Jul 26, 2018
Operator
Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp Second Quarter 2018 Earnings 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 on the Company's website at www.centralpacificbank.com. I would like to turn the call over to Mr.
David Morimoto, Executive Vice President, Chief Financial Officer. Please go ahead.
David Morimoto
Thank you, Phil, and thank you all for joining us as we review our financial results for the second 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 will turn the call over to Catherine.
Catherine Ngo
Thank you, David, and good morning, everyone. I'm pleased to report an another solid financial performance for the second quarter of this year.
On a year-over-year basis net income improved by 18.3% and earnings per share by 23.1% which included a positive impact of the tax reform legislation. David will provide more details of our net income component.
Loan growth remain stable during the quarter as well as of the first half for the year. Total loans increased by $55 million or by 1.7% over the previous quarter-end and by $290 million or 8.1% from the same period a year-ago.
Loan growth was distributed across all loan sites and led by regular mortgages and commercial mortgages. Asset quality remained strong with non-performing assets at 0.06% of total assets.
Total deposits growth remains flat on a sequential quarter basis and increased by 1.9% year-over-year. Competitive pricing for deposit with our local market has been elevating and has contributed to the compression in our net interest margin.
The consistency of our profitability and strong capital positions have allowed us to continue with our capital plan and returning shareholder value for our stock repurchase activity and cash dividends, a latter which increased by 10.5% in the previous quarter. Turning to the economic outlook to the Hawaii, the forecast remain positive for the remainder of 2008 and 2019 based on performance two recent indicators that includes the tourism industry, labor market conditions and growth the personal income into our [indiscernible] In the first five months of this year, the survival outpaced the number of visitors in the same period a year ago by 9.1%.
Visitor expenditures increased by 10.9% over the same period last year. The projected increases in visitor arrivals and expenditures for 2018 over the previous year are 6.0% and 8.6% respectively.
The unemployment rate in Hawaii for the month of June was 2.1% compare to 4.0% nationwide. The forecasted way unemployment rate for the year 2018 is 2.2%.
Job growth is projected to increase by 1.2% and real personal income by 1.7% year-over-year. The Honolulu Consumer Price Index is expected to increase in 2018 by 2.6% and Hawaii’s GDP is projected to increase by 1.9% over the previous year.
At this time, I will turn the call over to David to review the highlights of our financial performance. David?
David Morimoto
Thank you, Catherine. Net income for the second quarter of 2018 was 14.2 million or $0.48 per diluted share compared to net income of 14.3 million or the same $0.48 per diluted share reported last quarter.
Return on average assets was 1.00% and return on average equity was 11.83%. Our second quarter 2018 results include a 0.6 million one-time income tax benefit resulting from a tax accounting message streams which accelerate certain deductions into the 2017 tax year under the higher corporate tax stream.
Our first quarter 2018 results also included a one-time income tax benefit of 0.7 million related to a refinement in estimate of the revaluation of the net deferred tax asset. We continue to expect more normalized effective tax rate to be in the 23% to 25% range over the coming quarters.
Net interest income increased by 0.4 million and our net interest margin declined by one basis point to 3.20% on a sequential quarter basis. We continue to see some spread compression as interest bearing deposit costs slight increased slightly faster than our loan yields.
Our asset liabilities maybe continuing to implement, several balance sheet strategies to improve cost effective net interest margin and net interest income. During the second quarter, we reported a provision for loading these losses of 0.5 million compared to a credit of 0.2 million reported in the prior quarter.
Net charge offs in the second quarter totaled 1.6 million as compared to net charge offs of 0.6 million in the prior quarter. At June 30th our allowance for loan and lease losses was 48.2 million or 1.24% of outstanding loans that exist.
We are constantly monitoring the Kilauea lava eruptions in the Puna district on the big island of Hawaii. In the Puna district we have a total of 37 residential mortgage and home equity loans with a total outstanding balance of $4.3 million.
Within that portfolio we are aware that six residential mortgage properties with an aggregate outstanding balance of $1.6 million has been destroyed. We have confirmed that all six of these properties have adequate insurance coverage.
