CPF (2019 - Q4)

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Fourth Quarter 2019 Conference Call. [Operator Instructions].I'd like to turn the call over to Mr. David Morimoto, Executive Vice President, Chief Financial Officer. Please go ahead. David Mo

Thank you, Andrew, and thank you all for joining us as we review the financial results for the fourth quarter and full year of 2019 for Central Pacific Financial Corp. With me this morning are Paul Yonamine, Chairman and Chief Executive Officer; Catherine Ngo, President; 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 the risks related to our forward-looking statements, please refer to our recent filings with the SEC.And now I'll turn the call over to Paul.

Thank you, David, and good morning, everyone. I'm pleased to report on the company's solid financial performance for the fourth quarter of 2019 as well as for the full 2019 year. We continue to generate strong loan and core deposit growth and maintain solid asset quality and capital ratios, both on a sequential quarter and a year-over-year basis. For the full 2019 year compared to last year, we improved our net interest income, net interest margin, noninterest income and efficiency ratio. David will be providing the details of our financial highlights later in this call.Our profitability and strong capital position enabled us to repurchase 165,700 shares of CPF stock during the fourth quarter. During the 2019 year, we repurchased 797,000 shares or roughly 2.8% of our common stock outstanding as of the end of 2018. Combined with cash dividends, we have returned $48.5 million in capital to our shareholders this past year.We continue to execute with our RISE2020 initiative to enhance customer experience, drive stronger long-term growth and profitability, and improve shareholder returns. In the fourth quarter, we launched our new website under the cpb.bank domain name and implemented an end-to-end commercial loan origination system that will drive better efficiency. The development of our new online and mobile banking platform is progressing well, and our employees are excited to pilot the new platforms in the first quarter.Key steps toward our 2020 milestones in the area of branch and ATM modernization were achieved with constructions underway at our main branch headquarters and our new ATM selected. The Hawaii economy continues to perform well with annual visitor arrival set to exceed 10 million for the first time ever, continued strength in construction activity and the growing importance of the military in Hawaii for the U.S.'s Indo-Pacific Strategy.At this time, I'll turn it over to Catherine for our balance sheet highlights. Catherine?

Thank you, Paul. Our total assets surpassed the $6 billion mark at year-end and reflected an increase of 3.5% from the previous year-end. Our balance sheet composition continues to move in the right direction with growth focused in loans and core deposits. Total loans increased by $82 million or 1.9% over the previous quarter and by $371 million or 9.1% year-over-year. On a sequential quarter basis, increases were led by $43 million in growth in consumer loans and $41 million in growth in resi mortgages. On a year-over-year basis, the $371 million loan growth was broad based in almost all loan categories.Asset quality continued to be strong with nonperforming assets of $1.7 million, which represented 3 basis points of total assets. Total deposits increased on a sequential quarter basis by 1.6% and year-over-year by 3.5%. Importantly, core deposits contributed to all that growth with a sequential quarter increase of $103 million or 2.5%, led by a 3.7% increase in noninterest-bearing demand balances. The year-over-year increase in core deposits of $243 million or 6.1% was led by a 10.5% increase in savings and money market balances and a 9.3% increase in interest bearing demand. The increases in core deposits, both sequential quarter and year-over-year, were offset by planned decreases in higher-cost government time deposits. Our loan-to-deposit ratio was 87% as of the end of the year.Our efforts in business development and targeted deposit gathering strategies have yielded successful results in deposit growth. We are continuing to ramp up these efforts in 2020, supported by further strengthening of our teams and technology platforms.At this time, I'll turn the call over to David to review in more detail the highlights of our financial performance. David?

Thank you, Catherine. Net income for the fourth quarter of 2019 was $14.2 million or $0.50 per diluted share compared to net income of $14.6 million or $0.51 per diluted share reported last quarter. Return on average assets in the fourth quarter was 0.95% and return on average equity was 10.70%. For the full 2019 year, net income was $58.3 million or $2.03 per diluted share compared to net income of $59.5 million or $2.01 per diluted share in the prior year. Return on average assets for the 2019 year was 0.99% and return on average equity was 11.36%.For the full year 2019, pretax pre-provision net revenue totaled $84.2 million, which was a year-over-year increase of $7.1 million or 9.2%. We are pleased we are able to pull solid 2019 results while investing for our future through our RISE2020 initiatives. Net interest income for the fourth quarter increased by $2.3 million to $47.9 million on a sequential quarter basis and the net interest margin was 3.43%. The fourth quarter included $1.1 million in nonrecurring interest and dividend income which positively impacted net interest income and net interest margin. On a normalized basis, the fourth quarter net interest margin was 3.34%, which represented a 4 basis point sequential quarter increase. The sequential quarter normalized net interest margin expansion was driven by increases in average loan balances and decreases in interest-bearing deposit and borrowing costs.During the fourth quarter, we recorded a provision for loan and lease losses of $2.1 million compared to a provision of $1.5 million recorded in the prior quarter. Net charge-offs in the fourth quarter totaled $2.3 million compared to net charge-offs of $1.6 million in the prior quarter. The charge-offs primarily came from the Hawaii consumer loan portfolio.At December 31, our allowance for loan and lease losses was $48.0 million or 1.08% of outstanding loans and leases. Fourth quarter other operating income totaled $9.8 million compared to $10.3 million in the prior quarter. The decrease was primarily due to lower mortgage banking income.Other operating expense for the fourth quarter was $36.2 million compared to $34.9 million in the prior quarter. The sequential quarter increase was driven by higher salaries and employee benefits and higher computer software expense. These increases relate to our RISE2020 initiative and also include accruals for incentive compensation. The efficiency ratio was 62.81% in the fourth quarter compared to 62.48% in the prior quarter. The effective tax rate increased to 26.7% due to return to provision adjustments. Going forward, we expect the effective tax rate to be in the 24% to 26% range.Now we'll return the call back to Paul.

