty David to review in more detail highlights our financial performance.
Okay.
Thank you Catherine.
Net income for the third quarter of 2019 was 14.6 million or 51 cents per diluted share.
Fair to net income up 13.5 billion or 47 cents per diluted share reported last quarter.
Return on average assets in the third quarter was 0.99% and return on average equity was 11.11%.
We are pleased we were able to post solid third quarter results, while investing for future through a rise 2020 initiatives.
Net interest income increased by zero point Threemillion to 45 point Sixmillion on a sequential quarter basis, and the net interest margin was 3.30%.
During the third quarter, we recorded a provision for loan and lease losses of 1.5 million compared to a provision of 1.4 million recorded in the prior quarter.
Net charge offs in the third quarter totaled 1.6 million compared to net charge offs sub 0.4 million in the prior quarter.
The prior quarter included 0.9 million higher recoveries compared to the current quarter.
At September 30, our allowance for loan and lease losses was 48.2 million or 1.10% of outstanding loans and leases.
Third quarter other operating income totaled 10.3 million compared to 10.1 million in the prior quarter.
Other operating expense for the third quarter was 34.9 million compared to 36.1 billion in the prior quarter.
The sequential quarterly improvement was driven by a reduction in the reserve for unfunded loan commitments.
Promotions expense, primarily related to a core deposit campaign in the prior quarter.
And FDIC FDIC deposit insurance assessment credit in the current quarter.
The efficiency ratio improved in the third quarter, 262.5% from 65.1% in the prior quarter.
The effective tax rate was 25.2% in the third quarter.
Going forward going forward, we continue to expect the effective tax rate to be in the 24% to 26% range.
Thanks, and I will we turn the call to Paul.
Overall, we are pleased with another solid quarter and in maintaining a positive momentum throughout the first three quarters of the year rise 2020 initiative has infused another level of enthusiasm and commitment into our company to achieve the enhanced goals. We have set in the coming years on behalf of our management.
The team. Thank you for your continued support and confidence in our organization. We are confident that the timing is right to make a bold move and investment towards building a better bang for our employees customers community and shareholders for the long term at this time when we'll be happy to address any questions. You may have thank you.
Very much.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
Our first question comes from Aaron Deer, with Sandler O'neill and partners.
Hi, good morning, everyone.
Aaron.
Paul maybe starting to you mentioned the the outsourcing of the mortgage servicing just curious to know what kind of impact that might have on both your mortgage revenue line and expense line as we head into the fourth quarter.
Well you know I think the outsourcing opportunity with one for our employees to get more focused on mortgage growth, while making sure that we are really crossing the t's and dotting. The i's on all regulatory compliance matters. This was not a cost takeout.
Hey per se. It was about strengthening you know our regulatory compliance and credit policies.
And getting our folks to really focus on the market and so we made the transition.
And you know as with all migrations, there's always some bumps along the way, but I think our team did a great job pulling it together and is right on track right now.
Okay.
And then the I guess, where it back at the interest recover in the prior quarter looks like the core NIM was it was pretty flat sequentially.
But your loan yields looks like those move down a fair bit and given the.
The late in the quarter drop in the prime rate in perspective additional rates coming.
How are you thinking about the impact of falling loan yields on the margin and to what extent do you expect it can offset that with with reduced funding costs.
Aaron I'll have Catherine respond to that I'll start and then just in terms of dip on yields for for this quarter and then I'll turn it to David to talk about go forward at the new loan yields or for the quarter came in at 4.12% and that compares with our average portfolio yield of 4.25%.
And then is our go forward payback.
Hey, Karen I think we're comfortable for four now to stick with fee net interest margin guidance that we've been providing for several quarters now so we're sticking with the guidance for the next couple quarters under NIM of 325 to 335 regarding the outsized.
Decline in the loan yield a sequential quarter again that that was.
Exacerbated by the or non non recurring interest recoveries in the second quarter.
So so we do believe we can still maintained a 325 to 335 guidance, that's what we're holding 2.0.
Okay, that's great.
And then it looks like you've continued to run down the the investment securities portfolio I'm, just curious if or when is that done at this point or is there more to be done there and how do you.
Anticipate that impact in net interest income then moving forward if if that portfolio continues to shrink.
Yeah.
It's always going to be a function of.
Interaction between loan and loan and deposit growth, but on the the run down has largely a as you say she has largely taken taken place. We probably are normally would run to investment portfolio into 18% to 20% of assets I think we're right at the top end of that range right now.
So probably keep it in that range for the time being but it's always going to be a function. If we if were able to generate outsized deposit growth then came right that it might trend a little higher but normally we'd run it into 15% to 20% on total assets.