Second quarter 2018, other operating income totaled $9.6 million. Other operating expense for the second quarter slightly increased to 33.7 million, the sequential quarter increase was primarily driven by annual merit salary increases.
The efficiency ratio for the second quarter was 64.5% which was an improvement from the 65.4% reported in prior quarter. During the second quarter of 2018, we repurchased roughly 270,000 shares of common stock at an average cost per share of $29.54.
We have also repurchased an additional 53,000 shares of common stock mostly in July at an average cost of $29.22. Finally, would I like to close with financial summary by summarizing some of the highlights of our second quarter results.
Solid year-over-year, net income growth of 18% and EPS growth of 23%. Strong asset quality and capital ratios, net loan growth of 8% year-over-year and our efficiency ratio continues to improve and trend towards our low-60% target by the fourth quarter of 2018.
Thanks, and now I will return the call to Catherine.
Catherine Ngo
Thank you, David. I remain confident in achieving our goal set forth for 2018 in our business plan, built upon operational improvement, technology and strengthening customer relationships.
We have taken measures to address challenges in the areas of continued loan growth, cost to fund and modifying the investments in information technology. I would like to express my appreciation to our employees, customers and shareholders for their continued support and confidence in our organization as we work to attain our 2018 long term.
At this time, we'll be happy to address any questions you may have. Thank you.
Operator
Thank you, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Brett Rabatin with Piper Jaffray.
Please go ahead.
Brett Rabatin
Hi, good morning everyone.
David Morimoto
Good morning, Brett.
Catherine Ngo
Good morning.
Brett Rabatin
Wanted to ask - my first was cutting out for a second there. But I thought I heard you say 8% growth for the full-year, is that still for the guide?
David Morimoto
No, that was year-over-year growth right.
Catherine Ngo
And then as far as year growth for us for the year in mid-single digits range.
Brett Rabatin
Okay. Alright.
And then David, I guess I'm just curious on the margin. You mentioned some little more pressure on the funding cost of the equation.
Does the margin reach a floor here, are you thinking the back half of the year. And are you looking at doing anything different on the securities portfolio going forward?
David Morimoto
Yes Brett. Guidance on the margin is flat to - there could be some slight additional pressure in the back half of the year as you mentioned.
We are hoping that that is the conservative guidance. But right now we are kind of looking at 310 to 320 range, and we are hoping that that is conservative.
As far as the investment portfolio. We are looking - our employers considering shifting the investment portfolio somewhat as you saw in the second [half] (Ph).
So we are looking to take the investment portfolio down and continue to allocate assets into the higher yielding loan portfolio.
Brett Rabatin
Okay, but now strategic repositioning that is active is some more cash flow?
David Morimoto
At this point, that's the plan correct.
Brett Rabatin
Okay. And then just lastly around the expenses.
I mean it sounds like you are still looking for kind of a flattish outlook in the back half of the year. Just want to make sure that was right?
Catherine Ngo
Yes so for the expenses, we are expecting a range in the $33 million and $34 million range.
Brett Rabatin
Okay, great. Thanks for all the color.
Catherine Ngo
Alright, Brett. Thank you.
David Morimoto
Thanks Brett.
Operator
Okay. The next question comes from Aaron Deer with Sandler O’Neill & Partners.
Please go ahead.
Aaron Deer
Hey, good morning, everyone.
Catherine Ngo
Good morning Aaron.
David Morimoto
Hey, Aaron.
Aaron Deer
David, I guess following up on the kind of balance sheets strategies thoughts. I guess one question would be just what might have caused the decline in the average yield on investment securities in the quarter?
And then to the extent that you are looking to reposition or redeploy those cash flows off of that book into loans, is it your expectations that you can continue to see call it 2% to 3% growth in net interest income going forward?
David Morimoto
On the first question Aaron on the investment portfolio yield, it was a little bit of an operation, late in the second quarter we had a unexpected data on a commercial MDS. I know there was Fannie Mae thus far, delegated underwriter servicer bond, so these security are backed by a single multifamily property.
