Oct 24, 2018
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp Third Quarter 2018 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’d like to turn the call over to Mr.
David Morimoto, Executive Vice President, Chief Financial Officer. Please go ahead.
David Morimoto
Thank you, Anita, and thank you all for joining us as we review the third quarter financial results for Central Pacific Financial Corp. With me this morning are, Paul Yonamine, Chairman and Chief Executive Officer, Catherine Ngo, President and Chief Executive Officer of our Bank Subsidiary; 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 Paul.
Paul Yonamine
Thank you, David, and good morning everyone. Having just joined Central Pacific Financial Corp three weeks ago, I have been focused on better understanding how our strategies are being executed at the ground level.
My immediate goal is to work with Catherine and the CPF team on accelerating our future strategies for more efficiencies and growth. As I get my arms around this in the month ahead, I hope to share more of my files and insights with you.
That said, let me first thank each and every one of you for your time and effort and supporting Central Pacific and I do afford to getting to know each of you better. Now, the economic outlook for Hawaii continues to be on track for positive growth through 2018 and 2019.
Key leading indicators have turned in strong year-to-date results relative to the tourism industry, labor market conditions and growth of personal income and tax revenues. During the first eight months of this year and with the 6% increase in the air seat capacity of Hawaii, total visitor arrivals increased by 7.2% to 6.8 million over the same period last year, visitors spending also increased by 8.8% to $12.3 billion.
The 2018 forecast for visitor arrivals and spending has been revised upward by the State Department of Business, Economic Development and Tourism in the third quarter report with arrivals expected to increase by 6.1% and spending by 9.2% over the previous year. By the end of 2018, jobs growth is projected to increase by 1.2% and personnel income by 3.5% compared to the end of the previous year.
The unemployment rate in the Hawaii for the month of September increased slightly to 2.2% after remaining at 2.1% for the past three consecutive months, compared to 3.7% in Hawaii. The Honolulu consumer price index is expected to increase in 2018 by 2% and Hawaii's real GDP is projected an increase by 1.5% over the previous year.
Overall, the local business and economic conditions have continued to provide a steady tailwind for consumers and businesses In Hawaii. At this time, Catharine will provide some of the banks highlight of the quarter.
Catherine Ngo
Thank you, Paul. We’re pleased to report on a strong financial performance in the third quarter of this year compared to the same period a year ago, net income increased by 28.6% and earnings per share improved by 33.3%.
The driving factors can be primarily attributed to strong loan growth and a stable net interest margin, which improved net interest income as well as expense containment and the positive impact of the Tax Cuts and Jobs Act. David will provide more detail of our net income components later in the call.
Our earnings consistency and strong capital position have a lot us to continue executing on our share repurchase program which on a year-to-date basis announced to approximately 2.8% of the CPS common shares outstanding as of the end of 2017. We continue to realize the loan growth while maintaining strong asset quality through the quarter as long as year-to-date.
Total loans increased by $96 million or by 2.5% over the previous quarter end and by $342 million or 9.4% from the same period a year ago. Loan growth was distributed across all loan types led by commercial and industrial loans which increased by $42 million or 8.0% from the previous quarter or by $78 million or 16.0% from same period a year ago.
Increases were also realized in our commercial mortgage, resi mortgage and homes equity loan portfolio. Assets quality and our credit risk profile continue to improve with non-performing assets reduced to 5 basis points of total assets.
Total deposits increased by $25 million or 0.5% quarter-over-quarter, which included a $21 million increase in core deposits. On a year-over-year basis, total deposits increased by $76 million or 1.5% of which $62 million was in core of deposit growth.
The increase in non-interest bearing demand balances led the way on a sequential quarter basis with an increase of $39 million or 2.8%. Government time deposits were significantly reduced and will offset by increase in other timing project.
Competitive pricing for deposit on a local market has been escalating in the rising interest rate environment, however net interest margin remain stable with increases in loan and investment yield. We continue to improve our operating efficiency and reduced our efficiency ratio for the third consecutive quarter.
