Q3 2022 Central Pacific Financial Corp Earnings Call
Quite that we expect a recovery of Japanese visitors going into 2023 due to significant pent up demand.
This timely recovery will support Hawaii, overall economy, which could experience a moderate slowdown in other sectors in 2023.
Visitor spending is strong reaching one $7 billion in August an increase of 13, 8% compared to the same month in 2019.
<unk> performance continues to improve with total statewide hotel occupancy of 77% and an average daily rate of $380 in August .
Hawaii is employment and housing sectors are solid as well.
Eight wide seasonally adjusted unemployment rate was at four 1% in August 2022, and as forecasted by the University of Hawaii Economic research organization to remain fairly stable in 2023.
Housing prices in Hawaii remains very strong with the Oahu median single family home price at one $1 million.
In September 2022, which is up 5% from the previous year.
Like the rest of the nation, we have seen some moderation in home sales activity due to the significant rise in interest rates, resulting in less home buying power with that said the Hawaii housing market remains healthy with strong demand and low inventory, making it less likely to.
Experienced a material downturn.
Compared to most other U S market.
And the great financial recession, the Hawaii market here better than most states and with our continued strength. We believe this will once again be the case now I'll turn it over to Angel Martinez, our president and Chief operating officer to discuss our third quarter results Arnold.
Thank you Paul.
In the third quarter, we continue to focus on strong quality and diversified asset growth.
Our total loan portfolio increased by $121 million or two 3% sequential quarter and.
And 9% on an annualized basis.
The growth was broad based across most loan types, except for the C&I portfolio, which included decreases in PPP loans as that portfolio has almost completely run off.
We were successful in continuing to grow our residential mortgage portfolio by $32 million during the quarter.
Given our strength in the purchase market and our strong relationships with real estate developers and builders.
During the third quarter, we continued to execute on our mainland diversification strategy by selectively participating in mainland commercial real estate and C&I loan transactions.
And with the purchase of select consumer unsecured portfolios from our established lending partners.
In the mainland commercial market, we typically partner with larger mainland banks, with whom we have relationships with.
We participate in transactions, primarily on the west coast, ensuring that we are lending in markets that we understand and are comfortable with while maintaining our credit underwriting and concentration standards and limits.
The consumer purchases during the quarter had a weighted average FICO score of 740.
Our net growth in mainland consumer purchase loans was $44 million in the third quarter at September 30.
Our total mainland consumer purchase loan balances were approximately 8% of total loans, representing a mix of auto and unsecured consumer loans.
We have a healthy loan pipeline and are working closely with our lending teams to ensure we manage future loan growth given the current operating environment and economic outlook.
In particular, we intend to reduce future mainland unsecured consumer loan purchases.
On the deposit front during the third quarter, we start to see.
To see some moderation in our deposit balances, which grew significantly during the pandemic.
Total deposits declined by $65 million or 1% from the prior quarter.
Hawaii has traditionally had a strong and stable core deposit base, which is less likely to be impacted by interest rate swings as compared to the broader nation.
<unk> in particular has a long loyal customer base strong community ties and the opportunity to increase our market share.
We have an experienced team that is focused on deposit gathering in the current environment.
Finally, we continue to develop our banking as a service fintech strategy.
While adjusting with the market environment to manage the evolving risks.
The swell Fintech, which we invested in and are serving as the bank sponsor launched an alpha pilot earlier this month.
We are excited to have to spell out off the ground and we'll continue to grow slowly and steadily while we learn and iterate.
I'll now turn the call over to David Morimoto, Our Chief Financial Officer, David.
Thank you Arnaud.
Turning to our earnings results net income for the third quarter was $16 7 million or <unk> 61 per diluted share.
Return on average assets in the third quarter was 0.91%.
And return on average equity was 14, 49%.
The efficiency ratio was 64, 6% in the third quarter.
Net interest income for the third quarter was $55 4 million, which increased by $2 4 million from the prior quarter as our increase in loan balances and yields outpace the increase in our funding costs.
