Q3 2021 Central Pacific Financial Corp Earnings Call
Okay.
Thank you for standing by and welcome to the Central Pacific Financial Corporation third quarter, 2021 conference call.
During todays 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 www Dot C.
<unk> Dot bank I'd like to turn the call over to Mr. David Morimoto Executive Vice President and Chief Financial Officer. Please go ahead.
Thank you Betsy.
Thank you all for joining us as we review the financial results of the third quarter of 2021 for Central Pacific Financial Corp.
With me. This morning are Paul you're on EMEA, Chairman and Chief Executive Officer, Catherine NGO President.
Arnaud with Martinez Executive Vice President and Chief Banking Officer, and Anna Hu Executive Vice President and Chief Credit Officer.
We have prepared a slide presentation that we will refer to in our remarks today.
<unk> is available in the Investor Relations section of our website at CPB Bank.
During the course of todays 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.
I'll turn the call over to our chairman and CEO, Paul you know what I mean.
Thank you David and good morning, everyone as always we appreciate your interest in Central Pacific Financial Corp.
I'd like to comment on some exciting news, we sent out yesterday regarding some key executive management promotions to be effective January one 'twenty 'twenty. Two they are as follows Catherine no currently president of C. P F and president and CEO of CPB will become executive.
<unk> chair of the bank and the holding company.
Arnold Martinez currently EVP and Chief banking officer will be promoted to president and Chief operating officer of the bank and the holding company Dave.
David Morimoto currently executive Vice President and CFO will be promoted to senior executive Vice President and CFO of the bank and holding company and Kevin Adult stroke, currently EVP and Chief marketing Officer will become EVP, and Chief strategy officer, or the bank and the holding company.
Catherine will continue to serve on the CPB Executive Committee responsible for the management of the bank.
Working collaboratively with Catherine and myself all three of the individuals' promoted have played a key role in our financial success.
Last several years and I am pleased that they will continue to be part of the team.
Our focus on our four key business pillars will continue as before these include residential lending.
Small business in Japan market development and digital expansion.
We will also continue to be active in the commercial real estate.
Ni and consumer segments with a focus on driving digital solutions to provide an exceptional customer experience.
Our transformation to become a digital first banking underscored with the upcoming launch of Shaka checking.
Why its first and only digital bank account from a local financial institution.
We are preceding the November 8th launch with the state's largest ever social media Influencer marketing campaign.
We have over 2000 people on the waitlist, who are looking to be the first to sign up for a shocker.
Product benefits include the opportunity to get your paycheck up to two days early.
Our reimbursement of ATM fees up to $20 a month.
And a higher than average return on funds in the account.
We feel this product and other digital products like it will help the galvanize our position as the digital banking leader in Hawaii.
We will however continue to leverage our branch network.
Dating and modernizing our facility and investing in the talent required to deliver these products to market with a strong customer service we are known for.
Like the rest of the country the state of Hawaii experienced a spike in Covid case count in August and September related to the Delta variant.
To address this our state put in place certain measures to curb further spread of the virus and we are pleased the state has been able to get the delta variant under control as we have seen a rapid decline in case counts in recent weeks.
Given this positive trend earlier this month the government governor implemented the easing of restrictions on gatherings and events on Oahu.
And last week, the Governor announced welcoming back fully vaccinated domestic travelers for business or pleasure starting November one.
Our statewide vaccination rate has risen to over 70% as many employers in the state of mandated vaccinations to protect their employees their customers and the community in general.
With these positive developments are local economists are projecting that visitor numbers will once again continue to rise and Hawaii will have a strong holiday travel season.
The state of Hawaii unemployment rate declined to six 6% in the month of September and as forecasted by the department of business economic development and tourism to decline further to 6.4% in 2022.
The housing market in Hawaii remains very hot with our median single family home price, surpassing the 1 million dollar Mark this past quarter.
