Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. First Quarter 2019 Conference Call. [Operator Instructions]. 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, Chief Financial Officer. Please go ahead.

Thank you, Kate, and thank you all for joining us as we review the financial results of the first quarter of 2019 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 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. We are pleased to report on a solid performance for the first quarter of this year with net income of $16 million and diluted earnings per share of $0.55. While this represents an increase of 12.3% in net income compared to the first quarter of last year, there were some nonrecurring items in the quarter, which David will be covering later in the call. We also continue to achieve improvements in our key performance indicators, including net interest income, net interest margin, efficiency ratio and return on average equity. Overall, our company's performance trends are moving in the right direction. Consistent earnings and strong asset quality have allowed our Board of Directors to increase the quarterly cash dividend by 9.5% from $0.21 per share in the previous quarter to $0.23 per share. Activity in our stock repurchase program continued at a steady pace in the quarter, with the repurchase of 277,000 shares of common stock or approximately 1% of the outstanding shares as of the end of 2018. The outlook for Hawaii economy is for continued growth at a steady pace in 2019. For the first 2 months of the year, visitor arrivals increased by 1.8% and visitor expenditures declined by 2.5% compared to the same period last year. 2018 was a banner year with $18 billion in visitor expenditures or a 6.8% increase over 2017. The forecast for 2019 are increases in both arrivals and expenditures by 2% and 3.3%, respectively. Airline seat capacity is expected to grow with Southwest Airlines entering the Hawaiian market this year. Construction activity is expected to remain strong with a total value of private building permits increasing by 4.5% and government contracts awarded increasing by 63.5% as of the end of 2018. The unemployment rate in Hawaii ticked upwards to 2.8% in March compared to the average national unemployment rate of 3.8%. At this time, Catherine will provide some of the bank's highlights of the quarter. Catherine?

Thank you, Paul. The first quarter results in loan and deposit growth were reflective of a seasonally slow start for the year. Total loans increased by 0.6% from the previous quarter end and by 7.5% from the same period a year ago. On a sequential quarter basis, loan growth was driven by increases of $23.6 million in resi mortgage loans and $17.7 million in commercial mortgage loans. On a year-over-year basis, the increase in total loan balances of $285 million was distributed across all loan types. Asset quality and our credit risk profile remained strong with nonperforming assets at 6 basis points of total assets. Total deposits remain relatively flat on a sequential quarter and a year-over-year basis. However, our deposit composition has shifted from the previous quarter end with an increase of $44.3 million in core deposits and an offsetting reduction of $42.7 million in government and large time deposits. Competition for deposit gathering in our market remains sharp and we continue to focus on building our core deposit base with strong customer relationships and service delivery. 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 first quarter of 2019 was $16 million or $0.55 per diluted share compared to net income of $15.8 million or $0.54 per diluted share reported last quarter. Return on average assets in the first quarter was 1.10% and return on average equity was 12.97%. In the first quarter of 2019, we converted our holdings of MasterCard Class B common stock to Class A common stock and sold the Class A's shares at a gain of $2.6 million. We no longer hold any shares of MasterCard. Net interest income increased by $0.4 million to $45.1 million and the net interest margin expanded to 3.34% on a sequential quarter basis. During the first quarter, we recorded a provision for loan and lease losses of $1.3 million compared to a credit provision of $1.4 million recorded in the prior quarter. Net charge-offs in the first quarter totaled $1.9 million compared to net recoveries of $2.5 million in the prior quarter. At March 31, our allowance for loan and lease losses was $47.3 million or 1.15% of outstanding loans and leases. First quarter other operating income totaled $11.7 million compared to $9.4 million in the prior quarter. The majority of the sequential quarter increase and other operating income was due to the gain on sales of MasterCard stock. Additionally, we have a company-owned life insurance plan that is used to mitigate market risk in our deferred compensation plan. Current quarter equity market gains resulted in higher income on the life insurance plan and correspondingly higher expense in the deferred compensation plan. Other operating expense for the first quarter was $34.3 million compared to $33.6 million in the prior quarter. The sequential quarter increase was primarily driven by higher salaries and employee benefits of $0.8 million due to the previously mentioned deferred compensation plan expense. Furthermore, in the current quarter, there was an increase to the reserves for unfunded commitments of $0.2 million compared to a decrease to the reserve of $0.5 million in the prior quarter. The efficiency ratio for the first quarter was 60.49%, which was an improvement from the 62.21% reported last quarter, primarily due to the aforementioned MasterCard stock gain. The effective tax rate was 24.2% in the first quarter and, going forward, we expect the effective tax rate to be approximately 24% to 26%. During the first quarter of 2019, we repurchased 277,000 shares of common stock at an average cost per share of $27.83. We've also repurchased an additional 77,000 shares of common stock month-to-date in April at an average cost of $29.46 per share. And now, will return the call to Paul.

