Q2 2022 Central Pacific Financial Corp Earnings Call
22, and as forecasted by the University of Hawaii Economic Research organization default at two 9% in 2023.
And the housing market in Hawaii remains very strong with the Oahu median single family home price at $1 $1 million in June 2022, which is up 12% from the previous year.
Other factors contributing to a favorable Hawaii economic outlook include a significant increase expected in department of defense military spending which is already the second largest sector.
The economy was $7 $7 billion in annual spending in 2020.
Additionally, Honolulu is $9 billion plus rail construction project continues to move forward with construction of the first phase completed and expect it to be operational by year end.
Finally $600 million.
<unk> funding was recently awarded for Native Hawaiian housing, which will lead to significant home construction over the next five years.
Lastly, with the possibility of a national economic recession, increasing it is important to note that the Hawaii economy, whether the great financial recession better than most states.
Single family median home price fell 11% between 2008, and 2011 compared to a 24% decline nationally.
Additionally, Hawaii unemployment rate peaked at 7% in 2009, whereas nationally it rose to 10% during the same time period.
With Hawaii continued strength, we anticipate Hawaii will again outperform the rest of the nation during this cycle.
Now I'll turn it over to Kathryn <unk>, our executive Vice chair to provide additional updates on our company Catherine.
Thank you Paul.
Now moving on to pause remarks, with Hawaii's economic strength and our solid balance sheet, we believe central Pacific is well positioned for a potential economic downturn.
Our asset quality continues to be very strong with nonperforming assets to total assets remaining at seven basis points as of June 30th.
Additionally, total criticized loans are less than 2% of total loans.
Our net charge offs remained low at $1 million for the second quarter.
Another key point to note is that our loan portfolio today is much more diversified across product lines and industry compared to our portfolio prior to the great recession.
Additionally, our construction portfolio with nearly 30% of total loans in 2008 compared to just 3% of total loans today.
We have maintained solid risk management discipline and are committed to supporting our clients and community.
Next I'd like to share the really great news that it was announced last month, we were pleased and honored to be named the number one best bank in Hawaii by Forbes for 2022.
The ratings were based on an independent survey of consumer satisfaction in the areas of digital and branch service overall customer service and trust in our institution.
Just two 7% of all banks in the nation made the list for best in state rankings.
This recognition is a reflection of the hard work that our team of dedicated employees perform each and every day to serve our customer and community needs.
I'd like now to turn the call over to auto Martinez, our President and Chief operating Officer Arnold.
Thank you Catherine.
In the second quarter through our successful business development efforts, our total loan portfolio increased by $127 million or two 5% sequential quarter and 10% on an annualized basis the.
The growth was broad based across most loan types, except for the C&I portfolio, which included decreases in PPP loans as that portfolio continues to wind down.
We were successful and continues to grow our residential mortgage and home equity portfolios by nearly $40 million during the quarter. Despite the rising rate environment due to our strength in the purchase market and key relationships with our real estate joint venture companies.
During the second quarter, we continued our mainland diversification strategy with purchases of select consumer unsecured and auto portfolios from our established partners.
The purchases during the quarter were all within our established credit criteria and had a weighted average FICO score of 735.
Our net drilled in mainland consumer purchase loans was $46 million in the second quarter as of June 30, total mainland consumer unsecured and auto purchase loans were approximately 7% of total loans.
We also continue to selectively participate in mainland commercial real estate.
Our C&I loans.
Our teams are focused on specific mainland markets, primarily on the west schools, where we have built considerable experience and expertise.
We believe these opportunities complement our Hawaii franchise nicely as it provides diversification and typically higher yields while fitting within our risk guidelines we.
We continue to target our total mean in loan portfolio at approximately 15% of total loans.
We have a healthy loan pipeline and with our strong sales management discipline and outstanding team of relationship managers, we are expecting our positive loan growth trend to continue throughout the remainder of 2022.
During the second quarter core deposits grew $35 million or 0.6% from the prior quarter. Additionally.
Additionally, our average cost of total deposits in the second quarter held steady at just six basis points.
Finally, Japan continues to be a key strategic focus area for us given our strong relationships there.
We have restarted travel to Japan for business development, and we will continue to visit regularly.
Our Japan marketing efforts are doing well with our new Japanese website, driving a significant increase in views and soon we will be launching our online banking service and Japanese to further attract Japan customers to our bank.
Our initiatives are driving success with an increase in our deposits from the Japan market as well as a solid pipeline of opportunities.
I'll now turn the call over to David Morimoto, Our Chief Financial Officer, David.
Thank you Arnaud.