Overall, the Hawaii economy remains on track for recovery.
I'd like to now turn the call over to Kathryn No our president Catherine.
Thank you Paul.
Our financial results for the third quarter were very strong with quarterly pretax income again, reaching a new record high.
Our core loan growth picked up as anticipated and we are on track for a strong second half of the year our.
Our successful P. P. P effort continues to deliver strong fee income S forgiveness continue.
Our asset quality continues to be strong with nonperforming assets at just 10 basis points of total assets as of September 30th.
Additionally, total classified assets were less than 1% I told 'em horns nil.
Nearly all of the loans, we granted COVID-19 related payment deferrals have returned to pay status.
As of September the September 30th we have just $1.3 million in loans remaining under her all.
Finally, net charge off declined to just $22 million in the third quarter.
Shifting to our employees, we are very pleased that 95% of our employees are now fully vaccinated against COVID-19.
Protect our employees and customers we started weekly COVID-19 testing in September the small group.
Vaccinated employees. We also offered a 500 dollar cash incentives and vaccinate employees, who got vaccinated after September 1st.
I'd like now to turn the call over to Arnold Martinez, Chief Banking Officer Arnold. Thank you Catherine.
In the third quarter, our loan portfolio increased by 184 million or 4% sequential quarter, which was offset by PPP forgiveness paydowns up $216 million.
Year over year, our core loan portfolio increased by 7%.
Core loan growth was broad based across all loan categories, except construction.
<unk> 58 million or 32% of the quarters loan growth came from mainland consumer loans.
Our residential mortgage production continue to be very strong with total production in the third quarter of nearly 245 million and total net portfolio growth in residential mortgage and home equity up 72 million from the previous quarter.
P. P. P forgiveness continues to progress well with 93% of the loan balances are originated in 2020 and 40% of the balances originated in 2021 already forgiven and paid down through September 30th.
During the third quarter, we purchased an auto loan portfolio for about $20 million from one of our mainland alone origination partners and we continued consumer unsecured purchases on an ongoing flow basis.
Based on our established credit guidelines.
The purchased during the quarter had a weighted average FICO score of 750.
As of September 30th total mainland consumer unsecured and auto purchase loans were approximately 5% of total loans, both our mainland and Hawaii consumer portfolios continue to perform well.
Our target range for total mainland loans, including commercial and consumer is around 15% of total loans.
With Hawaii steady economic recovery, we continue to see a healthy loan pipeline in all loan product categories as such we anticipate ending the year with strong loan growth.
On the deposit front, we continue to see strong inflow of deposits with total core deposits increasing by $267 million.
Four 6% sequential growth.
On a year over year basis total core deposits increased by $1 1 billion or 21, 6%.
Additionally, our average cost of total deposits dropped in the third quarter to just five basis points.
Finally, as the Hawaii economy continues to recover and investment activity increases we are focused and prepared to help our customers meet their financial objectives.
Now I'll turn the call over to David Morimoto, Our Chief Financial Officer, David.
Thank you Arnaud.
Net income for the third quarter was $20 8 million or 74 cents per diluted share it.
An increase of $2 1 million or eight cents per diluted share from the prior quarter.
Return on average assets in the third quarter was 1.15% and return on average equity was 14.83%.
Net interest income for the third quarter was $56 1 million, which increased by $4 million from the prior quarter due to core loan and investment portfolio growth loan and investment yield improvements and slightly higher P. P. P fee fee recognition.
Net interest income included $8 6 million in P. P. P. Net interest income and net loan fees compared to $7 9 million in the prior quarter.
At September 30, an earn net PPP fees was seven $9 million.
The net interest margin increased to 3.31% in the third quarter compared to 3.16% in the previous quarter.
The NIM normalized four P. P. P was 296% in the third quarter compared to $2 93 in the prior quarter.
The normalized NIM increase was driven by the increase in the investment portfolio yield.
Actually offset by an increase in excess balance sheet liquidity.
