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Edited Transcript of CPF earnings conference call or presentation 24-Oct-18 5:00pm GMT

Q3 2018 Central Pacific Financial Corp Earnings Call

HONOLULU Nov 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Central Pacific Financial Corp earnings conference call or presentation Wednesday, October 24, 2018 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anli Ngo

Central Pacific Financial Corp. - President & Director

* Anna M. Hu

Central Pacific Financial Corp. - Executive VP & Chief Credit Officer

* David S. Morimoto

Central Pacific Financial Corp. - Executive VP, CFO & Treasurer

* Paul K. Yonamine

Central Pacific Financial Corp. - CEO & Chairman

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Conference Call Participants

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* Aaron James Deer

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst

* Jacquelynne Chimera Bohlen

Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research

* Laurie Katherine Havener Hunsicker

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp.'s Second (sic) [Third] Quarter 2018 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 now like to turn the conference over to Mr. David Morimoto, Executive Vice President, Chief Financial Officer. Please go ahead.

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [2]

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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'll turn the call over to Paul.

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Paul K. Yonamine, Central Pacific Financial Corp. - CEO & Chairman [3]

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Thank you, David, and good morning, everyone. Having just joined Central Pacific Financial Corp. 3 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 months ahead, I hope to share more of my thoughts and insight with you. That said, let me first thank each and every one of you for your time and effort in supporting Central Pacific, and I do look forward 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 8 months of this year and with a 6% increase in air seat capacity to Hawaii, total visitor arrivals increased by 7.2% to $6.8 million over the same period last year. Visitor 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 their 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, job growth is projected to increase by 1.2% and personal income by 3.5% compared to the end of the previous year.

The unemployment rate in Hawaii for the month of September increased slightly to 2.2% after remaining at 2.1% for the past 3 consecutive months, compared to 3.7% nationwide. The Honolulu Consumer Price Index is expected to increase in 2018 by 2% and Hawaii's real GDP is projected to 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, Catherine will provide some of the bank's highlights of the quarter. Catherine?

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Anli Ngo, Central Pacific Financial Corp. - President & Director [4]

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Thank you, Paul. We're pleased to report on a strong financial performance for 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 details of our net income component later in the call.

Our earnings consistency and strong capital position have allowed us to continue executing on our share repurchase program, which on a year-to-date basis amounted to approximately 2.8% of the CPF common shares outstanding as of the end of 2017. We continue to realize meaningful loan growth while maintaining strong asset quality through the quarter as well 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 and by $78 million or 16.0% from the same period a year ago. Increases were also realized in our commercial mortgage, resi mortgage and home equity loan portfolios.

Asset quality and our credit risk profile continue to improve, with nonperforming 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 within core deposit growth. The increase in noninterest-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 were offset by an increase in other time deposits.

Competitive pricing for deposits on our local market has been escalating in the rising interest rate environment. However, net interest margin remained stable with increases in loans and investment yields. We continue to improve our operational efficiencies and reduced our efficiency ratio for the third consecutive quarter. There are still opportunities to further improve efficiencies in the near term by leveraging recent investments in technology and information management initiatives.

At this time, I'll turn the call over to David to review in more detail the highlights of our financial performance. David?

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [5]

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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 1.06% and return on average equity was 12.54%. Net interest income increased by $0.7 million and the net interest margin 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 are reported in long-term debt on our balance sheet. The trust preferred redemption will occur on December 17 and will improve prospective 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 30, 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 increase was primarily due to $0.4 million in death benefit income from bank-owned life insurance recognized in the current 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 from the 64.5% in the previous quarter. We continue to expect the efficiency ratio to trend toward 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 net interest margin at 3.20%, strong asset quality and capital ratios and efficiency ratio continues to improve and trend toward our low 60s target.

And I will return the call to Paul.

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Paul K. Yonamine, Central Pacific Financial Corp. - CEO & Chairman [6]

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Thanks, David. While I just recently joined the organization on October 1 and served on the Board of Directors since June of last year, I'm confident in our business plan and our team's ability to advance in the areas of process improvement, digitization, customer relationships and quality growth. On behalf of Catherine and our management team, I would like to express my appreciation of 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 years.

