Central Pacific Financial Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 26, 2023

There are 6 speakers on the call.

Operator

Afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. 2nd Quarter 2023 Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions.

Operator

This call is being recorded and will be available for replay shortly after its completion on the company's website at www. Cpb. Bank. I'd like to turn the call over to Ms. Dana Matsumoto, Group Senior Vice President and Director of Finance and Accounting.

Operator

Please go ahead.

Speaker 1

Thank you, Sarah, and thank you all for joining us as we review the financial results of the Q2 of 2023 for Central Pacific Financial Corp. With me this morning are Arnold Martinez, President and Chief Executive Officer David Borimoto, Senior Executive Vice President and Chief Financial Officer and Anna Hu, Executive Vice President and Chief Credit Officer. We have prepared a supplemental slide presentation that provides and is available in the Investor Relations section of our website at cpb. Bank. During the course of today's call, management may make forward looking statements.

Speaker 1

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, Arnold Martinez.

Speaker 2

Thank you, Dana. 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 Hawaii tourism industry continues to be well supported by U.

Speaker 2

S. Visitors with total visitor arrivals just slightly under pre pandemic levels. Visitor spending continues to be robust, totaling $1,690,000,000 in May, an increase of 19% compared to the same month in 2019. Hotels in Hawaii continue to perform well with total statewide hotel occupancy in June at 77%, up 1% from a year ago and an average daily rate of $3.89 down 2% from a year ago. Hawaii's seasonally adjusted unemployment rate continued to decline to 3% in June and is outperforming the national unemployment rate of 3.6%.

Speaker 2

Year over year statewide non form payroll increased by 17,000 jobs or 2.7%. Labor market conditions are overall quite favorable in Hawaii. Real estate values in Hawaii remains a key strength. The Oahu median single family home price continues to be around $1,100,000 and the median condo sales price was $510,000 in June. While home sales volumes are down year over year, there is continued strong demand and limited inventory with properties generally staying on the market for less than 20 days.

Speaker 2

Strong construction activity in Hawaii continues to drive economic growth. Private building permits are up 8% compared to a year ago and construction job counts are up 5%. Government contracts awarded in Hawaii totaled $3,200,000,000 in the Q1 of 2023, which included a significant $2,800,000,000 award to Hawaii firms for the Pearl Harbor naval shipyard replacement project. Overall, the Hawaii market continues to have a healthier outlook compared to the rest of the nation and is projected to avoid a recession. The Hawaii Banking Industry is also differentiated from the national industry.

Speaker 2

With a high value deposit franchise that is predominantly relationship based. CPB's deposit portfolio is diversified and long tenured. Our business model is based on longer term customer relationships that are sticky and less rate sensitive. CPB has $6,800,000,000 in relationship deposits with approximately 50% of our customers having been with CPB for more than 10 years. Additionally, 65% of our deposits are FDIC insured or collateralized.

Speaker 2

During the pandemic, we grew our deposits responsibly with about 30% growth as compared to some of the challenged U. S. Regional banks that more than doubled their deposit portfolio size with surge deposits. In the Q2, we continued a strong focus on liquidity and while some deposit mix shift continued, We were successful in growing total deposits. Our teams remain very focused on generating relationship based deposits and we see upside opportunity to continue to grow our market share.

Speaker 2

At the same time, we continue to prudently make asset growth decisions with a strong risk management focus. I'll now turn the call over to David Morimoto, our Chief Financial Officer. David?

Speaker 3

Thank you, Arnold. Turning to our earnings results. Net income for the Q2 was 14,500,000 or $0.53 per diluted share. Return on average assets was 0.78%. Return on average equity was 12.12 percent and our efficiency ratio was 63.17%.

Speaker 3

Our balance sheet and liquidity position strengthened in the 2nd quarter with our loan and investment portfolios modestly declining, Growth in the deposit portfolio and a cash position in excess of $300,000,000 Our loan to deposit ratio declined to 81% in the 2nd quarter. We continue to moderate loan growth by being more selective and ensuring appropriate pricing and structure on new portfolio loans. In the Q2, we continue to let the Mainland unsecured consumer loan portfolio run off as we monitor the national economic outlook. We remain nimble and will look for opportunities as the operating environment evolves. On deposits, period end total deposits grew by $59,000,000 which included core deposit growth of $10,000,000 Average total deposit balances also grew by $19,000,000 sequential quarter.

