Oct 29, 2014
Executives
David Morimoto - Senior Vice President, Investor Relations John Dean - Chairman and CEO Denis Isono - Executive Vice President and CFO Lance Mizumoto - President and CBO Bill Wilson - Executive Vice President and CRO
Analysts
Jeannette Daroosh - RBC Capital Markets Aaron Deer - Sandler O’Neill Don Worthington - Raymond James Jackie Chimera - KBW
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corporation Third Quarter 2014 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, Senior Vice President, Investor Relations. Please go ahead, sir.
David Morimoto
Thank you, Katy. And thank you all for joining us as we review our financial results for the third quarter of 2014.
Highlights and comments will be provided by John Dean, Chairman and Chief Executive Officer; Lance Mizumoto, President and Chief Banking Officer; and Denis Isono, Executive Vice President and Chief Financial Officer. Also present and available for questions are Catherine Ngo, President and Chief Operating Officer and Bill Wilson, Executive Vice President and Chief Risk Officer.
Our comments on today’s call will reference non-GAAP financial measures. We have included a reconciliation of these non-GAAP financial measures on the presentation’s page of the Investor Relation’s section of our website at centralpacificbank.com.
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 announce our 15th quarter of profitable performance, as we report net income of $8.2 million for the third quarter. The reported third quarter net income was affected by several non-recurring items and Denis Isono will be providing more details during this call.
Core earnings for the quarter remained strong and consistent with our business plan. Loan growth continue to be strong during the quarter, primarily driven by our efforts to expand our client relationships and supported by strong market conditions in Hawaii.
While non-performing assets increased from the last quarter rate, our overall credit risk profile remains stable. We recorded a loan loss provision for credit in the quarter, primarily due to net loan recoveries.
And while total deposits maintained a stable growth rate, core deposits generated significant growth. Our technology infrastructure initiatives have been progressing well.
We completed the outsourcing of our items processing function this past weekend. Earlier this year, we completed the outsourcing of our core systems.
And we continue to make progress in the implementation of our data warehouse and a phase roller of our multiple point of sale offerings designed to improve customer experience and operational efficiencies. We’re also on track with the industry upgrades related to improving security measures on our ATM network and debit card issuance such as Windows 7 platform and EMV card technology.
Our Board of Directors declared a cash dividend of $0.10 per common share, payable on December 2014, which represents the sixth consecutive quarterly dividend. Turning to Hawaii’s economy, key economic drivers remained stable throughout August, modest increases over the previous year.
The upward trend is forecasted to continue for the remainder of 2014, with projected real GDP growth of 2.6% for the year. The year-to-date as of August, the increased visitor arrivals remained basically flat up 0.1% over the same period last year.
Approximately 8.1 million visitor arrivals are expected this year, the increase of 1.2% from 2013. Year-to-date visitor expenditures of $10 million were up by 2.1% compared to the same period last year and are expected to be up by 2.4% for the entire year.
The construction pipeline continues to be robust, primarily in the residential condominium and non-residential markets in Honolulu. As of August, approximately $4 billion in private and public building permits were in place, excluding the $5 billion Honolulu rail transit project.
Construction activity is picking up pace with approximately a 1,000 jobs added in this sector during the month of September and is expected to peak in 2015 or 2016. Overall job growth January to August grew by 2% and the increase in the month of August was 2.7%, compared to the same period last year.
The seasonally adjusted unemployment rate in September reached 4.2% which is the lowest level since July 2008. We remain encouraged by the improving market conditions in Hawaii as we move ahead with our business plans for the year.
At this time, I’d like to ask Denis Isono, our Chief Financial Officer to review the highlights of our third quarter financial performance. Denis?
Denis Isono
Thank you John. For the third quarter of 2014, we reported net income of $8.2 million or $0.23 per diluted share compared to net income of $9.2 million or $0.25 per diluted share reported last quarter.
There were several non-recurring income and expense items impacting our earnings during the quarter. On a normalized basis, our net income was $9.7 million or $0.27 per diluted share.
Net interest income for the quarter was $35.5 million, compared to $35.9 million in the previous quarter. Our net interest margin was 3.30% and 3.35% for the same respective quarters.
The sequential quarter decrease in our net interest margin was primarily due to net recoveries of interest on non-accrual loans of $0.4 million reported last quarter, compared with net reversals of interest on non-accrual loans of $0.1 million reported in current quarter. On a normalized basis, our net interest margin remained unchanged to 3.31% in the second quarter.
Our loan and lease portfolio ended the quarter at $2.87 billion, an increase of $80.6 million from the $2.79 billion reported at the end of the second 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 $1.43 billion.
