Oct 27, 2016
Executives
David Morimoto - Executive Vice President and Chief Financial Officer Catherine Ngo - President and Chief Executive Officer Lance Mizumoto - Vice Chair and Chief Operating Officer Anna Hu - Executive Vice President and Chief Credit Officer
Analysts
Brett Rabatin - Piper Jaffray Aaron Deer - Sandler O'Neill Jackie Boland - KBW John Moran - Macquarie Laurie Hunsicker - Compass Point Don Worthington - Raymond James
Operator
Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp Third Quarter 2016 Conference Call and Webcast.
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 on the Company’s website at www.centralpacificbank.com. I'd like to turn the call over to Mr.
David Morimoto, Executive Vice President and Chief Financial Officer. Please go ahead sir.
David Morimoto
Thank you, Alison [ph], and thank you all for joining us as we review our financial results for the third quarter of 2016. With me this morning are Catherine Ngo, President and Chief Executive Officer; Lance Mizumoto, Vice Chair and Chief Operating Officer; and Anna Hu, Executive Vice President and 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. The economic and market conditions at Hawaii continue to be favorable throughout the third quarter of this year and have reported in sustaining a positive momentum in loan and deposit growth.
Reported net income for the quarter was 11.5 million which included a significant lower credit to loan loss provisions compared to both, the previous quarter and the same quarter a year ago. Our business development efforts have been effective across all line of businesses particularly in the lending areas of commercial mortgage, construction loans, and home equity lines of credit.
Our deposit growth included a strong increase in non-interest bearing demand deposit. On a year-over-year basis, total loan increased by 10.9% and total deposit increased by 6.8%.
Asset quality continued to improve and our operational efficiency continued to head in the direction. David will be providing more detail in his financial highlights.
We have also been active in executing on our 2016 share repurchase plan, which authorized share repurchase of up $30 million for the year. During the third quarter, we repurchased 144,000 shares of common stock, and year-to-date as of September 30th, we have repurchased approximately 637,000 shares or 2% of a total common stock outstanding as of December 31, 2016.
The remaining stock repurchase authority for the year as of the end of third quarter was approximately $15.9 million. A quarterly cash dividend of $0.60 per share was also declared by our Board of Directors and is payable on December 15th to shareholders of record as of November 30th.
We are pleased to be in a position to return shareholder value as a result of our company's profitability and strong capital position. The economic forecast for Hawaii remains positive throughout the remainder of the year and into 2017.
In the first eight months of this year, visitor arrivals increased by 2.6% and visitor expenditures increased by 3% over the same period last year. The forecast for 2016 are year-over-year increases of 1.9% in visitor arrivals and 3.2% in visitor expenditures.
Construction activities likely to peak in 2016 based on a 19% increase in private and public loading permit issued in 2015, with an estimated value of $5.5 billion. While building permits are projected to decline by 8.2% in 2016, job growth in the construction industry is projected to increase by 10.9% in 2016 and 1.7% in 2017.
The outlook for overall job growth in Hawaii and real personal income continues to be positive for 2016 with the projected 1.8% growth in job and 2.8% increase in real personal income compared to 2015. Hawaii’s unemployment rate for the month of September was 3.3% compared to the national unemployment rate of 5%, and is projected to be at 3.2% for 2016.
Hawaii’s real GDP is forecast to increase by 1.9% in 2016, following an increase of 2.0% in 2015. At this time, I’ll turn the call over to David to review the highlights of our third quarter financial performance.
David?
David Morimoto
Thank you, Catherine. Net income for the third quarter of 2016 was 11.5 million or $0.37 per diluted share, compared to net income 12.1 million or $0.39 per diluted share reported last quarter.
While net income in EPS declined slightly, pre-tax pre-provision net revenue improved modestly sequential quarter. Our return on average assets in the third quarter was 0.87% and return on average equity was 8.81%.
Our loan portfolio grew by 36 million or 1% sequential quarter. The third quarter growth was led by growth in the commercial mortgage and home equity portfolios.