So we got a unexpected payoff and so we have to accelerate about 180,000 of premium amortization rate in the quarter. So I think that it's about five basis points on the investment portfolio yield.
So if you back that out then or if you normalized for that, the sequential quarter investment portfolio actually would have increased. So on that particularly security, it was still in the yield maintenance period and we are actually currently doing some research into whether prepayment penalty is forthcoming on that or not.
It's my understanding that if the property were to be destroyed by fire that I don't think of keep a penalty is forth coming. Some research still needs to be done there.
And then on the second question, regarding the reallocations. We are looking to reallocate from the investment portfolio into higher yield in loans, we are doing it on cash flow basis right now.
And then one thing that we are kind of taking into consideration in that process is just the cost of the government portfolios slash borrowings so that will also play into the decision.
Aaron Deer
Okay. And then I guess to slightly a little more into the dynamics, impacts in the margin, can you remind us kind of what is in the loan book itself.
What percentage of that is floating, maybe what percentage reprises within a year? And then also where is the average rate on new production coming on relative to what you have seen in recent quarters?
Catherine Ngo
I will speak to the new loan yield and I will turn it over to David to talk about the floating rates. But in the second quarter the new loan payment at 4.03% and that compares to our average loan before the other yields are 4.04%.
David Morimoto
Aaron, on the existing loan portfolio reprising, about a third of the portfolio reprises within one year.
Aaron Deer
Okay so it sounds like the new loan yields are kind of flat with where the portfolio is now, is that because of a mixed shift in terms of what the production was this quarter. It seems like the single family residential contributed a fair bit of that or are you just not seeing much lift from the higher rate environment?
Catherine Ngo
Well there is some Aaron. If you compare the new loan origination yield in the first quarter of this year that was at 3.80% and so we do expect going forward as we continue to focus on our - excuse me on relationships and pricing for the value that we are adding.
We do hope to see some lift in the next couple of quarters.
David Morimoto
Yes Aaron I might add, we are starting to see an uptick in new loan origination yields relative to the last several quarters. Some of that is related to - you know we have about a $165 million, $170 million portfolio that is based off the bank basically and if you recall the Hawaii banks didn't follow Wall Street Journal Time all the way down.
And so as Wall Street Journal time started to come, started to rise we didn't really see the benefit on the Hawaiian bank base rate portion of the portfolio until the first quarter of this year. And now with every subsequent increase in the prime rate it is helping the bank basically in portfolio.
So that is helping and we are seeing an increase in just pretty much across the board other loan categories. New loan origination yields are better than the say six months ago.
and then I just remembered your second question was about net interest income and I think it was whether we believe we can still drive sequential quarter net interest income increase similar to what we saw in the second quarter and that definitely is the objective.
Aaron Deer
Okay, terrific. Thanks for taking my question.
David Morimoto
Thanks Aaron.
Catherine Ngo
Thanks Aaron.
Operator
Okay the next question comes from Jackie Bohlen with KBW. Please go ahead.
Jackie Bohlen
Hi, good morning everyone.
Catherine Ngo
Morning Jackie.
David Morimoto
Hey Jackie.
Jackie Bohlen
Touching on the viability side, you have mentioned that public funds and then other sources of borrowings would play into how you are thinking about securities. Can you just provide an update on the fluctuation of public deposits this quarter and what you are seeing in that market, how you are thinking about the positioning going forward.
Catherine Ngo
I will turn that question to David. David.
David Morimoto
Hey Jackie. So total government at 6.30 was 727 million so it was a slight increase I think about a $25 million increase sequential quarter and that was just a function of pricing, we have seen some normalization of pricing in government time and it was cheaper.
It was cheaper than wholesale borrowings then we will lean on the public time. So we did average free of the 727 was 1.85% and the new volumes the new volumes that were booked in the second quarter had a weighted average rate of 1.93%.
Jackie Bohlen
Okay and is that at the main driver of the movement in your time deposit costs or are you seeing are there pressure from retail for you [indiscernible] as well.
David Morimoto
In the large time deposit is primarily the public funds. And again, when we look at the investment, when we look at the deposit portfolio, I think the best way or the way that we would like everyone to look at it is to segment $5 billion into $4 billion core portfolio and roughly $1 billion large CE portfolio.
