Q2 2023 Central Pacific Financial Corp Earnings Call
Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the Central Pacific Financial Corp, second quarter 2023 conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation. The conference will be open for questions.
Call is being recorded and will be available for replay shortly after its completion on the company's website at www Dot C. P B Dutch bank.
I'd like to turn the call over to MS. Dana Matsumoto Group Senior Vice President and director of Finance and accounting. Please go ahead.
Thank you Sarah and thank you all for joining US as we review the financial results of the second quarter of 2023 for Central Pacific Financial Corp. With me. This morning are our known Martinez, President and Chief Executive Officer, David Morimoto, Senior Executive Vice President and Chief Financial Officer.
And Anna Hu, Executive Vice President and Chief Credit Officer.
We have prepared a supplemental slide presentation that provides additional details on our release and is available in the Investor Relations section of our web site at C. P. B I think.
During the course of todays call management may make forward looking statements.
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.
And now I'll turn the call over to our President and CEO Arnaud with Martinez.
Thank you Dana Hello, everyone. We appreciate your interest in Central Pacific Financial Corp.
As we normally do I'll start with an update on the Hawaii market.
Then I'll turn it over to the team to provide additional detail and insights on our financial and credit metrics as well as other key updates.
The Hawaii tourism industry continues to be well supported by U S. Visitors with total visitor arrivals just slightly under pre pandemic levels.
Visitor spending continues to be robust.
Totally 169 billion, an increase of 19% compared to the same month in 2019.
Hotels in Hawaii continued to perform well with total statewide hotel occupancy in June at 77%.
Up 1% from a year ago.
And an average daily rate of $309 down 2% from a year ago.
Hawaii seasonally adjusted unemployment rate.
He knew to decline to 3% in June and is outperforming the national unemployment rate of three 6%.
Year over year statewide non foreign payroll increased by 17000 jobs or two 7%.
Labor market conditions are overall quite favorable in Hawaii.
Real estate values in Hawaii remains a key strength.
The Oahu median single family home place continues to be around $1 1 million.
And the media and condo sales price was 510000 in June .
While home sales volumes are down year over year.
There is continued strong demand and limited inventory with properties generally staying on the market for less than 20 days.
Strong construction activity in Hawaii continues to drive economic growth.
Private building permits are up 8% compared to a year ago and.
In construction job counts are up 5%.
Government contracts awarded in Hawaii totaled $3 2 billion in the first quarter of 2023.
Which included a significant two 8 billion award to Hawaii firms for the Pearl Harbor Naval Shipyard replacement project.
Overall, the Hawaii market continues to have a healthier outlook compared to the rest of the nation and is projected to avoid a recession.
The Hawaii banking industry is also differentiated from the national industry.
With a high value deposit franchise that is predominantly relationship base.
Tpb's deposit portfolio is diversified and long tenured.
Our business model is based on longer term customer relationships that are sticky and less rate sensitive.
CPB has $6 8 billion in relationship deposits with approximately 50% of our customers having been with CPB for more than 10 years.
Additionally, 65% of our deposits are FDIC insured or collateralized.
During the pandemic, we grew our deposits responsibly with about 30% growth.
As compared to some of the challenged U S regional banks that more than doubled their deposit portfolio size with surge deposits.
In the second quarter, we continued our strong focus on liquidity and while some deposit mix shift continues.
We were successful in growing total deposits.
Our teams remain very focused on generating relationship based deposits.
And we see upside opportunity to continue to grow our market share.
At the same time, we continue to prudently make asset growth decisions with a strong risk management focus.
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 second quarter was $14 5 million or <unk> 53 per diluted share.
Return on average assets was 0.78%.
Return on average equity was 12.12%.
Our efficiency ratio was 63, 7%.
Our balance sheet and liquidity position strengthened in the second quarter with our loan and investment portfolio is modestly declining.
Growth in the deposit portfolio and our cash position in excess of $300 million.
Our loan to deposit ratio declined to 81% in the second quarter.
We continue to moderate loan growth by being more selective in ensuring appropriate pricing and structure new portfolio loans.
In the second quarter, we continue to let the mainland unsecured consumer loan portfolio run off as we monitor the national economic outlook.
We remain nimble and we'll look for opportunities as the operating environment evolves.
On deposits period end total deposits grew by $59 million.
Which included core deposit growth of $10 million.
Average total deposit balances also grew by $19 million sequential quarter.
CTV continues to benefit from a granular and stable core deposit portfolio.
Deposit flows and activity has begun to normalize and at the same time. Our teams are highly focused on continuing to build new or deposit customer relationships.
Net interest income for the second quarter was $52 $7 million and.
<unk> by $1 5 million from the prior quarter, primarily due to higher funding costs.
This reflects a smaller quarter over quarter decrease compared to the first quarter, which declined by $2 1 million.
The net interest margin was 296% in the second quarter, a decline of 12 basis points.
Our total cost of deposits was 84 basis points in the second quarter and our cycle to date interest bearing deposit repricing beta is 24%, which remains within our expectations.
Second quarter other operating income was $10 $4 million, which decreased by zero point $6 million from the prior quarter, primarily due to lower income from fiduciary activities.
