Q2 2021 Central Pacific Financial Corp Earnings Call
Yeah.
Thank you for standing by and welcome to the Central Pacific Financial Corp, second quarter, 2021 conference call.
During todays presentation, all parties will be in a listen only mode.
Following the presentation.
The conference will be opened for questions.
This call is being recorded and will be available for replay shortly after its completion on the Companys website at Www Dot C. P. B Dot bank. If you require operator assistance. Please press star.
And then zero.
I'd like to turn the call over to Mr. David Morimoto, Chief Financial Officer.
Please go ahead.
Thank you Andrew and thank you all for joining us and we reviewed a financial result, second quarter of 2020, 1 for Central Pacific Financial.
Corp.
With me this morning on a call you and a meeting chairman and Chief Executive Officer, Catherine NGO President.
Arnold Martinez Executive Vice President and Chief Banking Officer and.
And executive Vice President and Chief Credit Officer.
We have prepared.
Presentation that we will refer to them and our remarks today. The presentation is available and the Investor Relations section of our website at CPB Bank.
So as a part 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 it.
Complete discussion of risks related to a forward looking statements. Please refer to slide 2 of our presentation.
And now I'll turn the call over to Paul.
Thank you David and good morning, everyone as always we appreciate your interest.
Slide that's what was that a.
A financial Corp.
Let's start first with a positive updates on a Hawaii Gov.
Economic recovery visitor arrivals from the U S mainland and Hawaii for.
And much quicker than anticipated and.
Good sign for economic recovery and the daily arrival accounts have averaged about 30000.
And per day since June and nearly a pre pandemic level and.
And early July and the state of Hawaii began allowing arriving passengers to get pre testing and quarantine for proof of a full vaccination against Covid and the U S.
Although we are not immune to the spike caused by the Delta.
Brian.
And I'd COVID-19 infection rates continuing to be a very low level with our infection rates currently at the lowest in the nation.
Nearly 60% of our state populations fully vaccinated as of July 'twenty, 1.2020 1.
State of Hawaii unemployment rate decline.
Declined to 7.7% and the month of June and and forecasted by the University of Hawaii Economic research organization to decline to 4.8% in 2022.
Housing market and Hawaii remains a hot with a median single family and home price at 9.
With a $79000 for June.
And our financial results for the second quarter was very strong with quarterly pretax income, reaching a new record and high with.
With increased confidence and the Hawaii economic recovery and a continued solid asset quality liquidity and capital.
100, we resumed share repurchases during the second quarter and continue to pay a quarterly cash dividend.
Against this backdrop, we are very optimistic about our future business profit.
Digital continues to be a key strategic priority for us enhancements through our.
Our online and mobile banking platforms are being made on a continual basis.
Additionally, in the second quarter, we issue a new contactless debit cards to all of our customers and increased mobile deposit adoption among our customer base.
Further online chat and is now available.
And online appointment schedule and it's coming soon to make banking easier and more convenient for a customer we can.
Continue to work diligently on product and service development and the digital area I'd.
And I'd like to turn the call over to Kathryn No our president and cash.
Thank you Paul.
First I'd like to provide an update on a credit area we.
We are free and our clients have weathered through the challenges of the pandemic.
Like all of the loans and we granted COVID-19 related payment deferral, a return to paying status.
As of June 30, we have just $3.5 million and loans remind me a entrepreneur.
Paul a majority of which are residential mortgages and <unk>.
Additionally, a classified assets declined during the quarter to $42 million and arm.
Non performing assets remained near historic lows, and just 9 basis points and total assets.
I'd also like to share about a recent development and the environmental social and governance.
And for ESG area.
And the second quarter, we were pleased to publish our first annual 2020 ESG report.
A link can be found and resupply presentation.
A continued to develop our ESG reporting and look forward to providing further updates.
CPB and legacy.
And pulp and the small business community and 1 of the pillars of our ESG program and remains a key priority for us.
Last week, we were pleased to announce a new program run by our CPB Foundation call.
That is a W.
And rising tide.
This program supports women entrepreneurs.
