Apr 25, 2018
Executives
David Morimoto - EVP and CFO Catherine Ngo - President and CEO Anna Hu - EVP and Chief Credit Officer
Analysts
Jackie Bohlen - KBW Aaron Deer - Sandler O’Neill Brett Rabatin - Piper Jaffray 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.
First Quarter 2018 Conference Call. 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, Chief Financial Officer.
Please go ahead.
David Morimoto
Thank you, Laura, and thank you all for joining us as we review our financial results for the first quarter of 2018. With me this morning are, Catherine Ngo, President and Chief Executive 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 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. First quarter net income of $14.3 million reflected an increase of 9.2% on a year-over-year basis.
On sequential quarter basis, the dramatic change in net income was primarily due to the $7.4 million non-cash income tax expense taken in the previous quarter, related to the revaluation of our net deferred tax assets or DTA. As a result of the newly implemented tax reform legislation, the current quarter net income included an income tax benefit of $700,000 that resulted from a further refinement of our estimated DTA evaluation.
Loan and deposit growth continued to be stable in the first quarter. Total loans increased by 1.2% from the previous quarter-end and by 7.6% from the same period a year-ago.
Loan growth from the previous quarter included an increase in Hawaii by 1.8% and a decrease on the mainland U.S. by 3.5%.
The key drivers of loan growth on a sequential quarter basis were the increases of 3.2% in the home equity loans and line, 2.9% in commercial mortgages, and 2.5% in commercial and industrial loans. Asset quality remained strong with non-performing assets at 0.06% of total assets.
Total deposits and core deposits increased by 0.5% and 0.4%, respectively compared to the previous quarter, and by 4.2% and 5.1% compared to the first quarter of last year. With respect to core deposits on a sequential quarter basis, there was a slight shift from non-interest bearing demand to interest bearing demand money market and savings, deposits.
With the competitive pricing for loans and deposits in our marketplace, we have experienced the compression in our net interest margin during the quarter. This is an area that we are placing a priority on addressing.
The quarterly cash dividend was increased for the second consecutive quarter to $0.21 from $0.19 per share in the previous quarter or by 10.5% and will be payable on June 15, 2018 to shareholders of record as of May 31, 2018. The economic outlook for Hawaii continues to be positive for 2018 following the solid performances of our leading economic indicators in 2017 that continued into 2018.
The visitor industry recorded a strong first two months in 2018. Year-to-date as of February, visitor arrivals increased by 7.7% and visitor spending increased by 8.5% compared to the same period a year-ago.
The number of non-agricultural jobs in February this year was up by 1.6% over the same period last year, representing the 89th consecutive month that jobs have increased year-over-year. The seasonally adjusted unemployment rate in Hawaii remained at 2.1% in March compared to 4.1% nationally.
The current economic forecast for the year 2018 includes year-over-year increases in real personal income by 1.5%, real gross domestic product by 1.7%, and the Honolulu Consumer Price Index by 2.4%. At this time, I’ll turn the call over to David to review the highlights of our financial performance.
David?
David Morimoto
Thank you, Catherine. Net income for the first quarter of 2018 was $14.3 million or $0.48 per diluted share compared to net income of $4.3 million or $0.14 per diluted share reported last quarter.
As Catherine mentioned, our fourth quarter 2017 results were negatively impacted by an estimated one-time $7.4 million charge for the revaluation of our net deferred tax assets. Also, our first quarter 2018 results included $0.7 million one-time income tax benefit due to the refinement to the estimate of the revaluation of the net deferred tax assets.
On a normalized basis, our first quarter effective tax rate was in line with our expectations at 24.4%. We continued to expect our effective tax rate to be in the 23% to 25% range.
However, we continue to evaluate additional tax strategies that may affect the effective tax rate, prior to the filling of our 2017 tax return. Return on average assets in the first quarter was 1.01% and return on average equity was 11.60%.
Net interest income decreased by $0.5 million sequential quarter. On a normalized basis, net interest income was flat sequential quarter as there was $0.5 million in interest recoveries in the fourth quarter of 2017.