Third quarter other operating income remained relatively flat at $10 $3 million.
During the quarter there was a decrease in bank owned life insurance income up.
0.7 million driven by market fluctuations.
It was offset by higher higher service charges and fees.
Other operating expense for the third quarter was $41 3 million, which was in line with the prior quarter.
The efficiency ratio decreased to 62, 3% in the third quarter due to a higher net interest income.
We remain focused on driving positive operating leverage with our strategic investments to continue to improve our efficiency.
As part of our ongoing efficiency initiatives, we recently announced the consolidation of a copper Lama branch into a nearby branch in Honolulu at the end of this year.
We expect annual future savings of approximately 800000 from this consolidation.
With the continued migration of transactions to digital channels, we will continue to evaluate our branch network and consider both consolidation as well as expansion opportunities in 2022.
At September 30, our allowance for credit losses was 74 6 million or 1.55% of outstanding loans, excluding PPP loans.
In the third quarter, we recorded a $2 $6 million credit to the provision for credit losses due to improvements in the economic forecasts and our loan portfolio.
The effective tax rate was 24, 7% in the third quarter.
Going forward, we continue to expect the effective tax rate to be in the 24% to 26% range.
Our capital position remains strong and during the third quarter, we repurchased 234700 shares at a total cost of $5 $9 million or an average cost per share of $25.12.
Finally on October 26, our board of directors declared a quarterly cash dividend of <unk> 25 cents per share, which was an increase of one cent or four 2% from the prior.
Previous quarter.
And now I'll return the call to Paul.
Thank you David in summary, Central Pacific had a solid third quarter, and we will continue to leverage our investments and innovate to progress towards our strategic targets.
At the same time, we maintained our strong credit liquidity and capital position.
Whether we remain committed to providing support to our employees customers and the community as we continue to progress through the economic recovery.
Finally, and perhaps more importantly, we approach the future with a highly motivated management team with optimism and our sense of purpose.
This team worked together to lead the implementation of rise 2020, a multi faceted initiative designed to strengthen our position in the market by investing in our branches ATM and our digital product offerings as well as continued focus on our four primary lines of business.
The results of these efforts are becoming increasingly apparent.
With this team we are well positioned to build on our past accomplishments.
And success as we continue to focus on service and value to customers employees and shareholders.
On behalf of our management team and employees.
You for your continued support and confidence in our organization at this time, we will be happy to address any questions. You may have thank you over to you Betsy.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Andrew Liesch of Piper Sandler. Please go ahead.
Hi, good morning, and congratulations on the promotion.
Just wanted to ask about the margin and the securities purchases here with with the rise with the recent rise in the tenure and the steeper curve. This increase your appetite to add more to the securities book.
Yeah, Andrew it's David.
Yeah, you know obviously with the recent rise in the 10 year. We we are we are looking to continue to redeploy excess liquidity.
To both loan growth and a potentially.
Potentially continue to grow the investment portfolio.
It has been nice to see that you know mortgage spreads have not come in to totally offset the increase in treasury. So we we find the agency MBS market quite attractive right now.
Got it and then can you just remind us what you are progressed during the quarter, what sort of yields you are getting.
Yeah.
On divestments, new purchase yield towards the weighted average 170, which compares to the current portfolio yield of roughly 185, so we're getting pretty close to where.
Things are at parity.
Got it very helpful.
And then just turning to loan growth are really good color there on what you've got in the quarter, but on the C&I you had really nice increases in both Hawaii and on the mainland what's what's driving the growth in those two markets.
Yeah.
Yeah, Hi. This is a this is arnell yeah. So so you know we've been very Oh, we've been very.
Lucky to have some some of our new talent that we've acquired are coming over to the bank as well as our our team and their business development efforts. So we've made a lot of great traction in building a nice strong pipeline in those areas.