And if you look at it that way, the $4 billion core portfolio has a weighted average rate of nine basis points and it's exhibited in rate beta over the last 12 months of 3%. So very low rate beta.
The large CE portfolio by contrast in the second quarter had a weighted average rate of 146 and a rate beta over the last 12 months of 88%.
Jackie Bohlen
So when your team is evaluating just it in terms of balance sheet strategies you mentioned and how you are thinking about securities. Does the discussion of any potential balance sheet shrinkage ever come up?
David Morimoto
We have taken a look at it, we have model it. Overall balance sheet shrinkage hasn’t been one of the strategies that we have been focused on.
We have been focused on keeping it steady, reallocating from investment into the higher yielding loans and to extent that we see strong loan growth. I think for five with even taking on a little more leverage and growing the balance sheet.
But going auto of the way shrinking really hasn't been a strategy we have been focused. We really need to drive the top-line revenue growth and so that is where the focus has been.
Jackie Bohlen
Now that make sense. Great.
Thank you.
David Morimoto
Thanks Jackie.
Catherine Ngo
Thanks Jackie.
Operator
Okay. The next question comes from Laurie Hunsicker with Compass Point.
Please go ahead.
Laurie Hunsicker
Yes, hi good morning. I just wondered can we follow up on Jackie's question upon funds.
Do you think you have a comparable cost of $700 million in the prior quarter to the 185 you just gave us for this quarter?
David Morimoto
You know I actually don't have it on me Laurie, but we can get back to you on that.
Laurie Hunsicker
Okay. And then I guess just generally to your comment about deposit cost to elevating capital.
Can you help us think specifically about the money market, that seems to be outside of CDs. That seems to be where we see the movement.
Where is that one going and how are you guys approaching specials. How should we be thinking about that?
Catherine Ngo
Sp you are speaking Laurie to the supply in the savings money market?
Laurie Hunsicker
Correct.
Catherine Ngo
There are as far as deposits in there, we have benefited earlier quarters of taken those escrow deposits. And also deposits related to one of the larger accounting and construction project here.
So in the second quarter, there was an outflow out of those two accounts.
Laurie Hunsicker
Got it, okay. And then with respect to the jumping cost, tough market reaction.
Yes just linked quarter if we are looking at the cost of savings and money market that went from 10 basis points to 12. Or I guess directionally, how should we be thinking about that?
Catherine Ngo
Let me turn that to David?
David Morimoto
Sure. Similar to a lot of other banks Laurie, we are implementing some deposit, I guess you would call it a deposit segmentation strategies.
So within the savings money market category, we have created some higher yield components within those categories. And we are doing that more of on defensive strategy and I think that is what you are just seeing there.
So it's not broad based rate increases on all savings NMB accounts there are pockets within those categories.
Laurie Hunsicker
Got it, okay. And then just putting that all together as we think about your margin guide 310 to 320 range.
How many rate hike had you assumed in that number?
David Morimoto
In the back half of 2018 its two. So it's a pretty consensus forecast Laurie.
And I do want to reiterate that the 310 to 320 we are hopeful that is pretty conservative guidance.
Laurie Hunsicker
Okay and then just to loan growth, I saw you purchase $20 million of auto, Newman auto, can you just give us an update where your total auto book stands and then what the breakdown in Hawaii versus Mainland? And then just how we should be thinking about purchases or growth in that book?
Thanks.
Catherine Ngo
David, do you have that number of the book?
David Morimoto
The breakout?
Catherine Ngo
Yes. Laurie, we may have to get back to you on that one.
David Morimoto
Yes.
Laurie Hunsicker
Okay. Okay.
I mean just generally how are you approaching growing that, was this kind of a one-off in terms of a purchasers or is this something we could expect to see going forward?
Catherine Ngo
The way that we look at book loan purchases and it's really no different from the way we look at it in OEM quarters. It's really more opportunistic and as we see opportunities and whether that is here or on the Mainland at the right yields.