The taxable equivalent yield on our investment portfolio declined 3 basis points to 2.57% from 2.60% reported for the second quarter. We did not purchase or sell any securities during the quarter.
Non-interest income for the quarter totaled $11.5 million, down from $12.0 million in the previous quarter. The decrease in other operating income from last quarter was due to fluctuations in several line items.
During the quarter, we reported lower net gains on sales of foreclosed assets of $0.4 million, lower equity and earnings of unconsolidated subsidiaries of $0.3 million and unrealized gains on loans held for sale and interest rate loss of $0.1 million compared with $0.4 million last quarter. These decreases were partially offset by higher net gains on sales of residential mortgage loans of $0.5 million and partial recovery of a counterparty loss of financing transaction of $0.6 million.
Non-interest expense for the quarter totaled $35.2 million, up from $32.9 million in the previous quarter. The increase in other operating expense from last quarter was primarily due to higher foreclosed asset expense of $1.4 million and costs related to the consolidation and relocation of our two Waikiki branches of $1.3 million.
We expect the Waikiki branch consolidation will result in -- around $400,000 per year in occupancy cost. Our efficiency ratio for the quarter increased 75% compared to 68.65% in the previous quarter.
Our efficiency ratio in the third quarter of 2014 was impacted by the previously mentioned non-recurring income and expense items during the quarter. When we consider these non-recurring items, our efficiency ratio would have been 73.01% for the quarter.
We continue to work on improving our efficiency ratio with our IT outsourcing and other changes that are expected to be completed during the year. In the third quarter of 2014, we recorded income tax expense of $5.2 million compared to $3.9 million in the previous quarter.
The effective tax rate for the quarter was 38.9%. Our income tax expense and effective tax rate in the third quarter was impacted by the 2013 income tax return adjustment of $0.9 million.
On a normalized basis, our effective tax rate was 32.3% in the current quarter. As of September 30, 2014, our net deferred tax assets totaled $110.1 million.
During the quarter, we reported a credit for the provision for loan and lease losses of $1.7 million compared to a provision of $2.0 million we reported in the previous quarter. The credit to the provision for loan and lease losses was primarily attributable to net loan recoveries of $1 million for the fourth quarter.
Non-performing assets ended the quarter at $45.3 million, an increase of $3.2 million from the $42.1 million reported at the end of last quarter. The net increase was due to -- in addition to non-accrual loans offset by $5.6 billion reductions in non-performing assets.
The reductions include $2.2 million in repayment, $1.5 million in accounts return to accrual status, $1.4 million in net charge-offs and write-down and $0.5 million in sales of foreclosed properties. The allowance for loan and lease losses as a percentage of total loans and leases decreased to 2.88% at September 30, 2014 from 2.99% at June 30, 2014.
Our allowance for loan and lease losses as a percentage of non-performing assets was 182.90% at September 30, 2014 compared with 198.47% at June 30, 2014. Lastly, at September 30, 2014, our capital ratios continued to exceed the levels required to be considered a well capitalized institution for regulatory purposes.
Our Tier 1 risk-based capital, total risk-based capital and leverage capital ratio was 17.19%, 18.46% and 11.87% respectively compared to 17.06%, 18.33% and 11.64% respectively at June 30, 2014. That completes our financial summary.
And now I’d 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. And good morning everyone.
The quarter-over-quarter increase in total loans and leases by $80.6 million or by 2.9% can be attributed to increases of $24.9 million in residential mortgages, $38.2 million in consumer loans, $9.6 million in commercial and industrial loans and $9.4 million in construction and development loans. Offsetting declines in loan balances included $1.2 million in commercial mortgages and $0.4 million in leases.
The average balances of our total loan and lease portfolio increased by $86 million or by 3.1% in the third quarter compared to the previous quarter. The year-over-year increase in total loans of $390.4 million was primarily driven by residential mortgages, consumer loans, and commercial loans.
Core deposits increased significantly over the previous quarter by 82.7 million. Total deposits increased by $45.5 million from the previous quarter, which included a decrease of $41.8 million in time deposits.
We remain focused on strengthening and expanding our customer relationships which has had a positive impact to core deposit growth. We are making good progress in building stronger support systems for our various lines of businesses.
In addition to technology enhancements for information management, security and process improvements, significant steps have been made in employee training and development. As a result, we are confident in our efforts to establish a relationship banking model that we believe will be highly competitive in our marketplace.
Going forward, our customers and a majority of the industry leaders in the business community continue to be optimistic with the market conditions in Hawaii. While growth in our visitor industry is not close to the better year we experienced in 2012, we believe that construction will be more active in 2015.