Our net interest margin increased by 12 basis points to three 7% in the third quarter.
Our total cost of deposits was 14 basis points, increasing from the historic low of 16.
We continue to manage deposit pricing through product segmentation and thus far our interest bearing deposit repricing beta has been less than 10%.
Third quarter other operating income and other operating expense normalized from the previous quarter, which included a onetime gain on sale of our visa class B shares of $8 5 million.
Had a onetime four 9 million settlement charge on our defined benefit pension plan termination.
We continue to focus on managing our expenses to drive positive operating leverage during the third quarter. We consolidated another branch S Fab, which brought our total branch count down to 27 branches.
There were one time branch closing costs zero point $4 million this quarter.
In 2022, we consolidated three branches.
Total estimated future annual expense savings of zero $9 million.
At September 30, our allowance for credit losses was $64 4 million or one.
119% of outstanding loans.
In the third quarter, we recorded a zero point $4 million provision for credit losses, due to loan portfolio growth and net charge offs.
Our asset quality continues to be strong with non <unk> non performing assets to total assets at six basis points as of September 30.
Additionally, <unk>.
Total criticized loans were just one 4% of total loans.
Our net charge offs were $1 6 million for the third quarter.
Our loan portfolio is well diversified with total construction at 3% of total loans and minimal exposure to sectors that could be have not been in a downturn.
Our effective tax rate was 26% in the third quarter and continues to be on the higher end of our range as a result of less tax exempt bonds in April .
Going forward, we expect the effective tax rate to be end of 25% to 26%.
Our capital position remains strong and during the third quarter, we repurchased 218000 shares at a total cost of $4 9 million or an average cost per share of $22 33.
Additionally, our board of directors declared a quarterly cash dividend of 26 26 cents per share, which will be payable on December 15 to shareholders of record on November .
I will now return the call to Paul.
Thank you David Central Pacific had another solid quarter and continues to be well positioned to continue to deliver strong performance, we are prudent and disciplined risk management and the right leadership to drive us forward and continue to excel despite external market challenges that may come.
On behalf of our management team and employees I would like to personally. Thank you for your continued support confidence organization.
I'd like to end with a personal note.
After four great years at Central Pacific Bank I have made the decision to retire at the end of the year.
<unk> January one 2023, I will become chairman emeritus of the bank and the holding company Arnold Martina currently President and Chief operating officer of Cps, and CPB will become Chief Executive officer of both entities as well as being named to both boards.
Kathryn no another valued member of the Executive Committee is also retiring as executive Vice Chair and will become chair of both boards in fact, I would like to ask Catherine to say a few words.
Thank you Paul.
12 years with this company have been exciting and gratifying tomorrow recapitalization to a recovery that follows and with our recent transformation through by 2020. It has been an honor to serve the bank with Paul Arnold and David and the rest of our exceptional team leaders and employees. Thank.
Bank has been transformed during this time to better support our employees customers and the community.
Look forward to my new role as board chair and to continuing to work with Arnold and supporting the bank, particularly on our women owned business initiatives as well as president.
Promotion.
Great. Thank you Catherine.
Really enjoyed my time at CPB and will continue to serve on the board and as an adviser.
Particularly in the areas technology and market development.
The bank has been through a transformative stage arrived 2020 program that included the $40 million renovation of our headquarter building, our online mobile banking and ATM upgrades and the total corporate rebrand set us on a solid path to becoming a digital.
First bank to help us excel in a rapidly changing bank banking paradigm.
My Thanks to the leadership team and board for their support in particular, my appreciation and gratitude, So Arnold David and Kathryn for their partnership and support for the past four years and in closing, let me say that I can think of no better banker then Arnold Martinez to lead this great institution into the future.
At this time, we will be happy to address any questions. You may have thank you very much.
Thank you Sir.
Our first question comes from the line of one Andrew Liesch with Piper Sandler if any other individuals on the call we'd like to ask a question. It is star one on your telephone keypad.
Your line is now open.
Thank you good morning, everyone and Paul Congratulations on your retirement and Arnold and Katherine on your new role certainly.
