Q1 2020 Earnings Call
Thursday Thursday Thursday
Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial quarter first quarter 2020 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. This call is being recorded and will be available for replay shortly after its completion on the company's website at ww.w Thursday back.
Two P. Think. I'd like to turn the call over to mister David Morimoto Executive Vice President and Chief Financial Officer, please go ahead.
Thank you crying and thank you all for joining us as we review the financial results of the first quarter of 2024 Central Pacific Financial Corp.
With me this morning are Paul. You want a meeting chairman and chief executive officer Kathryn? No, president Arnold Martinez group executive vice-president of Revenue off and Anna who Executive Vice President and chief credit officer.
We have prepared a slide presentation that we will refer to it in our remarks today. The presentation is available in the investor relations section of our website at CPD Thursday 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 two of our presentation now, I'll turn the call over to Paul.
I get David and good morning everyone as always we appreciate your interest and Central Pacific Financial Corporation.
The covid-19 pandemic is top of mind for all of us over. All the state of Hawaii is doing a good job at managing and containing the pandemic.
Why was early to put in place stay-at-home orders and mandatory curfews and quarantines our residents in general or abiding by government orders as well as hygiene a recommendation?
Who are geographic isolation? Why was able to effectively lock down and protect the state from outside visitors with potential covid-19 infections?
We believe these measures will slow and contain the spread of covid-19 and the state and result in a faster recovery.
However, with a complete tourism shut down in Hawaii. We are seeing a dramatic impact on the state's economy. We are hopeful that we will start to see visitors returning to the island in the late summer or early fall of this year particularly from Asia as they are closer to recovery from the pandemic.
Central Pacific Financial was committed to supporting our employees customers and Community during this time of Crisis. Our first focus is on our employees safety comes first. And therefore we have temporarily closed 13 of our smaller branches to allow for adequate social distancing and our larger remaining branches.
It's down from the temporarily closed branches have been redeployed to work at the remaining branches assist other areas of the bank or made customer telephone calls off the Geordie of our support staff, even at the executive level have started working remotely on a full-time or rotating basis.
We Believe
The actions we have taken to date will allow us to meet the needs of our customers and Community while ensuring the safety of all employees.
We want to assure you that we are prepared to handle this crisis. I personally let companies through prior crises including the 2011 Tahoe the earthquake tsunami and radiation after effect while I was in Tokyo leading IBM, Japan and the stars are outbreak in two thousand and two two thousand and four while I was leading bearingpoint asia-pacific additionally many of our team members that helped us through the 2008 to 2009 financial crisis remain with the company and are applying a valuable Lessons Learned.
Despite covid-19 arrives twenty-twenty initiatives are continuing the revitalization of our building headquarters is proceeding as we continue to support the local Construction in Thursday. We're also pushing ahead with our digital initiatives including the development of our new online and Mobile Banking platforms. And the replacement of our ATM digital technology is even more critical to our business during crises like this and will remain a high priority strategy for our future. I'd like to turn the call Catherine. We will share more about our business continued continuity plan.
Thank you. All a business continuity plan includes a pending plan which we successfully activated in early March and is summarized on page three and four of our presentations as a result. We have not had any disruption in our business as Paul noted. Our remote Workforce plan has been ruled out with a month overall smooth transition. We already have virtual private Network VPN technology capability over the last quarter and we've expanded VPN access off over 70% of our employees in addition to VPN. We are well fed up with the latest Technologies and enable our operations to continue efficiently.
Our teams are using collaboration tools including Microsoft teams and several other cloud-based software programs.
For our customers we continue to offer our current online and Mobile Banking tools and we're making good progress on our new digital offerings as part of our Rising 20/20 initiative.
Thank you, Dean and essential service and I've been so proud of how are CPP employees have risen to deliver exceptional service in these challenging times. I'd like to reiterate that our employ a customer safety is of the utmost priority. We are monitoring our employees health and well-being very closely. We are providing personal protective equipment for our Frontline staff and have implemented precautionary measures to ensure social distancing in our branches and all work areas. I'd like to turn the call over now to Arnold Martinez our group executive or president of Revenue who will share how we're assisting our customers during this pandemic Arnold.
