Jul 28, 2016
Executives
David Morimoto - Executive Vice President and Chief Financial Officer Catherine Ngo - President and Chief Executive Officer Lance Mizumoto - President and Chief Banking Officer Anna Hu - Senior Vice President and Interim Chief Credit Officer
Analysts
Joe Morford - RBC Capital Markets Brett Rabatin - Piper Jaffray Jacquelynne Chimera - KBW Aaron Deer - Sandler O'Neill John Moran - Macquarie Capital
Operator
Good day ladies and gentlemen. Thank you for standing by and welcome to Central Pacific Financial Corp Second Quarter 2016 Conference Call.
During today’s presentation, all parties will be in 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 at the company’s website at www.centralpacificbank.com. I would like to turn the call over to Mr.
David Morimoto, Executive Vice President and Chief Financial Officer. Mr.
Morimoto, the floor is your sir.
David Morimoto
Thank you Mike and thank you all for joining us as we review our financial results for the second quarter of 2016. With me this morning are Catherine Ngo, President and Chief Executive Officer, Lance Mizumoto, President and Chief Banking Officer and Anna Hu, Senior Vice President and Interim Chief Credit Officer.
During the course of today’s call, management may make forward-looking statements. While we believe these statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected.
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 Catherine.
Catherine Ngo
Thank you, David, and good morning everyone. We are pleased to report on another solid quarter for our company with net income of $12.1 million and diluted earnings per share of $0.39.
Loan growth continued to be strong reported by the cyclical economic and business conditions employee. Net interest income, non-interest income and asset quality continue to improve.
David will be provides the highlight of our company’s financial results later on the call. As a result of our consistent profitability and strong capital positions, our Board of Directors increase in quarterly cash dividend by 14.3% from $0.14 to $0.15 per share payable on September 15 to shareholders of record as of August 31 of this year.
We have also been active and executing on our 2016 share repurchase plan, which authorized share repurchase of up to $30 million for the year. Year-to-date as of June 30, they have repurchased close to 493,000 shares of CPF common stock or approximately 1.6% of the total common stock outstanding as of December 31, 2015.
The remaining stock repurchase authority as of the end of the second quarter was approximately $19.5 million. As provided in our 8-K filed this morning, going forward and in our continuing effort to build upon our bank's core franchise value our customer, we will be realigning our debt structure to a lot more of my time to be invested and engaging with our customers as our second customers.
While at the same time strengthening our focus on improving our operational competency. Effective September 1, 2015 Lance Mizumoto, our current President and Chief Banking Officer will be appointed to the new executive position of Vice Chairman and Chief Operating Officer, where he will oversee our operations and other support divisions.
And I will be assuming direct oversight of our front lines of business. Lance's depth of banking experience and management expertise together with his acute understanding of the end-to-end servicing needs of our customers will add significant value to strengthening our core operational competencies.
We are encouraged by the continuing improvement in outlook for the economic climate in Hawaii particularly in the visitor industry, labor market conditions, and growth in personal income and tax revenues. In the first five months of this year, visitor arrivals increased by 3.1% and visitor expenditures increased by 1% over the same period last year.
The forecast for 2016 are year-over-year increases of 2.2% in visitor arrivals and 2.5% in visitor expenditures. The outlook for job growth and real personal income continues to be positive for 2016 with a projected 1.8% growth in job and a 3.0% increase in real personal income compared to 2015.
Hawaii's unemployment rate for the month of June was 3.3% compared to the national unemployment rate of 4.9% and is projected to be at 3.2% for 2016. Construction activity continue to be strong and has been a key contributor to job growth albeit construction permit issued for private and public development project have been declining compared to peak periods in the previous year.
Hawaii's economy overall as measured by real GDP is forecast to increase by 2.3% for 2016 following an increase of 2.0% in 2015. At this time, I will turn the call over to David to review the highlights of our financial performance.
