Jan 29, 2015
Executives
David S. Morimoto - Treasurer, Senior VP & Head-Investor Relations John C.
Dean - Chairman and Chief Executive Officer Lance A. Mizumoto - President and Chief Banking Officer Catherine Ngo - President and Chief Operating Officer Denis K.
Isono - Executive Vice President and Chief Financial Officer Raymond W. Wilson - Executive Vice President and Chief Risk Officer
Analysts
Joe Morford - RBC Capital Markets Andrew Liesch - Keefe, Bruyette & Woods Donald A. Worthington - Raymond James & Associates
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp.
Fourth 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 S. Morimoto
Thank you, Laura, and thank you all for joining us as we review our financial results for the fourth quarter of 2014. Highlights and comments will be provided by John Dean, Chairman and Chief Executive Officer; Lance Mizumoto, President and Chief Banking Officer; Catherine Ngo, President and Chief Operating Officer: and Denis Isono, Executive Vice President and Chief Financial Officer, also present and available for questions are and Bill Wilson, Executive Vice President and Chief Risk 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. Before I turn over the call to John, let me share that John has been fighting a cold.
While he is getting better his voice has not fully returned. As a result, he will open the call but will rely on the team to handle the majority of today's conference call.
John.
John C. Dean
Thanks, David, and sorry everyone. I've moved to I guess soprano from what I used to be earlier in the week.
I just we’ve had - we think we've had a solid quarter. We believe we have had a very solid year.
If you look, we have had excellent loan growth, deposit growth; NIM has been stable overall in the industry as you know it has been under pressure. And I think last week we continued to see improvement in our asset quality.
All of the above have allowed us to basically increase our dividend by another $0.02 and in addition to continue that repurchase program. I want to congratulate all our people.
The team has done I think a great job in the results we have been able to put on the board for last year. I am going to turn my comments over to Catherine Ngo who going to I guess read them as I wrote them and I hope Catherine and Lance both will help out as I step back and listen.
Catherine
Catherine Ngo
Good morning, everyone. We are pleased to report on our Company's solid financial performance for another quarter as well as for the year 2014.
Net to income in the fourth quarter was $13.3 million and $14.5 million for 2014. Denis Isono will be providing more details later in this call.
Loan and deposit growth continued to be strong during the quarter primarily driven by our efforts to expand customer relationships supported by the improving economic and market conditions in Hawaii. In addition to loan growth during the year, we realized a significant increase in core deposit year-over-year which contributed to a stable net interest margin throughout 2014 despite industry trends towards margin compression.
Our credit risk profile continued to improve resulting in a credit to loan-loss provision in the fourth quarter. Meaningful progress continues to be made in enhancing our technology platform and for information management capability and online and mobile banking functions to meet the growing demands of our customers.
Operational process improvements were also on track with our business plan and have contributed to an improved efficiency ratio for 2014. We have also successfully executed our 2014 capital fund to return excess capital to our shareholders through stock repurchases and cash dividends.
Approximately 14.7% of our Company's outstanding common shares were repurchased via a modified Dutch auction and private transactions by April 2014. Another 2% of outstanding shares were repurchased in the open market by the end of last year.
In September 2014, our Board of Directors increased the Company's quarterly cash dividend by 25% to $0.10 per common share from $0.08 and today announced another increase by 20% to $0.12 per share payable in March of this year. Turning to Hawaii’s economy, positive trends continued throughout the year as reflected in the key economic drivers for Hawaii.
As of November 2014, year-to-date visitor arrivals by air increased by 1.5% over the same period in 2013. Visitor expenditures were up by 2.4% to $13.3 billion for the same period.
Construction activity continued to ramp up and is projected to peak in 2015 or 2016 as the value of private building permits have increased by 22% year-to-date as of November 2014 compared to the same period a year ago. The Hawaii labor market continued to improve with an increase in nonagricultural jobs by 1.2% year-to-date as of November 2014.
The unemployment rate in November and December of last year was at 4.0%, the lowest since May 2008. With the significant progress we have made in the past year and the improving economic and market conditions in Hawaii, we are optimistic in achieving our targets set in our 2015 business plan.
At this time I’d like to ask Denis Isono, our Chief Financial Officer, to review the highlights of our fourth-quarter and 2014 financial performance. Denis?