Thank you, David. Overall, we're pleased with our financial performance to start the New Year and we look forward to continue executing on our growth strategies for the remainder of the year. A lot of focus has been placed on revenue generation, infrastructure development and operational efficiencies. We remain confident that with deeper engagement with our customers and the commitment to delivering solutions for their needs, we will achieve the goal set forth in our 2019 business plan. On behalf of our management team, I would like to thank our employees, customers and shareholders for their continued support and confidence in our organization as we work toward attaining our key milestones in the coming year. At this time, we'll be happy to address any questions you may have. Thank you very much.

[Operator Instructions]. Our question is from Aaron Deer of Sandler O'Neill.

I guess, with the margin coming in a little better than I was expecting, I'll start there. First, were there any interest recoveries, prepayment penalties or other items that enhanced the average loan yield in the quarter?

Aaron, it's David. Yes, during the first quarter, there was roughly $300,000 of prepayment penalty income -- in interest income, but we generally have some of that type of nonrecurring income every quarter, whether it's prepayment income or interest on nonaccrual loans.

Okay. So it wasn't outsized in any way?

Not too outsized.

Okay. And I guess, given the kind of the flatness to the yield curve here and the sense that, that is going to remain on pause for a while, as you kind of look out at kind of where your funding costs are today and where new loans are coming on the portfolio, what's your expectation for the margin as we kind of move through the year?

Yes, last quarter we guided to a range of 3.25% to 3.35%. We're obviously on the high-end of the range. Right now, we're keeping with that guidance. The wildcard will be on the funding side. We are seeing nice improvement on the loan yields, so average loan yields, new loan yields in the first quarter was 4.75%. So we are seeing a nice movement there. It's the funding cost that's a little bit of a wildcard.

Okay. And then, it sounds like it was seasonally slower growth here in the first quarter, presumably expectations for the year are higher. Where do the pipeline stand today and do you guys think you can get back to kind of a high-single-digit growth for the full year? Catherine Ngo Aaron, I'll take that. So yes, we did get off to a seasonally slow start for the Q1 loan results, but we are expecting good growth in Q2 and for the remainder of the year. We're holding on the guidance that we gave last quarter in regard to the mid-single-digit range of loan growth for the year.

The next question is from Laurie Hunsicker of Compass Point.

Just wanted to stay where Aaron was on margin for a moment, and hoping that we could maybe just go a little bit deeper into the funding side because you guys are so unique in terms of your really low cost in core deposits. I think, some of it is Hawaii, but we've seen some others in Hawaii have a pretty sharp increase in the savings in money markets and your increase has been really small by comparison. So can you talk to us a little bit about how we should think about that line item, in particular, if you've got any specials planned or how we should be looking at that? Catherine Ngo So let me start and then I'll turn it to David. So first of all, in the first quarter in regard to deposits, we saw an nice increase as we mentioned earlier in core deposits, as we took down the government deposits. We have our line teams, of course, focused on building our core deposits. What we -- you did see in the first quarter is some shift in the components of core deposit. So you saw a decrease in noninterest demand and a corresponding increase in savings. Some of that is related to a couple of larger deposits that shifted into that savings line, and of course, we are focused on building that noninterest demand line. One thing we have underway here is an exceptional deposit campaign. I know we've talked about that in earlier quarters, but we hope to bring in some good DDAs with these exceptional customers in the next few weeks. And so, we will be reporting on the results at the next quarterly call.

