Q2 2019 Earnings Call
Good day, ladies and gentlemen, thank you for standing by and welcome to the Central Pacific Financial Corp, Second quarter, 2019 conference call and webcast. 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 Companys website at Www Dot Central Pacific Bank Dot Com I'll like to turn the call over to Mr., David Morimoto Executive Vice President Chief Financial Officer. Please go ahead Sir.
Thank you John and thank you all for joining US as we review the financial results of the second quarter of 2019 for Central Pacific Financial Corp.
With me this morning are Paul Yummynames Chairman.
Chief Executive Officer.
Katherine No President and Chief Executive Officer of our Bank subsidiary.
And Anna Hu, Executive Vice President and Chief Credit Officer.
During the course of todays 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'll turn the call over to Paul.
Thank you David and good morning, everyone.
Over the past eight years CBF has consistently improved its profitability performance metrics and shareholder value.
Nine months ago, the board appointed me as CEO since a CPF to the next level of performance.
I spent the last six months with Catherine and the rest of the executive management team developing a multi faceted initiative to take us to the next level today I would like to introduce this initiative that we have named rise 2020.
Right 2020, we will build upon the foundation that has led to our recent success, we view it as an enhancement to our current strategy and not a change in strategy.
We plan to further emphasize our strength.
And invest for the future in areas of opportunity.
Right 2020 includes numerous initiatives and I'd like to highlight four key areas of opportunity today.
Digital banking.
Revenue enhancements.
Branch transformation and operational excellence.
In the area of digital banking.
CBF plans to implement best in class online and mobile banking platform.
By the first quarter of 2020.
We are currently developing new platforms that will replace our existing system.
Additionally, we are working to redesign our website and implement robust digital marketing capabilities.
Revenue enhancements include the recent introduction of best in class small business products, including our business online banking and business exceptional account.
We also recently launched high business Central and an enhanced fleet of cash management products.
Additionally, we plan to invest and emphasize our business development initiatives in Japan.
Well, we have a sustainable competitive advantage.
In the area of branch transformation.
CPF plans to revitalize central Pacific Plaza, the building, we own in the heart of downtown Honolulu.
The redesign will include coal working areas for small business customers and community meeting space for local nonprofit.
Additionally, we will transform our flagship main branch to include innovative digital banking technologies to ensure an elevated customer experience.
Our plans here will also include the installation of full function Ats, we will upgrade our other branch facilities following our main branch.
Finally in the area of operational excellence, we are implementing an end to end commercial loan origination system and we are outsourcing residential mortgage loan servicing.
Additionally, we are driving efficiencies in our customer impacting areas through the expanded use of technology.
In the aggregate CPF expects to invest roughly $40 million on rise 2020 initiatives.
Some of these investments will be capitalized while others are recurring annually.
We expect annual operating expense increased by roughly $7 million when rise is fully implemented by the start of 2021.
We have started to execute on some of the rise initiatives and it is generating a lot of excitement within the bank.
We incurred approximately $1 million of rise related expense in the second quarter of 2019, and expect rights related expense to total roughly $2.5 million over the second half of 2019.
While expenses, increasing we also are forecasting enhanced revenue growth.
As a result, we expect our efficiency ratio to be in the 63% to 65% range and 2019 and 2020.
Right 2020, we will take CBF in the next level of performance with regard to customer and employee experience and also drive and enhance shareholder returns.
We are targeting a 15% return on shareholders' equity and a 57% efficiency ratio by the end of 2022.
We will provide more details on the rise 2020 over the coming quarters.
And now Kathryn will provide highlights of our second quarter results Kathryn.
Thank you Paul.
I'm pleased to report that we realized solid growth in the second quarter of this year.
Our net income was impacted by the right 2020 project and other investments for future growth.
Our balance sheet continued to expand our targeted areas with strong gains in loan and core deposit.
Total loans increased by $146 million or 3.5% over the previous quarter and by $366 million or 9.4% year over year.
Loan growth was strong across all loan categories on a sequential quarter basis led by increases of $65 million and ready mortgages $35 million and commercial mortgages and $24 million in commercial and industrial loans.
On a year over year basis, a 366 million dollar growth was also driven by the same loan category and solid increases across all loan types.