In the second quarter, we were able to successfully execute on a number of initiatives that positive positively impact shareholder value.
Including terminating and settling our defined benefit pension plan, which resulted in a one time settlement charge of $4 9 million.
Following the settlement the company has no further defined benefit.
Pension plan liability.
Our ongoing pension pension expense recognition, which will save us about 700000 annually.
Also during the second quarter, we sold all of our visa class B shares for a gain on sale of $8 5 billion.
On the branch and real estate funds, we consolidated two of our smaller branches into nearby locations, bringing our total branch count as of June 32, 28 branches.
Another branches scheduled to be consolidated into a nearby location in the third quarter.
We are also implementing other efficiency initiatives using technology and workflow automation that will allow us to scale our business, while driving positive operating leverage.
Finally, our banking as a service Fintech strategy continues to progress well and we are on track for the public.
Public launch later this quarter.
We look forward to providing additional updates in the near future.
Turning now to our financial results net income for the second quarter was $17 6 million.
Or 64 cents per diluted share.
Return on average assets was zero, 96% and return on average equity was 14, 93%.
The efficiency ratio was 64, 7% in the second quarter.
Net interest income for the second quarter was $53 million, which increased by $2 million from the prior quarter, primarily due to an increase in loan balances and yields.
The net interest margin increased to three zero or 5% compared to 297% in the prior quarter.
Normalizing for the impact of PPP in both quarters net interest income increased by $3 million and a net interest margin increased 13 basis points sequential quarter.
With our asset sensitive balance sheet, we are starting to see the favorable impact of the rising rate environment.
We anticipate that our margin will trend up further in the second half of this year as loan yields rise and we manage our deposit pricing, which has historically had lower beta repricing.
Second quarter. Other operating income was $17 1 million and included the one time gain on sale of our visa class B shares.
During the quarter. There was also a loss on bank owned life insurance.
Due to significant market volatility during the quarter.
We have certain company owned life insurance policies used used to hedge our deferred compensation plans.
Therefore, we also had an offsetting negative deferred compensation expense and other operating expenses.
Other operating expense for the second quarter was $45 3 million, which included the onetime settlement charge on our defined benefit pension plan.
Our other operating expense slides trended back up slightly after being seasonally low in the first quarter.
Going forward, we expect our quarterly recurring total other operating expense will be in the $41 million to $43 million range.
At June 30, our allowance for credit losses was $65 $2 million or 112, 3% of outstanding loans.
In the second quarter, we recorded a $1 million provision for credit losses, due to loan portfolio growth and net charge offs.
The effective tax rate increased slightly to 26% of second quarter.
As a result of less tax exempt bully income.
Going forward, we expect the effective tax rate to be end of 25% to 26% range.
Our capital position remains strong and during the second quarter, we repurchased 174000 shares at a total cost of $4 2 million or an average cost per share of $24 18.
Additionally, our board of directors declared a quarterly cash dividend of <unk> 26 per share, which will be payable on September 15 to shareholders of record on August 30, <unk> 31.
And now I'll return the call to Paul.
David to conclude central Pacific had another solid quarter and continues to be well positioned in all key areas, including liquidity.
<unk> capital and asset quality environment.
<unk> continues to evolve rapidly, but with our asset sensitive balance sheet high quality loan and investment portfolio as well as our strong capital base, we expect to continue to deliver strong performance.
We have a differentiated strategy that will enable us to expand and diversify our franchise maker.
Making us a leader in our market on behalf of our management team and employees I would like to personally. Thank you for your continued support and confidence in our organization at this time and we'll be happy to address any questions. You may have thank you back to usual.
Yeah.
Thank you sorry, if you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by chain when preparing to ask your question. Please show you'll find us on mute. Okay. So our first question comes from David <unk> from Raymond James Your line is now live for David.
Hey, good morning, everybody.
Hey, David Good morning, David.
I just wanted to start on deposits, it's great to see the continued noninterest bearing growth.
Just curious any commentary you might have on the deposit front and trends Youre seeing.
What are you starting to see some more rate pressures, obviously, I mean, the Hawaiian economy tends to be much more rational and then just.
Any commentary on how you think about your ability to continue to drive core deposit growth and fund your loan growth with core deposits.
Hi, David Thanks, This is Paul.
<unk> and.
And I'll have maybe David Morimoto chime in as well, but we're very focused on making sure that we maintain our low cost deposit base.
Again really stay focused on our digital offering.
And we're hoping that a lot of our business development trips to Japan, and trying to get more Japanese corporate and individual depositors here.
Which will naturally be low cost.
These are two key.
Strategies for US right now we're not taking the.