You know I want to say that you know, we're really proud of the efforts in the third quarter, we had solid loan growth in all loan categories.
Except for a modest decline in construction, but that really was more because of timing on on pay downs of construction loans.
And so yeah, we're really pleased with the efforts of the team.
Got it.
Very helpful. I'll step back thanks for taking the question.
The next question comes from David Feaster with Raymond James. Please go ahead.
Hey, good morning, everybody.
Hi, there.
I just kind of wanted to.
Follow up on that last line of questioning just kind of get your sense on thoughts on the organic growth outlook, just given the hires that you've made and the strength of the pipeline and the production that you're generating.
<unk> talked to high single digits.
Knock that out of the park just curious your thoughts on growth going forward.
And expectations are for production as well.
Yeah. Thanks.
Thanks, a lot this is arnold.
You know as we move into the into Q4 are in our pipeline looks pretty strong.
Across all loan our loan categories.
I think you know the improving economic conditions in Hawaii is going to.
Help to build a pipe and as we move board are looking.
Looking at Q4.
CRE regime, and consumer will probably be the drivers for up for us.
For <unk>, we expect to have a somewhat of a supercharged a quarter. We're looking at production in the 300 to 320 million range.
Really augmented by a few high rise projects that are that have completed and which were the elite take out take out lender.
And then.
Regards to how that translates to gain on sale. We're looking at a 1.2 to one 5 million range.
In Q4, and you know as we start to ship back to normal mix between selling a portfolio of loans I think I've mentioned in the past quarter and past quarters that we've because of the PPP fee income.
Bin bin.
Opportunistic about putting more of the rescue loans in the portfolio, but you.
We started we're starting to see.
A shift in that as we move forward in the future.
Okay.
No that's great color.
Hum.
And then just maybe touching on expenses I appreciate the detail on the branch closure could you maybe just talk about some of the puts and takes as we look forward just balancing the continued investments that you have with the cost saving initiatives that we've talked about just what you think is a good run rate going forward as we head into 'twenty two and just.
Some of the.
Puts and takes within that line.
Hey, David its David right now, we're sticking with the quarterly guidance. So 40 to 42 million on total other operating expense, we think that's a good run rate.
Okay.
Okay, and then just maybe on the deposit front.
Sounds like there's a.
The new new.
Mobile platform the Shocker initiative and then you've got the Japan initiative, just it sounds like the early read on shock is pretty good with 2000 and folks that are.
<unk> tried to sign up.
Curious, what you're seeing on the Japan side, and then expectations for this and deposit growth going forward.
Thanks, David This is Paul are you on them you know interestingly, even during the pandemic when the Japanese can't travel to Hawaii really because they have their quarantine measures still in play we've seen a rise on deposits from our Japanese customers. So we're quite optimistic that.
Once travel resumes, which will probably be hopefully early next year, you know, it's still really difficult to tell.
We will see a bump up on more deposits coming into Hawaii.
We plan to.
You know very proactively.
You know reconnect with a lot of our Japanese customers.
Prospects.
To see if we can continue building our deposit base as well as far as Shaka Shaka checking account is concern we started our social media programs. Just three weeks ago. We're quite pleased that there's 2000 over 2000 people on the wait list you know.
Some of the.
The challenges in front of US is to once we launch shocker checking on November eight is to convert them into customers.
We feel quite optimistic about.
But we will continue doing a lot of proactive marketing to try and increase our more new customers.
With that platform.
Got it that's helpful. Mike.
Thanks, David.
As a reminder, if you have a question. Please press star then one to be joined into the queue.
The next question comes from Laurie Hunsicker with Compass point. Please go ahead.
Yeah, Hi, Thanks, good morning.
I'm.
Hoping that you could help us think about net interest margin a little bit obviously PPP impact with outsized this quarter and you know how small.
There's $7 9 million unamortized fees for my name that you provided if we think about you know most of that happening in the fourth quarter. You know it was in the first quarter.
