Central Pacific Financial Q3 2023 Earnings Call Transcript

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October 25, 2023

There are 7 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corporation Third Quarter 2023 Conference Call. During today's presentation, all parties will be in a listen only mode. Conference Call. This call is being recorded and will be available for replay shortly after its Completion on the company's website at www.ctb.bank.

Speaker 1

Conference Call. I'd like

Operator

to turn the call over to Ms. Dana Matsumoto, Group Senior Vice President and Director of Finance and Accounting. Please go ahead.

Speaker 2

Thank you, Abby, and thank you all for joining us as we review the financial results of the Q3 of 2023 for Central Pacific Financial Corp. With me this morning are Arnon Martinez, President and Chief Executive Officer David Morimoto, Senior Executive Vice President and Chief Financial Officer and Anna Hu, Executive Vice President and Chief Credit Officer.

Speaker 1

And Exchange Commission of our website at cpb. Bank.

Speaker 2

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 Slide 2 of our presentation. And now, I'll turn the call over to our President and CEO, Arnon Martinez.

Speaker 3

Thank you, Dana, and aloha, everyone. We appreciate your interest in Central Pacific Financial Corp. As we normally do, I'll start with an update on the Hawaii market, Then I'll turn it over to the team to provide additional detail and insights on our financial and credit metrics as well as other key updates. The wildfire in Lahaina, Maui in August was devastating and I want to first thank our employees, customers and all of you for your continued support. Reporting our Maui community to the fullest.

Speaker 3

We were fortunate that our Lahaina branch was un impacted by the fires and reopened late August, which enabled us to help meet the needs of the community. The Hawaii tourism industry has been affected by the Maui wildfires with a significant drop in visitor arrivals to Maui in August compared to a year ago. With government officials now encouraging visitors back to Maui, we hope the negative impacts will be short lived and Maui visitor accounts will return to normal. Fortunately, we continue to see increases in visitors to the other islands and overall the Hawaii state economy is expected to have limited impact. In the month of August, a total of 769,000 visitors came to the state of Hawaii, which was down 7% from a year ago and 83% of pre pandemic levels.

Speaker 3

Total visitor spending was $1,580,000,000 in August, down 9% from a year ago and up 5% from August 2019. Total statewide hotel occupancy in August was 74%, down 3% from a year ago with an average daily rate of $3.70 down 4% from a year ago. Hawaii's statewide seasonally adjusted unemployment rate continued to decline to 2.8% in September and is outperforming the national unemployment rate of 3.8%. Year over year statewide non form payroll increased by 6,600 jobs or 1.1%. Unemployment claims on Maui have surged following the fires, but is expected to gradually recede with government leaders focused on supporting businesses and reopening areas of West Maui unaffected by the fires to help start restart the island's economy.

Speaker 3

Real estate values in Hawaii continue to hold up firmly. The Oahu median single family home price remains at $1,100,000 and the median condo sales price was $533,000 in September. While home sales volumes continue to be down year over year, there is still strong demand and limited inventory with properties staying on the market for a median of 20 days. 47% of single family homes sold atoraboveoriginalaskingpriceinceptemberanindicationofthe sustained demand and strength of Hawaii Real Estate despite mortgage rates reaching levels higher than we've seen in the last 20 years. Strong construction activity in Hawaii continues to drive economic growth.

Speaker 3

Our Governor recently issued an emergency proclamation on housing that will help accelerate housing development to address the lack of inventory and affordable housing in the state. Additionally, major infrastructure improvement projects as well as large federal military projects continue to be on the roadmap for the state. On top of this, Maui reconstruction efforts will be a priority and the state will need to balance construction worker demand and a likely increase in construction costs. In the Q3, we continue our focus on growing relationship based deposits, and I'm pleased that we were once again successful in growing total deposits. As part of our strong risk management focus, we continue to moderate loan growth.

Speaker 3

But with that said, our loan portfolio churn is resulting in favorable repricing and deposit costs continue to be managed at levels lower than our peers. I'll now turn the call over to David Morimoto, our Chief Financial Officer. David?

Speaker 4

Thank you, Arnold. Turning to our earnings results. Net income for the Q3 was 13,100,000 or $0.49 per diluted share. Return on average assets was 0.70%. Return on average equity was 10.95 percent and our efficiency ratio was 63.91%.

Speaker 4

During the Q3, we continued to strengthen our balance sheet and liquidity position with a quarter end cash position in excess of $400,000,000 and total deposit growth of $69,000,000 Average total deposit balances also grew by $63,000,000 sequential quarter. Our loan portfolio remained relatively flat during the quarter as we selectively grew certain portfolios with appropriate risk reward opportunities and continue to let other portfolios run off. We remain on hold with our Mainland unsecured consumer portfolio as we continue to monitor the national economic outlook and ongoing performance of consumer lending. We remain nimble and well positioned for future opportunities when the operating environment improves. Net interest income for the 3rd quarter was $51,900,000 and decreased by $800,000 from the prior quarter, primarily due to higher funding costs.