David Morimoto
Thank you Catherine and good morning everyone. Net income for the second quarter of 2016 was $12.1 million or $0.39 per diluted share, compared to net income $11.2 million or $0.35 per diluted share reported last quarter.
Our return on average assets in the second quarter was 93 basis points and return on average equity was 9.51%. Our loan portfolio grew by $95 million or 2.9% sequential quarter whereas our deposit portfolio decreased by $91.5 million or 2% during the quarter.
Lance will provide additional details on loans and deposits later in this call. Net interest income increased by $0.4 million or 1% sequential quarter as average loan balances again increased by over $100 million.
Net interest margin decreased slightly to 3.29% primarily due to an increase in premium amortization on the MBS investment portfolio, which negatively impacted the NIM by roughly three basis points. We expect the NIM to remain in the 3.25 to 3.35 range over the next couple of quarters.
During the first quarter, we recorded a credit to the provision for loan and lease losses $1.4 million compared to a credit of $2.7 million recorded in the prior quarter. Net charge-offs in the second quarter totaled $3,000, compared to net charge-offs of $0.4 million in the first quarter.
Our allowance for loan and lease losses at quarter end was $60.8 million or 1.79% of outstanding loans and leases. Other operating income increased by $1.5 million and other operating expense increased by $1.3 million sequential quarter, a decrease in long-term market interest rates during the quarter as effect of increase seen on gain on sale income, but also resulted in more amortization expense on our mortgage servicing rates.
We also had a one-time bank-owned life insurance of $0.6 million and true-ups to our incentive compensation. The efficiency ratio was little changed at 66.69% for the quarter.
In the second quarter, our effective tax rate was 34.3% versus 35.2% in the first quarter. The lower tax rate was due to the one-time employee benefit that is non-taxable.
We expect our normalized effective tax rate to approximate 35% to 36% going forward. That completes the financial summary, and now, I’ll turn the call over the Lance.
Lance Mizumoto
Thank you, David, and good morning, everyone. Overall, our business development efforts have been effective across all line of businesses during the quarter.
We continue to make good progress in selected target markets, including the small business and the consumer segments. Total loans and leases increased by $95 million or by 3.9% on a sequential quarter basis and by $398 million or 13.2% on a year-over-year basis.
Our commercial mortgage portfolio increased significantly by 9% over the previous quarter, which included a few large Hawaii-based transactions. Consumer and industrial loan balances decline by 5.8% with most of the reduction occurring in our Shared National Credits portfolio.
Construction loan balances also declined by 2.9% from the previous quarter, as a large construction loan project was paid-off. The consumer segment realize meaningful growth with consumer loan balances increasing by 3.8% and residential mortgage and home equity line of credit balances increasing by 2.9% over the previous quarter.
On a year-over-year basis, all loan portfolio balances increase included consumer loans by 22.3% and commercial mortgages by 21.2%. For the second half of 2016, we anticipate that loan growth will continue and the year-end balance will reflect growth at the high-single-digit percentage level over the previous year.
Total deposits decline by $91 million or by 2% compared to the end of the previous quarter and the majority of the decrease was due to the outflow of temporary funds that included large 10.31 exchange transaction came in 2015. On a year-over-year basis, total deposits increased by 5.3%.
The execution of our 2016 business plan initiatives has been on-track and we are well positioned to obtaining our goals for the year. Our continued focus on strengthening customer relationships will be supported by process improvement initiatives, leveraging our information management capabilities and the favorable business and economic conditions in Hawaii.
That completes my summary. And I till now, turn the call back to Catherine for her closing remarks.
Catherine.
Catherine Ngo
Thank you, Lance. In summary, we are confident in maintain stable growth throughout the year, while acknowledging that we have more work ahead in improving operational efficiencies and leveraging our investments in technology.
I would like to thank our employees, customers and shareholders for their continued support and confidence in our organization as we work toward achieving our 2016 business plan goals. At this time, we will be happy to address any questions that you may have.