That completes my summary of our business development activity and I will now turn the call back to John for his closing remarks. John?
John Dean
Thank you, Lance. In summary, we continue to make significant progress with our business plans during the third quarter, both in business development and improving our organization infrastructure.
While we recognize large non-recurring income and expenses during the quarter, our normalized earnings remain on track. We still have work to do in improving our operational efficiencies to process improvements and technology solutions.
And we’re pleased with the direction and pace of our progress. We remain optimistic on future opportunities for quality growth in our marketplace.
I’d like to take this opportunity to thank our shareholders and customers for their continued support and confidence as we work diligently toward achieving our targeted milestones. At this time, we’ll be happy to address any questions you may have.
Thank you.
Operator
We will now begin the question-and-answer session. (Operator Instructions).
The first question comes from Joe Morford from RBC Capital Markets. Please go ahead.
Jeannette Daroosh - RBC Capital Markets
Good morning everybody, this is actually Jeannette Daroosh filling in for Joe.
John Dean
It didn’t sound like Joe, Jeannette.
Jeannette Daroosh - RBC Capital Markets
Well, thank you.
John Dean
You’re welcome.
Jeannette Daroosh - RBC Capital Markets
Just wanted to get a little bit better understanding on the margin. It sounds like the underlying margin held stable quarter-over-quarter and so it would seem that that was supported by the positive mix shift that we saw in earning asset base.
That leads us to wonder what is the optimal breakdown between loans and investments that you might be targeting or just to say how much more of a reduction in the investments portfolio might we see going forward?
John Dean
Yes, I’ll tell Denis, our Chief Financial Officer to take the question, Jeannette.
Denis Isono
So, we’re looking at, I mean it’s longer term balance and investment security is about 20% 8s where we are heading for the longer term. So as deposits grow or as deposits change and loans grow that kind of balances in.
John Dean
Does that answer the question Jeannette?
Jeannette Daroosh - RBC Capital Markets
It does. And then I guess as a follow up to that.
The loan yields and the securities yields also continued to be under pressure in the quarter. So, I was just wondering what are the new loan yields coming on out and what kind of the spreads between the new yields and the existing portfolio yields?
John Dean
Yes, I’m going to turn to Lance, but I would tell you it’s challenging right now. Lance Mizumoto, our Chief Banking Officer.
Jeannette Daroosh - RBC Capital Markets
Okay.
Lance Mizumoto
Good morning, this is Lance. I think what we’re seeing in the marketplace is continued competitive pressure on the higher quality loans.
And while we’re seeing I think our officers continue to call on our customers that new prospects, what we’re seeing again is maybe our competitors providing provide more competitive pricing or lower pricing than we anticipated. I think our officers have done a good job however of maintaining the growth and a healthy pipeline of business.
John Dean
And I can just add to that. So, Jeannette, as you held during the quarter, the market moved against us if I may in terms of rates and that’s impacting, just started impacting all banks throughout the country.
And there is not much more we can do on the deposit side. I think our cost is 7 basis points, I’m guessing here now.
Denis Isono
9.
John Dean
9, that’s close. But 9 basis points where we continue to get pressure on the loan and investment yields.
Jeannette Daroosh - RBC Capital Markets
Okay. Well, thank you very much.
That’s very helpful. And I’ll step back now.
John Dean
Okay. Thank you, Jeannette.
Jeannette Daroosh - RBC Capital Markets
You’re welcome.
Operator
The next question is from Aaron Deer of Sandler O’Neill. Please go ahead.
Aaron Deer - Sandler O’Neill
Hi, good morning everyone.
John Dean
Good morning, Aaron.
Aaron Deer - Sandler O’Neill
Just want to follow-up, Lance you made the comment that your producers still have a healthy pipeline out there. I was wondering just the growth in the quarter, the loan growth that is with -- was pretty solid, but it seems more weighted towards the consumer side.
Can you give us a sense of as how the pipeline is shaping up in the commercial side, if we can expect more growth in that direct and over the coming year?
Lance Mizumoto
Yes. Hi Aaron, this is Lance.
I think what we saw this past year was lower than anticipated construction activity. And we had again anticipated maybe more construction financing, flooding is actually taking place.
We’re encouraged that going into 2015 with increased construction activity that the fundings, more fundings will start to materialize. So on the commercial real estate side, I think construction activity is picking up or will pick up in 2015.
And I think we’re also seeing or encouraged by demand of income property of commercial mortgage lending in our pipeline. So, I don’t know if that provide enough color.
John Dean
Aaron, does that answered question?
Aaron Deer - Sandler O’Neill
It does, it does. And then obviously got some -- had some nice product recoveries.