Asset quality improved significantly with nonperforming loans decreasing to $1.3 million or two basis points of total assets.
Total deposits remained flat on a sequential quarter and a year over year basis.
However, core deposit increased by $39 million from the previous quarter and by $103 million from a year ago.
Our loan to deposit ratio was at 85% as at the end of the second quarter.
Competition for deposit gathering in our markets remain shark and we continue to focus on building our core deposit base with strong customer relationships and service delivery.
Our very successful consumer exceptional checking account campaign was executed in the second quarter and we continue to expand our small business market with strong market tough.
At this time I'll turn the call over to David to review in more detail the highlights of our financial performance.
David.
Thank you Catherine.
Net income for the second quarter of 2019 was $13.5 million or 47 cents per diluted share.
Compared to net income of 16.0 million or 55 cents per diluted share reported last quarter.
The first quarter 2019 results included a $2.6 million pre tax gain on sale of Mastercard stock.
Return on average assets in the second quarter was 0.92%.
And return on average equity was 10.73%.
Net interest income increased 0.3 million to 45.4 million on a sequential quarter basis, and net interest margin was relatively stable at 3.33%.
During the second quarter, we recorded a provision for loan and lease losses of 1.4 million compared to a provision of 1.3 million recorded in the prior quarter.
Net charge offs in the second quarter totaled zero point $4 million compared to net charge offs of $1.9 million in the prior quarter.
At June 30, our allowance for loan and lease losses was 48.3 million or 1.14% of outstanding loans and leases.
Second quarter, other operating income totaled $10.1 million compared to $11.7 million in the prior quarter.
The decrease was primarily due to the gain on sale of Mastercard stock in the prior quarter, partially offset by higher income from our investment services business of 0.5 million.
Other operating expense for the second quarter was $36.1 million compared to $34.3 million in the prior quarter.
The sequential quarter increase was primarily driven by higher salaries and employee benefits of zero point Sevenmillion at higher promotions expense of zero point $8 million.
The increase in salaries and benefits was partially rise related and the increase of increase in promotions expense was due to the previously mentioned core deposit campaign.
The efficiency ratio for the second quarter was 65.1%.
And reflects the rise related investments as well as the core deposit promotion expense.
The effective tax rate was 24.7% in the second quarter.
Going forward, we expect the effective tax rate to be approximately 24% to 26%.
We announced in June 2019 that the board authorized a new share repurchase plan with authorization up to $30 million.
During the second quarter of 2019, we repurchased approximately 214000 shares of common stock.
At an average cost per share of $29.22.
Thanks, and now we will return the call to Paul. Thank you. David overall, we are pleased with the continued growth and profitability of our company, while improving asset quality and maintaining a strong capital position.
The timing is right to embark on rise 2022 invest in meeting the changing needs of our market and for the long term viability of our franchise.
We believe this acceleration of our growth strategy on Gen generate an improved and sustainable financial performance for the benefit of all of our stakeholders.
On behalf of our management team I'd like to thank our employees customers and shareholders for their continued support and confidence in our organization as we work toward reaching higher levels in the coming years at this time, we'll be happy to address any questions. You may have thank you.
We will now begin the question and answer session.
To actually a question you May press Star then one on your Touchtone phone if you are.
If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed you will like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Aaron Deer of Sandler O'neill and partners. Please go ahead.
Hi, good morning, everyone.
Good morning, Aaron.
Hi, I missed the first few minutes of the.
The calls so forgive me if I ask something that's that's been addressed but just digging into that to rise 2022 initiatives.
Can you talk about what.
Specifically I guess is different from from this versus some of the other technology and efficient efficiency initiatives that youve.
Been taken for the last few years.
And it seems like some of this is more.
It has the expectation of driving revenues higher can you talk specifically about how that is expected to play out.
Sure. Thanks, Aaron This is Paul I mean.
I think I'd like to touch on a couple of things on our overall rise 2020 initiative and the first area.
Everyone's talking about digital banking today, and you know I think the way the market is.
The end of the day over over a period of time.
Many banks are going to be.
Pretty pretty much on a similar platform in a in the digital banking technology, but I think some of us have an opportunity to.