Speaker 3

CPB continues to benefit from a granular and payable core deposit portfolio. Deposit flows and activity have begun to normalize And at the same time, our teams are highly focused on continuing to build new or deposit customer relationships. Net interest income for the 2nd quarter was $52,700,000 and decreased by 1,500,000 from the prior quarter, primarily due to higher funding costs. This reflects a smaller quarter over quarter decrease compared to the first quarter, which declined by $2,100,000 The net interest margin was 2.96% in the 2nd quarter, a decline of 12 basis points. Our total cost of deposits was 84 basis points in the 2nd quarter And our cycle to date interest bearing deposit repricing beta is 24%, which remains within our expectations.

Speaker 3

2nd quarter other operating income was $10,400,000 which decreased by 0.6 Other operating expenses totaled $39,900,000 in the 2nd quarter, a decrease of $2,200,000 from the prior quarter. The decrease was primarily due to lower salaries and employee benefits as we prudently manage our staffing levels and compensation expense in the current operating environment. Our effective tax rate was 23.6% in the second quarter and we continue to expected to be in the 24% to 25% range going forward. In the area of capital, during the Q2, we repurchased 23,750 shares at a total cost of $400,000 or an average cost per share of $14.92 Our Board of Directors declared a quarterly cash dividend of $0.26 per share, which will be payable on September 50 to shareholders of record on August 31. Overall, our capital position remains strong and our shareholders' equity has grown by $23,000,000 year to date.

Speaker 3

I'll now turn the call over to Anna Hu, our Chief Credit Officer.

Speaker 1

Thank you, David. We continue to have strong asset quality with non performing assets at 15 basis points of total assets and criticized loans at 1.3% of total loans. While we saw an uptick in nonperforming assets, it was related to 2 Hawaii construction loans to a single borrower, which were subsequently paid off in full in mid July. Our loan portfolio continues to be well diversified by loan type and industry sector with low exposure to the U. S.

Speaker 1

Mainland at 17% of total loans and construction at just 4% of total loans. The total Mainland Consumer portfolio is $386,000,000 or 7% of total loans as of June 30, which was a $44,000,000 reduction from the prior quarter as we continued to let the portfolio run off. Over 75% of the loan portfolio is real estate secured with a weighted average loan to value of 65%. Our commercial real estate portfolio is diversified by sector with low office exposure at 3.5% of total loans and low retail exposure at 4.5 percent of total loans. The office portfolio has a weighted average loan to value of 55% and 73 weighted average months to maturity.

Speaker 1

The retail portfolio has a weighted average loan to value of 64% and 63 weighted average months to maturity. We continue with our conservative underwriting policies, including tight loan to value and concentration standards and are being more selective in the loans we make. Our net charge offs were $3,400,000 for the 2nd quarter, which equates to 24 basis points annualized as a percent of average loans. The increase in net charge offs came primarily from our Mainland unsecured consumer portfolio due to the continued seasoning of the portfolio. Overall loss levels for the Mainland Consumer Portfolio remain within our original expectations, and we currently believe these higher loss levels are peaking with the leveling off thereafter in subsequent quarters.

Speaker 1

Our allowance for credit losses was $63,800,000 or 1.16 percent of outstanding loans. In the 2nd quarter, we recorded a $4,100,000 provision for credit losses on loans primarily due to net charge offs. Additionally, we recorded a $200,000 provision for unfunded commitments for a total provision for credit losses of $4,300,000 during the quarter. Overall, our portfolio is diversified, strong and well positioned to withstand the near term pressures from the environment. We continue to have a strong risk management culture and are monitoring the economic environment closely.

Speaker 1

Now I'll turn the call back to Arnold. Arnold?

Speaker 2

Thank you, Anna. In summary, Central Pacific continues to have solid liquidity, Capital and Credit. As we continue to navigate the current environment, I want to express Mike's appreciation to our exceptional team of employees We work tirelessly to serve our customers and the community. Thank you also for your continued support and confidence in our organization. At this time, we will be happy to address any questions you may have.