Denis K. Isono
Thank you Catherine. For the fourth quarter of 2014, we reported net income of $13.3 million, or $0.37 per diluted share, compared with net income of $8.2 million, or $0.23 per diluted share reported last quarter.
For 2014, year we reported net income of $40.5 million, or $1.07 per diluted share. Net interest income for the quarter increased to $36.2 million from $35.5 million in the previous quarter.
Our net interest margin also improved to 3.3% and 3.30% for the same respective quarters. The sequential quarter increase in our net interest income and net interest margin was primarily due to $65.3 million increase in average loans and leases.
Our loan and lease portfolio ended the quarter at $2.93 billion, an increase of $57.4 million from the end of the third quarter. We continue to be encouraged by our ability to consistently 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 $1.47 billion.
The taxable equivalent yield on our investment portfolio increased 7 basis points to 2.64% from 2.57% reported for the third quarter. During the fourth quarter we chose to reinvest investment cash flow and grow the portfolio slightly to support net interest income.
Non-interest income for the quarter totaled $10.2 million, down from $11.5 million in the previous quarter. The decrease in other operating income from last quarter was primarily due to the partial recovery of a counterparty loss on a financing transaction of $0.6 million reported in the third quarter and lower net gains on sales of residential mortgage loans of $0.3 million reported in the current quarter.
Non-interest expense for the quarter totaled $32.7 million, down from $35.2 million in the previous quarter. The decrease in operating expense was primarily due to $1.3 million and costs associated to the consolidation and relocation of our two Waikiki branches that were reported in the prior quarter and lower foreclosed asset expense of $1.1 million.
As we previously communicated, we expect the Waikiki branch consolidation to result in an annual savings of approximately 400,000 in occupancy cost. The decrease in other operating expense was partially offset by higher salaries and employee benefits of $0.9 million which included additional accruals for restricted stock awards and incentive compensation totaling $1.3 million during the current quarter.
Our efficiency ratio for the quarter decreased 70.59% compared with 75% in the previous quarter. As mentioned in our last earnings calls, our efficiency ratio for the third quarter was significantly impacted by the Waikiki branch consolidation and relocation costs as well as significant foreclosed asset expense which we recognized in the previous quarter.
In the fourth quarter of 2014, we recorded income tax expense of $5.8 million compared to $5.2 million in the previous quarter. The effective tax rate for the quarter was 30.3%.
Our income tax expense and effective tax rate in the fourth quarter was impacted by solar tax credits of $0.4 million and a credit true up adjustment of our net deferred tax assets of $0.5 million. As of December 31, 2014, our net deferred tax assets totaled $104.4 million.
During the quarter, we recorded credit provisions from loan and lease losses of $5.4 million compared with a credit of $1.7 million recorded in the previous quarter. The credit for the provision for loan and lease losses was primarily attributable to the improving trends in credit quality during the quarter.
Nonperforming assets at the end of the quarter ended the quarter at $42.0 million, a decrease of $3.3 million from the $45.3 million reported at the end of last quarter. The net decrease was due to $2.8 million in charge-offs and write-downs $1.4 million in sales of foreclosed properties, $0.8 million repayments and $0.2 million in accounts returned to accrual status.
These reductions were offset by the addition of $2 million in non-approved loans. The allowance for loan and lease losses as a percentage of total loans and leases decreased 2.53% at December 31, 2014 from $2.88% in September 30, 2014.
Our allowance for loans and lease losses as a percentage of nonperforming assets was 176.14% at December 31, 2014 compared with 182.90% in September 30. During the fourth quarter, we repurchased 676,354 shares of common stock at a total cost of $13 million under our share repurchase program.
The average cost was $19.28 per share repurchase. In January 2015, our Board of Directors also increased the share repurchase authorization by $25 million to $55 million.
Our remaining buyback authority under this share repurchase program is approximately $129 million. Lastly at December 31, 2014, our capital ratios continued to exceed the levels required to be considered a well-capitalized institution for regulatory purposes.
Our Tier 1 risk weighted capital, total risk weighted capital and leveraged capital ratios were 16.97%, 18.24% and 12.03% respectively, compared with 17.19%, 18.46% and 11.87% respectively at September 30, 2014. That completes our financial summary and I would now like to turn the call over to Lance Mizumoto who will provide additional background related to our banking activity.
Lance.
Lance A. Mizumoto
Thank you, Denis, and good morning, everyone. The continued strong growth in loans and deposits in 2014 could be attributed to our focus on building client relationships and the positive momentum behind construction activity and job growth in Hawaii.