Laurie Hunsicker
Okay. And then maybe David, can you just describe that jumped in charge offs, was there anything.
I mean your credit has foreseen, but was there anything in particular within that consumer book that $1.8 million as charge off? Is there any one line item?
David Morimoto
No, no. Laurie, it was pretty consistent.
I think if you look at the growth charge offs, growth charge offs have been pretty consistent. So that charge offs look high this quarter relative and that is really due to the first quarter of 2018 we actually had two large recoveries that were kept in that charge offs.
Laurie Hunsicker
Okay. And then I mean in terms of your loan loss provisioning and obviously we are just now starting to see a ramp come back here.
I mean, to what point do you say hey our provisions at a minimum needs to be covering charge offs? Or maybe can you just refresh us on that guide you gave us last quarter that is somewhere between $0.5 million, $2.5 million and how should we be thinking about loan loss provisioning?
Catherine Ngo
I will turn that question over to an Anna.
Anna Hu
Hi, Laurie.
Laurie Hunsicker
Hi, Anna.
Anna Hu
Hi., similar to the last quarter, what we directed that range to be with between $500,000 to $1.5 million. We continue to expect that going forward.
Of course baring any major changes, and any unforeseen changes to occur. We do to expect to maintain within that range.
Laurie Hunsicker
Okay. Great, that is helpful.
And then just two more questions. The income statement, let's take a bowling was elevated to some of that included just benefit?
David Morimoto
So Laurie, no. There were no debt set into the second quarter, I think it was roughly 500,000, that's generally a good core run rate for all the income.
The first quarter was actually no, we do have a one separate account bully policy that does not have a stable value that came over in acquisition a long time ago. But because it doesn’t have a stable value add it's invested in fixed income securities, so when the bond market isn't doing well, that policy does not do well from an income standpoint.
So first quarter was actually low.
Laurie Hunsicker
Okay, that is helpful, okay then last question I appreciate the detail you gave around the Puna district, can you just remind us what your total big island burn exposure is?
Catherine Ngo
Sure, I will take that question Laurie and then I actually have auto information for you. I will come back to that.
So as David mentioned in his remarks, the damage of destroyed properties in the Puna district was $1.6 million and then as far as the total amount of mortgages and hillocks in the Puna district that is 4.3 million in principal balance. And then total big island exposure which would include of course the Puna district is a $137 million and that represents 3.5% of our total loan portfolio.
Laurie Hunsicker
Okay, that is really helpful, okay. And then you said you had the auto.
Catherine Ngo
Let me come back to that, and I will break it up between Hawaii and Mainland, so as of Q2 and the Hawaii auto portfolio balances were a 172 million and then the Mainland auto portfolio balance was 116 million.
Laurie Hunsicker
Okay, great, thank you so much. I will leave it there.
Catherine Ngo
Sure. Thank you.
David Morimoto
Thank Laurie.
Operator
Okay. [Operator Instructions] The next question comes from Don Worthington with Raymond James.
Please go ahead.
Don Worthington
Thank you, good morning. Just one or two more, in terms of mortgage banking revenue that has been pretty steady the first two quarters of the year, would you expect that to continue at the level you had this quarter.
Catherine Ngo
I will take that one. So I think in our production in the second quarter for mortgages we had a $140 million and we are expecting in the next quarter for that to be more in the $150 million range.
And then if I look out beyond 2Q, Q4, we do have a couple of condo projects that are going to be completed in the fourth quarter, and we do have a significant percentage of the units in those buildings that will be closed now in the fourth quarter.
Don Worthington
Okay, great, and then it looks like the Mainland C&I portfolio went up a little was that anything in particular.
Catherine Ngo
That was mix and as I mentioned earlier in my remarks, to the extent there are opportunities for purchases whether that be auto or snakes on the Mainland we are going to continue to look opportunistically at that. So that 8.3 million in C&I was that you saw in the mainland in Q2 was fixed.
Don Worthington
Okay. Great, thank you.
David Morimoto
Thanks.
Catherine Ngo
Sure Don.
Operator
Seeing no further questions in the queue, 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 second quarter of 2018. 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.