There is still opportunities to further improve efficiencies in the near-term by leveraging recent investment in technology and information management initiatives. At this time, I will turn the call over to David to review in more detail the highlights of our financial performance.
David.
David Morimoto
Thank you, Catherine. Net income for the third quarter of 2018 was 15.2 million or $0.52 per diluted share compared to net income of 14.2 million or $0.48 per diluted share reported last quarter.
Return on average assets in the third quarter was 1.76% and return on average equity was 12.54%. Net interest income increased by 0.7 million and the net interest margins held steady at 3.20% on a sequential quarter basis.
We announced today that we submitted a notice to redeem 20 million in floating rate trust preferred securities, which I reported in long term debt on our balance sheet. The trust preferred redemption will occur on December ’17 and will include perspective net interest income and net interest margin.
During the third quarter, we recorded a credit to the provision for loan and lease losses of 0.1 million compared to a debit provision of 0.5 million recorded in the prior quarter. Net charge offs in the third quarter totaled 1.3 million as compared to net charge offs of 1.6 million in the prior quarter.
At September 30th, our allowance for loan and lease losses was 46.8 million or 1.18% of outstanding loans and leases. Third quarter 2018 other operating income totaled 10.8 million.
The sequential quarter increases was primarily due to 0.4 million in debt benefit income from bank owned life insurance recognized in the third quarter. Other operating expense for the third quarter increased slightly to 34.1 million.
The sequential quarter increase was primarily driven by higher computer software expense. The efficiency ratio for the third quarter was 63.1% which was an improvement on the 64.5% in the previous quarter.
We continue to expect the efficiency ratio to trend towards the low 60s by the fourth quarter of 2018. During the third quarter of 2018, we repurchased roughly 235,000 shares of common stock at an average cost per share of $28.43.
We've also repurchased an additional 81,000 shares of common stock month-to-date on October at an average cost of $26.22 per share. Finally, I’d like to close the financial summary by summarizing some of the highlights of our third quarter results.
Continued quarter-over-quarter growth in net interest income driven by strong loan growth, stable interest margin at 3.20%, strong asset quality and capital ratios and efficiency ratio continues to improve and trend towards a low 60s target. And now, we will return the call to Paul.
Paul Yonamine
Thanks David. While I’ve just recently joined the organization on October 1st and served on the Board of Directors since June of last year, I am confident in our business plan and our team’s ability to advance in the areas of profits improvement, digitization, customer relationship and quality growth.
On behalf of Catherine and our management team, I’d like to express my appreciation of our employees, customer and shareholder for their continued support and confidence in our organization as we work toward attaining our key milestones in the coming years. At this time, we’ll be happy to address any questions you may have.
Thank you.
Operator
We’ll now begin the question-and-answer session. [Operator Instructions] The first question today comes from Aaron Deer with Sandler O’Neill.
Please go ahead.
Aaron Deer
I guess I’d like to begin with the loan growth in the quarter, which seemed to be fairly strong. I am just curious to know, if there anything particularly that drove this strength this quarter, particularly given the bump that you got in the Mainland C&I book?
Catherine Ngo
Good morning, Aaron. The loan increase in the third quarter primarily was in Hawaii.
So, you saw that 87 million of that 96 million growth was here, it was really across all asset classes, and starting with C&I, we saw a $42 million growth quarter-over-quarter, which 15 million that was here in Hawaii. So, I would say that it’s the strategy of building relationships here in Hawaii in fact is paying off nicely with the increases that we saw in our Hawaii book.
Aaron Deer
And then looking at the margin, the shift in earning assets seems to play a role in maintaining the margin stability this quarter. Certainly, you guys have the capacity to keep doing that given the liquidity that you have.