Okay. And if we were just thinking about just the one line item, the savings in money markets that's about 1/3 of your deposits, this last quarter costing 22 basis points, where would you potentially see that line item going on cost?

Yes. Laurie, that's the line item that we're all -- we've all been focused on, as Catherine mentioned, there was a deposit composition shift during the first quarter with money moving from DDA into that line item. The majority of that composition shift took place in March. So the 22 basis points does look great today. We do anticipate that, that line to continue to increase. As far as guidance on that line, I think it's a little bit difficult at this point. It is a function of what happens going forward. But as Catherine mentioned, we do have some initiatives underway to focus on the more core components of core deposits. But I think at the end of the day, I think, the takeaway we have is, we still have a $4 billion core deposit portfolio that has a weighted average rate of 13 basis points, and over the last year, has exhibited a deposit rate beta of 7%. So we're still pleased with that.

Yes, it's amazing. What is the balance on your public funds? I have it from last quarter its $631 million. What was that at March?

It's right about $600 million. It came down roughly $30 million during the first quarter.

Okay. And what are the plans on that?

Again, it's a little bit of a function of pricing to the extent that pricing is reasonable relative to borrowings that it could stabilize near its current level, I don't see it necessarily growing from there. But whether it stabilizes or whether we continue to run it down, it's going to be somewhat of a function of pricing. The weighted average rate on the $600 million was just over 2.35%

Okay. Great. That's helpful. And then, just jumping over to credit. Certainly your credit has been absolutely pristine, but your charge-offs have largely been in the consumer category. Am I correct in assuming that still mainly coming from the consumer unsecured? Catherine Ngo I'll push that question over to Anna.

Laurie, yes. So it's primarily coming from our customer unsecured, and it's -- with a focus we have done purchases on the mainland, but it's really what we're seeing it as coming from the local Hawaii market in the consumer category.

In the consumer category. Okay. And it's not the auto, is that correct?

No. To a smaller degree, auto.

Okay. And what is the total balance on your consumer unsecured? Catherine Ngo Do you have that, Anna?

Consumer unsecured would be... Catherine Ngo Can we get back to you on that one?

Yes, absolutely. I can follow-up with you later. I guess, just maybe sort of bigger picture on that because I know it's a smaller piece, but seemingly that's where your charge-offs are coming. Are you thinking about that book differently or what are your plans for that book? Catherine Ngo Let me take that question because there are 2 components in that consumer unsecured book. So the first is the local Hawaii unsecured book. And we continue to refine the analytics on that preapproved portfolio. And so, as we go out and target customers, we will get better and better in targeting the right kind of customer. And the other thing that we will focus on as we think about that Hawaii preapproved book is on pricing. And so, making sure that we are pricing appropriately for risk. And then, the other component of the unsecured book is our mainland book. And the same as far as making sure that we are looking at credit profile of those customers coming into the book. And the second -- excuse me, the first quarter, we did have a small purchase on the mainland and it's from a provider, Prosper, that we have purchased from before. It was about $18 million in the first quarter.

Okay. Great. I can follow-up with you on the rest of the consumer questions later unless you have those details. Catherine Ngo I actually have it now. So it's the $483 million.

We have about $483 million in our consumer book and that's a combination of what we have here at Hawaii as well as on the mainland.

Okay. And if I strip out the auto, how much is that?

Strip out the auto, it's running at about just over $200 million.

Over $200 million. Okay. And then, how much is the Prosper? Catherine Ngo So that one, we will have to get back to you, Laurie.