Advance a lot quicker and one of the major initiatives and our rise 2020 plan is to migrate to a best in class online and mobile banking platform that I think is going to be very unique for this marketplace.
Our bank is making a big leap in utilizing cloud technologies.
I believe that we'll be taking a hard look at data analytics artificial intelligence at a level that I feel will differentiate from one other financial institutions are doing even in the U.S. mainland.
So this is this is going to be one area you know a lot of the the investment associated with this it's on a.
You know software as a service basis. So you know, it's not baked Dan completely into the $40 million either things that we incur on a year to year basis right, but we think that's going to be a key strength within our rise 2020 investment now the area you know even on our facilities investment in downtown Honolulu. You know this is a dynamic a unique dynamic for Hawaii or are building his position and in a really critical location in downtown Honolulu, and a lot of what we do with the facility is going to turn into a huge billboard or really creates and supports more relevance for the bank at least in this marketplace.
A third area that.
Again, I think as part of our rise 2020 that we've been spending a lot of time and this relates to our digital strategy is that we are as an organization, making a real investment on process reengineering and also on how we operate the business. We've already started this and the second quarter and a lot of it is some of the underpinning our growth for loan growth and deposit growth during the second quarter.
Okay. That's that's helpful. I appreciate that and I guess just since you know these investments are presumably going to be ramping up over the next 12 18 months.
I know you've given your long term objectives in terms of where you'd like to get the efficiency down too but.
Over over the next 12 to 18 months as this ramps can maybe give us a sense of where the noninterest expenses might go on a dollar basis and also maybe on it on an efficiency basis because it. It my my expectations are probably going to be trending up toward that 30 940 million on a on a quarterly.
Basis, but just would like to get your thoughts on that.
Thanks, Aaron I'm Gonna have David Morimoto respond to that.
Yes.
Thanks, Paul Hey, Aaron So other operating expense in the second half of 2019, we're guiding to a.
34 to 36 million dollar range. So it's it's similar to what we saw in the second quarter, but as Katherine mentioned there was a.
Our core deposit campaign in the second quarter that will not recur in the back half wells twin 2019. So so we're estimating roughly two and a half million of rice related expense in the second half. So it. So it is very similar to what was up in the second quarter results. So 34 to 36 million in the back half of 19.
Quarterly in the back half of 19, then we expect that to rise to 36 to 38 million in 2020.
How it ramps up to the 36 to 38 will be dependent on our implementation of the various initiatives. So it will take place over time.
But by the end of 2020 will be in the 36 to 38 million dollar range.
Just to your margin outlook, given obviously the rate environment has been changing pretty quickly. This year in terms of the the outlook and expectations for the fed is given kind of what's expected out of the fed it at this point.
And some of the different dynamics affecting your margins, including spear securities purchases and I guess that book has been down, but maybe you start building up from here.
What's your expectation for the margin through the back half of this year.
Yeah on it we're maintaining our net interest margin guidance at 325 to 335.
So you know and that's assuming two fairly easy in the back half of 19 and one in the first half of 2020.
You know as we've discussed over over many quarters.
You know that the balance sheet is relatively well matched so that's why we didn't see a significant pick up in the margin in the rising rate cycle. Similarly, we don't expect you know a lot of degradation of the net interest margin.
To the extent that rates reverse course, so we're sticking with the 325 to 335 guidance.
Okay. That's great. Thank you for taking my questions.
Our next question comes from Luke Wilson of KBW. Please go ahead.
Good morning, guys. Thanks for taking my questions.
I'm just kind of wanted to keep it going on that margin just that 325 to 35 is that through the end of this year and next year is it kind of just going forward without really a timeline associated with I know you put the two fed cut to the end of this year and then one in the first half of next year just wanted to see.
Like if we're looking at for Q2 0, I know, it's obviously a lot of moving parts in there just kind of relatively down from here or is it is it well matched in that in that 325 to 330 yen.
Yeah. Yeah. This is David you know I I think you know definitely treat 325 335 for the next two three quarters. You know end of 2020, you know, we we would hope that we could be.
I'm seeing some expansion, but the big wildcard would be the three the yield curve the steepness of the yield curve.
But for the next several quarters, we're comfortable with the 325 to 335.