Thank you.
Operator
Thank you ma’am. We will now begin the question and answer session [Operator Instructions] The first question we have comes from Joe Morford of RBC Capital Markets.
Please go ahead.
Joe Morford
Thanks. Hello everyone.
Lance I guess I wondered if you could talk a bit more about the details, in the loan growth you mentioned that C&I decline was related to the [SNIK] (Ph) portfolio, I guess if you could remind us how big that portfolio now is? What kind of magnitude of decline was?
And then also would be curious to learn a little bit more about the larger CRE projects that you did in Hawaii and just kind of going forward, what you expect the mix of loan growth to be? Thanks.
Lance Mizumoto
Thanks Joe. It's kind of a long question, I will try to answer as much as I can.
Joe Morford
To keep you on your toes there Lance.
Lance Mizumoto
Total SNIK portfolio will probably about in the $185 million range and we've been trying to reduce those balances as we look at opportunities more on Hawaii. As we've said before, we were looking more for organic growth and so opportunities arise more in the local side we've decided to temper our activities on the mainland.
,
In terms of the mix of the portfolio, I anticipate that we'll see continued growth in all sectors. it may be tempered by some reduced shared national credit activity.
We did purchase some auto portfolios in the first half of the year. We don't necessarily see that as continuing over the next six months unless we see an opportunity.
So I hope that answers all your questions.
Joe Morford
Sure. Just quick a follow-up, can you size up any of the I guess that auto purchase may be this quarter.
And then also, I understand there was a pay-off in the construction portfolio this quarter, but with the activity going on in Hawaii, do you still see some decent growth and construction to the balance for the year?
Lance Mizumoto
The auto portfolio that was purchase in the second quarter was about $18 million. Again, we saw business opportunity.
In terms of the construction activity, you are seeing a tapering off, as we talked before about in the high-end luxury market. There is still some activity going on, or starting to go on in the affordable housing or workforce housing sector.
But I think, we’re going to start to see construction activity primarily in the high rise condominiums start to taper off.
Joe Morford
Okay. Thanks so much.
Lance Mizumoto
Thank you.
Operator
Next we have a Brett Rabiton of Piper Jaffray.
Brett Rabiton
Hi. Good morning.
Catherine Ngo
Good morning Brett.
Brett Rabiton
First wanted to ask the management structure change maybe Catherine you can just talk about. Is this pretty new face forward to try and help CPF gain market share or maybe you can talk about some of the outcomes you are hoping for with the structure change?
Catherine Ngo
Sure. A couple of things drove our decision on the reorganizational change.
The first is the importance of operational efficiencies and continued focus on that. And Lance in his new role will be focused on the end-to-end servicing quality first for our customers, also operational efficiencies.
And then second as CEO, I think it is critical that I am out in the market have direct line of site, not only to our line officers, but our customers. And so with this reorganization, I will be directly overseeing the lines of businesses.
Brett Rabiton
Okay. And then wanted to talk about mortgage for a second, obviously a strong mortgage environment.
How do you think about the back half for the year shaping up for sort of the net mortgage banking numbers and just thinking about the expense levels, obviously that impacted expense in a little bit in 2Q. Maybe, you could comment on that as well?
Catherine Ngo
I'm going to turn this over to Lance. Lance.
Lance Mizumoto
Good morning. I think we are still continuing to see a strong mortgage market in Hawaii.
I don’t expect that to significantly reduce over the rest of the year. We have been quite successful in our originations.
It may not necessarily reflect in the growth just because we sell a large number of our mortgages in the secondary market.
Brett Rabiton
Okay. And then just lastly on credit, you know a little more reserve release than maybe I would have thought into the quarter, but credit is obviously very good.
Any thoughts on reserve release from here and how we should think about relative reserve levels?
Catherine Ngo
I’ll turn that over to Anna.