The year-over-year increase in total loans and leases by $302 million or by 11.5% was distributed across our lines of business and consistent with our 2014 business plan. Increases in loan balances comprised of $146 million in residential mortgages, $65 million in commercial and industrial loans, $55 million in consumer loans and $39 million in construction and development loans.
The year-over-year increase in total deposits of $174 million included a significant shift towards core deposits. Non-interest demand deposits increased by $143 million or by 16.1% and interest-bearing demand increased by $60 million or by 8.2%.
Savings and money market balances increased by $36 million, while time deposit balances decreased $64 million. We continue to remain focused on strengthening and expanding our customer relationships and made meaningful progress in improving our infrastructure to support our relationship banking model.
Information management and human resource development are key areas that will continue to be enhanced. As we move forward in 2015, we remain optimistic for continued growth quality business development with the improving economic and market conditions in Hawaii.
In summary, we remain on track with our annual business plan, capital plan and longer-term strategic initiatives. While there is more work to be done, we are pleased with the significant progress made during the year and are committed to achieving our 2015 goals to further strengthen our relationship banking model and streamline operational efficiencies.
On behalf of John Dean and our CPB team, I would like to take this opportunity to thank our shareholders and customers for their continued support and confidence as we work diligently towards achieving our targeted milestones. At this time we will be happy to address any questions you have.
Thank you.
Operator
[Operator Instructions] Our first question today will come from Joe Morford of RBC Capital Markets.
Joe Morford
Thanks. Good morning, everyone.
John C. Dean
Good morning, Joe.
Joe Morford
John, sorry about your cold there. I guess first question just on the compensation expense, I understand this quarter had a little over $1 million of accruals for restricted stock and incentives and all.
So is it fair to say a run rate going forward is closer in the $16 million to $16.5 million range for the first quarter and just how should we think about growth and compensation over the year ahead?
Lance A. Mizumoto
Hey, Joe this is Lance Mizumoto. I'm going to turn that question over to Denis Isono, our CFO.
Denis K. Isono
Joe, that accrual is kind of an unusual one, it is not a normal one. We are achieving a target greater than we expected so we should expect it to run around between $16 million and $18 million I think.
Closer to $16 million.
Joe Morford
Closer to $16 million and it sounds like minimal growth off of that through the year or --?
Denis K. Isono
Modest growth I guess across the year.
Joe Morford
Okay. The other question probably more for you, Lance, would just be how should we think about the mix of loan growth in the year ahead?
Kind of what portfolios do you really see driving most of the increases?
Lance A. Mizumoto
Joe, I think we are still going to continue to see growth in the residential mortgage side. We will see continued activity in the construction side as you can imagine.
There is still a lot of construction activity taking place in 2015, probably more so than we anticipated in 2014. Then we will still see some growth also on the consumer side.
Our commercial real estate portfolio, while our production has been strong, it has been masked in the past by some reductions in some commercial real estate loans that have paid down on the Mainland.
Joe Morford
Okay, that is helpful. Thanks very much, guys.
John C. Dean
Great, thank you.
Operator
And our next question come from Aaron Deer of Sandler O’Neill.
Andrew Liesch
Hi, guys. This is actually Andrew Liesch on for Aaron.
He had to step away for a second. Just curious on the loan growth this quarter, were there any purchased loans or any nonlocal participations that contributed?
Lance A. Mizumoto
Andrew, this is Lance Mizumoto again. We had a couple of purchases on our shared national credit portfolio but we also saw some activity locally so it was a mix of both.
Andrew Liesch
Got you. And then just looking at the margin, should we expect to see a continued remixing of assets by the securities and into loans going forward?
Lance A. Mizumoto
This is Lance again. I think as we see continued growth in both our loans and deposits, it will help with the net interest margin.
Andrew Liesch
Thanks. Then I guess just one more.
What are your mortgage expectations this quarter given the drop in rates?
Lance A. Mizumoto
I think we have seen some continued activity. What we are seeing is that because the inventory in housing is so low that there is a great demand for housing and thus as purchase activity continues, again the fact that inventory's low is kind of a limiting factor for us.
So again, we still hold a leading market share in terms of mortgage loan activities but again the limiting factor is the lack of inventory.
Andrew Liesch
Okay. Thanks for taking my questions.
Lance A. Mizumoto
Thank you.
