Apr 24, 2014
Executives
David Morimoto – SVP, IR John Dean – President and CEO Denis Isono – EVP and CFO Lance Mizumoto – EVP and Chief Banking Officer Bill Wilson – EVP and Chief Credit Officer
Analysts
Joe Morford – RBC Capital Markets Aaron Deer – Sandler O’Neill Jackie Chimera – KBW Don Worthington – Raymond James
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp First Quarter 2014 Conference Call.
During today’s presentation, all parties will be a 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.centralpacificbank.com. I’d like to turn the call over to Mr.
David Morimoto, Senior Vice President, Investor Relations. Sir, please go ahead.
David Morimoto
Thank you, Amy, and thank you all for joining us as we review our financial results for the first quarter of 2014. On today’s call are John Dean, President and Chief Executive Officer; Denis Isono, Executive Vice President and Chief Financial Officer; Lance Mizumoto, Executive Vice President and Chief Banking Officer; and Bill Wilson, Executive Vice President and Chief Credit and Operations 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’ll turn the call over to John.
John Dean
Thank you David and good morning everyone. We are pleased to report another solid quarter financial performance to begin the New Year with net income of $9.8 million.
Our continued efforts to strengthen client relationships and to streamline operations have resulted in consistent earnings and improved operational efficiencies. With the support of improving market conditions in in Hawaii, our balance sheet growth has been a solid with 18.6% increase in total loans and 5.9 % increase in total deposits, compared to March 31 of last year.
In the first quarter of 2014, net increase margin continues to improve due to loan growth, increased yields in our securities portfolio and a continued shift in assets from securities investments to higher yielding loans. Our credit risk profile remains stable and we recorded a credit to our provision for loan losses for the 13th consecutive quarter.
Non-performing assets remained at 1% of total assets. Since the recapitalization of our company three years ago, our earnings’ consistency and a significant progress made in improving our asset quality have allowed us to achieve our overall comp targets ahead of schedule.
For this reason, we elected to repurchase a $125 million of our common stock and completed the transaction a few weeks ago. On March 28, we purchased 3.4 million shares through a modified bench auction tender offer for $20.20 per share.
This transaction is reflected in our first quarter financial results. On April 7, we purchased 2.8 million shares from our two largest shareholders through private purchase agreements at the same price per share set the tender offer.
This transaction will be reflected in our second quarter financial results, by total of $6.2 million shares or approximately 15% of our total outstanding shares was repurchased for a total of $125 million. We’re also pleased to announce that our Board of Directors declared a dividend of $0.08 per share payable on June 16 to shareholders of record as of May 30.
Turning to Hawaii’s economy, the current pipeline for construction progress – projects in the State is encouraging. As of the end of 2013, there were $2.7 billion in approved private building permits and $1.2 billion in public contracts awarded excluding the Honolulu rapid transit project for a total of 3.9 billion in building permits.
The total commitment to build in 2014 are forecasted to reach $4.7 billion. Visitor arrivals increased by 2.6% in 2013 and is forecasted to increase by 1.7% this year.
Visitor expenditures increased by 2% last year and is projected to increase by 3.4% this year. Jobs and real person income increased by 1.3% and 2.2% respectfully in 2013 and are projected to increase by 1.8% and 2.8% in 2014.
Hawaii’s seasonally adjusted unemployment rate in March was 4.5%, the lowest levels since August 2008, compared to 6.7% on the mainland. With robust construction activity and stable visitor arrivals, we’re encouraged by the improving market conditions in Hawaii as we execute our business plans for 2014.
At this time, I would like to ask Denis Isono, our Chief Financial Officer to review the highlights of our first quarter financial performance. Denis?
Denis Isono
Thank you John. For the first quarter of 2014, we recorded net income of $9.8 million or $0.23 per diluted share compared to net income of $10.3 million or $0.24 per diluted share reported last quarter.
Net interest income for the quarter was $35.8 million, compared to $35.5 million in the previous quarter. Our net interest income was 3.31% and 3.29% for the same respective quarters.
The sequential quarter increase in our net interest income continues to be driven by our increasing interest earning assets which grew by 41.3 million. The growth was reflected in average loans which increased by $112.3 million, offset by a decrease in our average investment portfolio of $42.8 million.
The sequential quarter improvement in net interest margin was also attributable to an increase in the yield of the investment securities portfolio. Our loan and lease portfolio ended the quarter at $2.70 billion, an increase of almost $67 million from $2.63 billion at the end of the fourth quarter.