Anna Hu
Okay. For this quarter, our provision credit was really commensurate with our growth.
Our credit quality, what we are seeing with our overall portfolio mix, as well as where we think we are in the marketplace. So it’s really commensurate with that and we continue to assess that from quarter-to-quarter.
Brett Rabiton
Okay. Thanks, great.
I appreciate the color.
Anna Hu
Thanks Brett.
Operator
Next we have Jackie Chimera of KBW.
Jacquelynne Chimera
Hi. Good morning, everyone.
Catherine Ngo
Good morning.
Lance Mizumoto
Good morning.
Anna Hu
Good Evening.
Jacquelynne Chimera
I was curious what the size of the decline was form the 1031 that you had in the quarter?
Lance Mizumoto
Jackie this is Lance. The approximate amount was $61 million.
Jacquelynne Chimera
Okay. Thank you.
And what your expectations for the deposit book, just in the latter half of the year?
Lance Mizumoto
Jackie this is Lance again. We're optimistic that we'll see balances roll over time.
What happened in the fourth quarter of 2015 was there was a large surge in balances and we knew that some of those deposits were going to temporary, but I do expect that we will continue to see some deposit growth for the rest of the year.
Jacquelynne Chimera
Okay. And Catherine if you shift queue more of a front facing role, I guess how do you balance between looking at loan customers versus deposit customers and how you are thinking about and Lance as well how you are thinking about balancing the growth between those two?
Catherine Ngo
So as I think about the strategy for the company going forward, we are focus on building deeper relationships with our existing customers, but also bringing in new customers. And so as part of that strategy, we and I will drive our officers brining in the loans and deposits, but more importantly appreciating the needs of our customers and cross selling into those needs.
I think a critical part of that is ensuing that the teams are working together, so whether that be our community banking team, with our business banking team or our mortgage group with our credit banking team. So it's really going to be that collaboration across all of our groups to drive increased end loans and deposits across all of our customers segments.
Jacquelynne Chimera
Okay. And over time would you anticipate any fee income impact from this as well?
Catherine Ngo
One thing that we are looking at is our wealth strategy and I see it as an continuing opportunity for us in this market. So over time I am optimistic that we will see an uptick in fee based income related to that whole strategy and it goes back to what I mentioned earlier Jackie, just in regard to understanding our customers better.
So in this case our higher net-worth customers and just what their needs are, including their investments need.
Jacquelynne Chimera
And do you think you are appropriately staffed in your wealth division or are there any hires that you need to in the foreseeable future?
Catherine Ngo
At this point we're stepping back and assessing the group and thinking about our strategy. So having said that, I do think that there likely will be a new or a couple of new hires that we will need to make in that group.
Jacquelynne Chimera
Okay. Thank you very much for all the detail.
I appreciate it.
Catherine Ngo
You are welcome Jackie.
Operator
[Operator Instructions] The last question we do have comes from Aaron Deer with Sandler O'Neill.
Aaron Deer
Hey good morning, everyone.
Lance Mizumoto
Good morning, Aaron.
Catherine Ngo
Good morning Aaron.
Aaron Deer
Following up on Joe’s earlier questions. Lance, could you give some greater insight into the growth in the commercial real estate portfolio this quarter and you mentioned that there was the a large construction that was completed is that now part of your permanent financing in CRE?
Lance Mizumoto
Let me address the construction loan first. I think the closing of that project did translate to mortgage financing.
So we did a few take out loans as the construction project closed off and was sold. With regards to commercial real estate growth in general, we did see a large transaction take place in one of the neighbor islands and it involved a shopping center complex that we successfully helped refinance out another lender.
So that was one of the big drivers in our commercial real estate growth.
Aaron Deer
Okay, sorry. I guess, I missed that construction, I know it was a condo.
And then it sounds like, you guys continue to be very focused on efficiency initiatives and improvement in that front. Any guidance you can provide in terms of expectations for operating costs here as we have kind of moved through the back half for the year or efficiency ratios?