Got it okay. Thank you ill step back.
Our next question comes from Luca <unk> with KBW.
Good morning, guys.
Right.
Just wanted to dig in on expenses for a second so what's the.
The in the current quarter you guys had the the reversal for the unfunded commitments Reserve and then I'm also the drop off for the the promotional campaign just wanted to see for the guide on the 34 to 36 million for the fourth quarter should we anticipate that.
Going back up to around three.
Closer to the higher end of that range or or how should we look at that going forward and then also just for the 2020 balance maintaining this 36 to 38 million and just kind of wanted to hear how expenses the extent outlook was looking.
Okay, Hey, Hey, Little Kids saw David Yeah, I I think the way you're thinking about it is correct.
We were roughly 35 million in the third quarter, but Ah, yes, there was fee.
Reduction and the reserve for unfunded, that's I'm not that said, we can't necessarily calling on so 35.5.
Seems like a good guide for the fourth quarter 35 to 36 million for the fourth quarter and then looking forward into 2020 to $36 million to $38 million range is isn't appropriate range for 2020 and that would incorporate the anticipated.
Investments related to rise 2020 and be normal inflationary increases in other expense line items.
Okay. That's helpful and then.
It's kind of on the deposit campaign I know you guys finished up with the exceptional plan deposit campaign in Twoq you would you guys consider implementing another campaign considering the success of that plan or.
Kind of how do you how do you feel about.
Doing something like that at this point in the cycle.
This is Paul Yeah, we're still and dialogue on the campaign Theres No question that we'll be doing deposit campaigns, but as to the nature of that a timing where we're currently in discussion on that but you can expect us to really drive more no power.
The growth in subsequent quarters.
Okay. That's that's helpful. And then just on the the deposit growth this quarter.
Really core funded and just wanted to know if any that was I know you guys had talked last quarter about.
The additional the addition of of Japanese deposit accounts. The accounts and was wondering if any of it was related to that or I know you guys had been kind of pushing for a lot more of the deposit accounts or you know as you know I'm working with Japanese companies or what the Japanese market always take some time.
But I think we have made some good progression and growth.
This current quarter and we expect to continue placing a focus on that market opportunity given the.
Given the strength on the economy, there and the appetite.
For a lot of Japanese investors, then and consumers wanting to globalize, so well continue to place a focus again.
Ah things in Japan, sometimes take take little time that I think we're making some good progress.
Okay. That's helpful. And then just just lastly have you guys seem a lot of traction on the new online and mobile banking platform I know its plan to rollout I think either late Fourq you early early one Q2 0.
But just wanted to see how the traction was building on on those accounts.
You know this and there hasn't been any traction on the new platform because that it has done.
It's not established yet in our plans are to roll it out.
You know in the early part of 2020 I.
I can tell you that our current implementation is on schedule.
We're quite pleased and proud and confident that you know I could inaugurate really help our help our business on our bank going forward. So we'll keep you posted a you know on our progress on that in subsequent quarters.
Okay. Thank you I'll step back.
Again, if you have a question. Please press Star then one.
Mm.
Our next question comes from Laurie Hunsicker with Compass point.
Yeah, Hi, good morning.
Good morning, just wanted to circle back to where Luke what's going on do you have an actual balance of where you're a Japanese deposits Chad.
You gave us as a kid seem at least 500 million is that on changed or do you have a number.
Currently we're at about 545 million.
And so again you know some progress and we're hoping do continue to focus on the opportunity there and the interest among the average Japanese consumer and you know into Hawaii market.
Okay, great. Thanks, and then I'm just going back to expenses.
I know you had the FDIC assessment kind of how much how much is still run meaning in terms of what we could see roll into fourth quarter.
Hey, Hey, laureates, David Washington.
It was what came through as a roughly a quarter of it. So there is roughly 1.2 million remaining.
And with the timing on when that credit would be you know obtained is a function of the deposit insurance fund as you know sure. Okay. Good and then on the rise 2020 I saw that.
Third quarter was was 1.2 million expenses, they can and that compared to the June quarter of 10 million into that kinda sits roughly with with the guidance you gave us that I wonder if you could refresh us in terms of what's the rise 2020 will be embedded into the fourth quarter and then that's all your 2020 hellish.
Thinking about that thanks.
Yes.
So yeah 1.2 million in the second quarter right now you know our estimate of be rise 2020 related expenses in the fourth quarter or is it as soon as roughly 1.3 million in the fourth quarter. Okay. And then again as we disclosed on last quarter, you know as you grow.