Just curious about the NPA pick up in the quarter, I expected just kind of a one-off thing with general improvement. But Bill, maybe you can comment on that and then give us kind of where the overall classified and watch list loans were at period end relative to the prior quarter?
Bill Wilson
Good morning, this is Bill. Yes, I think it’s what we saw in the quarter was probably just normal activity ins and outs and then unfortunately in this particular quarter more ins and outs a little bit of tick up.
The portfolio ended pretty good. Criticized loans ended up at just under $94 million in total, which is down from a $103 million prior quarter.
So, we continue to move in the right direction.
John Dean
And just to Bill -- John here, Aaron. In terms of -- do you see any losses and credits moving into the NPA bucket?
Bill Wilson
No so far what we’ve seen in particular this last quarter, the credits moving in. We are well collateralized and don’t anticipate any loss in principle with what we’ve seen coming in.
Aaron Deer - Sandler O’Neill
Okay. That’s great.
I’ll step back.
John Dean
Thank you, Aaron.
Operator
(Operator Instructions). Our next question comes from Don Worthington from Raymond James.
Please go ahead.
Don Worthington - Raymond James
Hey good morning everyone.
John Dean
Good morning, Don.
Lance Mizumoto
Good morning Don.
Don Worthington - Raymond James
I’ve noticed in the quarter it looked like there was a pay down of $29 million in short-term borrowings, what was that comprised of?
David Morimoto
Hey Don, this is David Morimoto. That was just overnight funding.
Basically as we were able to reduce the investment portfolio and we have net deposit growth that covered the loan growth and we paid down the overnight borrowings.
Don Worthington - Raymond James
Okay. And then I think, Denis, you mentioned no purchases or sales of securities.
So, the reduction on a linked quarter basis was just normal run-off out of the portfolio. Is that correct?
Denis Isono
Yes, that’s correct Don.
Don Worthington - Raymond James
Okay. And then I guess my last question just any comments on capital deployment as it pertains to say share repurchases going forward?
John Dean
We just don’t comment on anything with regard to the stock repurchase strategy. We’re continuing to recognize relatively high capital levels and looking to get different alternatives as we go forward.
And I’d probably leave it that’s the best, Don.
Don Worthington - Raymond James
Okay. Thanks John.
That’s all I have.
John Dean
Thank you Don.
Operator
The next question comes from Jackie Chimera from KBW. Please go ahead.
Jackie Chimera - KBW
Hi, good morning everyone.
John Dean
Good morning Jackie.
Denis Isono
Good morning Jackie.
Jackie Chimera - KBW
Just to clarify, there weren’t any repurchases in the third quarter, is that correct?
John Dean
That’s correct Jackie.
Jackie Chimera - KBW
Okay. And then I was wondering, this might be a Denis question, what buckets did the $1.3 million expense associated with closing the branch get into just because there wasn’t -- it wasn’t a clear larger movement in any one bucket or occupancy or something like that?
Denis Isono
It’s in the other category Jackie.
Jackie Chimera - KBW
Okay. All of it was?
Denis Isono
Yes, all of it was.
Jackie Chimera - KBW
Okay. And then since you had such great consumer growth in the quarter, where are you seeing that coming from primarily?
John Dean
Turning to Lance, if we could, Jackie. Lance?
Lance Mizumoto
Good morning Jackie, this is Lance. We saw -- we had a pre-approved consumer term loan program we just completed and we saw some pretty good results there locally.
I think the larger increase took place from an opportunity we saw in a student loan portfolio that we purchased. So those two comprised the bulk of the increase in our consumer loan portfolio for the quarter.
Jackie Chimera - KBW
Okay. So was just success in items that you’ve had success within the past as well?
Lance Mizumoto
That’s correct.
Jackie Chimera - KBW
Okay. And then just lastly, you had a really nice bump up in your mortgage banking income in the quarter.
Was that higher production or expanding margins, what drove that?
Lance Mizumoto
I think, this is Lance again. I think we had more activity on our mortgage origination.
So again, we’re encouraged by the marketplace. As you can probably tell there was overall reductions in mortgage productions in the marketplace but we held of our own.
Jackie Chimera - KBW
Okay. So little bit of taking market share took place in the quarter?
Lance Mizumoto
Great. That was all I had.
Thank you all very much.
John Dean
Thank you Jackie.
Operator
This concludes our question and answer session, I would like to turn the conference back over to John Dean for final remarks.
John Dean
Thank you. Just thank you very much everyone for participating in our earnings call for the third quarter 2014.
We look forward to future opportunities to update you on our progress. Have a good day.
Operator
The conference has now concluded. Thank you for attending today’s presentation.
You may now disconnect.