Thanks, David. Overall, we are pleased with another solid quarter and the continued positive momentum as we finished off the 2019 year. Our team is working hard to deliver on our RISE2020 commitments, and we look forward to sharing our progress with you over the coming quarters. At this time, we will be happy to address any questions you may have. Thank you.

[Operator Instructions]. The first question comes from Aaron Deer of Piper Sandler.

I guess I'd like to start on the margin since that was a very encouraging results on that this quarter. Let's begin, first, just I want to confirm that other than the nonrecurring item that you highlighted that there wasn't any other noise that might have benefited that. And then looking at the asset side of the drivers there, is it your sense that all of the kind of repricing that needs to be done within, I guess, in particular, the loan portfolio, but also within the securities book that that's largely played out at this point? Or might we see continued pressure on the asset yields?

Aaron, it's David. On the first part of the question, yes, the nonrecurring interest and dividend income, the $1.1 million in the quarter was the only unusual item in the fourth quarter. And then on the asset repricing questions, as is normal, a lot of times, the liability side, we're able to react quicker on the liability side than the asset side. The asset side needs to work its way through our portfolio. We don't have generally a higher percentage of variable rate loans. We were about 60:40, 55:45, 45% variable. So there is the potential for still some downward repricing on the asset side. But again, we're very pleased with the result of the fourth quarter. We had very good core deposit growth, and then we were able to reprice the liability side of the balance sheet well in the fourth quarter.

Yes, it was very impressive, particularly in your overall cost of deposits down quite meaningfully. Is it your sense that there are too, that there's more opportunity to bring that down some? Or is that going to be pretty dependent on what market pricing happens for deposits? And then, I guess, given that, is your outlook for the margin overall going to kind of hold in this, I guess, about 3 -- kind of mid-3.30s level? Or what are your thoughts there?

Yes. We're sticking to the guidance that we've had on the margin for the last several quarters. So we're sticking to the 3.25% to 3.35% guidance. We're obviously on the high end of that range on a normalized basis. We do think that there's some opportunities to reprice further, but probably not to the same degree we saw in the fourth quarter. The last -- assuming the Fed stays stable today, the last rate adjustment was in October. So a lot of the repricing on the liability side has run through, but we have been able to move a few things. It's just not going to move at the same degree that we saw in the fourth quarter. And obviously, the other thing that really helped the margin was the core deposit growth that Catherine highlighted. Core deposit growth, I think, was up 10% linked quarter annualized. The DDA growth was actually even higher than that on a linked quarter annualized basis. So that also helps.

Aaron, this is Paul Yonamine. We're going to continue a lot of focus and rigor around trying to increase core deposits going forward. As we make further investments in our RISE2020 initiative, I think the whole workforce is really getting focused on trying to drive core deposits. And then naturally, latter part of the year, we're hoping to really see our digital platform come alive to, again, help us in trying to further increase core deposits.

I'd like to -- on the NIM -- sorry, Aaron, just on the loan side, and we talked about it in earlier calls in regard to the discipline on new loans coming on to the book. And so in Q4, our new loans came in at 4.25% average yield, and that compares with an overall portfolio yield of 4.20%. And so that kind of discipline is instilled in our -- in all of our officers as they work with finance, and we would expect that to continue.

That's great. And then, I guess, just in terms of the loan growth in the quarter, which was pretty good. Obviously, it looks like maybe you did some -- refilled the consumer bucket there. I was wondering what was that. If it was automobiles or student loans? And what amount that was during the quarter?

Yes. I'll take that question. So in the fourth quarter, yes, we did refill the book as we saw pay downs in the consumer portfolio on the mainland. So we did have purchases in the fourth quarter, and it was a mix of auto and unsecured. So about even, about $30 million in purchased auto and then $30 million in unsecured.

The next question comes from Laurie Hunsicker of Compass Point.

Just staying with loans, how should we be thinking about loan growth for full year '20?

Yes. For 2020, we're guiding to mid-single digit. As we said in earlier calls, we always hope to exceed the guidance, but we're communicating mid-single digit currently.