At this time, we'll be happy to address any questions you may have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Aaron Deer with Sandler O'Neill.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [2]

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Paul, congratulations on your new role. I extremely look forward to meeting you.

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Paul K. Yonamine, Central Pacific Financial Corp. - CEO & Chairman [3]

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Thank you.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [4]

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I guess I'd like to begin with the loan growth in the quarter, which seem to be fairly strong. I'm just curious to know if there's anything in particular that drove the strength this quarter, particularly given the bump that you got in the Mainland C&I book?

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Anli Ngo, Central Pacific Financial Corp. - President & Director [5]

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Yes. 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, and was really across all asset classes. And starting with C&I, we saw $42 million growth quarter-over-quarter, of which $15 million of that was here in Hawaii. So I would say that the strategy of building relationship here in Hawaii, in fact, is paying off nicely with increases that we saw in our Hawaii book.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [6]

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Okay. And then, looking at the margin, the shift in earning assets seem to play a role in maintaining the margin stability this quarter, certainly guess of 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 is going to have to grow deposits 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?

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Anli Ngo, Central Pacific Financial Corp. - President & Director [7]

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Yes, I'll turn over to David, but I wanted just make a comment on the loan yield, which of course has helped the net interest margin. And so we saw the new loans coming in this quarter at 4.25%, and it's 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.

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [8]

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Right. Yes. Thanks, Catherine. Yes, the net interest margin, we were pleased that we were able to stem the decline, the sequential quarter 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 thing that -- the things that have benefited the 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 repricing in the loan portfolio, 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 of those things put together are what helped us this quarter. Going forward, as you mentioned, it is going to be a function -- what will help us is growing core deposits and our asset/liability committee is strategizing on that front for future quarters.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [9]

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Okay. 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 a write-down on some legacy software, but that seem to be the line item where it hit. But just as you look out to the fourth quarter and really out into 2019, should your expectation is can stay in that range? And just kind of the thoughts on operating leverage moving into next year?

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Anli Ngo, Central Pacific Financial Corp. - President & Director [10]

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Yes, so I'll take that. 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 slight uptick in the third quarter, that really is -- was related to some catch up on accruals. Going forward, you can expect that, that number to be more in the $2.4 million range.

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Operator [11]

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The next question comes from Jackie Bohlen with KBW.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [12]

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I echo Aaron's welcome. Paul, I look forward to meeting you as well.

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Paul K. Yonamine, Central Pacific Financial Corp. - CEO & Chairman [13]

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Thank you.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [14]

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Just's a question on the trust preferred redemption. Which trust number is it that you'll be redeeming?

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [15]

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Jackie, it's David. So at the end of -- or mid-December, we're redeeming CPB Statutory Trust III.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [16]

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Stat III, okay. And was there anything, in particular, whether it was opportunity or whether it was some other characteristic, that caused you redeem that particular tranche?

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [17]

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As disclosed in our SEC filings, Jackie, on -- there's -- we have -- at current, we have $90 million in trust preferreds currently outstanding. They're issued through 4 different tranches or trusts, and 2 of the trusts have higher margins. So the outflow, quarterly outflow, 3-month LIBOR in Trust II and Trust III have margins of 285 basis points.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [18]

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Okay. And might you look to do a similar redemption of Trust II?

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [19]

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That's always an option, Jackie. It's -- for a change, it's nice to be the holder of these options rather than being on the other end of it. So it's an option that we have for the future.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [20]

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Okay. All right. And will there be outside of accrued interest and everything that will be payable alongside the redemption? Are there any other sort of fees or penalties on redemption?

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [21]

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No. All 4 trusts are beyond that their lock-out period. So they're all redeemable at par on quarterly interest pay dates.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [22]

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Okay. 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 gross charge-offs. I guess, what's left in that bucket?

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Anli Ngo, Central Pacific Financial Corp. - President & Director [23]

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I'm going to turn that question over to Anna. Anna?