For all of you.
Great to see.
Thank you question on the mainland commercial real estate that was added in the quarter. It sounds like all of that word participation is that correct and then I'm just curious on the underwriting.
Did you guys go through your own underwriting after being sourced the deal minimal sort of Ltvs and maybe geographies of this as well just kind of more detail on.
How these loans are sourced.
Okay.
Yes, Andrew this is Arnold.
Yes, thanks for the question.
It's a combination of.
Participations with.
With banks on the mainland, but it's also.
Hawaii based customers that we've had long time relationships with that have diversified real estate investments.
In Hawaii as well as on the mainland.
And then as far as the underwriting.
Our participations are clearly, we do our own independent.
Underwriting reinsure that.
The.
Transactions are aligned with what we expect.
What our standards are so.
In any of it I hope that answers your question.
By the way we apologize for the.
Noise behind it seems like there's some some.
Some things going on outside will tell you that Thats test.
Well I'm not hearing anything so hopefully.
Coming through for anybody else.
I guess my other question is on the on the Hawaii, the Hawaii growth.
Okay.
Obviously with the stronger on the mainland and you had some good residential growth.
In the state, but on the commercial side that CRE and.
And C&I is there anything thats, causing you to pull back or is this just maybe.
Just normal trends from your customers.
And we're seeing normal normal trends on it there's no reason at this point for us to pull back on.
Specifically, when we talk about commercial real estate transactions.
Or C&I.
And as well as residential.
Those are fairly.
Those are areas that we look at and we expect to be stable, especially in Hawaii given the the the.
The lack of inventory.
In <unk> and as well as the.
On the real estate side.
Just the stability here theres only so much.
Inventory that's available in Hawaii.
Got it.
Alright, thanks for taking those questions I will step back.
Yes.
Thanks, Andrew.
Thank you for your question Sir.
Our next question comes from the line of one David Feaster with Raymond James.
Your line is now open.
Hey, good morning, everybody, Congratulations Paul and Catherine on the retirement and Arnold the congratulations on the promotion is excited for you all.
Okay.
I'm just curious if we could start on the deposit side, just curious some of the deposit trends youre seeing.
Then if you could touch on the especially on the noninterest bearing flows how much of that was from migration within the book towards interest bearing or cash burn and clients is there any seasonality to those flows and then just curious whether you've seen any deceleration in <unk>.
Outflow of noninterest bearing.
Okay.
Yes, Thanks, David.
I'll have David here answer that question.
Yes.
Hey, David.
During the third quarter, we did we did see a drop in <unk>.
Non interest bearing deposits and that was primarily related to some large corporate corporate depositors.
That had built up a decent amount of excess liquidity and but money was and just fitbit as market rates were really low.
Projected protracted period of time.
The fed increasing rates as rapidly as they did with money market rates approaching 2%, we did see some of that money.
Balance sheet.
Some of it went into other.
Interest bearing accounts, but some of it leaves the balance sheet.
Good news there is that we have seen the pace of that those types of large corporate outflows. It has slowed so hopefully we've put a lot of that is behind us in the third quarter.
Okay.
And then maybe just touching on thing on deposit puts on two aspects of it I'm curious is how the shock of digital deposits are trending and how flows are turning in that and how rates and betas are within the digital deposits and then Paul I know you've spent a lot of time working on this Japanese deposit.
Initiatives curious if theres any updates on that and whether you are starting to see some fruits from from all of those efforts.
Hey, David its David again, so on the Shopko, we continued to do well with the shock we continue to add new accounts.
But.
It has been going on at a slow and steady pace.
So I think I think we're probably at about 4000 Chaco accounts and.
We continue to run initiatives to drive more more activity there.
The rate sensitivity of that account has been we have not changed anything on the rate profile of Datacom. So it's still where are you.
We pay a modest amount of insurance I think it's three basis points. So Beatrice.
But if you do the qualifying activities 15 debit card transactions a month with the direct deposit and then the bonus interest rate is 1%. So it's a decent <unk>.