Okay. That's helpful. Thanks, and then just going back to the rise 2020.
Just what kind of revenue synergies and what's the what should we see the timing with that I know that there is there is some of the stuff coming on with the commercial end to end and other technology efficiencies just kind of wanted to see how we should look at non or fee income lines as well as kind of on in the net interest income embedded in that number.
Just through kind of different platforms, you guys or are working.
Sure Luke this is Paul in the meeting.
So naturally we need a period of time, you know that make a lot of these investments, but operationally we've already commenced in Q2 in terms of revenue enhancements revenue generation, we have done some reorganization on our customer facing organization, we have new leaders appointed a within the organization.
There is more of a operational discipline and a cadence in terms of loan pipeline management in terms of frequency of customer visits patients.
We are getting very granular on how we go to market today and because we understand with these investments and we have to deliver even now and so on so this is we have embarked on this process and full force in Q2, and we anticipate that that will be a tremendous trigger on some of our loan and deposit growth in the quarters ahead.
Okay. That's the that's super helpful.
Just kind of switching over to the portfolio growth you guys are so really strong loan growth this quarter.
And just wanted to see how the full year guide of mid single digit is coming in is that going to be on the higher end of that or do you see it softening a little bit in the backend the back half of 2019.
Catherine respond to that cancer. Thank you.
Yeah, we were really pleased to see that 110.5 million dollar.
Well the number for you to ask about to the south.
Got me bond point here in the organization a much higher level. So we are updating our guidance for for loan growth for the back half of the area.
Well say it will be both.
Okay.
Okay.
That's helpful. Thanks, and then just finally I'm just kind of wanted to see with the new new expenses kind of getting pushed into the rise 2020 should we see that kind of impact repurchases going forward, just how should we think about that especially with the three authorization at the end of June .
Hey, Hey look good so David Yeah, we will continue to share the open market share repurchase program, but as we started mentioning earlier.
This year, you know the pace of repurchases may slow, but obviously that will be market driven.
Yes, we.
Where where the ultimate inside or in <unk>.
If depending on market changes, we can increase or decrease the the volume, but they will continue to be an open market share repurchase program.
Okay. That's helpful. I'll step back thank you for taking my questions.
Sure.
Our next question comes from Laurie Hunsicker of comp of Compass point. Please go ahead.
Hi, Thanks, Paal, Catherine Im favorites that morning.
Hi, I just wondered if you could go back to some of the comments you made around rise 2020.
And the potential to capture business in Japan can you can you help us think about that.
I'd be happy to do that Laurie.
So ER.
From last year, we are affected alliances with seven Japanese regional banks.
And that's really you know through these type of relationships with Japanese organizations.
It sometimes takes time to call debate a lot of the customer referrals, we're starting to see a steady stream of that has as many of you know Japan is going through a tremendous economic cycle. Today corporations individuals are extremely cash rich and we feel that one of our key focus is given the interest of Japanese investors and tourists in the state of Hawaii, and we need to do a better job harvesting those opportunities.
So again it takes a little time, but I think we are showing good signs of development Ah be go into Japan next week as well.
It was a very loaded itinerary, but that's going to be one of our key areas of focus and trying to work with our alliance partners visiting a lot of customer prospects as well.
And so I guess.
And I I don't know that so forgive me I say, if you had asked about the funny enough that they have your 4.2 billion or sell them back.
How much of that is to customers in Japan.
So the loans themselves Uh huh.
I think our focus is primarily around deposits with the Japanese and better customer base.
You know in terms of lawns, we'll see some lift as they continue to have interest.
And investing in residences here in Hawaii, and we've been seeing a lot of activity, especially on the high end on residential purchase.
The Japanese have not been.
That active in the Hawaii market in terms of overall commercial or large scale residential developments yet are our focus has been more with the consumer.
Got it Okay, and then I guess some question on that on the 5 billion in deposits how much of that if it's coming from Japanese investors.
I don't have that number with me right now David do you have.
Yeah, Yeah, that's in excess of half a billion.
Okay, and then how I mean, how are you thinking about that in terms of.
Growing right. So there are a couple of avenues. There a one thing you know given the robustness of the Japanese economy today.