Thank you Catherine during the first.
Our teams remain focused on generating Revenue, even as the pandemic situation began to escalate the bank grew total loans by 63 million months or 1.4% sequential quarter. The loan growth primarily came from our residential and commercial mortgage loan categories.
We were also able to grow apart deposits by 45 million or 1.1% sequential quarter. Additionally. We were successful in reducing the average cost of total deposits by 5 basis points to 36 basis points going forward. We believe there are still opportunities for loan and deposit growth as our teams collaborate together to support our consumer and business customers through this unprecedented time.
We have also moved quickly to put in place a number of covid-19 relief programs for our consumer and business customers.
The relief programs are summarized on slides five to seven of the presentation for our customers. We are offering an employment disruption loan as well as consumer and Residential Mortgage loan payment deferral programs for our business customers. We are an SBA approved lender and are participating in the paycheck Protection Program for p p p which is part of the federal cares act. We've seen tremendous demand for the paycheck Protection Program and that made over 4,200 loans totaling nearly $490 million approved by the SBA.
as a result of the PPP loan demand it was necessary to redeploy employees to handle and assist with the loan processing including augmenting the loan process by engaging outside resources to assist
Our PPP team is focused right now to fund the loans that were approved by the FDA as well as the prioritize remaining applications wage did not get processed in time under the initial funding and of course the submit the applications to SBA when the lender portal reopens.
We are staying in close contact with our customers through increased Outreach efforts are Bankers are having calls with their key customers as frequently as daily. We are monitoring our customers financial help during this challenging time and are providing guidance and the resources they need to help them weather the storm. Furthermore. We are prudently making loan modifications for certain commercial customers to allow for deferral of loan principal and interest for a short-term log. As of April 16th. We have made loan payment deferrals on approximately three hundred million in total balances, which represents less than 7% of our total loan portfolio.
I'd like to turn the call over now to Anna who are Executive Vice President and chief credit officer provide further detail on our credit and portfolio risk management and God. Thank you Arnold Central Pacific Financial has had a prudent credit risk management philosophy, which we believe will help us whether to attend following our recovery from the Great Recession. We implemented a disciplined approach to credit that included tighter underwriting standards with a focus on making quality loans and maintaining a diversified from home today as well as diversifying byproducts and by industry while certain industries we meant to will be impacted by the pandemic there are other indirect and portfolios that we expect to have limited impact.
The primary industries that will likely experience impacts from the pandemic are summarized on 5/9 and include accommodation and Food Service retail trade off trade $90 range and Healthcare this comprises approximately $378 million or 8% of our total loan portfolio a large portion of these bags are too well established businesses that have weather through the last boundary secondary industries that may also experience impact include Real Estate Management and other leasing office applications professional and administrative and other Industries and services that total approximately 487 million or 11% of our total loan portfolio with these industries have best bar experience middle impact from covid-19 additional details on our primary and secondary Industries can be found on flying jet song.
We also anticipate impacts on our Consumer Portfolio, which is approximately $560 billion or 13% of our total loan portfolio. We are actively participating 90-day payment deferrals to these borrowers additional details on our customer portfolio are shown on flight eleven.
We anticipate limited impact on our residential home equity and investor commercial real estate the weighted average loan-to-value in these portfolios are $60 58% and 53% respectively these loans comprised of approximately 3.1 billion or 68% of our total loan portfolio with additional details on these portfolios can be found on five twelve and thirteen.
In the final week of March. We aggressively reviewed our commercial loan portfolio and reached out to our customers to determine the initial impact if any of covid-19 on their business through this process, we identify borrowers that were likely to experience financial difficulty and proactively celebrated approximately $65 billion in loans from a special mention are primarily as far as part of the outstanding balance of the primary Industries previously mentioned. It is important to know that off the phone for performing prior to covid-19 as part of our assessment for the downgrade. We reviewed management and actions taken such as closing businesses and reducing expenditures monthly cash first and access to cash liquidity and capital and the overall ability to weather through the pandemic in the near-term. We further know that it is still early to reach any birth.
conclusion and that these phones
Work on braided did not include the expected positive impact from the federal subsidy program. We are proactively working with our customers and many have already applied and have been approved on a paycheck Protection Program. Furthermore. We have also provided assistance with short-term payment deferrals as necessary additional details and breakdown by industry can be found on five fourteen overall our asset quality continues to remain strong allow turn the call over to David our Executive Vice President and Chief Financial Officer, David.