Speaker 4

The quarter over quarter decrease in net interest income continues to narrow as assets reprice up and the pace of deposit cost increases subsides. The net interest margin was 2.88% in the 3rd quarter, a decline of 8 basis points sequential quarter. Our total cost of deposits was 108 basis points in the 3rd quarter and our cycle to date total deposit repricing beta was 21%, which remains within our expectation. With the current higher for longer interest rate forecast. The pay fixed receive flow interest rate swap that we put on last year continues to increase in value and will support our future earnings.

Speaker 4

The swap payments will begin on March 31, 2024 and it is currently 3 40 basis points in the money on a notional balance of $115,500,000 3rd quarter other operating income was $10,000,000 which decreased by $400,000 from the prior quarter, primarily due to lower BOLI income driven by equity market volatility and offset by lower deferred compensation expense. Other operating expenses totaled $39,600,000 in the 3rd quarter, a decrease of $300,000 from the prior quarter. The decrease was primarily due to lower salaries and employee benefits related to deferred compensation as well as the ongoing management of our FTE account. Our effective tax rate was 24.9% in the 3rd quarter and we continue to expect it to be in the 24% to 25% range going forward. Our Board of Directors declared a quarterly cash dividend of $0.26 per share, which will be payable on December 15 to shareholders of record on November 30.

Speaker 4

During the Q3, we repurchased a nominal 4,500 shares at a weighted average price of $16.07 And now, I'll turn the call over to Anna Hu, our Chief Credit Officer. Anna?

Speaker 1

Thank you, David. Our asset quality remained strong in the 3rd quarter with non performing assets at 9 basis points of total assets and criticized loans at 1.09 percent of total loans. Our loan portfolio continues to be well diversified by loan type and industry sector. Over 75% of the loan portfolio is real estate secured with a weighted average loan to value of 60%. Our commercial real estate portfolio represents 25% of total loans and is diversified across all asset types with 5% of this portfolio maturing over the next 12 months.

Speaker 1

Our CRE office and retail exposure remains low at 3.5% and 4.5% of total loans respectively. The office portfolio has a weighted average loan to value of 55% and 73 weighted average months to maturity. The retail portfolio has a weighted average loan to value of 65% 64% weighted average monthly maturity. The U. S.

Speaker 1

Mainland loan portfolio declined in the 3rd quarter to 16% of total loans, which included a continued decrease in the Mainland consumer portfolio to $345,000,000 or 6% of total loans as of September 30. Our loan exposure to the Lahaina, Maui area was a manageable $111,000,000 or 2% of total loans before the wildfires in August. Since then, balances have paid down slightly to $107,000,000 or 1.9 percent of total loans. We estimate that $78,000,000 of the total Lahaina Maui loans outstanding was not impacted by the fires as of September 30. Additional updates continue to be collected from our borrowers.

Speaker 1

Insurance, FEMA and unemployment benefit assistance processing also continues. To support our borrowers, we have provided 3 to 6 month loan payment deferrals and have granted total deferrals on 142 loans totaling $32,700,000 in balances. Overall, at this time, we do not anticipate material credit impacts on the Maui wildfire and we'll continue to monitor the situation. Net charge offs were $3,900,000 for the 3rd quarter, which equates to 28 basis points annualized as a percent of average loans. The increase in net charge offs were primarily from our maintenance unsecured consumer portfolio, which has lower recoveries.

Speaker 1

We believe the losses are leveling off due to the seasoning of the portfolio and the performance remains within our original expectations. Our allowance for credit losses was $64,500,000 or 1.17 percent of outstanding loans. In the 3rd quarter, we recorded a $4,500,000 provision for credit losses on loans primarily due to net charge offs. Additionally, a $400,000 provision for unfunded commitments for a total provision for credit losses of $4,900,000 during the quarter. Overall, Given our strong risk management culture and history of conservative underwriting policies, our loan portfolio remains well positioned to and the near term pressures from the environment.

Speaker 1

We continue to monitor the economic environment closely and are being selective and thoughtful call about the loans we're adding to our portfolio. Now I'll turn the call back to Arnold. Arnold?

Speaker 3

Thank you, Anna. In summary, we continue to execute on our strategies as we navigate the current environment. Our liquidity, capital and credit remain solid and our teams continue to be focused on building relationships and serving our community. Thank you for your continued support and confidence in our organization. At this time, we will be happy to address any questions you may have.

Operator

And we will take our first question from Andrew Liesch with Piper Sandler. Your line is open.

Speaker 5

Hey, good morning everyone. I want to take a look at the margin here kind of right in line with the guidance. You're still thinking that between north of 380 is a good place to be here before maybe it bottoms out and maybe stabilizes next year?

Speaker 3

Andrew, this is Arnold. I'll just say good morning to you and then I'll pass it on to David.

Speaker 4

Thanks, Michael. Hey, Andrew. Yes, we are pleased with the margin performance right within management's prior guidance. I think the guidance for the next couple of quarters, we're lowering the guidance range by a nickel. To $275,000,000 to $285,000,000 range, but we're cautiously optimistic that we can stay above $280,000,000 And then as far as the trough in the NIM, I think if the Fed stands pat in the 4th quarter, We're projecting the NIM trough probably in the Q1.