Higher cost government deposit route.
Just yet.
We I think we have a very robust deposit pipeline.
Yeah, and then David maybe I'll just add the loan to deposit ratio is still at <unk>.
Attractive, 80%, so we do have room to continue to.
Grow loans, while managing our deposit costs.
In the first half of the year, we saw some good opportunities for loan growth and we took advantage of that.
Yes, Thats, what you saw with <unk>.
Loan growth outpacing deposit growth.
We believe there is Paul.
Paul mentioned, we believe there is some great opportunities to grow core deposits to our digital strategies.
Strategies in Hawaii on the mainland and in Japan.
Okay that makes sense and then Hudson on the organic growth outlook could you maybe just touch a bit on demand you talked about some of the economic trends in Hawaii, but just curious where you're seeing the most opportunities how pipelines are trending well there this quarter, maybe saw some pull forward of demand just given.
Rising rates.
And then just any any thoughts on organic growth outlook and the appetite to continue to supplement organic growth with with pool purchases looking forward.
Yes, Hi, David This is Arnold.
We are pretty optimistic about loan growth.
Going into the second half of the year.
Our pipelines are fairly robust.
Particularly we're seeing continue to see.
A lot of activity in the commercial real estate area as well as raising although we've seen.
<unk> seen somewhat of a drying up of the refi activity, we still see.
A nice pipeline of that purchase.
Segment of Brinci.
We will continue to.
To work with our established partners on the mainland on the consumer front.
Particularly in the auto.
Category.
So.
Our expectation for the second half of the year is really.
We feel very good at pilot pipe.
Line looks really really healthy.
Okay.
That makes sense and then just switching gears to the expenses I appreciate the third quarter guidance could you maybe just.
Walk through some of the puts and takes with what's driving expense growth and where you're expecting growth. Obviously, there's a lot of investments also inflationary pressures just.
I was hoping you might be able to walk us through some of the drivers and how much of the growth might be from swell as that launches approach in here at the end of the third quarter.
Yes, yes.
Hey, David It's David.
Again, the first quarter was seasonally low we did see some.
<unk> uptick in.
Other operating expenses in the second quarter, and again, we're guiding to roughly 41% to $43 million per quarter.
For the next several quarters.
And the reason, it's slightly higher that guide is slightly higher than the normalized second quarter is a result of deferred comp. So again, the deferred comp plan had a rough second quarter, but that was with so it differed comp expense was lower than normal.
And that was also reflected in the bully income into other operating income section.
So again overall, we are guiding to roughly <unk>.
<unk> 41 to 43.
I think if you take it for the full year.
Going to be.
Roughly 2% to 3% over 2021 is what we've been consistently guiding towards.
Yeah, Let me Hi, David This is Paul and let me just add to that now again on the swell investment.
We are accounting for our investment under the cost method of accounting.
<unk>.
Equity stake and 19, 9% are voting.
Share position is four 9%.
So.
Even if there were unexpected losses within the swell organization, we will not be picking that up on our income statement.
That's one thing on <unk>, just another thing to add to what David mentioned is that we.
We've been very pleased with our ability on cost control.
And I think it shows the most on our head count right now we are at.
Very low head count level.
From say the past four years or so.
And so we've had a lot of rigor and making sure that despite inflationary pressures that.
And that we stay on content cost control.
Absolutely you guys have done a great job.
You all taking the questions.
Thank you David.
Yes.
Okay.
Thank you. Our next question comes from Andrew Liesch from Piper Sandler Your line is now open.
Thanks.
Good morning.
I am David just a question on the Securities portfolio was there any migration from.
Yes.
Held to maturity in this quarter.
Yes.
Andrew.
We did move $330 million from asbestos to HTM in the first quarter.
You are correct in the second quarter, we moved an additional $400 million I think it was done in early may.
Got it so today, we're roughly.
I think today, we're roughly.
About 57% of <unk> 43 HTM.
Okay.
And then how should we look at the size of the securities portfolio going forward. It sounds like you've got some pretty good opportunities for boats.
Loan and deposit growth. So do you think it's going to stay around this.
The size right here, just kind of trying to.
Get a handle on the balance sheet makeup right now.
Yes, yes.
Again.
The investment portfolio is kind of the offset right.
The <unk>.
The reserve of liquidity, so it's going to be a function of what we see with.
Net loan and net deposit growth on a quarterly basis.
Depending on what we see on those two fronts.
The increase or decrease the investment portfolio accordingly.
Gotcha Alright, that's helpful.
And then with the deposit beta staying low and.
The improvement in loan yields that youre seeing.