We continue to be encouraged by our ability to meaningfully grow our loan and lease portfolio. Lance Mizumoto will provide more insight into the loan portfolio later in this call.
Our investment securities portfolio ended the quarter at $1.66 billion. The taxable equivalent yield on our investment portfolio improved to 2.62% from 2.43% reported for the fourth quarter.
The increase in yield was primarily driven by the continued slowing of premium amortization on our mortgage backed securities and yields from the non-agency CMBS and RMBS, corporate bonds and agency CMBS that we’re purchased in the prior quarter as part of the bond swap strategy. Non-interest income for the quarter totaled $10.1 million, down from $12.2 million in the previous quarter.
The decrease was primarily attributable to one-time items recorded in the prior quarter including a $1 million gain on the extinguishment of $10 million in trust preferred debt and $0.5 million gain in sale of investment securities. Additionally, gains and fails of residential mortgage loans continues to slow and decrease by $0.3 billion from the prior quarter to $1.2 million.
Non-interest expense for the quarter totaled $31.9 million, down from $35.3 million in the previous quarter. The sequential quarter decrease was primarily attributable to lower salaries and employee benefits of $2.9 million.
Lower charitable contributions over $0.4 million. The decrease in salary and benefits was primarily due to severance, early retirement and retention benefits of $1.8 million recognized in the prior quarter, compared to $400,000 in the current quarter.
In the second quarter, we expect a similar amount of severance, early retirement and retention benefits. Our efficiency ratio for the quarter, which is no longer adjusted for the non-recurring items decreased at 69.5% compared to 73.99% in the previous quarter.
Our cost improvement initiatives from 2013 are beginning to have an effect in the efficiency ratio and continue to work on further improving our efficiency ratio at our I.T outsourcing, another changes that are expected to be completed during the year. In the first quarter of 2014, we recorded income tax expense of $5.5 million, compared to $3.4 million in the previous quarter.
With the reversal of the reserve against the DTA completed last year, tax expense would no longer be influenced by the reversals. Our effective tax rate of $0.36 – 36% for the quarter.
As of March 31, 2014 our net deferred tax asset totaled $125.3 million. We also continue to make progress in improving our credit risk profile.
During the quarter, we recorded credit provision for loan and lease loss of $1.3 million, same amount reported in the previous quarter. Non-performing assets ended the quarter at $54.0 million, an increase of $7.3 million from the $46.8 million reported at the end of last year.
The increase is primarily due to the addition of two main and commercial loans to a single borrower totaling $13.6 million. Although classified as non-accrual, we believe the loans were under writs and well and loss exposure is limited.
The allowance for loan and lease losses as a percentage of total loans and leases decreased to 3.08% in March 31, 2014 from 3.19% at December 31, 2013. Our allowance for loan and lease losses as a percentage of non-performing assets grew 153.87% of March 31, 2014 compared to 179.29% in yearend.
Lastly, at March 31, 2014, our capital ratios continue to exceed levels required to be considered well capitalized institution for regulatory purposes. Our Tier 1 risk-based capital, total risk-based capital and leverage capital ratios were 18.63%, 19.90% and 12.62% respectively, compared to 20.30%, 21.57% and 13.68% respectively at December 31, 2013.
The decline in our capital levels from prior quarter has primarily resulted in repurchase of our common stock in the tender offer [indiscernible] went up. That completes our financial summary and I now like to turn the call over to Lance Mizumoto, who will provide additional background related to our banking activity.
Lance?
Lance Mizumoto
Thank you Denis. The quarter-over-quarter increase in total loans and leases by 66.9 million was primarily driven by an increase of $43.5 million in residential mortgages, $37.5 million in commercial loans and $11 million in [indiscernible] construction loans, offsetting declines and loan balances included $19.2 million in commercial real estate loans, $5.1 million in consumer loans and $1 million in leases.
The average balance of our total loans and leases increased by $112.3 million in the first quarter compared to the previous quarter. The year-over-year increase in total loans with $422.9 million was primarily driven by commercial loans, residential mortgages and consumer loans.
Our continued focus on strengthening our customer relationships has resulted in the growth of – in loan balances as well as an increase of $81.4 million in core deposit balances from the previous quarter. We are encouraged by the improving market conditions in Hawaii as mentioned by John particularly in the robust construction commitments, increasing supply of housing being placed in the market and a growing optimism within our local business community.