Thank you, Anna.
On the finance side. We have implemented several steps to effectively manage through the current environment. We will ensure our capital and liquidity positions remain strong to our own experience. We have developed robust capital and liquidity stress tests and comprehensive capital and liquidity contingency plans.
We also decided to temporarily suspend our share repurchase program.
Manage our expenses as well as protect our employees. We have implemented internal policies to temporarily suspend all business travel large group meetings meals and entertainment.
We have also re-evaluate we evaluated or postpone certain Consulting project and finally hiring of new employees is on an exception basis and we are evaluating our compensation plans.
I'd like to know briefly cover the company's Financial results for the first quarter of 2020, which is summarized on slide fifteen.
Cecil methodology and the effects of the covid-19 pandemic on the economic forecast
We also recorded a Cecil Day One impact of 3.6 million, which was an adjustment to our opening shareholders equity.
Pre-tax pre-provision earnings for the first quarter was 21 million.
That charge offs in the first quarter totaled 1.2 million dollars compared to net charge-offs of 2.3 million in the prior quarter.
The charge is primarily came from the consumer loan portfolio.
At March Thirty One our allowance for credit losses was 59.6 million dollars or 1.32% of outstanding loans that interest income for the first quarter was 47.8 Million, which was relatively flat on a sequential basis and the net interest margin remains stable at 3.43%
First quarter other operating income total 8.9 million compared to nine point eight million in the prior quarter. The decrease was primarily due to lower Mortgage Banking and come home and fully income driven by market volatility during the quarter.
This was partially offset by additional fee income of 1.3 million dollars related to an interest rate swap for a commercial real estate client.
Other operating expense for the first quarter was 36.2 million, which was flat to the prior quarter included in the total. There was lower deferred compensation expense due to Mark volatility, which was offset by higher provision on off-balance-sheet credit exposures under Cecil.
The efficiency ratio increased to 63.9% in the first quarter compared to 62.8% in the prior quarter. The the increase was primarily due to the decrease in other operating income.
The effective tax rate was 25.3% in the first quarter going forward. We expect the effective tax rate to be in the 25 to 27% range now, I'll turn I'll return the call to Paul you on a meeting the global covid-19 demek is an extremely challenging situation faced by off during this time. We want to assure you that Central Pacific is prepared and ready to handle the situation. We have a solid Financial Credit liquidity and off position to enable us to weather the storm. We remain committed to our employees customers and the community and will continue to provide support to all of these areas.
Earlier this month. We ran a highly successful Community campaign sponsored by our foundation called keep Hawaii clicking through this program our foundation subsidize the cost of 10,000 takeout meals to local families struggling during this time the purchase of the meals also provided the much-needed support to our local restaurants. We are further looking at other potential initiatives to help our local economy. One of which is a campaign to continue communication and engagement with visitors particularly from Japan to keep Hawaii off of mine and encourage their return to why want once the pandemic ends and Recovery occurs.
to conclude
We very focused on flattening the curve with the covid-19 situation, and we are pulling together as a company and Community to beat this on behalf of our management team. Thank you for your continued support and confidence in our organization at this time will be happy to address any questions you may have. Thank you.
We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys off at anytime your question that's been addressed and you would like to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
Our first question comes from David feaster with Raymond James, please go ahead. Hey, good afternoon guys, you guys have been a big part of the approved PPP loans in Hawaii. Are you just accepting applications from Newk's are you are you accepting applications from new clients or just existing clients? Are you able to require deposit relationships with those loans and I guess with regards to the timing I guess that a lot of those have already been approved. Do you think most of those fund into q20? So most of the fee revenues should come in next quarter? Yeah. Thank you David, you know, and and I'd like to respond to all of that positively but I don't want to take Arnold Thunder you spend working night and day on Earth don't you respond to that?