Interest bearing checking a call if you do it.
It was a qualifying activity. So we haven't made any changes to that the bonus rate in the current rate environment, thus far.
So I'll turn it to Paul.
Japan.
I'm sorry.
No go ahead.
Yes, so hi, David so.
Generate today is 151 yen in that.
Presents considerable headwinds.
For people to transfer money.
And to the United States at this moment.
And we will have to say that we have great run up on Japan deposits, even during the pandemic.
Those individuals who deposited money with us last year of a launch.
And but.
The scenario today is that there is tremendous pent up demand for a lot of the JAK inhibitor.
Why.
I think they have to go through this is emotional roller coaster ride because theres been such a significant.
Strengthening of the dollar we think as we go into next year that that will ease off and when it does.
The one key takeaway for a lot of that behavior that they shouldnt have all of our assets.
And we're hoping that they will look to dollar deposit and at that time with products like Shocker.
Digital products or people, who don't live here in Hawaii, I think it's going to be a very attractive platform. So.
In the short term some headwinds, but we know that the Japanese will be back here.
<unk> interest in shifting assets to the U S and we hope we can really capitalize.
And how much it that's good color how much is in the shock of digital deposits now.
Okay.
Well, David its about 4000.
So it took about a thousand dollars average balance.
Because the good news there is what we're seeing is engagement five shopko customers increase over time.
Essentially as normal rate with people open an account it takes them a little bit of time to move their direct deposit and then start making their primary checking account.
Now starting to see that engage with the shock of customers, which is good.
And David.
<unk>.
This is Paul but more importantly.
Basically really penetrating the younger set of customers.
And that was a critical.
Piece of strategy for our shopping offering so.
This is something that we did to invest into the future.
Yeah, and that's perfect dovetail I wanted to touch touch on swell.
I know, we're planning on a fourth quarter soft launch just curious where we are in that process. How it is going and any updates on the evolution of that business.
Yes, David its David again, so we move.
<unk> we move.
The swell friends and family pilot, who the swell outflow of quite a bit so that's where we're inviting.
The people from the swell wait lists to open their swell Swehla column. So we're just at the beginning of the outflow pilot.
As we will probably stay in the outflow pilot to mid mid to late November and then we're going to start.
A more broad public launch so we plan to do.
The public launch probably late November early December time frame.
Elsewhere.
There will be a much larger set of customers coming in.
And how has it gone so far I mean is there any update on how its gone.
Sure.
Whether theres been any issues or just curious how it now it's going in your early feedback.
Yes no.
As expected U.
Two highlights too.
Lower figure things out and make sure everything is working as expected before you do the larger public launch. So we went through that process with the friends <unk> family.
Learned and iterate it through that process of that now we're doing the same thing through the outflow pilot.
But it's going exactly as expected.
This is Paul.
I might just add.
With the changing economy.
Especially in the Continental U S and we have.
A little more originate on our credit policies.
So we are focused more on <unk>.
Customers invited customers with FICO scores north of 720.
Initial nailed Bronx that we're planning it right.
Okay. That's helpful. Thanks, everybody.
Thank you. Thank you.
Yes.
Thank you for your question Sir.
Again, if you would like to ask the taking the question and the star one on your telephone keypad.
Our next question comes from the line of Laurie Hunsicker with Compass point. Your line is now open.
Great Hi, Thanks, good morning, and and Paul Arnold Thank Kathryn I, just want to Echo my congratulations.
Yeah.
Just going back to your your Japanese strategy and pollen I'm, hoping you can help us think about it and I'm sorry, if I missed that piece.
Number one can you just remind us what Japanese deposits are at the moment and then.
Paul as you transition.
Into a different role can you can you take us through how the Japanese strategy.
It seems as we look to 2023 and now you've been active in traveling there can you just help us think about that.
Thanks sure so Laurie.
16 quarters ago.
When I first stepped in as CEO I think we were hovering around $650 million in terms of Japanese.
We're just a little south of about $1 billion.
We've made very good progress over the last four years.
There is still tremendous potential in our core business.