And we believe they are a key to building a strong and resilient economy.
Part of this program, we selected our first cohort of 20 women entrepreneurs and the Stephens different business sectors that we participate in and Henry theory, a workshop, a financial management marketing and leadership and receive free advertising.
And then.
Support of our employees is another pillar of our ESG program, we believe and investing in our employees is critical to our success.
During the second quarter, we had our annual merit increases and we made a few key strategic new hires.
We also continue to prioritize.
And how is the health and wellbeing of our employees and therefore continue to allow for flexible work schedule off a dollar.
Hoping our hybrid a return to office Wow.
Finally, we are pleased that's a second and final phase or central Pacific Awesome revitalization and completed last month.
We.
Expect smaller office projects to continue and we create a collaborative refreshed and sustainable and workplaces for our employees.
We also continued to refresh our branches and evaluate our branch network to meet the changing needs for our customers.
I'd like to now turn the call over to Arnold Regina and our Chief Banking Officer.
Arnold Thank you Catherine and.
The second quarter, our core loan portfolio decreased by $103 million or 2.3% sequential quarter.
It was offset by a PPP paydown of $163 million.
Year over year, our core loan portfolio a decrease.
By 3.7%.
A core loan growth was broad based across all loan categories, Hep C and high which as everyone knows with a customer segment, most impacted by the pandemic and knowledge recovery.
Our residential mortgage production.
A really strong.
A little production in the second.
A quarter of nearly 208 million and a total net portfolio growth and residential mortgage and home equity a $48 million from the previous quarter.
We wrap up for 2021, new PPP originations during the second quarter with over 4600 loans totaling more than 321 million.
Yeah.
I am proud of Rte for beef and I'm, a leadership role and supporting our small business customers and a broader business community.
ETP forgiveness is also progressing well for 70% of a loans originated and 2020 already forgiven and paid off through June 30th.
Assisting our customers with a forgiveness profit has been a key priority or the bank has a local economy begins to recover and our business customers begin to pivot from surviving and thriving again.
During the second quarter with confidence as a national economic recovery was gaining strength and a locally.
Caught me was on its way to recovery.
We resumed our consumer lending programs on the mainland and in Hawaii.
During the quarter, we purchased and auto loan portfolio from 1 of our established partners and also restarted and other consumer programs on an ongoing for basis for a consumer direct and indirect loans on the mainland and Hawaii.
While it was prudent for us to suspend our consumer programs last year.
Despite what we experienced at the economic downturn, both our mainland and Hawaii consumer portfolios performed well augmented by the support from federal stimulus programs.
With Hawaii economic recovery, you expect it to take traction combined EBITDA.
With a loan pipeline, we anticipate strong loan growth for a second half for the year.
On the deposit front, we saw a strong inflow of deposits totaled 45 assets, increasing by 279 million or a 5% sequential quarter growth.
On a year over year basis total core deposits.
And our health increased by $705 million for Turkey, 8%. Additionally.
Additionally, our average cost a total deposits held steady and the second quarter adjusted 6 basis points.
Finally, I want to mentioned and as the Hawaii economy is recovering and consumer confidence is increasing we are.
It was a positive trend and transactional fee income recovery, including investment services fees.
I'll now turn the call over to David Moore and model.
Our executive Vice President and Chief Financial Officer, David.
Thank you Arnaud.
Net income for a second quarter was $18.7 million.
<unk> 66 cents per diluted share.
Return on average assets was 1.6% and return on average equity was 13.5 6%.
Net interest income for a second quarter was $52.1 million, which increased for the prior quarter, primarily due to greater rep.
And our share of PPP fee income due to a higher forgiveness.
Net interest income included a 7.9 million a PPP net interest income and net loan fees compared to $5.2 million and the prior quarter.
At June 30, and earn net ptc's.
And a $16.9 million.
Net interest margin decreased to 3.6%.
2 to $3, 1.9 and the prior quarter.
The net interest margin normalized for a PPP was 293% compared to 312 and the previous.
And what's the water.