Okay. Great. And then same question on deposits. I mean, right now, your core deposits are the most attractively priced in all of Hawaii. I mean, the cheapest. And so if we think about your focus on growth and keeping those trends, how do you look to grow that book in 2020?

So as far as high-level guidance, low to mid-single digits, but again, hoping to exceed guidance. And the way that we're going to do that as we talked in earlier calls, just looking at our customers, cross-selling into the customer base, we talked about our exceptional account in earlier calls, and that will continue to be a focus, given that's a relationship base kind of a deposit account. And they tend to be higher balances, too.

Okay. And then was any of your deposit growth this quarter, was it from Japanese deposits? Or if you've got a number on that?

Laurie, this is Paul. So from the last quarter, we've had some ins and outs. We've pretty much stayed steady in the fourth quarter, but I think we're making a lot of great progress in terms of getting more penetration into a number of new accounts. I personally was in Japan last month, conducting a number of seminars, trying to feature investment opportunities in Hawaii. And I can tell you that I believe that we have a number of new prospects that we plan to continue to stay focused and harvest new opportunities from this current year.

Okay. Great. And then just on to the RISE2020, I was hoping you could just refresh us in terms of the spend. The last number that I had from you all for 2020 was $7 million, and I didn't know if you had a '21 or if there was a refresh number around that? Or how we should think about that? And then even more broadly, how we should think about total noninterest expenses, as we've heard from some of the other Hawaii banks? Is there going to be a pretty sharp increase in 2020? And just so how we should think about the expense line?

Sure. Laurie, it's David. Yes, I think the latter part of your question is exactly how we would like to view it. It's really the overall other operating expense because RISE is just becoming part of our business going forward. So the guide on the total other operating expense on a quarterly basis is $36 million to $38 million per quarter in 2020. Having said that, as we've mentioned before, RISE and just overall business, the business plan also includes revenue gains in 2020. So the guide on the efficiency ratio is to remain in the 63% to 65% range throughout the year.

[Operator Instructions]. The next question comes from Jackie Bohlen of KBW.

I wondered if you might be able to provide any details on CECL to the extent you're able. And if not, just let us know when we might see some of those?

Yes. Our CECL preparations, obviously, are proceeding along plan. And we'll disclose -- we plan to disclose a CECL range of reserves when we file our 10-K in late February. Having said that, we do believe the CECL impact will be manageable and within the range of expectations that we've been seeing for the broader industry.

Okay. That's helpful. And then just one last one, rest everything I had was covered. I know you've had a pretty consistent capital return strategy, but now that we're starting a new year, is there any change in that? Or is it just kind of consistent dividend and then a consistent level of repurchase activity outside of what you made for internal growth?

Yes. That's exactly right. There was a period of time, Jackie, as you know, where we had some excess capital. So we were definitely returning 100% of net income. We -- beginning last year, we sort of stepped back from that. So we definitely are maintaining the quarterly dividend with the payout ratio and yield comparable to our peers and then we're just being a little more opportunistic with the open market share repurchase plan. And obviously, the Board did approve a new $30 million share repurchase plan this month.

And we have a follow-up from Aaron Deer of Piper Sandler.

Just a couple of quick housekeeping items to follow up on. One is on the mortgage, revenue was down a bit in the quarter. Just curious if that just reflects an adjustment to the MSR? And then secondarily, the -- I was wondering what amount, if any, was there in terms of a benefit from -- on FDIC assessment credit in the quarter? And if any, how much might still be remaining that we might see in the first quarter or 2 of this year?

Aaron, this is Paul. And let me just address first on the -- on your question on mortgages, and on the latter FDIC question, I'll have David touch on that. During the fourth quarter, we were very successful in going ahead with the whole outsourcing of our mortgage servicing to DMI, to Dovenmuehle. And I have to tell you that just like any outsourcing process, it's always -- it always takes a herculean effort. But I think the team did a great job and the servicing is ongoing quite well. I have to admit that when you go through these type of transitions, sometimes people stay focused internally than externally. And so I think those were some of the dynamics that occurred in the fourth quarter, but I think we're right back on track in the first quarter of this year. And if you look at lot of the news coverage these days, the real estate market in Hawaii is still very vibrant. Through our joint ventures of various real estate companies here and our presence in the market, I feel that we should be performing quite well going forward with the ease of mind that a lot of the servicing will be taken care of by a great operator like DMI. David, the second part?

Yes. Aaron, on the small bank assessment credit. So after the fourth quarter, we have roughly $540,000 in credits remaining. So assuming that the deposit issuance fund maintains where the level it currently is at, we would expect 0 deposit issuance costs in the first quarter and then it would -- we'd have some expense in the second quarter, probably roughly around $300,000. And then in the back half of the year, we get back to paying the full load of roughly $440,000 per quarter in the back half of the year.

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Yonamine for any closing remarks.

Thank you, and thank you, everyone, for participating in our earnings call for the fourth quarter of 2019. We look forward to future opportunities to update you on our progress. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.