Also, the reported net interest margin declined by 6 basis points. 3 basis points of the NIM decline was due to the interest recoveries received in the fourth quarter of 2017, and 2 basis points of the decline was due to the tax reform impact on municipal bond income.
On a normalized basis, we did experience 1 basis point of spread compression in the first quarter as deposit costs increased slightly faster than our loan yields. Our asset liability committee is implementing several balance sheet strategies to improve prospective net interest margin and net interest income.
While some strategies can be implemented quickly, others will occur over time. As a result, we believe that interest income may be flattish to slightly higher for another couple of quarters.
During the first quarter, we recorded a credit to the provision for the loan and lease losses of $0.2 million compared to a credit of $0.2 million recorded in prior quarter. Net charge-offs in the first quarter totaled $0.6 million as compared to net charge-offs of $1 million in the prior quarter.
At March 31st, our allowance for loan and lease losses was $49.2 million or 1.29% of outstanding loans and leases. Based on current forecast, we believe the provision will return to a debit provision in the second quarter of 2018.
First quarter 2018 other operating income totaled $9 million. Other operating expense for the first quarter declined by roughly $1 million sequential quarter to $33.5 million.
The sequential quarter decline was primarily driven by decreases in advertising, legal and professional fees, and salary and benefit expense. The efficiency ratio for the first quarter was 65.4%, which was a slightly improvement from the fourth quarter.
We continue to expect the efficiency ratio to trend toward the low 60s by the fourth quarter of 2018. During the first quarter of 2018, we repurchased approximately 344,000 shares of common stock at an average cost per share of $29.36.
We’ve also repurchased an additional 102,000 shares of common stock month-to-date in April at an average cost of $29.09. Finally, I’d like to close by summarizing some of the highlights of our first quarter results.
Solid year-over-year net income growth of 9.2% and EPS growth of 14.3%. We increased our quarterly cash dividend by 10.5%.
We continue to maintain strong asset quality and solid capital ratios. And finally, we continue to have opportunities to improve -- further improve performance.
Thanks. And I’ll return the call to Catherine.
Catherine Ngo
Thank you, David. In 2018, we do have an ambitious business plan and have factored in our projection for the economic climate and market conditions in Hawaii, as well as the competitive challenges we face in a rising interest rate environment.
I’m confident that we will attain the milestones and goals we have set forth, and we’ll continue to focus on operational improvement and strengthening customer relationships. 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 2018 goals.
At this time, we will be happy to address any questions you may have.
Operator
Thank you. [Operator Instructions] And our first question today will come from Jackie Bohlen of KBW.
Jackie Bohlen
Hi. Good morning, everyone.
Catherine Ngo
Good morning, Jackie.
Jackie Bohlen
David, I wondered if you could cover the movement in public deposits that you may have seen in the quarter on both -- how those re-priced just generally and then also volume.
David Morimoto
Yes. Good morning, Jackie.
The public deposits were roughly consistent in the first quarter; they increased slightly. So, we are just about -- just over $700 million at the end of the first quarter.
And that is contrary to what we’ve been discussing about running down public deposits. But, there was a change in the pricing in the market.
So, during the third and fourth quarter, the pricing relative to treasury, the government deposits, were about 11 basis points above comparable term Tbills. In the first quarter of ‘18, the pricing change back to more of a norm, where it’s 4 to 5 basis points below comparable term Tbills.
So, as a result of that 15 basis-point decline in pricing, government deposits became roughly 30 basis points cheaper than comparable term wholesale borrowings. So, we did maintain the balance and we actually slightly grew it during the first quarter.
Jackie Bohlen
So, that was -- it went from roughly 11 basis points above the Tbills to roughly 4 to 5 basis points below, making them now 30 basis points cheaper than wholesales. Did I get that right?
David Morimoto
Yes.
Jackie Bohlen
And I guess, just thinking about other deposit costs in the portfolio, I know CDs are the area where you’ve seen the most pressure. Is it just local competitors?