Operator

Thank you. Your first question comes from the line of Andrew Liesch with Piper Sandler. Please go ahead.

Speaker 4

Hey, good morning, everyone. Good morning, Andrew. Hey, Andrew. Say, I'd just like to talk a little bit on loan growth here. So the pay down in the or the planned decline in the consumer mainland, is that like a normal pace that we should be assuming every quarter?

Speaker 2

Andrew, this is Arnold. Yes, basically we're looking at $40,000,000 to $50,000,000 per quarter.

Speaker 4

Got it. Okay. And then how is the pipeline for the rest of the portfolio trying? Can that be offset with what you're seeing in the Local economy, you had some pretty positive comments for the state. So I'm just kind of curious like where you think loan growth shakes out?

Speaker 4

Is it going to be is production going to be strong To offset those pay downs?

Speaker 2

Yes. Andrew, the pipeline continues to be pretty robust, but We're being more selective in what we're doing given the operating environment. We'll make those decisions on asset growth just based on overall deposit levels and deposit growth As we move forward in the coming quarters. Got it. Okay.

Speaker 2

Then

Speaker 4

shifting gears To the margin came in here a bit 290s, I guess. David, how do you think that Trends here going forward. There's certainly been some pressures on funding costs. And maybe if you're that some of these higher rate loans pay down, Could there be a how much more margin pressure do you think you're going to see?

Speaker 3

Yes. Hey, Anju. We're monitoring closely the second derivative, right, the rate of change in the Rise in deposit costs and we're hoping to start to see that moderate. As I mentioned in the prepared remarks, we're starting to see some Normalization of deposit flows. We are pleased with the DDA balances being roughly Stable sequential quarter.

Speaker 3

So again, we're hoping we're cautiously optimistic That the second derivative rate of changes will start to moderate and we can see some moderation in the Pressure on the net interest margin. So for the next couple of quarters, the slightly conservative guide is 280 to $290,000,000 on the NIM.

Speaker 2

Got it.

Speaker 4

And you just had the cycle to date interest bearing deposit betas In line with your expectations. Have your expectations changed on where you think that's going to peak?

Speaker 3

Yes. I think in the past, we thought it was going to peak about where it is Today, Andrew, I think now with everything that's transpired, maybe it peaks at 30% Rather than 25. Got it.

Speaker 4

All right. Thank you for taking the questions. I'll step back.

Speaker 2

Thanks, Andrew. Thanks, Andrew.

Operator

Your next question comes from the line of David Feaster with Raymond James. Please go ahead.

Speaker 4

Hi, good morning, everybody. Good morning, David.

Speaker 5

Maybe just staying on the deposit front, I was hoping you could touch on the flows that you guys have If I had characterized a lot of the calls that I've been on, it sounds like most of the pressure was early in the quarter. And if I kind of look at average Trends versus end of period. It seems like that might be the case for you all as well, but I'm just curious How non interest bearing balances have trended throughout the quarter? Similarly, how deposit costs trended? And Maybe what are you seeing what's the early read on core deposits in the 3rd quarter?

Speaker 3

Hey, David. It's David. Yes, as we mentioned, we started to see some moderation of deposit flows. So Obviously, the whole entire industry has been challenged with mix shift and acceleration of deposit betas. And we're cautiously optimistic that we'll start to see moderation on both fronts.

Speaker 3

The DDA balances were relatively stable quarter to date. And On deposit flows, I think what we generally see is as we come off quarter end, there's a little bit of runoff and then we make it up as we approach the subsequent quarter end. And those flows Continue to occur.

Speaker 5

Okay. And then just thinking about the moves that you guys made in the quarter and With the whole idea that we've got a $40,000,000 or $50,000,000 headwinds on loan growth from the consumer front. And again, you've built deposits and we have the excess liquidity. I'm just curious how you think Just how you think about deploying the liquidity? Is this a normalized level or what drove that?

Speaker 5

And Just plans on driving core deposit growth going forward.

Speaker 3

Yes, David. There was a little bit of a liquidity build during the quarter and that was purposeful. I think that's probably the appropriate amount of on balance sheet liquidity in the current environment. So I wouldn't anticipate it growing significantly more from there. And On just net interest income, yes, we realized we got a little bit of a headwind from the Mainland consumer portfolio.

