CPF
#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 <UNK> <UNK>, President and Chief Executive Officer; <UNK> <UNK>, President and Chief Banking Officer; and <UNK> <UNK>, Senior 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 <UNK>.
Thank you, <UNK>, 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, supported by the favorable economic and business conditions in Hawaii.
Net interest income, non-interest income, and asset quality continue to improve.
<UNK> will be providing the highlights of our Company's financial results later in the call.
As a result of our consistent profitability and strong capital position, our Board of Directors increased the quarterly cash dividend by 14.3%, from $0.14 to $0.16 per share, payable on September 15 to shareholders of record as of August 31 of this year.
We have also been active in executing on our 2016 share repurchase plan, which authorized share repurchases of up to $30 million this year.
Year to date, as of June 30, we have repurchased close to 493,000 shares of CPF common stock, or approximately 1.6% of the total common stock outstanding as of September 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 a continuing effort to build upon our Bank's core franchise value, our customer base, we will be realigning our exec structure to allow more of my time to be invested in engaging with our customers and prospective customers, while at the same time strengthening our focus on improving our operational competency.
Effective September 1, 2016, <UNK> <UNK>, our current President and Chief Banking Officer, will be appointed to the new executive position of Vice Chair 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.
<UNK>'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 continued improvement and 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.
Before tax for 2016, our 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 jobs 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 continues to be strong and has been a key contributor to job growth, albeit construction permits issued for private and public development projects 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% in 2016 following an increase of 2.0% in 2015.
At this time, I'll turn the call over to <UNK> to review the highlights of our financial performance.
Thank you, <UNK>, 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 of $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.
<UNK> 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 second quarter, we recorded a credit to the provision for loan and lease losses of $1.4 million compared to a credit of $0.7 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.
The decrease in long-term market interest rates during the quarter had the effect of increasing our gain on sale income, but also resulted in more amortization expense on our mortgage servicing rights.
We also had a one-time bank-owned life insurance benefit 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 (inaudible) benefit that is nontaxable.
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 <UNK>.
Thank you, <UNK>, and good morning, everyone.
Overall, our business development efforts have been effective across all lines of businesses during the quarter.
We continued to make good progress in selected target markets, including the small business and 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 declined 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 realized 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 increased, including 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 balances will reflect growth at the high-single-digit percentage level over the previous year.
Total deposits declined 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 a large 1031 exchange transaction that came in 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 will now turn the call back to <UNK> for her closing remarks.
<UNK>.
Thank you, <UNK>.
In summary, we are confident in maintaining stable growth throughout the year while acknowledging that we have more work ahead in improving operational efficiency 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 you may have.
Thank you.
Thanks, <UNK>.
It's a long question.
I'll try to answer as much as I can.
All right.
Our total SNC portfolio, we're probably about in the $185 million range, and we've been trying to reduce those balances as we look at the opportunities more on Hawaii.
As we've said before, we're looking more for organic growth.
And so as opportunities arise more on the local side, we've decided to temper our activities on the mainland.
On the large construction project, it was a project on Oahu.
It was a high-rise condominium project that we had a participation in.
The project closed successfully, and as a result, the construction loan participation was paid off.
In terms of the mix of the portfolio, I anticipate that we'll see continued growth in all sectors.
It may be tempered, again, 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.
The auto portfolio that was purchased in the second quarter was about $18 million.
Again, we saw this as an opportunity.
In terms of the activity, the construction activity, we're seeing a tapering off, as we've talked before, but in the high-end luxury market.
There's 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.
Sure.
A couple of things drove our decision on the organizational change.
The first is the importance of operational efficiencies and continued focus on that.
And so <UNK> in his new role will be focused on the end-to-end servicing quality, first, for our customers, but also operational efficiency.
And then second, as CEO, I think it is critical that I am out in the market to drive line of sight, not only to our line officers, but our customers.
And so with this reorganization, I will be directly overseeing the lines of businesses.
I'm going to turn this over to <UNK>.
Good morning.
I think we're still continuing to see a strong mortgage market in Hawaii, and I don't necessarily expect that to significantly reduce over the rest of the year.
We've 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.
I'll turn that over to <UNK>.
For this quarter, our provision credit was really commensurate with our growth, our credit quality, what we're 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.
<UNK>, this is <UNK>.
The approximate amount was $61 million.
<UNK>, this is <UNK> again.
We're optimistic that we'll see the balances grow 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 be temporary.
But I do expect that we'll continue to see some deposit growth for the rest of the year.
So as I think about the strategy for the Company going forward, we're focused 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 bringing in the loans and deposits, but more importantly, appreciating the needs of our customers and cross-selling into those needs.
And I think a critical part of that is ensuring 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 private banking team.
So it's really going to be that collaboration across all of our groups to drive the increase in loans and deposits across all of our customer segments.
One thing that we are looking at is our wealth strategy, and I see it as a 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 wealth strategy.
And it goes back to what I mentioned earlier, <UNK>, 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 investment needs.
At this point, we are 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.
Let me address the construction loan first.
I think the closing of that project did translate into mortgage financing, so we did a few takeout loans as the construction project closed off and it 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 the shopping center complex that we successfully helped refinance out to another lender.
So that was one of the big drivers in our commercial real estate growth.
Sure, so Aaron ---+ <UNK> 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.
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 <UNK> in his new role, we are looking at expenses, and we will continue to look for opportunities to streamline where there are opportunities.
<UNK>, this is <UNK>.
There were a handful of other large depositors that did withdraw funds.
And again, as I mentioned before, we had anticipated that, but we knew that those were 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 a larger-than-anticipated reduction.
But again, we knew that that was going to happen; it was just a matter of timing.
But the other deposits, the withdrawals that made up for that $90 million reduction, those withdrawals were probably in the low-double-digit range.
Right.
<UNK>, I'll turn that over to <UNK>.
Hey, <UNK>.
So on the reinvestment rates, so in the investment portfolio, we actually did not purchase any securities during the second quarter.
We put the investment portfolio in runoff 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 purchase, 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 yields, weighted average rates, were coming on in just that 3.90%, 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 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 rates.
However, market rates remain low, so we do think amortization may be at the level that we've seen over the first two quarters.
Somewhere in that neighborhood, I think, would probably be a good estimate.
Yes.
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.