As predictive, we did experience some slowing of loan growth in the pay to achieve during the first half of 2016. However, we continue to expect full year 2016 loan growth in the high single digit percentage range.
Total deposits increased 113 million or 2.6% sequential quarter. Deposit growth was broad-based with the largest increases in non-interest bearing demand and government time deposits.
At September 30, 2016, our loan to deposit ratio was 67%. Net interest income decreased by 0.2 million sequential quarters and our net interest margin declined by 4 basis points to 3.25%, both decreases were primarily due to an increase in premium amortization on the MBS investment portfolio, which impacted the NIM by about 4 basis points.
We expect the net interest margin remain in the 3.25 to 3.30 range over the next couple of quarters. During the third quarter, we recorded a credit to the provision for loan and lease losses 0.7 million, compared to a credit of 1.4 million recorded in the prior quarter.
Net charge-offs in the third quarter totaled 0.6 million, compared to net charge-offs of $300,000 in the second quarter. Our allowance for loan and lease losses at quarter end was 59.4 million or 1.73% of outstanding loans and leases.
Other operating income decreased by $0.7 million and other operating expense decreased by $0.9 million sequential quarter. The other operating income decline was primarily as a result of the one-time employee benefit, we've seen in the second quarter and the other operating expense declined was primarily driven by a decrease in amortization expense on our mortgage servicing rates.
Efficiency ratio includes to 66.0%. In the third quarter, our effective tax rate was 35.8% versus 34.3% in the second quarter.
Despite the higher tax rate was due to a one-time employee benefit in the second quarter as 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 to Catherine.
Catherine Ngo
Thank you, David. In summary, I believe we are on the target with execution of our 2016 business plan initiatives which includes strengthening structural relationship, improving operational efficiency and leveraging information technology.
While there is works to be done, I am confident that we are heading in the right direction and making good progress toward our company. I would like to take this opportunity to thank our employees, customers and shareholders for their continued support and confidence in our organization as we work toward achieving our 2016 goals.
At this time, we will be happy to address any question you may have. Thank you.
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first quarter will come from Brett Rabatin of Piper Jaffray.
Please go ahead.
Brett Rabatin
I wanted just to first ask, you gave the guidance for the margin for being up 320 to 330 range going forward, directionally maybe you can help us a little more with just thinking it might be many components there. Does the premier amortization if I get, it's still kind of being at elderly levels and may me some color on the securities portfolio you yield in particular?
Catherine Ngo
I am going to turn that question to David. David?
David Morimoto
Hi, Brett. Yes, the range in the margin is, we lowered it by a nickel of 320 of 330.
Couple of things going on there; first, the premium amortization on the MBS portfolio, we got to look into October and the slowing in prepayments in October was not as great as we expected or would like. So, we are expecting somewhat elevated premium amortization in the fourth quarter, so that's leaded to some compression on the investment yield.
But having said that, I would expect, we do expect premium amortization to be at a lower level than what it was in the third quarter. In the third quarter, it was extremely high.
Another thing that I've said, we are seeing as we continue to see just some overall pressure on earning asset yields. New volumes of investments are probably coming on around 220 versus the overall full year yield of 340.
New loan yields are coming, it varies quite significantly depending on the type of loan, but it's in that 350 to 370 range versus average portfolio yield of 390. So, we just continue to see some downward pressure on new volumes relative to where the portfolios are.
Brett Rabatin
Okay. I appreciate all the color there.
And then I guess the other thing is just thinking about fee income and the new share with mortgage banking, stronger quarter overall from that perspective. Any thoughts on some seasonality will be a little slower in the fourth quarter?
Can you give us some color on mortgage?
Catherine Ngo
Sure. So, let me start and then I will turn it over to David.
So, we do continue to be optimistic about mortgage production in the fourth quarter. So, not only benefiting from the joint ventures that we have, we have developers and retail brokerage from Honolulu.
But we have a couple kind of condominium project in Honolulu that will be completed in the fourth quarter and expect a nice production volumes from the purchases of those condo units and the completed projects?