It would be reasonable to expect another <unk> <unk>.
<unk> basis point increase in the margin.
This quarter, just given that we had a 75 basis point rate hike last month.
I think youre looking like that for today as well.
Yes, Andrew.
Again, obviously, a lot of things in play but with the.
June 75 in <unk>.
Additional 75 likely today.
We are guiding to a similar sequential quarter increase in the core NIM, So plus 10 to 15 basis points sequential quarter.
Got it makes sense is there any pressure on deposit costs that you guys have seen.
We obviously saw did not see it in the second quarter, we were able to hold deposit rates flat with the 75 basis points in June an additional 75 in July we are starting to see some some movement in deposit.
Deposit rates deposit costs, which as expected, but again, we think we have.
Quite a bit of room with.
Total deposit costs at six basis points.
Certainly.
Alright, thanks for taking the questions I'll step back.
Thanks, Andrew.
Just to remind everyone. If you would like to ask a question. Please press star followed by one on your telephone keypad now. Our next question comes from Laurie Hunsicker from Compass point. Your line is now open Laurie.
Hi, Thanks, good morning.
Tyler could go back to just.
Some comments you made in your prepared remarks, and Arnold I think I think you were speaking I just want to make sure I heard this right.
Do you plan to have 15% of your loan book in mainland loans is that correct.
Hello, and good morning.
Yes.
So it's been consistent throughout the <unk>.
The quarters in the past we.
We target around 15%.
Of mainland maintenance of total loans.
So and Thats a combination of.
Consumer.
CRE and.
And and snakes.
That's our target 50% of total loans on the mainland.
Yes.
Okay.
And maybe you can.
Because I know your mainland auto was running about 2%.
Elena unsecured was about 4% alone and then your mainland Hewitt.
So maybe I'm missing it clean air perhaps can you refresh us on what those actual balances are.
Maybe starting with the snack what Hawaii, what's mainland and I don't know if this is for you.
David.
But if you can just help us maybe on some of those balances.
And then yes. So same thing yes go ahead.
So laurie.
I think and I can help help with that information for you.
Okay. Laurie this is Anna signing with I guess your question on mainland next.
All right.
<unk> is running about 184 million.
Okay.
And then do you like that.
Oh, yeah by the Hawaii, six it's about $77 million.
And then Nick.
Yeah.
Okay go ahead.
Yes.
Thanks.
Thank you Brian .
Okay going to the commercial real estate.
Yeah.
Yes, total commercial real estate on the mainland is about $309 million.
So that represents about just under 6% of <unk> loan portfolio.
Got it.
Okay, and then your consumer mainland.
Consumer mainland.
300 <unk>.
$378 million.
Okay, and sorry, and what piece of that is auto versus may.
Mainly unsecured.
Okay, So mainly auto is $126 million.
Okay, and then mainland.
Unsecured is $252 million.
Okay. Okay, and then just more broadly when you think about areas that youre going to focus on growth.
Terms of that target that 15% target is that across the board youre going to be taking it up.
Our close rate or how do you how do you think about that.
Yes.
Youre, referring to to how the how the percentages will change.
To the total portfolio Laurie.
Yes.
Okay, Yes, so I would say that it's going to be fairly around percentages that.
We have today, it's pretty much stayed around there.
In the past as well we try to manage.
Between the three product categories and ensure that we maintain kind of the same amounts of.
Exposures.
Got it got it and then just staying on lung can you just give us a refresh in terms of.
Where you are on office exposure with that.
Well looks like any color you can give us around Opex also office mainland versatile topic, Hawaii and then.
Same question I guess.
On leverage loans cannot disconnect that leveraged loans.
Where you are on that.
Okay sure. This is Donna Laurie.
For office.
Our total commercial mortgage book is running about $189 million.
So that represents about 15% of that commercial mortgage book.
And about three 6% of our total portfolio. So the weighted average LTV on that entire bucket 50, 57%.
And then breaking it down.
Yes.
Yes.
Please go ahead.
Okay, I was going to break it down into Hawaii and mainland for you.
So if our office the Hawaii portion is $110 million.
And that represents about 8% of our total book.
Our total commercial mortgage book I should say.
And then about two 1% of our total loan.
With a weighted average LTV of 62%.
Okay, and then yes.
Yes going up to mainland then the balance is $79 million.
And Thats about 66% of our total commercial mortgage book.
One 5% of our total loan.
With a weighted average LTV of 49%.
Okay.
Okay, and then on the leverage loan side.
Do you have a refresh on that.
Sure on our leveraged loans, it's relatively small it's about $30 billion as of June 30.
Yeah.