Catherine Ngo
Sure. So Aaron its Catherine here..
For other operating expense, you can expect that in the next couple of quarters to be in the $32 million to $34 million range.
Aaron Deer
Okay. And I’m not sure how comfortable you are kind of looking out towards 2017.
But are there going to be opportunities to bring that down or at this point is it more a matter of growing revenues to deliver operating leverage?
Catherine Ngo
I think that the opportunity is going to be on the income side. So leveraging technology and the investments that we've made over the last several quarters.
Having said that and particularly with Lance and his new role, we are looking at expenses and we will continue to look for opportunities to streamline where there are opportunities.
Aaron Deer
Okay. Terrific.
Thanks for taking my questions.
Operator
Next we will have John Moran of Macquarie.
John Moran
Hey, good afternoon. Just wanted to follow-up on the deposit side of thing.
So it sounds like kind of around number is $61 million from the 1031. But even if you sort of adjust for that, it looks like you guys were down a little bit softer and I know that 2Q can be a little bit soft, I think historically for you.
But just wondering if there is anything else that you could provide in terms of what went on, on the composite side of things this quarter?
Lance Mizumoto
John, this is Lance. There were a handful of other large depositors that did withdraw funds and again as I mentioned before, we anticipated that - well we knew that those are temporary funds and that they were likely to be withdrawn during the year.
Just difficult to assess exactly when that happens. And of course, when these deposits are withdrawn, again unfortunately it did lead to larger than anticipated reduction.
But again, we knew that that was going to happen, it’s just a matter of timing. But other deposits, which all of it made up for that $90 million reduction.
Those withdrawals were probably in the low-double-digit range.
John Moran
Okay. Got you.
So maybe like to handful of other kind of lumpier deposits.
Lance Mizumoto
Right.
John Moran
Okay. That’s helpful.
And then the other one that I had was just on - if you had it handy. The reinvestment dips on securities and loans just kind of where new money yields are coming in versus rolling off.
And then an outlook, if you could on premium amortization. It clearly kind of hit things a little bit this quarter, but just keeping where rates have kind of bounced around and everything, if you had any thoughts on that.
Catherine Ngo
John, I'll turn that over to David.
David Morimoto
He John. So on the reinvestment rate, so in the investment portfolio we actually did not purchase any securities during the second quarter, we put the investment portfolio in run-off mode and we reallocated the cash flow to fund the strong loan growth that we saw during the quarter.
Having said that, if we were to have been buying the traditional makeup of what we typically purchased, I think it probably would have been in the 1.90% to 2% range versus our portfolio yield that’s more like 2.55%. so that would probably be the delta there if we were repurchasing.
On the loan portfolio, it’s much better news, the new portfolio yield weighted average rates were coming on in just that 390 which is right at the portfolio yields and that’s similar to what we saw in the first quarter. so it seems as though we are kind of hitting a trough on the loan portfolio yields.
And then finally the last question was on MSR amortization. We obviously have seen an uptick with the lower market interest rate.
so however, market rates remain low. So we do think amortization may be at the level that we have seen over the first two quarter, somewhere in that neighborhood, I think would probably be a good estimate.
John Moran
Okay, so sort of stabilizing on that.
David Morimoto
Yes.
John Moran
Perfect. Thanks very much.
David Morimoto
Thanks John.
Operator
Well at this time, we have no further questions. We will go ahead and conclude our question-and-answer session.
I would now like to turn the conference back over to Ms. Catherine Ngo, President and Chief Executive officer.
Ms. Ngo.
Catherine Ngo
Thank you very much for participating in our earnings call for the second quarter of 2016. We look forward to future opportunities to update you on our progress.
Operator
And we thank you ma’am and to the rest of the management for your time today. The conference call has now concluded.
Again, we thank you all for participating on today's conference call. At this time, you may disconnect your lines.
Take care and have a great day.