Speaker 3

But as Arnold mentioned, we're looking for opportunities going forward. We have a healthy loan pipeline and we'll lean into that as We feel more comfortable with the deposit balances.

Speaker 5

Where are you seeing I'm sorry, go ahead.

Speaker 2

David, sorry, this is Arnold. Let me just add that our continued focus on the small business market, which is One of our pillars is really helping us drive deposit growth. So the team is doing a really good job In focusing on that segment and continuing to build new relationships that bring in new core deposits.

Speaker 5

Okay. That's helpful. And just kind of hearing your commentary, it sounds like the slowdown in growth was really obviously excluding the The slowdown in originations was maybe a bit more intentional as you've been selective, rather than a slowing in demand. Is that a fair characterization, especially just given the commentary on the pipeline? And then, I guess, where are you still seeing good risk adjusted You talked about the small business just now, but I'm just curious what segments are still providing good risk adjusted returns from your perspective?

Speaker 2

Yes. So, your observation is a good one. That's exactly how we're seeing things With regard to having a healthy pipeline, but very being very selective Risk adjusted returns. Maybe David can comment on some of the segments that we're looking at that we believe are good risk can get us good risk adjusted returns in the current operating environment.

Speaker 3

Yes. Thanks, Reinhold. Yes, David, the small business, the C and I area is obviously a good opportunity. You get decent loan yields there generally bank base rate or prime floating type of rates. And then as Arnold mentioned, they also bring in core deposits.

Speaker 3

So that area continues to be a focus on construction. There continues to be a decent amount of construction activity within the state of Hawaii. And again, there you have floating rates Either generally off of sulfur with decent margins, decent spreads. So those are some of the areas that we're focused on.

Speaker 5

Okay. That makes sense. And then last one for me, just expense control, you guys did a great job there. I suspect there was some Benefit on the incentive accrual side. I'm just wondering if you could help us think about a good core expense run rate.

Speaker 5

And just again, how you think about Again, we've got revenue headwinds and cost savings, but at the same time, trying to continue to invest in the franchise playing a long game here. Just curious how you think about additional investments, hires, and anything that you might have on the horizon?

Speaker 3

Yes, David. That's really what it is, right? It's a balancing game, right? We have loan opportunities, but we need to balance that with the availability of deposits. So we're balancing that to help manage the revenue side.

Speaker 3

And then, we're to the extent that we continue to see revenue headwinds, where We will continue to manage expenses very prudently. And but as you say, we need to continue to Invest in key areas, and we continue to do that. So it is definitely a balancing game between revenue and But we're highly focused on getting back to positive operating leverage. Okay.

Speaker 5

That's helpful. Do you think this kind of $40,000,000 run rate is a good core expense run rate?

Speaker 3

Yes. I think 39 to 40 and with Our commitment to be nimble. So to the extent that operating environment remains difficult, we'll need to manage expenses appropriately. David, this is Arnold. Let me just add that, as we've mentioned in previous

Speaker 2

quarters, We are very focused on harvesting more of the investment that we made in technology. So there is traction there. We are making progress in being able to Automate and to focus on building out a more efficient back office System and Processes.

Speaker 4

Okay. That's helpful. Thanks everybody.

Operator

Your next question is a follow-up from Andrew Liesch of Piper Sandler. Please go ahead.

Speaker 4

Hi, everyone. Thanks for taking the follow-up here. Just on the non interest income side, down about 5% from prior quarter. I think some of those were outsized though, Some of those line items. But is this around $10,500,000 the right place to be thinking about going forward?

Speaker 3

Yes. The guidance there, Andrew, would have been 10 to 11. So you're spot on.

Speaker 4

Got it. Great. You've asked or you've covered everything else that I've wanted to ask. Thanks so much.

Speaker 2

Thank you, Andrew.

Operator

There are no further questions at this time. I will turn the call to Arnold Martinez for closing remarks.

Speaker 2

Thank you, Sarah. And thank you very much everyone else for participating in our earnings call for the Q2 of 2023. We look forward to future opportunities to update you on our progress.

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