Sure. Thanks Paul. Yeah, so we I would say the super majority of the the applications we receive from our customer but we you know do have non-customers that did apply and you know, the the our position has been that the program is for support of the business Community page and so as we obviously support our customers, we are also supporting the the over broader Community with regard to the the fees off, you know, we it is a it is amortized over over the the term of the loan but we estimate that we are in the eighteen roughly eighteen million dollars range for fees at this point.
Okay terrific and then David I appreciate the color on some of the expense saving opportunities. But how do you think about the rise twenty-twenty initiatives, you know just here in your comments just sounds like things are progressing as planned. But are there any projects that were Investments that you might like to place on hold or I guess broadly. How do you think about expenses? And do you have much expense Leverage?
availability
This is Paul. You know what? I mean? Let me start first by um, you know, just once again explaining our rise twenty-twenty initiative. It's largely to compose one is a technology play and the other is infrastructure on the technology play, you know, everything from our new online mobile platform you ATMs definitely converting all of our employees to become VPN ready and also give them collaboration tools. This was extremely timely and nothing has stopped. There is a matter of fact we've been trying to accelerate that in terms of infrastructure, you know, as of February, we already started the demolition of our first floor and some change our plan is to, you know, continue down the path and complete the full renovation of our main building on the first floor and having said that there are pieces and components for Thursday.
I'm All Glass materials that were planning to place into the ninth floor of our building but many ancillary things that we feel that we can postpone just to be prudent wage. Uh, but you know having said that we do plan to push ahead on the first floor renovation, which is the Lion's Share of our investment Club. Most of it is advertised over 39 years, and and I think personally our Target date of January one 2021. We're hoping that that's going to be a real great celebration. We're going to have covid-19 campaign. Uh, hopefully the, you know, the whole state of the city of Honolulu will be open for business and will all take a really long view on it, but David want to provide any other information on on expenses. Sure. Thanks. Yeah, so that says David David hazan all mentioned, you know, we're dead.
Continuing with the major components of the rise twenty-twenty initiative. And what will we will guide to on other total other operating experience is roughly wage. You know what we're sticking with the 36 to 38 million dollar range and obviously as we said in our prepared remarks, you know, we're we're trying to walk manage that to the lower lower end of the range.
Okay, that's helpful. And then I guess last one for me, you know on the on the allowance for loan losses. We saw a pretty big jump obviously to 132 basis points, but you know given given where we are today and assuming that this might you know stick around a little bit longer. How do you how do you think about additional Reserve builds and just you know kind of your overall thoughts on on reserves and just any comments here you have would be helpful.
Okay. Thanks David. Yeah, yeah as as as all banks, it's been a it's been a challenging quarter implementing one of the life bank account changes in the midst of a pandemic but you know, the team did did a nice job implementing Cecil and you know, we we took a look at the situation as of March 31st. We we use a blend of economic forecast at the time that did include some of the thoughts that came out in late March. So we did incorporate some of the downside that people were seeing with covid-19.
April that have
Shown potential further down side. So to the extent that there is further deterioration and the economic environment, you know, there could be there there would be additional Reserve build in in the coming quarters and if we we would think it's probably the second and third quarter, this is Paul. Let me just add them. Clearly. There's a lot of uncertainty on how cold it's all going to play out. You know, it's Arnold touched on you know, our bank is also been extremely focused on a lot of the federal subsidy programs like the PPP. We as a bank have overachieved, you know, in terms, you know in relation to our market share in the state of Georgia and with some of the fees that we anticipate in Q2 and hopefully in Q3 with the additional $310 billion that Congress is considering wage.
To again put into the SV that we can achieve a lot of fees that we feel will help us to counter additional Provisions as well.
Okay, that's helpful. I guess kind of along those same lines. What are you what are you hearing for your customers? Like what's the pulse of it? It sounds like you're actually expecting some you know potential loan growth. But what are you hearing from your clients? What's what's the pulse in maybe at what point you know, do they like how much longer if this goes on at? What point do you think they start feeling the pressure? You know, you'll see an orange. We have a very diverse portfolio of logs and the majority of it. I think we're in a really good place, you know, especially with the low loan-to-value in our own new clients, you know, clearly the you know, the companies that are very focused on tourism, you know, whether it be hotels restaurants who had completely shut down operations. There's tremendous concern, you know, the city and county the mayor has just announced, you know, a stay-at-home mandate.