But I guess to grow net interest income more meaningfully it seems that Charles going to have to grow deposit as well. So, how are you thinking about kind of deposit growth and net interest income growth over the coming year given the current economic and rate environment?
Catherine Ngo
Yes, I'll turn it to David, but I want just make a comment on loan yield, which of course has helped the net interest margin and so, we saw new loan coming in this quarter at 4.25% and is compared with an overall loan portfolio yield of 4.01%. So then now, David, I'll turn it to you to talk about the deposit side.
David Morimoto
Thanks Catherine. Yes, the net interest margin, we were pleased that we were able to send the decline, a sequential quarter and decline in the net interest margin and hold it flat this quarter.
And obviously, we are hopeful that we can turn that in future quarters. The things that have benefited in net interest margin as you had mentioned, the composition shift in the balance sheet.
In the earning assets, we are shifting from lower yielding investment securities into the higher yielding loan portfolio. We’re also starting to see improving re-pricing in the loan portfolios as Catherine mentioned.
So, now we’re starting to see an uptick in the overall loan portfolio yield. And the final contributor to the net interest margin on this quarter was, we did shift roughly 30 million from government CDs, public fund CDs into customer CDs, which are more -- less rate sensitive, lower beta deposits.
So, all those things pull together are what helped us this quarter. Going forward, as you mentioned, it is going to be a function -- what will help is growing core positive and our asset liability committee is strategizing on that front for future quarters.
Aaron Deer
And then last one for me just on the expense front. Operating expenses poked a little above your 33 million to 34 million target range, I’m guessing some of that might have been, I don’t know if you guys did have write-down on some legacy software, but that seem to be the line item where you hit.
But just as you look out to the fourth quarter and really out into 2019, do your expectation can stay in that range and just kind of thoughts on operating leverage moving into next year?
Anna Hu
So, I’ll take that. See, we expect the other op expense line to be in the $33 million to $35 million range.
On the computer software expense where you did see a slightly uptake in the third quarter, that really was related to some catch up on accruals. Going forward, you can expect that number to be on the $2.4 million range.
Operator
The next question comes from Jackie Bohlen with KBW. Please go ahead.
Jackie Bohlen
Just question on the trust preferred redemption. Which trust number is that you’ll be redeeming?
David Morimoto
Jackie. It's David.
So, at the end of mid December, we’re redeeming CPB Statutory Trust III.
Jackie Bohlen
And was there anything in particular whether it was opportunity or whether it was some other characteristic that cost you redeem that particular tranche?
David Morimoto
As disclosed in our SEC filings, Jackie, there is -- at current, we have $90 million in trust preferred, it's currently outstanding there issue through four different tranches or trust. And two of the trusts have higher margins.
So, the outflow -- quarterly outflow, three month LIBOR in Trust II, Trust III have margins of 25 basis points.
Jackie Bohlen
And might you look to do at similar redemption of Trust II?
David Morimoto
That’s always an option, Jackie. For a change, it's nice to be the holder of these options rather than been on the other end of it.
So, it's an option that we have for the future.
Jackie Bohlen
And will there be an outside of the crude interest and everything that will be payable alongside the redemption? Are there any other sort of fees or penalties on redemption?
David Morimoto
No, all four trusts are beyond that their lockout periods. So, they’re all redeemable at par on the quarterly interest pay dats.
Jackie Bohlen
And then just one last one for me. You’ve had a good amount of steady recoveries that have continued to offset some of the growth charge off.
I guess what’s left in that bucket?
Catherine Ngo
I am going to turn that question over to Anna. Anna?
Anna Hu
Good morning, Jackie. Our recoveries from quarter-to-quarter, there is -- it's not flat.
We have been looking we work hard at recovery. The charge offs that we have been processing through, but there is nothing really in there to say what's left.
Jackie Bohlen
Okay. Is it -- I guess most of what you’re recovering now, are they more Hawaii based or more main Mainland base?
Anna Hu
Hawaii based.