Other operating expenses totaled $39 $9 million in the second quarter.
A decrease of $2 2 million from the prior quarter.
The decrease was primarily due to lower salaries and employee benefits as we prudently manage our staffing levels and compensation expense in the current operating environment.
Our effective tax rate was 23, 6% in the second quarter and we continue to expect it to be in the 24% to 25% range going forward.
In the area of capital during the second quarter, we repurchased 23750 shares.
At a total cost of zero point $4 million or an average cost per share of $14 92.
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 31.
Overall, our capital position remains strong and our shareholders' equity has grown by $23 million year to date.
I'll now turn the call over to Anna Hu, our Chief Credit Officer.
Thank you David we continue to have strong asset quality with nonperforming assets at 15 basis points of total assets and criticized loans at one 3% of total loans.
While we saw an uptick in nonperforming assets. It was related to two Hawaii construction loan to a single borrower, which was subsequently paid off in full in mid July .
Our loan portfolio continues to be well diversified by loan type and industry sector with low exposure to the U S. Mainland at 17% of total loans and construction at just 4% of total loans.
The total mainland consumer portfolio is $386 million or 7% of total loans as of June 30, which was a $44 million reduction from the prior quarter as we continue to let the portfolio run off.
Over 75% of the loan portfolio is real estate secured with a weighted average loan to value of 65%.
Our commercial real estate portfolio is diversified by sector with low office exposure at three 5% of total loans and low retail exposure at four 5% of total loans.
The office portfolio has a weighted average loan to value of 55% and 73 weighted average months to maturity.
The retail portfolio has a weighted average loan to value of 64% and 63 weighted average months to maturity.
We continue with our conservative underwriting policies, including tight loan to value and concentration standards and are being more selective in the loans we make.
Our net charge offs were $3 4 million for the second quarter, which equates to 24 basis points annualized as a percent of average loans.
The increase in net charge offs came primarily from our mainland unsecured consumer portfolio due to the continued seasoning of the portfolio.
Overall loss level for the mainland consumer portfolio remain within our original expectations.
We currently believes these higher loss levels are peaking with a leveling off thereafter in subsequent quarters.
Our allowance for credit losses was $63 $8 million or 116% of outstanding loans.
In the second quarter, we recorded a $4 $1 million provision for credit losses on loans, primarily due to net charge offs.
Additionally, we recorded a zero point $2 million provision for unfunded commitments for a total provision for credit losses of $4 $3 million during the quarter.
Overall, our portfolio is diversified strong and well positioned to withstand the near term pressures from the environment.
We continue to have a strong risk management culture and are monitoring the economic environment closely.
Now I'll turn the call back to Arnold.
Thank you Anna in summary, Central Pacific continues to have solid liquidity capital and credit.
As we continue to navigate the current environment.
I want to express my appreciation to our exceptional team of employees.
We're obviously to serve our customers and the community.
Thank you also 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 ladies and gentlemen, if you have a question. Please press star one on your telephone keypad.
Your first question comes from the line of Andrew Lee with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning, Good morning, Andrew.
Just like to talk a little bit loan growth here. So the paydown in the or the planned decline in the consumer mainland does that like a normal pace that we should be assuming every quarter.
Andrew This is Arnold yes, basically we're looking at.
$40 million to $50 million.
Per quarter.
Got it Okay and then how is the how is the pipeline for the rest of the portfolio trying to not be <unk>.
Set with what Youre, what youre seeing in the local economy. You thought you had some pretty positive comments for the state. So I'm just kind of curious like where do you think loan growth shakes out as it can be is production going to be strong enough to offset those paydowns.
Yes, Andrew.
Andrew.
Pipeline continues to be pretty robust, but but where we're being more selective in what we're doing given given the operating environment.
<unk>.
We'll we'll make those decisions on an asset growth just based on overall deposit.
<unk> and deposit growth as we move forward in the quarter.
Coming quarters.
Got it okay.
Then shifting gears to the margin came in here.
290 days I guess, David how do you think that trends here going forward, there's certainly been some pressure on funding costs in.
And maybe if some of these higher.
Higher rate loans pay down.
How much more margin pressure do you think youre going to see.
Yes, yes.
Andrew.
We are monitoring closely the <unk>.
Second derivative right the rate of change.
The rise in deposit costs, and we're hoping to start to see that moderate as I mentioned in the prepared remarks, we're starting to see some normalization of deposit flows.
We are pleased with the DDA balances.
Roughly.
Stable sequential quarter. So again, we're hoping we're cautiously optimistic that the second derivative radar changes will start to moderate and we can see some moderation in the pressure on the net interest margin for the next couple of quarters.
Okay.
Slightly Conservative guide is $2 80 to 290 on the NIM.
Got it.
<unk> had.
The cycle to be cycle to date interest bearing deposit beta is in line with your expectations have your expectations changed on where you think that's going to peak.
Yes, I think in the past we thought it was going to peak about where it is today Andrew.
I think now with everything that's transpired, maybe it maybe it peaks at 30%.
Rather than 25.
Got it alright.