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Anna M. Hu, Central Pacific Financial Corp. - Executive VP & Chief Credit Officer [24]

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Our recoveries from quarter-to-quarter, there's -- it's not flat. We have been lucky. We worked hard at recovering a lot of the charge-offs that we have been processing through, but there's nothing really in there to say what's left.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [25]

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Okay. Is it -- I guess, most of what you're recovering now, are they more Hawaii-based or more Mainland-based?

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Anna M. Hu, Central Pacific Financial Corp. - Executive VP & Chief Credit Officer [26]

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Hawaii-based.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [27]

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Hawaii-based, okay. So there's -- given what you have and the data that you have, understanding that obviously this is a very variable thing and hard to predict, is it possible that you could see some continued recuperations similar level to 2Q and 3Q? I know 1Q had some unique items in it.

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Anna M. Hu, Central Pacific Financial Corp. - Executive VP & Chief Credit Officer [28]

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Yes. Barring the unique items, I think that it may be south of what we reported in 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.

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Operator [29]

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(Operator Instructions) The next question comes from Laurie Hunsicker with Compass Point.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [30]

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Wondered if we could just go back to margin here. Can you just remind us what are your public funds at September 30, with the comparable number in June 30 being $727 million?

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [31]

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Laurie, it was just under $700 million, so in the $690 million range.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [32]

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Okay. And then, what is your plan for that as we head into next year?

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [33]

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Laurie, it's going to be a little bit of a function of pricing. On a daily basis, the public entities put out their funds for bid to the local institutions, and we bid based on where the -- our alternative sources of wholesale borrowings are. So it's 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's really the function of where they're being priced.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [34]

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Okay. And they're still roughly costing 4 basis points under the T-Bill? Or has that slowed?

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [35]

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It's roughly around the T-Bill range, but where -- what we compare it to is where we can borrow from the Federal Home Loan Bank for comparable term.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [36]

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Okay. That's helpful. Okay. And then just going back to Jackie's question on the trust preferred. So just so that I'm thinking about this the right way, obviously you're sitting with a lot of cash. Assuming that there's no other short of cost with the redemption, this is basically a 2 basis point drop to the bottom line in terms of -- a 2 basis point pickup in margin?

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [37]

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That's correct. It's -- on the $20 million redemption on an annualized basis, it's about $0.5 million in net interest income, 2 basis point pickup in net interest margin.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [38]

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Okay, great. And then Paul, last question for you. You 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 it going to be business as usual and just more efficient in the growth?

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Paul K. Yonamine, Central Pacific Financial Corp. - CEO & Chairman [39]

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Thanks, Laurie. And once again, I'm not trying to avoid responding to that question, but having been here for 3 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 huddling quite a bit on weekends trying to further refine strategies to do exactly that, addressing more quality, process improvement, use of technology, so forth and so on. So Laurie, if you could please give me a little bit more time, and I'd like to come back on some of these calls and get a little bit more granular and into details in the months ahead to respond to your question more effectively.

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Operator [40]

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Next question comes from -- is a follow-up from Aaron Deer with Sandler O'Neill.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [41]

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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, that seems like it might even be more attractive. So I'm just curious to know if this redemption has any impact on your thoughts in terms of repurchases over the coming quarter or 2?

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Anli Ngo, Central Pacific Financial Corp. - President & Director [42]

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David?

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David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [43]

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When we do these redemptions, we do need 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 redeem the $20 million while continuing with our current plans to -- with our repurchase plan. So it does not have to impact the repurchase plan, but obviously, what we do with the repurchase plan is at management's discretion.

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Operator [44]

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

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Paul K. Yonamine, Central Pacific Financial Corp. - CEO & Chairman [45]

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Actually, I'll defer that over to Catherine. Catherine, if you could close the call.

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Anli Ngo, Central Pacific Financial Corp. - President & Director [46]

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Sure. Thank you very much for participating in our earnings call for the third quarter of 2018. We look forward to future opportunities to update you on our progress.

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Operator [47]

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This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.