Do we think about what margin.
Looking like as we kind of move past that.
And specifically to you know when you commented in your cost of deposits is remarkably well your core deposits.
Hitting a three day.
No more movement there so.
I guess, how should we be putting everything together any any help any guidance you can give us greatly appreciate it.
Sure Hey, Hilary it's David.
So when when you normalize for P. P. P O. The core NIM was $2 96 in the third quarter, which was a three three basis point expansion from the second quarter.
And what we're guiding to for the next few quarters as our NIM in the 293% range. So we're hoping that the NIM as you know.
Relatively at its trough and we can start to hopefully see increases as we roll into 2022.
But.
The sequential quarter NIM by three basis points expansion.
Majority of that came from our bond swaps that we executed in the investment portfolio. So we were successful in doing the bond swaps to dawn and coupon MBS bond swaps, which brought the premium amortization under control.
So that was the majority of the sequential quarter increase so loan and deposit core loan and deposit yields were relatively flattish sequential quarter, which obviously is a good thing. If we can do that now if we can drive asset yields up from here, we'll see some margin expansion.
Got it got it okay. Thanks, and then I guess, along those lines like your auto purchasing and the $20 million that you purchased went in the quarter was that was that early right at all.
Or maybe more broadly if you don't have that right at your fingertips.
Laurie.
Auto information you know what Hawaii mainland.
Just generally how we should think about where that puck is going to ground.
Yeah. Laurie. This is a this is arnell Ah yeah, I don't know I don't have that information right at hand on win when that auto purchase close, but we can get back to you on that that's not a problem.
As far as as far as the mix and the strategy I mean right. Now. We're you know we're look we had basically a boat auto auto loans and unsecured on on the mainland.
I believe it's like a port 40, 60 split 40, or 40 or 60 are unsecured consumer as far as the strategy is concerned we look at the main and kind of more holistically.
From our perspective, our total loan portfolio. So we've always.
Looked at about a 15% mainland to total loan portfolio and we try to manage.
The consumer and CRE in the snake.
Exposure on them on the mainland.
And so that's kind of how we looked at it.
And I can I can assure you that we also have a fairly disciplined risk management.
Process behind behind all of this you know we've been doing this as you know for for a while.
And you know between our or our line of business.
Management as well as our credit management Panna, who in our our credit folks are we pretty have a pretty strong grasp on this.
I think as I mentioned.
And earlier.
You know the the Hawaii economy is trailing.
The mainland.
And and so it was opportunistic for US you know as we announced earlier in the second quarter I believe that when we restarted our consumer loan programs that he was with it.
This thing for us to kind of start that.
Movement on the mainland and and it's actually performed very well for us and we're very very pleased with the.
With the you know the overall.
And the performance of those portfolios.
Great. Thanks, that's helpful and just one more question.
I guess, maybe for you as well as David.
So loans are now at 148 or 155 ex PPP.
Any guidance you can give us there on where you think that is.
Phone number settles down.
As we're trying to model in provision and obviously your credit is pristine how should we be thinking about where.
It was not so bad.
But most likely not at all.
Yeah, Yeah, Laurie it's David Okay.
Laurie.
So the ACL and they see all coverage ratio.
As we as we've stated previously it's going to be consistently cut.
Just directionally consistent with the net impact of.
The economic forecasts.
Charge offs loan migration and net loan growth.
But what I think we're seeing across the industry and what we're expecting here at CPI is that the ACL to total loans coverage ratio will.
Gradually revert back to the day, one C. So coverage ratio, which was in the 115 to 120 loans area.
Right. That's helpful. Thank you so much.
Thanks Laurie.
This concludes our question and answer session.
I'd like to turn the conference back over to Paul <unk> for any closing remarks.
Thanks, Betsy. Thank you very much everyone for participating in our earnings call for the third quarter of 2021, we look forward to future opportunities to update you on our progress. Thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.