Is it credit unions? Is it kind of everyone across the board?
David Morimoto
Again, you are right, Jackie. It’s primarily in CDs and I’d say large CDs; that’s where we’ve seen the majority of the increase on the deposit cost.
And that’s again primarily related to government. But, there have been some other increases in costs.
And what the team -- we have been doing is we have actually been trying to segment the customer, the deposit customer base a little more finely. As a result, I think we’ve done a pretty good job o keeping deposit costs manageable outside of the government.
So, total deposit costs went up 4 basis points. But then, I think if you look at the betas, the story remains the same.
So, the -- if we were to segment the light CD portfolio, the portfolio -- the core deposit portfolio, the non-large CD portfolio is roughly $4 billion with a weighted average rate of 8 basis points, and our rate being over the last 12 months of 2%. When you contrast that with the large CD portfolio, $970 million, weighted average rate of 1.27 and a rate beta over the last 12 months of 88 basis points -- 88%.
So, again, we think the key takeaway is the $4 billion core deposit portfolio, as exhibited a very low rate beta of 2% and currently has a weighted average interest rate of 8 basis points.
Jackie Bohlen
Okay. No, that’s definitely understood and that’s great color.
So, essentially, it just continues to be a focus to grow the non -- to grow the part of the portfolio that’s not in those large CDs?
David Morimoto
Yes. And there is other things that ALCO is looking at to manage net interest income, net interest margin.
We do maintain, the $90 million trust preferred portfolio. And while it remains a relatively cheap form of Tier 1 capital.
It is hurting the net interest margin. So, that’s a lever that we can pull.
All forward issuances that comprise the $90 million are callable on quarterly interest pay dates at par.
Jackie Bohlen
Okay. So that I would assume something under discussion and potentially more to come on that later?
David Morimoto
Yes. Definitely, something that we’re discussing.
Jackie Bohlen
Okay. Are there any other strategies?
I know, you mentioned that you’re looking into other ways of growing NII. What are some of the other ways that you’re looking at?
David Morimoto
I think it’s keeping our focus on the loan and deposit pricing. So, it’s focusing more on our profitability reporting.
Operator
Our next question will come from Aaron Deer of Sandler O’Neill.
Aaron Deer
You have given some good color on what’s going on in the deposit side. I was wondering if you could switch to the asset side and specifically the loans.
I understand that a few basis points for the margin pressure came from a decline in recoveries. But even beyond that, I guess, I would have expected to maybe see some expansion on the loan yields.
Can you talk about where new yields are coming on relative to the portfolio and what kind of benefit you are seeing from higher rates on the existing book?
Catherine Ngo
Yes. I’ll take that question, Aaron.
So, the new loan origination yield was about 3.80% in the first quarter and that compares to our average loan portfolio on yield or 3.98%. We are taking measures to address this and we’re continuing to look at the appropriate risk reward balance and looking at our loan opportunities.
David Morimoto
If I may add Aaron, the re-pricing of portfolio, we have roughly a third of the loan portfolio and that re-price is one year in. So, that’s what we consider to be the short-term portion of the re-pricing portfolio.
And one thing to note on that is, in that third of the portfolio does include the portion that re-prices off of the CPB bank base rate. [Ph] And all of the Hawaiian banks when interest rates were falling, I think this was back to 2008, when interest rates were falling, all of the large Hawaiian banks, we lowered our prime rate at 4.5.
So, even though fed funds went further down and Wall Street Journal Prime was down to 3, we stopped at 4.5. So, on the way up, as Wall Street Journal Prime was re-pricing up, we were not getting the benefit on this portion of the bank base rate portfolio until the March 22nd timing where Wall Street Journal Prime went to 4.75 and we finally were able to increase the bank base rate portfolio.
Aaron Deer
Okay. That’s very helpful.
And what portion of that one-third of the book then is tied to that base rate?
David Morimoto
$165 million.
Aaron Deer
Okay. That’s helpful.