The normalized net decrease was due to an acceleration of MBS premium amortization excess balance sheet liquidity and lower investment and loan yields.
<unk> MBS premium amortization increased by 900000 sequential quarter.
And our fusco and acceleration of prepayments and the second quarter.
To mitigate the prepayment risk going forward, we executed a consolidate and coupon MBS bond swaps totaling $175 million.
We continue to deploy excess liquidity into the loan and investment portfolios to further.
Further support our net interest margin.
Second quarter other operating income remained relatively flat at $10.5 million Davita.
During the quarter and there was a decrease in mortgage banking income, which was offset by higher service charges and fees and.
Banco and life insurance income.
Other operating expenses for the second quarter was $41.4 million compared to 37.8 million in the prior quarter.
With much of the increase and the salaries and benefits volume.
The current quarter increase in salaries and benefits was primarily due to $1.2 million and.
And recurring reduction and the prior quarter.
And $2.8 million and higher incentive compensation and commission accruals strategic hires to drive forward performance and annual Merit increases.
The efficiency ratio increased to 66, 2% and a set.
And non water due to.
Higher other operating expenses we.
We expect the efficiency ratio, a moderate and improve over time as we drive positive operating leverage based on our strategic investments.
Net charge offs and the second quarter, a total of 0.8 million with the majority of.
Charge offs coming from a consumer loan portfolio.
At June 30, our allowance for credit losses was $77.8 million or a 168% of outstanding loans, excluding for PPE low.
And a second quarter, we recorded a $3.4 million credit too.
For the provision for credit losses, due to improvements and the economic forecast and our loan portfolio.
The effective tax rate was 23, 9% and a second quarter and.
Going forward, we expect the effective tax rate to be and a 24% to 26% range.
Capital position remains strong and as Paul noted earlier, we resumed share repurchases this quarter with repurchases of 156600 shares at a total cost of $4.3 million.
We've also repurchased an additional 78000 shares a common stock.
And to date through July <unk>, and yet at an average cost of $24.90 day.
Finally, our BARDA.
And has declared a quarterly cash dividend of <unk> 24 per share, which was consistent with the prior quarter.
Thanks, and now we'll return the call to Paul Thank.
Thank you David and.
Our Caribbean Central Pacific has a solid financial credit and liquidity and capital position and we continue to make positive forward progress on a core business strategy.
Further we remain committed to providing support for our employees customers and the community as we continue to progress.
Summary, and the economic recovery and the.
A half of our management team and employees. Thank you for your continued support and confidence and our organization at this time, we'll be happy to address any questions. You may have thank you back a year entity.
We will now begin the question and answer session.
Ask a question.
And through press Star then 1 on your telephone keypad.
And we're using a speakerphone please pick up your handset before pressing the keys.
And at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Andrew Liesch with Piper Sandler. Please go ahead.
Hi, good morning, everyone.
Just wanted to touch on loan growth here and it's nice to.
See strength from a quarter.
How large was the.
Consumer auto purchases.
Yes, hi.
Andrew This is not a this.
This is arnold so.
And India.
And the corner, we didn't have a.
And we did make an auto loan portfolio purchases.
For $33.6 million.
And and in addition to that.
And I mentioned in my earlier comments.
And <unk> both are more.
For a Hawaii and for a meeting and on consumer.
Got it yet so it's a good organic growth even beyond.
And that that purchase okay. That's a good value and then on the residential front. It looks like you guys retained more on the balance sheet and.
And so then had a resulting decrease on the mortgage banking income whats the outlook for how is the pipeline for that business right now and whats your plans right now as far as a.
It's a anymore and the balance sheet versus selling.
Should we be looking at portfolio growth versus a gain on sale revenue.
Yeah, So Andrew on and ready for adoption for Q3, you were looking at a $2.50 million to $260 million range.
We feel pretty free.
We are confident on Randy production for the second half of the year, we have a.
Several of the projects big projects.
There are competing in the early fourth quarter, where that's been a super side.
And the production and then to your question with regard to.
The mix between.
And our portfolio and.
And selling.
We are at a near term portfolio more of a loan.
