CPF
#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 <UNK>, President and Chief Executive Officer; and <UNK> <UNK>, 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.
Thank you, <UNK>, 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 a sequential quarter basis, the dramatic change in net income was primarily due to the $7.4 million noncash 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 valuation.
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.<UNK> by 3.5%.
The key drivers of loan growth on a sequential quarter basis were the increases of 3.2% in home equity loans and lines, 2.9% in commercial mortgages and 2.5% in commercial and industrial loans.
Asset quality remained strong with nonperforming 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 noninterest-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 a 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 2 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 nonagricultural jobs in February of 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 seasonably 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 growth domestic product by 1.7% and the Honolulu Consumer Price Index by 2.4%.
At this time, I'll turn the call over to <UNK> to review the highlights of our financial performance.
<UNK>.
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 onetime $7.4 million charge for the revaluation of our net deferred tax assets.
Also, our first quarter 2018 results include a $0.7 million onetime income tax benefit due to a refinement to 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 continue 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 filing 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 net 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 loan and lease losses of $0.2 million compared to a credit of $0.2 million recorded in the 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 31, our allowance for loan and lease losses was $49.2 million or 1.29% of outstanding loans and leases.
Based on current forecasts, we believe that 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 slight improvement from the fourth quarter.
We continue to expect the efficiency ratio to trend towards the low 60s by the fourth quarter of 2018.
During the first quarter of 2018, we repurchased roughly 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 solid performance.
Thanks, and I'll return the call to Catherine.
Thank you, <UNK>.
In 2018, we do have an ambitious business plan and have factored in our projections for the economic climate and market conditions in Hawaii as well as the competitive challenges we face in a rising interest rate environment.
I am confident that we will attain the milestones and goals we have set forth, and we'll continue to focus on operational improvements 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.
The public deposits were roughly consistent in the first quarter.
They increased slightly.
So we're just about ---+ just over $700 million at the end of the first quarter.
And that is a little 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 treasuries of government deposits were about 11 basis points above comparable term T-bills.
In the first quarter of '18, the pricing change were reverted back to more of the norm where it's 4 to 5 basis points below comparable term T-bills.
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.
We actually slightly grew it during the first quarter.
Yes.
Yes.
Again, you're right, Jackie.
It's primarily in CDs, and I would say large CDs.
That's where we've seen the majority of the increase on the deposit costs, and that's again primarily related to government.
But there have been some other increases in costs.
And what the team has ---+ we've been doing is we've actually been trying to segment the customer ---+ the deposit customer base a little more finely.
And as a result, I think we've done a pretty good job of 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 is ---+ story remains the same.
So the ---+ if we were to segment the large CD portfolio, the portfolio, the core deposit portfolio, the nonlarge CD portfolio is roughly $4 billion with a weighted average rate of 8 basis points and a rate beta over the last 2 ---+ last 12 months of 2%.
When you contrast that with the large CD portfolio of $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 that $4 billion core deposit portfolio has exhibited a very low rate beta of 2% and currently has a weighted average interest rate of 8 basis points.
Yes, yes.
And there's 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.
Yes, it's definitely something that we're discussing.
I think it's a keener focus on the loan and deposit pricing.
So it's focusing more on our profitability reporting.
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 yield of 3.98%.
We are taking measures to address this, and we're continuing to look at the appropriate risk reward balance in looking at our loan opportunities.
And if I may add, Aaron, the repricing of the portfolio, we have roughly 1/3 of the loan portfolio that reprices 1 year-end in.
So that's what we consider to be the short-term portion of the repricing portfolio.
And one thing to note on that is in that 1/3 of the portfolio does include the portion that reprices off of the CPB Bank base rate.
And all of the Hawaii banks when interest rates were falling ---+ I think this goes back to 2008, when interest rates were falling, all of the large Hawaii banks, we floored our prime rate as 4.5%.
So even though debt funds went further down, and Wall Street Journal prime went down to 3%, we stopped at 4.5%.
So on the way up as Wall Street Journal prime was repricing up, we're not getting the benefit on this portion of the bank base rate portfolio until the March 22 tightening where Wall Street Journal prime went to 4.75%, and we finally were able to increase the bank base rate portfolio.
About $165 million.
Yes.
That's a good question, Aaron.
That's a discussion that we plan to have with the regulators.
The way the trust indentures read today, it does require us to discuss the prepayments with our regulators prior to call.
So like similar to what we did, we did call the ---+ our CPB Capital Trust I $50 million several years ago, so we'll go through the same process.
And there's a possibility that it could be considered ---+ I guess, the term is extraordinary capital actually, so you can get an approval to do that, and then it was necessarily change what we change our plans on the repurchase front.
But that's obviously something that still needs to occur.
Yes, Aaron, we're still expecting mid-single-digit loan growth for the year.
Sure.
I'll take that <UNK>.
Well, the first thing I will say is in the fourth quarter of last year, we announced an increase in our entry-level rates 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 calls, and so it still will be in the $18 million to $19 million range quarterly.
Yes.
I'll start and 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 of a couple of condo towers here in Honolulu where we got a significant percentage of the takeoff.
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 that and 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 that tends to be higher than our competitors.
And in Q1 of this year, the purchase percentage was 64%.
Yes, sure, <UNK>.
I would say that, that we're going to be ---+ or continue to be careful as we look at that risk reward balance in our Hawaii opportunities but also Mainland opportunity.
So you will see us being opportunistic, including on the Mainland.
And where we see the right balance, specifically to the Mainland, you could see that percentage.
I think it's under 11% today of the total portfolio.
You can see that [bumped up] beyond the 11%.
Actually, for this (inaudible), we ended the quarter at 10.7% of total loans on the Mainland.
Let me start, <UNK>, and then I'm going to turn it over to <UNK>.
I believe in earlier calls, we've been (inaudible) that we're coming to an inflection point.
And we do believe in the second quarter that we are at that inflection point.
So let me turn it to <UNK> to give you a little bit more color on what we could expect in the second quarter.
<UNK>.
So as you know, we don't set a target percentage level for us.
So while we are at the 1.29%, as Catherine mentioned, we do believe we reached a normalized point.
And really going forward, barring any major unanticipated changes, we do expect a 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.
I'm going to turn that over to <UNK>.
Thank you, Catherine.
<UNK>, the BOLI line, you're right, the normal quarterly run rate was probably 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 death 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 wrap.
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 bear market, it underperforms.
So that's a BOLI policy that came over in the past acquisition.
So because it doesn't have the stable value route, it does agree to a little bit of volatility in the income line.
Let me turn that to <UNK>.
Don, the change in the first quarter, the decline in the DTA 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 if that money went into the interest-bearing DTA ---+ interest-bearing checking accounts.
So we actually had an accrual on the interest-bearing checking account side.
And now that was more ---+ so it feels pretty broad-based for a lot of good account(inaudible) increases in interest-bearing checking.
No, no loans purchased, Don.
Let me turn that question over to <UNK>.
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.
That's the growth in our loan 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 targeted for.
Thank you, Laura.
And thanks, everyone, for participating in our earnings call for the first quarter of 2018.
We look forward to future opportunities to update you on our progress.