Speaker 4

If there is additional tightening that may get pushed out to the 2nd quarter. So first half of twenty twenty four trough by the NIM.

Speaker 5

Got it. Is it just Liabilities repricing faster than you thought pushing down the NIM guide?

Speaker 4

Yes. It's just it's being cautious. Again, it's being cautious and we're hopeful that we can stay above 280.

Speaker 5

Got it. All right. And then on loan growth balance is stable. You guys have been talking about stable balances for a while, stable ish. Is that kind of the right place to look at it here, continued payoffs of the Mainland book, they have some pretty good production locally in Hawaii.

Speaker 5

I guess how's the pipeline for the Hawaii production? Is That going to be sufficient enough to offset those pay downs?

Speaker 3

Yes. Andrew, this is Arnold. Yes, you're right. We are continuing to moderate loan growth. We're being very selective.

Speaker 3

Again, David mentioned it in his prepared comments that we're looking for risk reward balance in this environment. I would just add that despite the fact that were remaining flattish, I guess, in loan growth. We do have about $150,000,000 to $170,000,000 of churn every quarter and we are replacing that with market rate loans. So I think the repricing from that aspect as well as just overall repricing of our loan portfolio will help us over the next 2 quarters.

Speaker 4

And Arnold, if I may add, Andrew, to give you some color, new loan yields in the 3rd quarter weighted average was 7.5% and that compares to the portfolio yield of 4.5%. So significant upward repricing similar in the investment portfolio, new investment yields, opportunities to the extent where we invest in is roughly 6% versus the portfolio investment yield of 210. So as Arnold mentioned, nice repricing opportunities in the asset side of the balance sheet.

Speaker 5

Got it. That's very helpful. Thanks for taking the questions here. I will step back.

Speaker 3

Thank you, Andrew.

Operator

And we will take our next question from David Feaster with Raymond James. Your line is open.

Speaker 6

Hey, good morning everybody.

Speaker 3

Good morning, David.

Speaker 6

Maybe just kind of following up on the higher for longer environment. I'm curious how you think about balance sheet management assuming we stay here in a higher for longer environment. You guys built some liquidity this quarter, and appreciate the margin discussion in the short run. But assuming we stabilize in the Q1, hit that trough, Again, assuming we stay in this higher for longer type of environment, how do you think about the pace of margin expansion given the repricing dynamics that you talked about and hopefully stabilizing funding costs?

Speaker 4

Yes. Hey, David. It's David. Yes, I think the margin expansion would be moderate to begin with. But I think the wild card there will be our ability to stabilize deposit balances and have it start to grow more consistently and start to see growth in more core deposit categories.

Speaker 4

So if we can stabilize and start growing core deposits, that may give us the opportunity to grow the loan portfolio a little more, returning to more normal type of loan growth and that will help the NIM expand. So a lot of it depends on what happens on the liability side.

Speaker 6

And that's maybe let's dig into that. I'm just could you talk about some of the trends that you're seeing on the core funding side. Obviously, we're seeing more migration. But I'd just be curious some of the underlying trends that are happening there, how new core deposit pricing is and just how you think about deposit balances going forward in your conversations with clients and your focus on gaining share?

Speaker 4

Yes. Like the industry, where we've been Yes. The deposit remix has continued. The positive there is we see the rate of change starting to moderate, starting to slow. DDA balances as a percent of total are returning back to 2019 levels.

Speaker 4

So the risk of migration is diminishing. And I think that's what gives us some cautious optimism on the net interest margin. As far as deposit flows, it is like everywhere. The battle for core deposits is real. We are grateful that we have great customer relationships and we've been fortunate to deepen some of those relationships, while we have been, able to grow some new relationships and we expect that to continue.

Speaker 6

Okay. That's helpful. And maybe just touching on the credit front, you talked about some of the stabilization, it sounds like in the consumer book. I'm just curious, I know you guys sold some loans in the quarter. Just curious how you think about managing credit and asset quality?

Speaker 6

Are there any additional loan sales that you're expecting? And then just as you look more broadly into your portfolio, what are you watching more closely? And just anything causing you concern and your thoughts on proactively managing credit going forward?

Speaker 3

David, we'll turn to Anna to respond to your question.

Speaker 1

Hi, David. This is Anna. So with regards to a broader outlook, we continue to focus on consumer. We have been focused on watching the mainland consumer performance, but we are also watching the Hawaii performance. There's also the Lahaina, Maui wildfire in which we are continuing to work with our customers.

Speaker 1

We're not expecting significant impact there, but we are watching with regards to the return of tourism and just the general outlook for that island specifically with regards to our consumer portfolio. The rest of the portfolio continues to do well. We are not concerned with any aspects of the different product types that we currently have. Overall, that's yes, the focus is really on consumer, both Mainland and Hawaii.

Speaker 3

Okay. Terrific. Thank you.

Operator

And there are no further questions at this time. So I will now turn the call back to Mr. Arnold Martinez for closing remarks.

Speaker 3

Thank you, Abby, to update you on our progress.

Operator

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.

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Central Pacific Financial Q3 2023
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