We also look forward to the roll out of several technology enhancements this year that will provide us with more opportunities to deliver better experiences to our customers. Going forward, we are confident in being able to continue expanding our customer base and building our loan portfolio with quality assets.
That completes my summary on our business development activity. I will now turn the call back to John for his closing remarks.
John?
John Dean
Thank you Lance. Through our total team effort, we’ve made significant progress throughout 2013 and bring that positive momentum into this year.
In summary, we still have work to do particularly in the implementation phase of our key strategic initiatives that are designed to support relationship banking model. We’re moving quickly and diligently and I believe we’re on the right track to building a high performing bank over the longer term.
I’d like to take this opportunity to thank our shareholders and customers for their continued support and confidence as we steadily progress and attain the milestones of our business plan. At this time, we’ll be happy to address any questions you may have.
Operator
Thank you. We will now begin the question and answer session.
(Operator instructions) At this time we will pause momentarily to assemble our roster. Our first question is from Joe Morford – Morford, I apologize with RBC Capital Markets.
Joe Morford – RBC Capital Markets
Thanks, good morning guys. I guess, first question is for Lance, do you think this kind of 10% annualized loan growth seen in the quarter is a good run rate for the full year and would you suspect, you know, less reliance this year on participations and national credits and other small repurchases?
Lance Mizumoto
Yes, good morning Joe. You know, we expect continued strong growth in our loan portfolio going forward, that’s partly attributable to I think the continued strengthening of the economy of Hawaii and the fact that we’ve deepened our relationships with our current customers and new prospects.
So, I think our loan demand will continue to be strong whether that’s double digits or not, I think we’ve come to think cautiously optimistic about our prospects going forward. In terms of our reliance on shared national credit, we’ve already seen less reliance on that and much more growth in our local customer base.
So I think going forward again, we’ll rely less on the syndicated market as well as some Mainland purchases.
Joe Morford – RBC Capital Markets
Thank you. I guess a follow up question be, John, with the tender offers now complete, the capital level are still relatively robust and well accessed to the requirements and I’m just curious about your current options for further deployment and beyond supporting organic growth, just some possibility of you know, further dividend increases or other share buyback activity or other options.
Thanks.
John Dean
Maybe similar Joe to what we discussed here in the past and you know, yearend, a base garnering and what we’ve dividend about, we’ll have an opportunity there to decide if we would want to do another stock repurchase or cash – additional cash dividends to loosen [ph] considerations that are available to us. Going forward and probably not through this year maybe next year, managing capital levels and where we’re at, we’d always look at it and we are still relatively high but a lot closer to a well-capitalized bank perhaps versus the very well-capitalized bank a few months ago.
I mean, we still have the troughs as another possibility so we consider and continue to look at those. I think right now the focus for this year was just to execute, we’ve got the A-10 dividend, we can look at that too, the – another alternative towards yearend.
But probably through this year, I think we want to execute on the base we have.
Joe Morford – RBC Capital Markets
Okay, that’s helpful. Thanks so much.
Operator
Our next question is from Aaron Deer with Sandler O’Neill Partners, go ahead.
Aaron Deer – Sandler O’Neill
Hi, good morning everyone.
John Dean
Good morning.
Aaron Deer – Sandler O’Neill
The – one of the real highlights of the quarter was the big drop in your operating cost and I know in recent quarters you guys have kind of guided toward a 34 million to 36 million in quarterly expense or you have just given a lot of the initiatives that you have going on. Is this lower rate now?
Are we down to something that’s more sustainable or is there still some big expenses beyond the modest amount of retention bonuses that was discussed earlier?
Denis Isono
Aaron, this is Denis. The – what we’re looking at is actually sitting down a little bit, we’re looking at our rate in between 31 million and 33 million for the quarter going forward.
But we’ll see some impact of all the initiatives that we’re pursuing and so we’re seeing modest improvement in that number because of that.
Aaron Deer – Sandler O’Neill
Sure. Okay, and then the – you continue to have to remix your [indiscernible] assets with more loans relative to the securities and obviously that’s help to benefit the net interest margin.
I was curious, if –given the positive growth outlook that you have for the loan book and where finding levels stand out, can we expect to see some further additional improvement in the margin going forward?
Denis Isono
Yes, we expect that margins will improve continually, so pulling into margin at a rate between 330 and 340 per quarter going forward.
Aaron Deer – Sandler O’Neill
Okay, and then just lastly on the single family mortgages added during the quarter, can you talk about what type of products that is? Is that an arm product or is that a variety of products that – products that incurs [ph]?