And into 2020, it's roughly 7 million dollar or increasing expense related to rise 2020, but the flu.
Other operating expense guidance, we've been providing that we mentioned earlier the 36 to dirty quarterly run rate includes not only rise related expenses, but also just other inflationary expenses.
In other line items.
Okay. Lori you know a big big component in our right as you know initiative aside from the total dollar investment is really how we've reorganized stand how we are.
You know spearheading efforts into the market and ER and I think you know our our team is really coming together and and getting a lot more customer oriented than and making sure that we continue to bring in more grow.
You know the counter some of the short term investments, we're gonna be making for rice 2020.
Okay, Great. That's helpful and just I want to make sure that I have the expense piece that right. So that's when I look at the third quarter the million Taylor, obviously at a 4.8 million run rate and when you talk about 7 million.
And 2020, so you're basically saying it on an annualized increase that's what will amount to about 2.2 million am I thinking about that the right way.
Yeah, Yeah again, a lot of stay expenses, we we strengthened our team in key strategic areas and we needed to do that too to gear up and implement a lot of the ER rice 2020 initiatives. So so that that's correct.
Okay. Okay, great and then strategically I guess is as you've had a chance to look to truly everything pollen sort of re tweak how you're seeing the world can you just take us through sort of a new lands in terms of how you would feel de Novo branch and I know you're getting every deal with your current branches, but how are you.
Thinking about that relative to rise 2020 or is that completely off the table.
You are you talking about our remaining branches.
No in other words said the idea that you would potentially do any kind of done now build out that you would look at new branching.
Oh.
You know as as part of our branch optimization effort. Lori you know we're naturally looking at you know refreshes off storefronts.
You know we have our CBB lab that we're gonna be having in our main branch and that's going to be a real catalyst for us to look at reconfiguration of remaining branches, but this isn't all going to occur in 2020. A you know this is over a certain period of time and in that process, where naturally looking at.
A new opportunity you know given the demographic changes on no primarily on this island on Oahu. So so yeah, you know I'm definitely new branch opportunities or you know clearly on the table I I can tell you that we still need from time to really or you know fed them.
Office out on <unk>, you know, we'll keep you posted on subsequent quarters. Okay. That's great and then just one last question on on credit and debit hoping you can help me with that's obviously your credit looks great.
The charge offs appeared on all be coming from.
Largely coming from the consumer categories. So can you just update us in terms of.
Yeah, how much of that charge off bounce is coming from prosper that.
You know.
Or the other consumer categories, and then just where the balance stands on.
On prosper and how your how you're approaching aggressive.
Oh, I've already [laughter] pop friend, Oh, Hi, Jonathan I sense, and so the charge off on the consumer line came from a mix of Prosper and then also our consumer portfolio here in Hawaii.
We had mentioned on earlier calls that we.
Every time home Choppier on pre approved consumer online.
The charge off in Q3, and then also in earlier quarters like key often leahy consumer portfolio.
Okay, and so where where is your prosper balance at the moment I have it as of June It was 74.
Yeah. So the proper balances is holding at about that actually and it's in that range for kids.
Three as well.
Okay, and it's a plan to kind of hold it at these levels are you looking to continue to grow.
It really is a function of opportunity and so of course I'm focused on credit quality and then I'm deals. So as we see those opportunities going forward, we will continue departure.
Okay, great. Thanks.
Our next question is a follow up from Aaron Deer, with Sandler O'neill and partners.
Hi, Thanks for taking the follow up I'm, just curious the commercial loan growth in a in Hawaii I guess, both on the Cnine. The Syria line seemed a little weak in the third quarter, just curious to know how much of that stemmed from pay downs surfaced, maybe seem less demand from borrowers and then to the extent that you're doing maybe give us a sense of your.
Outlook for.
For loan growth heading into 2020.
I'll take that question, Aaron Oh, Yeah, I'm seeing a high minded as you know obviously we had.
Ah well I would say is a medium loan growth and in Hawaii, but if you look at the overall business being high line and the decline related to that that decline in our next on the mainland as far as our go forward and we have our officers very focused on continuing.
The out there in the market and so we are optimistic about cnine grows in a in the fourth quarter and then next year.
Okay, and then hub with commercial real estate.
I would say the same for on commercial real estate I think I get a function of relationships that we are building in our and Arclight market.
Okay. Good stuff thanks for taking my questions.
This concludes our question and answer session I would like to turn the conference back over to Paul Yummynames for any closing remarks.
[noise] [noise] [noise], okay. Thank you very much for participating in our earnings call for the third quarter 2019, we look forward to future opportunities update you on our progress.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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