The strong dollar has been headwinds as well, but now in my new role from January .
Arnold has to do all the earnings call.
We have time.
<unk> more timings and still as a board members CPB or an advisor to Arnold and Arnold's request of me.
Really do submarine Megan and Japan, I'm going to have a lot more time to focus on that market and.
And I don't know what my marching orders are to go out and get low cost deposits. So that's where I'm going to spend a lot of time on and I hope I'm successful.
Okay. Okay.
Okay, Great I hope you are too.
Okay, Great I guess shifting over.
Oh I'm sorry go ahead.
Okay. Okay.
Oh for Gaylord tumor.
Shifting over to consumer.
You mentioned that you are going to reduce unsecured consumer mainland.
And I'm showing that number.
Our $310 million can you help us think a little bit about.
Now.
Where that reduction is going to occur what that book looks like.
Maybe by the back end of next year, just how youre thinking about that.
Yes.
Yeah.
So maybe on that.
Sure.
No go ahead finish your question.
Oh I was just going to say and then with respect to well elevate.
Because obviously that's not the mainland so that is starting to grow can you help us think about the targets there over the course of the next year.
How youre thinking about that.
Initially I think there was a small elevate target of $8 million by the end of this year and you backed off on that which was great, but maybe help us help us think about that a little bit more what is your target look like four quarters from now and then.
Probably just one more question sort of fold. It in I mean, your credit is spectacular the only place you probably had charge offs has been in consumer and so maybe help us think about that a little bit.
Especially with the backdrop of.
Continued chatter out there from CEO and CFO across the board, saying very very concerned about unsecured consumer lending and maybe just help us think about those three pieces in other words that unsecured consumer book.
One look like.
Over the course of the next year, what well elevate will look like and then.
How youre thinking about charge offs.
Okay.
Thanks Laurie.
Try our best.
Spun respond to your questions. So this is al I'll just start.
They say that.
Obviously, we recognize.
The headwinds.
Overall.
Our portfolios are performing very very well.
Including our consumer portfolios.
We think the probability of a recession.
Is higher at this point and as a result.
A look at.
What we tend to do in the future and to start to modify a moderate.
Certain loan categories.
So I'm going to ask.
Maybe to start off with talking about consumer and.
And to respond specifically to your questions about.
Where we see that category growing in the future and then and then we'll pass it onto David to talk a little bit about swell and kind of the numbers that we're looking at.
In the future in the future so denim.
Laurie this is Anna.
With regards to your question on our $310 million.
We do expect a moderate that portfolio.
As Arnaud mentioned, we are expecting headwinds to come.
<unk> way.
That would just be to natural runoff on a monthly quarterly basis.
Where we may look to add is really on the auto side, we have historically performed very well in auto and our overall expectation is to maintain somewhere in the 8% range as to where we currently are with me.
Our mainland consumer products.
And then shifting over to the charge offs were expecting charge offs to increase apart given market conditions, but we are expecting it to be at an acceptable level.
Primarily due to our higher credit underwriting standards.
As mentioned again in this past quarter.
Average weighted weighted average FICO score was 740.
We expect to maintain high credit underwriting standards going forward as well.
I'll now turn it over to David to talk about our.
I saw elevated site.
Yes.
<unk>.
Yes.
Correct. The original goals for swell was eight 8 million in cash.
Catch the deposit accounts and $8 million in.
Our lines of credit.
By the end of this year, we moderate we took that back to $4 million each.
That's still the target for year end, we will see if we get there or not.
IV of the public launch has been pushed back by a few weeks.
But.
As we've always said, we're going to start slowly.
We're going to learn and we're going to iterate I think what's been good about.
The process we've gone through this last year is obviously theres been a lot of turmoil with it because it's the neo banks out there and it's given us an opportunity to observe in and learn and.
And what we're doing now is we're targeting accounts accounts and customers that we believe will be profitable customers. So our business on the small business plan now is to target fewer accounts, but try to make them profitable.
Maybe a 100000 accounts, but half the majority of them be profitable, maybe a business model than having 1 million accounts that are unprofitable.