Brett Rabatin
Okay. I appreciate that color.
And then just last for me, obviously, continued strong expense management as I've talked there that level is sustainable sales or can you give us any color and how you think about expenses from here?
Catherine Ngo
For the next couple of quarters, we do expect to hold the operating expense line in the $32 million to $34 million range.
Operator
Our next question will come from Aaron Deer with Sandler O'Neill. Please go ahead.
Aaron Deer
It sounds like pretty straightforward quarter on too many questions, but just curious to get maybe a little bit more color on the -- little bit more sluggish loan growth this quarter versus what you’ve been expected to what extent pay downs influenced that? And then kind of what gives you the confidence here going to be end of the year in terms of what your guidance remains?
Catherine Ngo
So, let me take that question Aaron. For loan growth, I'd like about also the year-on-year to-date where we are, but we had a pretty healthy first couple of quarters of the year.
So, each of those quarters, we showed 3% loan growth. So year-to-date, we are on 7% in loan growth and we still do expect to be in the high single digit in terms of growth for 2016.
As I look at loan growth when I particularly please to see in the third quarter is the pace of growth in our Hawaii portfolio. So, in the third quarter, we had a $65 million increase in the Hawaii portfolio, which was offset though by reduction and balances in our mainland portfolio about $30 million reduction.
So, we continue to be optimistic about loan growth and particularly in regards to our Hawaii portfolio.
Aaron Deer
Okay. And then, maybe also related to that, with the condos that are coming to completion sounds like that’s going to provide some opportunity on the mortgage side.
Are you also then a part of the lenders on the construction side of that? Is that going to serve you now some pay downs in that book?
Catherine Ngo
I am going put Lance on one of the two as -- let me, let you speak to when we're -- when we finance one of those 200 projects in the collection.
Lance Mizumoto
Aaron, this is Lance. Yes, we are involved with the construction financing on a participation basis.
So, we'll benefit work from the construction financing as well as the take-ups happened after the completion of the project.
Aaron Deer
Okay. And just one last one on the loan front, it didn’t appear there was any loan purchases or just basis of anything meaningful size in the quarter, is that correct?
Catherine Ngo
There were no loan purchases, and no auto, no unsecured consumer purchases in the third quarter.
Operator
Our next question will come from Jackie Boland of KBW. Please go ahead.
Jackie Boland
What are your thoughts as we look to the changing construction landscape, given all the press that there has been around some of the single family communities that are going to be developing? Is that something that you might be able to part taken in terms of loan growth or I guess what your thoughts overall on that?
Catherine Ngo
Hi, Jackie. I’ll start it off and then maybe turn it over to Lance, but there are a couple of significant single-family construction projects that have been approved on West of downtown Honolulu.
As far as, we're anticipating on the construction of those projects that is not to look at this point. However, what is going to be something we would participate in would be the purchases of those single family homes.
And so, really the relationships with customer starting with and mortgage loan and then hoping to have opportunity to expand those relationships.
Jackie Boland
Okay, go ahead Lance.
Lance Mizumoto
We went with the same thing that it’s too early right now to say whether that we’re going to be participating in the construction financing, I don’t think the close giving the permitting process.
Jackie Boland
Okay. And I would guess that the purchase of the homes itself, even in the first Phase were probably still away the way from that?
Catherine Ngo
That’s right Jackie.
Jackie Boland
And then as just we look into year end and thinking about the high-single-digit loan growth, are there any pipelines in particular that excite you as we had into 4Q, anything in particularly strong?
Catherine Ngo
If a mix, I would say what we are particularly pleased whether we look at the pipeline is on the mix of growth in Hawaii. So, it really across all asset classes including commercial real estate, home equity line of credit.
So pretty board based, Jackie, I would say.
Operator
Our next question will come from John Moran with Macquarie. Please go ahead.
John Moran
I’ve got just one left in terms of just housekeeping. The pre-NIM, what’s the debt run do you happen and how many basis points that not got off in 2Q just sequentially?