Lance Mizumoto
Aaron, this is Lance. We’ll continue to see a – what we call a jumbo loans being over the standard confirming sizes going into the portfolio.
Now there’s been quite a demand and as you know housing prices in Hawaii are quite high, so then loan amounts are correspondently as high.
Aaron Deer – Sandler O’Neill
Sure, either it’s typically five or one, seven one arms [ph], 10-1 for what kind of structure that’s…
Lance Mizumoto
Well, we’re seeing loans in the five to seven year type of adjustable range.
Aaron Deer – Sandler O’Neill
All right, great. Thanks for taking my question.
Lance Mizumoto
Thank you.
Operator
(Operator Instructions) Our next question is from Jackie Chimera with KBW, please go ahead.
Jackie Chimera – KBW
Hi, good morning everyone.
John Dean
Good morning Jackie.
Jackie Chimera – KBW
Denis, is 36% a good run rate going forward for your tax rate?
Denis Isono
Yes, we think it’s going to fall within 35% or 37% effective rate going forward.
Jackie Chimera – KBW
Okay, I’m just kind of – how many new [indiscernible] you’re adding and other things.
Denis Isono
That’s right.
Jackie Chimera – KBW
Okay. And then in past quarters, you talked about taking a look at your reserves methodology, has that been taken care of and that’s impacted in the first quarter as a reserve or is that something that’s still on the table going forward?
John Dean
Jackie, John here; and we have Bill Wilson our Chief Credit Officer with us, so I’m going to turn it over to Bill.
Bill Wilson
Good morning Jackie, it’s Bill. We did make some enhancements of methodology effective first quarter, primarily it was to extend our look back period for real estate secured loans from two years to six years and we’ll grow into that six years, it’s going to take us a while, we kind of used 2010 as a cut-off date for our historical data.
Jackie Chimera – KBW
Okay. So we could see small reverse [indiscernible] continue as credit continues to improve as we move forward?
John Dean
It is based continue as they did in the first quarter, I think directionally that would be correct.
Jackie Chimera – KBW
Okay, and then the Mainland relationship that was referenced was that already in criticized assets?
John Dean
No, that was a criticized asset, we had – it was criticized – so I take that back – before the quarter we had released that to a special mentioned status, and it went on accrual and the end of the first quarter. The company’s executing on its remediation plan, we expect that it should [indiscernible] later this year.
Jackie Chimera – KBW
Would you say it’s more of a one-off?
John Dean
Definitely.
Jackie Chimera – KBW
Okay. And then, just lastly, a little bit more clarification on the expenses, now that we’re done to that 31-33 run rate instead of 34-36, is that because initiatives are costing less than you originally thought or have you – are you more rapidly realizing the benefit from them?
Denis Isono
I think it’s the latter, we think the benefits of that and the reduction enforce on the ERI, early retirement program we put forth, we’re seeing the benefits that going forward.
Jackie Chimera – KBW
Okay. So have people just retired a little earlier than you were already anticipating and that’s driving comp lower because of this URFTE [ph]?
Denis Isono
Yes.
Jackie Chimera – KBW
Okay, great, thank you very much.
John Dean
Thank you Jackie.
Operator
Our next question sis from Don Worthington with Raymond James, go ahead please.
Don Worthington – Raymond James
Hi, good morning.
John Dean
Good morning Don.
Don Worthington – Raymond James
I noticed in the quarter, short term borrowings were up about 94 million, it looked like not just a timing issue between the level of loan demand and in the deposits and then would we expect to see those borrowings kind of work down as you generate more core deposits?
Denis Isono
Yes, that’s [indiscernible] materializes, it’s really a timing issue.
Don Worthington – Raymond James
Are these primarily federal home loan bank advances?
Denis Isono
Yes, they are
Don Worthington – Raymond James
Okay. And then on the mortgage banking revenue, has that kind of hit a trough or are you expecting any further declines and the gain on sale?
Lance Mizumoto
We probably continue to see some declines in the gain on sale, mortgage volume overall I think has been down compared to last year. So we probably anticipate a corresponding decline in the gain of sale.
Don Worthington – Raymond James
Okay, thank you.
John Dean
Thank you Don.
Operator
This concludes our question and answer session, I would like to turn the conference back over to John Dean for any closing remarks.
John Dean
Just thank you very much for participating in our earning calls for the first quarter this year; we look forward to future opportunity to update you on our progress.
Operator
The conference has now concluded, thank you for attending today’s presentation and please disconnect your lines.