So thats kind of what we're focused on as far as the targets for next year.
It's very difficult to say I think what we've always said Larry.
We're not.
Accelerate growth unless we find.
A sweet spot.
A strategy that leads to profitable 12 customers.
Swell CPB and <unk> are all aligned in that objective.
No.
The growth will be will be stronger if we find that sweet spot of profitable customers.
Otherwise it will be rather slow and we will be learning and iterating.
And so and thanks for that David.
Just to quantify it.
Or are we looking at.
$10 million by the end of next year, we're looking at 50 million or 190, <unk> rough rough numbers. So that we can think about.
Think about credit risk, how we think about that.
Thanks again.
Again.
I don't think its going to be $100 million I think it would be south of that.
Think all most of next year is going to be.
The team running cohort tests.
We target different cohorts of the <unk>.
Striver target market.
We're trying to find the sweet spot. So I think that's the process will be going through much of 2023.
The final thing to mentioned lawyers.
And I know we've talked about this at length, but again, we do have the <unk>.
Credit guarantee from elevate that is cash secured on our balance sheet.
This is Arnold I'll, just ask the hard too right because I will just to elevate is sitting at a dollar a share.
Right.
I don't know.
I'm sorry go ahead, I didn't mean to cut you off.
Yes, no no problem Laurie I know that there is a slight delay.
But I wanted to add that.
Yeah.
Yes.
Well as 111 product initiatives that we're doing.
Obviously, we have a very strong disciplined overall, so the bank's balance sheet and so at the end of the day, we are going to manage consumer concentration.
Globally right Holistically.
For the bank.
So from the extent that re growth well.
Other parts other other sources of consumer rule will reduce other sources of consumer to maintain a.
A strong risk management discipline and stays true to our concentration standards in minutes. So I just wanted to put that out there that we are still going to manage our balance sheet.
Actively we're not.
One product too.
Two or.
Let's just say, we're not going to we're not going to have the consumer category.
Grow.
To a point where it is.
A huge concentration of our balance sheet.
Okay, Okay, great and just one more one more question, if I could different different subject altogether.
Funding is fabulous your core deposits are fabulous.
Let's think about.
Maybe just if you could quantify you know over the next several quarters. How you think about margin in terms of in terms of basis points.
Deposit pricing, obviously at some point.
Catches up on the Fed's cloud right. So maybe help us think a little bit about when Martin might peak and how youre thinking about that.
Thanks, so much.
Yes.
Yes Laurie.
So the third quarter.
We were very pleased with the core deposit.
Betas.
So the interest bearing deposit beta in third quarter was 9% total deposit beta was 6% and our.
Our average, earning asset beta was 21%.
What led to the 12 basis points sequentially.
Sure.
We are targeting to continue to see NIM expansion over the next couple of quarters.
And we're currently in the budget process. So.
We are currently thinking the NIM may peak in mid 2023 is when we're looking at.
Great. Thanks for taking my questions.
Yes.
Laurie This is Paul and before I end the call I just wanted to respond again.
Your comment about elevated share share price being $1 right.
Alright.
There is enough cash at elevate.
Again, the arrangement is that they place deposits with us where we have a security interest in them and we are in the driver's seat.
Volume of direct mail, which is the key driver.
So a lot of the loan origination so.
So we're going to be taken a very close look at that.
I think I also mentioned in past calls.
Through our terms and conditions with elevate we do have the right lending management platform.
Even in the event that there were any issues.
With the viability of the company I think Cpus in a very secure position. So just wanted to.
Point that out okay.
So with that.
I think there might be one more question okay.
Yeah.
Got it.
Yes, sorry. The question, we had actually dropped back out if you would like to continue.
Okay, well, let's talk about people, okay well.
With that thank you very much everyone for participating in our earnings call for the second quarter of 2022.
We look forward to future opportunities to update you on.
Thank you.
Okay.
And with that we will end today's central specific Pacific Financial Corp Conference call. Thank you for your participation you may now disconnect your line.