We are actively talking to our alliance partners about having a better view of providing consulting and outsourcing services to their clients and trying to hedge the yen a little bit more by having a bigger dollar presence and their portfolio that's number one.
The second thing is that we're looking at certain niche opportunities for example, like captive insurance, Hawaii in Vermont or the two states that have the most progressive captive insurance regulations in the nation and we feel that Japanese companies are really way behind the bar in terms of the self insurance and creating a captive insurance company and that's been a that's not a very good angle for us and we plan to continue pursuing that.
Okay, great. Thanks, and then.
David maybe can you just going back to the rise 2020 expenses I want to make sure I'm.
Thinking about this the right way so in the $36 million that Ted on non interest expense included a million.
I've rise when we look at it in your guidance of two and a half million for the back half let's call. It 1.25.
Spread equally between third and fourth quarter exactly.
Is that 1.25 going to be in addition to the millions and millions of run rate or is it you're spending a million and 10, and then that jumps up 250 give or take in September how should we be thinking about that.
Yeah, Yeah, no it's more the latter so it it's the <unk>.
Quarter of a million increment in the back half.
Perfect. Okay, and then just to clarify Katherine you mentioned that the entertainment and promotions or the one point or two three.
And I know that was very outsized where should that number be running.
Yes and.
And.
That that's bigger than 1 million includes about 800000 in the promotional expense which is.
Non recurring.
It was in connection with exceptional the pathetic.
So if you back out of it where you should expect to see yet other instances, where we are.
Okay. That's great. That's helpful. Okay, and then last thing I'm, the Vice 2020, how should we think about this in terms of a delta.
In terms of changing gears I'm proud of their teaching or deposit growth or changing your fee income.
How does it play through yeah. Thanks, Laurie I think rice 2020 is is basically also a call to action.
For all of our front line bank employees, whether it be a branches or officers. They all have a playbook and starting today that they started going out to the market.
Central Pacific Bank.
This is our 65th year on the state of Hawaii, We've done a lot for the community rise 2020, and especially our main building here will be creating a community area that a lot of our customers and nonprofit organizations can utilize and and our employees believe that this is a tremendous opportunity for us to go out to the market you know remind a lot of our customers about the history and our bank has had with them and ask them in turn to double down on their business with us I. Thank our employees are committed we have an operational system to support that and we're quite.
We're quite excited and looking forward to a you know what it what happens in the weeks and months ahead.
Okay, great. Thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Don Worthington of Raymond James. Please go ahead.
Thank you.
Good morning, everyone.
Good morning, John .
Oh, just a couple of.
Questions in terms of.
Maybe going back to the core deposit.
Campaign.
Can you size.
The success of that in terms of.
What you're able to raise from the the special campaign.
Yeah sure we were really pleased with the results of this compound. So the lift was in that $30 million to $40 million range.
Yeah for us and we've talked about this on previous calls the importance of that that's it these are.
Our relationships with customers that we believe will eventually need other products and services from our organization at this time.
Acquired minimum dollar balance the process as much about the opportunity that list represents as it is about the actual amount.
Okay.
Right.
Okay great.
And then a FHLB advances were up in the quarter was that.
Kind of a temporary funding of the load growth.
Phil deposit growth catches up.
Hey, Dan its David Yeah that that's correct. So as as you saw those loan growth outpaced deposit growth in the quarter. We did we were able to reduce the investment portfolio. Some but the remainder was funded with.
FHLB advances and as you know, we did going back and forth between FHLB advances and public or government Cds and it's really a function of pricey whichever way. It whichever is cheaper is where we'll do the excess funding from.
Okay.
And then were there any loan purchases this quarter.
Now let me take that question Don There was a loan purchase and the 3 million dollar range and it was the follow on what we reported last quarter a proper purchase.
But this is on top of a purchase we made in Q1, okay. So that shows up in the in the mainland loans.
It shows up in mainland consumer that's right.
Yes, Okay, alright, great. Thank you.
Hi, Don.
This concludes our question and answer session I would like to turn the conference.
Back over to Paul Yonah Mena.
For any closing remarks.
Yeah, that's quality on M&A.
Everyone really thank you very much for participating in our earnings call for the second quarter 2019.
We look forward to future opportunities to update you on our progress many thanks.
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The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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