That represents about 6% of total loan book.
Yes.
Okay.
Maybe just.
Okay.
That's super helpful. Thank you. Thank you for all of that color.
And maybe just quickly back on the elevate.
As you think.
I guess part of this is more questions.
That was the target.
<unk> average arco.
Steve from bank hold back from this type of lending.
Is there any sort.
Sort of tweak that and I definitely appreciate that we're going to start small.
On Whatsapp.
Is there any thought about moving up the cycle pain as you start death are you still thinking about the same.
Targeting on average.
How far how do you think about that.
Yes. Thank you thanks Laurie.
Yes.
May have been remiss in not commenting on this in the past.
I am on the swell board by the way.
<unk>.
And so I'm very proactive and all of that all of the discussions at the swell level.
And naturally Anna who is here today.
Instrumental in creating their credit policy.
And as a board member and also as a bank sponsor we will make sure that there is adherence to our credit policy and so that might be a little bit different.
With some of the other fintech companies out there and their relationship with the banks.
Sure.
Thanks for bringing up that point on FICO scores because.
Our plan over the next two.
Two to three quarters is to limit our exposure at about $8 million.
And as we've said all along we're going to start small we're going to.
Take a look at Kpis dashboard on a daily basis.
And make sure that we iterate we pivot.
And we can very well.
Just FICO scores or any other criteria as we see fit, especially if it starts to exceed 6% default.
They were elevated.
Essentially giving us a preferred security interest in the deposit that will be made to CPP. So we're protected on default to 6% and we will manage it accordingly, so if at any time, we see those be false exceeding 6% we're going to.
Pivot on a lot of our lending criteria that make sense.
Okay, and so youre still though I mean, yes. It does makes sense and definitely I hear you, but I think.
So I remain concerned elevate has a market cap of $60 million and so I guess it does beg a question.
If it stays within those parameters and then you grow it.
I mean, I guess, just circling back to HEICO that the 650 FICO is that is that still unchanged in terms of your average target or have you moved the needle at all on that.
Yes.
It's not really the target per se, but that's a minimum threshold that we plan to.
<unk> off the process again too.
Really start small and iterate and.
And if that 650 starts when we start to see a lot of default Lori obviously were going to ratchet it up and we have all of the authority and ability to do so.
I think the key is going to be around execution.
And this is where myself on the board taking a look at the Kpis dashboard on a daily basis.
And and.
And really our ability to execute I think.
The last four years.
Rather self fulfilling but whether it be rise 2020, or the guidance, we've been giving to the street or PPP loans.
We've executed and this is not going to be any different.
We as a management team will make sure that we're not going to be spending our franchise.
Some disaster out in the mainline going with consumer unsecured so.
You have our assurance on that.
Okay. Okay.
David maybe just last question, if we could go back to expenses.
Just wanted to make sure that I did I understand that so you had two branches obviously that closed in the quarter were there one time branch closure costs.
In that number in that.
Are there other expense number and if so where.
They are maybe they werent occupancy I'm not sure.
Yes, Laurie there was one time branch closure expenses of about 300000 in the second quarter.
And without saying, okay. So I guess, so if on netting out your defined benefit of netting out the branch closures I mean, we're basically at $40 million on a quarterly run rate.
Which is which is pretty substantially below your guidance of $41 million to $43 million or so.
Can you help us think a little bit and I realize somebody already touched on this in their Q&A.
Can you just help us think about where you're actually spending money, especially as you've got another branch, that's consolidating and <unk> Q.
Where is that coming from or how we should be thinking about that in terms in terms of our line items.
Thanks, so much yes.
And that guide Laurie there is there is an assumption of a normalization of deferred comp expense and fully income.
So in the second quarter.
Our.
Our normal bank owned life insurance.
Earned about half a million dollars, but the deferred comp hedge fully.
Loss of about $1 $5 million. So there was about $1 5 million in <unk>.
Reduced other operating income and reduced other operating expense. So in that guide. There is there is an assumption that.
The equity markets stabilize and deferred comp expense returns to a more normal run rate. So that's probably the biggest delta too.
The numbers Youre talking about.
Got it got it okay, great I'll leave it there thanks for taking my question.
Thanks Laurie.
Thank you.
That concludes the Q&A session on today's call I will now refer you back to Paul.
<unk> for further remarks.
Great. Thanks, Thank you very much everyone for participating in our earnings call for the second quarter of 2022, and we look forward to future opportunities to update you on our progress. Thank you.
Yes.
Yes.
That concludes today's central Pacific Financial Corp, second quarter earnings call. You May now disconnect your lines.
Okay.
Sure.