Need extension to the end of May so clearly that has a huge, you know implication to those businesses. So a lot of concerns, you know, there's not quite so much light at the end of the tunnel yet why he's doing a great job, you know in comparison to Most states and you know in the United States so, you know, there's some companies that are cautiously optimistic and yet you know situations quite tough. So, you know, what we've been doing is reaching out to all of those customers, you know, trying to really understand their business page seeing how the bank can help and and we plan to continue doing that.
Okay, that's helpful. Thanks guys.
Crap next question. Our next question will come from Jackie Bolen with KBW, please go ahead.
Hi, good morning. Everyone. Just one more question on Hawaii before I changed topic, but I think it may have been in your prepared remarks call. You mentioned that you were hopeful for visitors to return in late summer too early fall. Is that something that come out of one of the local organizations or the Hawaii tourism Authority or is that just an internal hope?
You know, I'd like to say it's a little bit of everything Jackie, you know, you know, nothing is very definitive yet. I mean, you know our major markets with Japan the mainland us, you know, it has its challenges today. So it's not just about Hawaii, you know, the whole ecosystem has to work and yet, you know, Hawaii today with infections of a little under six hundred four hundred recovered and our daily new infections. I think generally the state in the office been doing a pretty good job, you know, I containing it but the concern is naturally on the market that we bring in tourists into so, you know, but our view right now is dead, you know, wouldn't it be wonderful if the state of Hawaii can position itself as one of the safer tourist destinations globally and and in that situation
And I think people are willing to pay a premium to to come to Hawaii and and it really boils down to the tenacity of state government. And that's something that even our bank and all the bank actually and why are are working very closely with the state and city governments and providing ideas new initiative new hygiene protocol, um, you know providing ideas on new technology to try and make the tourism experience a positive one and we're very hopeful by by the end of the third quarter early fourth-quarter that we can start seeing a gradual rise in towards
And is it reasonable to assume that the people of why would be able to return to their new normal, you know in advance of that because the state has done such a good job of you know, really containing the virus and you know, just given your status as an island State you more than any other state in the u.s. Really probably about places everywhere have been able to keep people out from introducing the virus again. Is that a fair assumption, you know again Jackie the the city's stay-at-home mom has been with just extended yesterday to May 31st. And you know, I I would, you know looking at all of the activity in the mainland us right now. I I think it is a fair assumption that a lot of businesses will be able to start moving towards normalcy from early June.
Okay.
Okay, thank you. That's that's wonderful color and very helpful. Just looking in terms of growth and understanding that everybody is essentially at home through the majority of the second quarter of a minimum. You know, we're how are your customers thinking about that? Is it all just coming from businesses that are looking for help through either the PPP or the other programs that you have available to them or are there are there other ways for growth that you know that I'm not thinking of
You know Jackie and the independent directors, they're still are winners, you know grocery stores, for example, you know companies that are providing, uh, you know health and safety type services and and whatnot. So, so again, those are reflected in our portfolio as well. But you know, they're clearly, you know, uh businesses that are that are also, you know, a a benefitting from from what's happening today, but having said that, you know, the vast majority of companies, especially in the tourism sector and again, you know, I want to emphasize that we have a very diverse portfolio and we have those companies that are still in construction working on the Honolulu Rail Project doing a lot of Defense Contracting those businesses are still business as usual the ones that are facing the tourism industry on the other hand with a shutdown on business, you know, the the rep
Send Kare back subsidies are critical and and this is why um cpb has has invested so much time and energy in making sure we bring those dollars even to the small businesses 4200 applications. I with four hundred ninety million. We averaged a little over $100,000 per application. And that was that was just critical during during these kind of times Jackie.