Fair enough. Okay. Good. And then Paul, just one last question for you. I know I put you on the spot, I guess, when you first joined. But now that you've had a chance to hopefully look through everything and start to think about your vision, can you share with us directionally what you may do differently and how we should be thinking about that going forward?

Laurie, I think I touched on it previously, but there are fundamentally three areas that we're taking a hard look at. One is on the technology front. So the further digitalization for Central Pacific and it's a work in progress. And I'm hoping to come back to everybody with something more specific and definitive in the next couple of months or so. Second area is we're trying to -- and this goes back to our ability in trying to attract better core deposits at good funding costs, we're looking very heavily into the Japanese market. We see a continuation of interest on the part of Japanese investors and companies wanting to develop some new opportunities here in Hawaii and that's a big strategy for us. And the third area is really around what I like to call sales execution. And so, we are currently working with our management in trying to determine more processes and more rigor and discipline around that. And I think, things are coming together quite well, Laurie, and I'm hoping that in the next couple of months, hopefully in next quarter or so, that we'll have more to share with everyone.

The next question is from Don Worthington of Raymond James.

In terms of mortgage banking, it looked like linked quarter at least the gain on sale was down a bit, where do you kind of see that activity going the next quarter or 2? Catherine Ngo Don, I'll take that. It's Catherine here. So in Q1 indeed, we have -- what was -- what I would consider seasonally light, but particularly seasonally light volume in mortgage. So we had $104 million in production in the first quarter. I'll share with you that we're expecting a stronger Q2 and we expect that production range to be in the $165 million range. And one thing I will add, I believe we've talked about this on earlier calls is just the composition of our mortgage production, and we have the good fortune just given our relationships with developers and real estate brokers here in having a higher percentage of our production in the purchase as opposed to refi market. And so in Q1, the purchase percentage was 71%.

Okay. Great. And then, this is maybe for David. What was the amount of the stock sold, domestic card stock?

Let me see. Hang on, Don, we're getting that number. It was roughly 11,000 shares of MasterCard Class B shares that were converted to Class A. And the way it works is, once you convert to Class A, there is a limited amount of time that we can continue to hold the shares. So the shares -- we decided to sell the shares in the first quarter.

Okay. All right. And then, I know you paid off one of the truPS in early January. How much did that contribute to the margin expansion?

So we paid off $20 million in mid-December. We paid off the second $20 million in early January, as you mentioned. And I think combined, it was about 4 basis points in NIM improvement.

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

I wanted to touch on the buyback. I know we had a lengthy discussion on it on last quarter's call. Looking to the pace of it this quarter, it didn't seem to be all that much different from where it was in the fourth quarter. Do you view this as normalized level of repurchases or was it perhaps accelerated in the quarter, just given pricing?

Jackie, it was more the latter. As you know, the stock along with the market coming out of the rough fourth quarter, stock prices were depressed and -- so there was -- the first quarter buyback was likely to be higher than the full year run rate. Yes, I think we returned probably 80% to 90% of net income in the first quarter. I wouldn't expect that pace to necessarily continue for the full year.

Okay. That's helpful. And then, secondly, with the quarterly swing in unfunded commitments and there being a reserve or a provision added to that this quarter, does that imply that you had some good generation that may fund later in the year to help boost loan growth?

Yes. There was an increase in the unfunded commitments. You are correct, Jackie.

Okay. And were those in construction or were they somewhere else?

C&I. I think it was in C&I and construction.

Okay. Just more projects coming online.

Yes.

Okay. And how is the outlook looking for -- from a construction standpoint? Catherine Ngo Yes, so the growth that we expect in quarter 2 and the rest of the year is -- some amount in construction, but I would say more in the other asset classes. And then, particularly here in Hawaii -- so you saw the relatively light net loan growth in Hawaii for Q1. We do see -- expect a pickup in quarter 2 and for the rest of the year.

There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Paul Yonamine for closing remarks.

Thank you very much for participating in our earnings call for the first quarter of 2019. We look forward to future opportunity to update you on our progress. Thank you very much.

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