Just because we are.
As you know we are doing really well with our PPP forgiveness process and we're getting a lot of resolving.
Acceleration a.
From there and we think that near term, it's optimistic opportunistic for us to just go in and put more and the portfolio.
Got it Okay, that's really helpful and of the remaining $435 million a PPP any sense on timing on how long that's going to stick around.
Yes, so as of June 3.
And on the <unk>.
Net hundred fees were about $15.9 million.
As far as a forgiveness and the Q3, we're thinking we're going to be in a $160 million ish range.
For forgiveness, though.
Probably a few more quarters thereafter, a andrew.
And Joe for Us to get the PPP loans off our balance sheet.
Okay, great. Thanks for taking my questions on the loan portfolio and I'll step back. Thank you.
The next question comes from Jackie Bohlen with <unk> W. Please.
Please go ahead.
Hi, everyone and good morning.
David. Thank you. Thank you for the color on that the premium amortization and then the bond swap. That's helpful. I'm just wondering what impact do you expect a swap itself to have on a forward yield a within the margin.
Yes, Josh.
And the bonds.
For yields.
And we're in the 160 to 170 area, so maybe a benefit.
Antenna with a purchase was to try to manage better manage a.
Forward prepayment risk with the Don and coupons and trade so.
What we're hoping for is the first quarter portfolio yield.
And once.
Closer to 190, it's dropped down to $1.55 to 2 accelerate accelerated premium amortization and we're hoping to get the yield back to the 165.170 area and the third quarter and going forward.
So.
And there is an opportunity to pick up a lot.
And 5 basis points on the.
PPP and normalized NIM.
And if we're successful and managing the investment portfolio.
Okay.
Flop is effective immediately.
Yes, it was done and it was done in June.
Okay.
And that's 1 of them can be delayed.
Okay, great. Thank you.
And then and I understand the comments related to mortgage and kind of taking advantage of some of the the PPP liquidity and adding additional production into the portfolio and just wondering how youre thinking about other cash deployment.
And if deposits a number 1 if you are seeing deposit.
And that continue to flow in and growth has just been incredible over the past year and a half and.
For Q4.
You plan to do with all of those funds.
Yes.
Dr. Jackie So obviously the first choice always is.
Funding funding net loan growth and as.
Arnold mentioned, we do have.
Have a nice pipeline and we are expecting.
Stronger growth and the second half of a year, then and we experienced in the first half and like we said.
Second quarter was we felt good about the growth there, but we do a accelerating expecting for accelerated in the back half of a year, so that would be that.
<unk>, the first option, but again to the extent, we find ourselves with excess liquidity. We are open to continuing to increase the investment portfolio I think we're about at 20% of assets.
There is still has room to add assets there.
Okay.
And you have.
And.
Would you ever look to I know that the percentage of the Hawaii portfolio versus a mainland portfolio can fluctuate in any given quarter.
Given the excess liquidity would you ever look to bring the mainland portfolio up a bit and I'm, referring to loan purchases or are you pretty happy with where that bad and you'll look more of a securities.
Correct.
Yes.
I think what we've guided to Jackie is roughly 10% to 15% of the total portfolio to be comprised of mainland.
So we're still in that range and that's still a the current thought process.
<unk>.
But obviously to the extent that we find ourselves with excess liquidity and there is a better risk reward opportunities on the mainland and I think it would be credit for us to take a look at those.
Okay.
So I would guess then is it fair to say that.
That balance and everything.
<unk> will largely depend on organic lending opportunities and Hawaii.
That's correct, yes, okay.
Great. Thank you.
Thanks Jackie.
Again, if you have a question. Please press Star then 1.
The next question comes from boring.
Well take a with compass point.
Please go ahead.
Yeah, Hi, Thanks, good morning.
Wanted to go back to Andrew's question around auto can you can you help us think about a $36 million that you purchased.
What is the split between Hawaii and the U S.
Free hung with FICO, and then I think that bringing your auto book for about 300 million better.
You have an exact number there and then what's the split there is between.
Hawaii.