Jackie Bohlen
So, there is given what you have in the data that you have understanding that obviously this is a very variable thing and hard to predict. Is it possible that you can see some continued recoveries in similar levels at 2Q and 3Q, I know, 1Q had some unique items in it?
Anna Hu
Yes, barring the unique item, I think that it may be south of what we’ve reported in the third quarter. We had some nice surprises that have come through for us, but I don’t think it's sustainable really at that level.
Operator
The next question comes from Laurie Hunsicker with Compass Point. Please go ahead.
Laurie Hunsicker
Wonder, if we could go back to margin here. Can you just remind us, what are your public funds of September 30 with the comparable number in June 30 being 727 million?
David Morimoto
Laurie, it was just under 700 million, so in a 690 range.
Laurie Hunsicker
And then, what is your plan for that as we head into next year?
David Morimoto
Laurie, it's going to be a little bit of function of pricing. On our daily basis, the public entities put out there, their funds forbid to the local institutions and we bid based on where the -- our alternative sources of wholesales borrowings are.
So, it is really a function of we'll bid where it make sense for us and to the extent we win, the bidding will be growing the public funds. So, it is a function of where they're being priced.
Laurie Hunsicker
And they're still roughly costing 4 basis points under the T-Bill or has that slowed?
David Morimoto
It's roughly around the T-Bill range, but what we compare it to is where we can borrow from the Federal Home Loan Bank for comparable term.
Laurie Hunsicker
And then just going back to Jackie's question on the trust preferred. So just that I’m thinking about just the right way obviously you’re spending lot of cash, assuming that there is no other sort of cost of redemption, this is basically a two basis points drop to the bottom line in terms of two basis points pick up in margin?
David Morimoto
That's correct. On the $20 million redemption on an annualize basis, it's about half a million in net interest come 2 basis point pick up in net interest margin.
Laurie Hunsicker
And then, Paul, last question for you, you've referenced quality growth. Can you just talk a little bit about your vision in terms of CPF where you would like to see growth that maybe is different than what CPF has currently been doing?
In other words, if you just talk a little bit about where you might be a little bit more outside of the box or changing strategy? Or is that going to business as usual and just more efficient in the growth?
Paul Yonamine
Once again, I’m not trying to avoid responding to that question. But having been here for three weeks, I’m still in the process of really spending a lot of time with our employees and also with our customers.
And Catherine, David, and the rest of the team and I have been hobbling quite a bit on weekends, trying to further refine strategy to do it exactly that, as addressing more quality profit improvement, use of technology so forth and so. So, Laurie, if you could please give you a little bit more time, and I would like to come back on some of the call and get a little bit more granular into detail for the months ahead to respond to your question more effectively.
Thank you.
Operator
Next question comes from is a follow-up from Aaron Deer with Sandler O’Neill. Please go ahead.
Aaron Deer
Just a quick follow-up on the trust redemption, the -- vis-à-vis the stock repurchases, obviously, that’s been part of your capital return story and with the bank stocks having taken a good dip here. It seems like it might even be more attractive.
So just curious to know, if this redemption has any impact on your thoughts in terms of repurchases over the coming quarter or two?
David Morimoto
When we do these redemptions we do these to get prior approval from our regulators. And the approval that we sought and obtained with regard to the Statutory Trust III was, we informed them that we wanted to be deemed the 20 million while continuing with our current plans to with our repurchase plans.
So, it does not have to impact the repurchase plan, but obviously what we do with the repurchase side is at management’s discretion.
Operator
This concludes our question-and-answer session. I would now like to turn the call back over to Paul Yonamine for any closing remarks.
Paul Yonamine
Actually, I’ll defer that over to Catherine. Catherine, if you could close the call?
Catherine Ngo
Sure, thank you very much participating in our earnings call for the third quarter of 2018. We look forward to the future opportunities to update you on our progress.
Operator
This conference has now concluded. Thank you for attending today’s presentation.
You may now disconnect.