Lance Mizumoto
Yes. The MBS premium amortization was accounted for roughly, I think, it was 13 basis points on the investment portfolio yield and 4 basis points on the overall NIM, John.
John Moran
13 basis points on securities and 4 basis points on NIM, and that's for this quarter, right?
Lance Mizumoto
That’s correct.
John Moran
And do you know what it was last quarter just in terms of comparison?
Lance Mizumoto
It probably was maybe two-thirds of that number.
John Moran
Okay. And then it sounds like, if I am understanding you correctly and I am sorry the kind of labor this one, but it's going to be elevated in 4Q but lower than it was in 3Q -- if I got you right, I think in one of the earlier questions.
Lance Mizumoto
Yes, so it was a pretty long answer but you interpreted it correctly.
Operator
[Operator Instructions] Our next question will come from Laurie Hunsicker of Compass Point. Please go ahead.
Laurie Hunsicker
Catherine, if you could just help us think about as we looked to next year for a loan growth. I appreciate the color as we look into the fourth quarter, but how should be thinking about 2017?
Catherine Ngo
Sure. If you think about 2017, the loan growth should be in the mid-to-high single digits, and across all asset classes and what we hope seeing and as we've seen in 2016 is continued growth particularly in the Hawaii portfolio.
Laurie Hunsicker
Okay great. And then, do you have what the share national credit portfolio was?
Catherine Ngo
Yes, so the C&I, if you look at the C&I lines from U.S. mainland, it's about $140 million.
So, that is reduction from the Q 2 number of about $144 million.
Laurie Hunsicker
Okay and that's mainland and then what's the sneak on Hawaii?
Catherine Ngo
I'm going to get some help from Lance here. The sneak on Hawaii would be about 99 million committed.
And the current outstanding on the Hawaii portfolio was about 59 million.
Laurie Hunsicker
And then as we look to loan loss provisioning potentially for next year, can you help us think about how you see that playing out, if you have a reserve to loan target? In another word, when sitting in the longer recoveries, is that when you reserves to loans get to 1:6 or 1:5 that you then look to start to build or how do you think about that?
Catherine Ngo
Sure, let me turn my question over to Anna. Anna.
Anna Hu
As we look into 2017, our credit quality continues to improve. And all of the Q4, we do expect to be directionally consistent and at some point level off.
Laurie Hunsicker
Do you have reserves to loans target?
Anna Hu
No. We don’t have target.
It really depends on a number of things.
Laurie Hunsicker
Okay. It's fair to assume that we will start to see a provision built?
Anna Hu
On a go forward basis, at some point we do it like that.
Laurie Hunsicker
Okay. And then just one last question, did you all have a MSR write-off this quarter?
Was that in the numbers?
David Morimoto
Hi, Laurie, this is David. Yes, we did not have a MSR write-off.
We have a slowdown in MSR amortization.
Operator
Our next question will come from Don Worthington of Raymond James. Please go ahead.
Don Worthington
Just taking a look at the changes and deposit accounts during the quarter and saw the increase in time deposits of about $60 million, was there any campaign or anything behind that increase where you find increased balances there?
Catherine Ngo
So you're looking at the 100,000 or overtime deposits.
Don Worthington
Right.
Catherine Ngo
Most generally, I believe in government into the significant percentage of that. David, may be can provide more color.
David Morimoto
Hi, Don. The dollar is basically opportunistic, so with an opportunity to kick in some additional government time deposits, and those time deposits are, as they're dangerous from a cost perspective relative to short-term borrowings.
Don Worthington
Okay. What was the rate on those in the term?
David Morimoto
Generally, government deposits are in the 60 to 90 day range as far as tenure and the rates are roughly 40 basis points.
Operator
And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Ms.
Catherine Ngo for any closing remarks.
Catherine Ngo
Thank you, Alison, and thanks to everyone for participating in our earnings call for the third quarter 2016. We look forward to future opportunities to update you on our progress.
Operator
The conference is now concluded. Thank you for attending today's presentation.
You may now disconnect your lines.