And mainland and then also what the FICA was running and and just how big potentially you would you would grow that bad.
And.
Hi, Laurie this is Paul and Mike.
And have to get back to you on some of those details Arnold and do you have any color on that.
What I can say to you Marty.
And that's all.
The mainland economy.
Recovered quicker than Hawaii and so.
Thank you.
And started to resume our consumer.
Programs like consumer lending program and we.
Obviously, starting to be and a number and.
And moving very quickly to restart.
Hawaii a pro.
<unk>.
Yes.
My expectation is.
ZIP between Hawaii, and consumer growth is going to normalize.
As we.
As we move to.
Resume Hawaii consumer lending and the.
Coming in coming quarters.
And Jay and I guess.
Yeah go ahead, sorry, Lorie and Justin.
Youre right.
The total auto portfolio is just under agreement and its $2.90.
And to kind of that is in Hawaii and roughly EV is on the mainland.
All of those numbers were as a $6.30.
Great and then do you have a FICO score.
I'll start I'll circle back with you.
And actually a already and this is anna on for the mainland portfolio on a weighted average FICO of 757.
Okay, great and.
And the new purchases you are doing or are they right around the same FICO.
Yes, it's about 700 and okay.
Okay, Okay great.
And that.
I guess, just generally thinking about how big you would potentially grow that book.
Any any thoughts there so that's round number a 6% of loans, but how big would you like to take that.
Laurie and farnell, so right now the.
And consumer.
And then it was about 213 youll need and arm.
For percent of our total loan portfolio.
And it's a good mix or between a consumer on a.
Unsecured and auto.
And as for.
For the growth I think.
And over we look at overall.
Percentage mainland vs, Hawaii, a 10% to 15% range as David mentioned.
And my expectation is that.
Rules.
Going to grow more and Hawaii as David mentioned, not as much and on the mainland.
And I hope that helps us helps you.
A little bit.
And it does and I.
Just a.
For you guys on a side a little bit I just wanted to make sure you're not doing the plan is not to purchase anything subprime is that correct.
That's correct.
Okay.
A lot.
Okay, and then just wondering and.
And I Love that you were and outside PPP lender I think that's great, but as we look forward to 2022 and that's not.
Not in there that as you mentioned you know there are $15.9 million, a unamortized fees and.
And we're kind of putting all of that together.
Your net interest income run rate is going.
I don't know a $45.46 million per quarter am I thinking about that the right way.
And Thats, taking your margin down to somewhere in the 70 to 75 range, even assuming a pick up.
And I, Miss or something or maybe the better question is can you can you help us think a little bit about.
2022.
Going to be and the margin side.
Yes.
So if I understand the question correctly, Laurie I think what you'll see is once we get cash PPP.
Fee income what do we expect on net interest income and net interest margin correct.
Yes, yes, I think the ban is what we're doing is we realized that we were and outsized PPP lender.
A good thing and we realize we are benefiting from this nonrecurring fee income in 2021.
And what we're trying to do is we're trying to use that fee income to strategically invest to provide positive operating leverage and future.
A periods starting in 2022, and we're trying to replace that income.
The expectation in 2020.
And who is a.
Over time, maybe not the first quarter of 2020, we will over time, we get net interest income back into the $50 million range. So its not so it doesn't dropdown back down to a $45 million.
Yes, you are a good Paul so.
22, Arnold mentioned earlier as well.
We're.
Seeing a lot a success and the purchase mortgage area.
And we've been guiding to mid to high single digit growth.
For the balance of the year.
For 2021 and with some of the portfolio.
And.
And trying to leverage the PPP fee income this year.
We feel that next year and in addition to some of the growth that we will have for the balance of the year a plus.
Our record of driving more growth.
And we will be driving.
Julio interest income in 2022.
Great. Thank you very much.
Yeah.
This concludes our question and answer session.
I'd like to turn the conference back over to Paul you want I mean, a CEO for any.
Net and remarks.
Thank you very much for participating on our earnings call for the second quarter, a 2021, and we look forward for 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.
At closing.
[music].