And then, you mentioned the possibility of paying off some of these TRUPS. I guess, I can do the math to see what kind of impact that might have.
But, if you were to go that direction, given that you have now worked down some of the excess capital on the balance sheet and increased the dividend of course. How would -- how are you thinking now about the continuation of share repurchases, particularly if you were to pass this TRUPS?
David Morimoto
Yes. That’s a good question, Aaron.
That’s a discussion that we plan to have with the regulators. The way the TRUPS debentures read [ph] today, it does require us to discuss the prepayment with our regulators prior to call.
So, that’s similar to what we did. We did call the -- our CPB Capital Trust won $50 million of several years ago.
So, we’ll go through the same process. And they -- there is a possibility that it could be considered -- I guess the term is extraordinary capital action, you can get an approval to do that.
And then, it wouldn’t necessarily change what we -- change our plans on the repurchase front. But, that’s obviously something that still needs to occur.
Aaron Deer
Okay. And then, just one question on the outlook.
Can you give us an update on kind of what your expectations are for loan growth for the year, given where pipelines are today?
Catherine Ngo
Yes. Aaron, we’re still expecting mid single-digit loan growth for the year.
Operator
The next question comes from Brett Rabatin of Piper Jaffray.
Brett Rabatin
I wanted to ask, I guess first, just thinking about the Hawaiian environment, it’s obviously very low unemployment. Can you maybe give us a little color on what you’re expecting from wage pressure this year, given the tightness of the market?
And then, you’ve managed expenses well the past year. Just maybe some updated thoughts on kind of how you see few of the core trends going outside of the personnel as well this year?
Catherine Ngo
Sure. I’ll take that, Brett.
Well, the first thing I will say is, in the fourth quarter of last year, we announced an increase in our entry level rate for our employees to remain competitive with our other banks here in the local market. I would say that we continue to be very aggressive out there in terms of attracting and retaining our best employees.
As far as overall salaries and benefits expense, we’re holding to the guidance that we’ve given in earlier call. And so, it still will be in the $18 million to $19 million range, quarterly.
Brett Rabatin
Okay. And then, I’m curious to hear, mortgage banking was little better than I would have guessed, just given the difficult environment.
Can you maybe give just an outlook for the rest of the year, kind of what you’re seeing competitively, and then the possibility of that having kind of a bounce back here after a tough 2017?
Catherine Ngo
Yes. So, I’ll start.
Let me just look at production. And the first thing I will say is that we did have a nice uptick in production in the fourth quarter.
So, we were at about $230 million. That related in part to the completion on of a couple of condo towers here in Honolulu where we’ve got a significant percentage of the takeoff.
[Ph] The first quarter of this year, we have production of about $130 million, but we do expect in the second quarter for that production number to be more in the $150 million range. And then, the other thing I would add is something unique to our bank compared with our competitors is we have joint ventures with real estate brokerage and development firms.
So, our percentage of production is represented by purchases. It tends to be higher than our competitors.
And in Q1 of this year, the purchase percentage was 64%.
Brett Rabatin
And then, I just want to go back to the loan growth question and sort of thinking about the origination rates versus existing portfolio. Are you thinking about doing anything differently in terms of the production going forward, looking at things that might be a little higher rate, differentiated product, possibly more stuff on the mainland or can you give us maybe little more flavor for that?
Catherine Ngo
Yes. Sure, Brett.
I would say that we are going to be -- or continue to be [indiscernible] as we look at that risk rewards balance in our Hawaii opportunities but also Mainland opportunities. So, you will see us being opportunistic including on the Mainland.
And where we see the right balance now specifically to the Mainland, you could see that percentage. I think it’s under 11% today of the total portfolio.
You could see that number beyond the 11%. Actually for this quarter -- we ended the quarter at 10.7% of total loans on the Mainland.
Operator
And our next question comes from Laurie Hunsicker of Compass Point.