Operator
And next we have a question from Don Worthington of Raymond James.
Donald A. Worthington
Good morning, everyone.
John C. Dean
Good morning, Don.
Catherine Ngo
Good morning.
Donald A. Worthington
Yes, in terms of the lending activity in the quarter, I noticed there was an increase in C&I loans in the Mainland portfolio. Was that due to anything in particular or any kind of change in approach relative to the lending mix there?
Lance A. Mizumoto
Don, this is Lance, again. I think it is more timing.
As we looked at opportunities, there were some loans on the Mainland that we closed at the last quarter. So I don't think it was a change in strategy so much as it was a timing issue.
Donald A. Worthington
Okay. Then it looked like short-term borrowings were up a little bit, $38 million in the quarter.
Again, was that just short-term liquidity to fund loans?
Lance A. Mizumoto
Don, I'm going to ask Denis Isono to answer that question.
Denis K. Isono
Yes, Don, we mentioned in the prepared remarks while keeping the securities portfolio relatively consistent in the fourth quarter, that caused us to borrow a little bit on a short-term basis and that is what you saw.
Donald A. Worthington
Okay, all right. Great.
Then in terms of just the cost-saving initiatives that have been implemented, kind of where are you in that process in terms of implementing what you want to do and I think you are wanting to get that efficiency ratio down into the 60s. Is that something that would happen in 2015?
Denis K. Isono
Don, I’m going to ask Catherine Ngo, our President and Chief Operating Officer to answer that question.
Catherine Ngo
A couple of the cost-saving initiatives implemented last year including the outsourcing of a couple of key systems. So first, our core banking system and also items processing.
So we already are realizing the expense saves relative to that. We also have a number of other technology initiatives underway including implementation of our enterprise data warehouse and while we are already seeing some benefit related to the analytics on the part of the enterprise data warehouse, the more significant benefits, I don't think we’ll be seeing for a few quarters.
The other thing I might mention is in regard to another of our significant technology initiatives which is our branch system and our encore system and related to that we are implementing a number of process improvements and so we will see the benefits in those process improvements this year as we roll out that new encore system to our branches and back-office operations.
Donald A. Worthington
Okay, great. Thank you.
John C. Dean
Thanks Don.
Operator
[Operator Instructions] our next question will come from Jackie Chimera of KBW.
Unidentified Analyst
Hi this is Jason for Jack in actually. [Technical Difficulty].
Lance A. Mizumoto
Jason, this is Lance Mizumoto. Sorry.
We couldn’t quite hear your question. Could you repeat that for us please?
Unidentified Analyst
Sure, well can you hear me?
Lance A. Mizumoto
Yes, we can hear you now.
Unidentified Analyst
Just have a question about the dividends and buybacks for the remainder of 2015, do you see that remaining below 100% of net income or do you foresee that going above that level outside of any potential Dutch auction?
John C. Dean
Jason I’m going to ask David Morimoto our treasurer to address that question.
David S. Morimoto
To give you a sense David, I think what we’ve announced to-date is designed to largely give the money retained earnings. The Company continues to work with its Board on evaluating its longer-term capital strategy but at this point that is what we have decided on thus far.
So it’s the buyback, it’s the quarterly cash dividend increase and it’s the ongoing share buyback reauthorization.
Unidentified Analyst
Great. That’s very helpful.
And also given the drop in your rates, what was the percentage of refi volume in the quarter where mortgage bank is.
John C. Dean
I will see if we can get that information for you, Jason. Yes.
Unidentified Analyst
With this in general, do you see that any pick up in the first quarter?
David S. Morimoto
I think again our refinance activity if you take the breakdown between purchase and refinance, purchase was about 68% the balance was about 32% refinance piece. What we see going forward I think is an increase in purchase activities despite the fact that rates have come down a bit, we anticipate that would be new constructions projects that’s closed that because we are a preferred lender on some of these projects that we will get our share of purchase mortgage activity.
Unidentified Analyst
All right that’s everything I had. Thanks guys.
David S. Morimoto
Thank you Jason. End of Q&A
Operator
And this concludes our question-and-answer session. I would like to turn the conference back over to Catherine Ngo for any closing remarks.
Catherine Ngo
Thank you very much for participating in our earnings call for the fourth quarter of 2014. We look forward to future opportunities to update on our progress.
Thank you.
Operator
The conference is now concluded. We thank you for listening today's presentation.
You may now disconnect.