Okay, thank you. And just one last one for me and then I'll step back. Just wondering what the expectation is for Mortgage Banking in the near-term and whether or not the the swing between quarters was purely driven by the MSR Mark or whether it was a function of volume to I'm sorry wrong message, but that was a perfect segue. So the the the volume in in q1 was when I would say seasonably low and and it's in in Prior years wage in the dip but I will share with you that in to the pipe looks really good and we are projecting about 220 million dollars in in production and a lot of that goes off some things we talked about earlier in regard to the unique nature of our mortgage business. A lot of it is purchased and and we have joint ventures with key developers birth.
And roll a realtor agencies here. And and so that will can
That you to drive the growth and and the mortgage business not just in Q2, but for the rest of the year, okay, thank you. And then just the and this might be a technical question. It just on the the difference between MSR and if that was the primary driver of one Q.
Yeah. That's that's correct. Jackie the MSR amortization increase sequential quarter by about 800,000.
Okay. Thank you everyone. I'll set back.
If you'd like to ask a question, it is star then one again, if you'd like to ask a question * 1 our next question will come from Lori with compass point clubs. Go ahead.
Yeah. Hi. Good morning. Just wanted to start first of our on the income statement. You had just wondered boldly a loss of $19,000 for the quarter versus it's been running about 600 or so for quarter. Has should we be thinking about that? Yeah, Glory that was impact of the equity Market volatility. So we took we have a bowl of only policy that's used as a indirect funding source for our employee deferred comp program. So the the assets inside of the bully policy are Equity mutual funds so that that policy declined in value by roughly 600,000 month and we had our normal bully policies with income of roughly 600,000. So they kind of offset each other and that's what resulted in roughly zero income dead.
You can cut it. It assuming you know, we don't have another downturn in equity Market if things Stay Saved stable, we would expect fully income to return to the five or six hundred thousand quarterly range going forward. Okay, that's helpful. And then within your net interest income this quarter, were there any not approval loan or like you had last quarter?
Okay. Okay, very strong. Margin. Okay good and then just shifting over to credit your deck was phenomenal. Thank you for the detail on slide. Nine months primary industries that you outline is potentially be more at risk from covid-19. It looks like obviously, you know, the majority of that is is CN I can you tell us off of the $370 million. Is there any real estate secured piece to that and if you know, you know percentage or dollar of that 378 million.
I won't say that between the primary and secondary Industries 325 million a billion of it is real estate secured. Okay between birth. I'm 320% Okay, that's helpful. And then um, this is kind of more macro. I guess those Anna and David for you, you know in terms of construction lending causing and you can just give us a request update your just your whatever your 2% you're hundred 1 million, but just just in terms of sort of a month. Go ahead. Can you can you restart please do your question? Sure. Can you hear me now?
yeah, just
Very high level if if you could just help us think about your construction book since that's what really hurt you during the last downturn and he looks so different now, right? So you had 28% of your loan book a construction lending back at the end of 07 and today. That's 2% But can you just help us think about what are the differences in your construction booked today versus back then, you know outside the obvious, which is sized. Thanks.
Hi Lori for a construction. But today it's very different than ten years ago. We were doing a lot of Land Development residential construction development Inc. Have today is very focused on supporting the Middle Market to the affordable condo bills that we have here in Hawaii on Oahu primarily off. That's where the difference is in the portfolios. We are not in what we were ten years ago.
Okay, and then you're the the hundred and 1 million, is that all hawaii-based?
Yes, okay. Okay and versus the last go round it was mainly in the mainland. Is that correct? Okay, perfect. Okay, and then if you have it, do you do you happen to remember what ltvs were back then versus?
today
Glory Days they probably started Felicia conforming or six sixty sixty-five percent, but they ended up, you know upside down obviously once we bought okay, okay much different exposure, you know, as you said it was it was almost 30% of the portfolio. It was over a billion dollars in construction at that time. And today it was I think it peaked at one point 1 billion and today its $100,000 so much different risk profile in the loan portfolio.
Right coupled with the fact that your loans were a lot smaller. Okay, perfect. I'll leave it there. Thank you so much.
I think
this concludes our question-and-answer session. I would like to turn the conference back over to Paul Young chairman and CEO for any closing remarks. Thank you. Thank you very much for participating in our earnings call for the first quarter of 2020. 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.