Laurie Hunsicker
I’m wondering if we can go back to loan loss provisioning and the return -- I guess the return of it, and how we should be thinking about that? In other words, you reserves to loans are 1.29.
Are you thinking on a go forward basis you are going to be holding that reserve to loan level or how should we be thinking about that?
Catherine Ngo
Let me start Laurie and then I’m going to turn it over to Anna. I believe in earlier calls we have been saying this that we are coming to an inflection point.
And we do believe in the second quarter that we are at that inflection point. But, let me turn it to Anna to give you a little bit more color on what we could expect in the second quarter.
Anna?
Anna Hu
So, as you know, we don’t set a target percentage level for us. So, while we are at still 1.29% as Catherine mentioned, we do believe we’ve reached a normalized point, and really going forward barring any major unanticipated changes, we do expect to provision and that range is going to be somewhere between 500,000 and 1.5 million in the second quarter.
And that’s really based on a number of things, our loan portfolio performance, of course asset quality including our net charge-offs, and then again how the economy, environmental factors. So, a number of things that we’re looking at that goes into that.
Laurie Hunsicker
Great. That’s helpful.
And then, a question under non-interest income. The BOLI line, your BOLI had been running around 600 or so per quarter, even when had the outsized quarters with debt benefits and this quarter was 318.
How should we be thinking about that line and was there some additional discrepancy that drops it?
Catherine Ngo
I’m going to turn that over to David.
David Morimoto
Thank you, Catherine. Laurie, the BOLI line, you’re right, the normal quarterly run rate would probably be in the 500,000 to 600,000 area.
The reason for the underperformance in the first quarter is first of all, we didn’t receive any debt benefit income. And then secondly, we do have a policy.
We have a separate account -- we have a one separate account policy that does not have a stable value ramp. And it’s primarily invested in fixed income, in bond securities.
So, it performs along with the bond market. When the bond market is performing well, it performs well; and when the market is more of a market, it underperforms.
So, that’s a BOLI policy that came over in a past acquisition. So, because it doesn’t have the stable value ramp, it does lead to a little bit of volatility in the income line.
Operator
[Operator instructions] And our next question will come from Don Worthington of Raymond James.
Don Worthington
Catherine, you mentioned the kind of a shift from non-interest bearing DDA into interest bearing accounts. Do you expect that to continue for our customers looking to move funds into something where they get some interest?
Catherine Ngo
Let me turn that to David.
David Morimoto
It does. The change in the first quarter, the decline in the DDA balances was primarily related to a real estate developer that’s building a residential condominium in Hawaii.
So, we basically had their operating account. Last year, they deposited a bunch of construction funds.
And we’ve been slowly disbursing those funds. And so, the rundown in the first quarter was a result of their construction withdrawals.
So, it wasn’t as in that money went to the interest bearing DDA -- interest paying check in accounts, so we actually had that growth on the interest paying check in account side. And that was more of -- it was pretty broad-based, quite a lot of good account increases and interest paying check in.
Don Worthington
Okay, all right. Thanks.
And then, any loans purchased during the quarter?
Catherine Ngo
No, loans purchased, Don.
Operator
And our next question will be a follow-up from Aaron Deer of Sandler O’Neill.
Aaron Deer
Hi, guys, I appreciate the follow-up. I just want to circle back on the reserve, because your credit trends have been spectacular; the outlook seems very good.
And so, I guess, I wouldn’t have expected to see a shift in kind of your expectations for reserve to continue down. Have you made a change in your reserve methodology or how is it that you’re able to support provisions going forward?
Catherine Ngo
Let me turn that question over to Anna.
Anna Hu
Hi, Aaron. So, our methodology, we did take a look at that and did do a change back in 2016.
Where we’re going with our reserve going forward is with our -- primarily due to two things. It’s the growth in our own portfolio as well as the net charge-off level.
So, we are seeing an increase in our net charge-offs, particularly in the consumer segment and that is really where the increase in reserves is.
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, Laura. And thanks everyone for participating in our earnings conference for the first quarter of 2018.
We look forward to the 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.