Alright, Thank you for taking the questions I'll step back.
Thanks, Andrew Thanks, Andrew.
Your next question comes from the line of David Feaster with Raymond James. Please go ahead.
Hi, good morning, everybody.
Good morning, David maybe maybe just staying on the deposit front I was hoping you could touch on the flows that you guys have seen.
If I would characterize a lot of the calls that I've been on it sounds like most of the pressure was early in the quarter and if I kind of look at average trends versus in the period. It seems like that might be the case for you all as well, but I'm just curious.
Non interest bearing balances have trended throughout the quarter. Similarly, how deposit costs trended and maybe what are you seeing what's the early read on core deposits in the third quarter.
Hey, David It's David.
As we mentioned we started to see some moderation of deposit flows.
Obviously, the whole entire industry has been child.
Charles Lynch with.
Mix mix shift.
The acceleration of deposit betas, and we're cautiously optimistic that we'll start to see moderation on both fronts.
The DDA balances were relatively stable quarter to date.
<unk>.
On the positive flows I think what we generally see is as we come off quarter and Theres, a little bit of run off and then we make it up as we are.
I approached the subsequent quarter end and those those flows continue to occur.
Okay.
And then just just thinking about.
The moves that you guys made in the quarter and the liquidity build with the whole idea that we've got a 40 or $50 million headwind on loan growth from the consumer front.
And.
Again, you built deposits and we have the excess liquidity I was just curious how you think.
Just how you think about deploying the liquidity is this a normalized level or what drove that and then you know.
Just just plans on.
Driving core deposit growth going forward.
Yes, David.
Yes, there was a little bit of a liquidity build during the quarter and that was purposeful.
I think that's probably the appropriate amount of on balance sheet liquidity in the current environment.
So I wouldn't anticipate it growing significantly more from there.
And then on just net interest income.
Yes, we realized we got a little bit of a headwind from the mainland consumer portfolio.
As Arnold mentioned.
Sure.
<unk> four opportunities.
Going forward we have.
We have a healthy loan pipeline and.
We will lean into that as we feel more comfortable with the deposit balances.
And where are you still get where are you let me I am sorry go ahead.
David I'm sorry. This is Arnold let me just add that our continued focus on the small business market, which as you know our.
One of our pillars.
Is really helping us drive deposit growth for the team is doing a really good job in focusing on that segment and continuing to do.
To build new relationships that bring in new core deposits.
Okay. That's helpful and just kind of hearing your commentary it sounds like the slowdown in growth was really obviously, excluding the consumer stuff the slowdown in originations was maybe a bit more intentional as you've been selective.
Rather than a slowing in demand is that a fair characterization, especially just given the commentary on the pipeline and then.
I guess, where are you still seeing good risk adjusted returns with that you talked about the small business just now but I'm just curious what segments are still providing good risk adjusted returns from your perspective.
Yes.
Your observations are good one that's exactly how we are.
We're seeing seeing things.
With regard to having a healthy pipeline, but very being very selective in.
Risk risk adjusted returns and maybe David can comment on some of the segments that we're looking at that we believe.
Our good risk can get us good risk adjusted returns in the current operating environment.
Yes, Thanks Arnaud.
David.
The small business the C&I areas, obviously, a good opportunity.
We you get decent loan yields there generally bank base rate a prime floor.
Floating type of rates and then as Arnold mentioned, they also bring in core deposits.
Areas continues to be a focus some construction.
There continues to be a decent amount of construction activity within the state of Hawaii and again, there you have floating rates either.
<unk> offered sulfur with decent margins decent spreads.
So those are some of the areas that we're focused on.
Okay that makes sense.
And then last one from me just expense control you guys did a great job there I suspect there was some.
Benefit on the incentive accrual side I'm just wondering if you could help us think about a good core expense run rate and just again, how you think about again got revenue headwinds and cost savings, but at the same time.
Could you try to continue to invest in our franchises, we're playing a long game here just curious how you think about additional investments hires.
And anything that you might have on the horizon.
Yes.
Yes, David Thats really what it is right.
It's a balancing game right.
We have loan opportunities, but we need to balance that with.
The availability of deposit so we're balancing that to help manage the revenue side.
Then.
Where to the extent that work we continue to see revenue headwinds, where we will continue to manage expenses.
<unk> prudently and.
But as you say, we need to continue to invest in key areas and we continue to do that so it is it is definitely.
A balancing game between revenue and expenses, but we're highly focused on getting back to positive operating leverage.
Okay. That's helpful. Do you think this kind of $40 million run rate is a good core expense run rate.
Yes, I think I think 39% to 40 and.
With with our commitment to be nimble so to the extent that the opt.
Operating in a environment remains difficult, we'll need to manage expenses appropriately.
And David This is Arnold let me just add that.
As we've mentioned in previous quarters.
We are.
<unk> focused on.
On harvesting.
More of the investment that we made in technology.
There is traction there we are making progress in being able to.
<unk> and to focus on building building out a more.
Efficient.
Back office.
System and processes.
Okay.
That's helpful. Thanks, everybody.
Your next question is a follow up from Andrew Light of Piper Sandler. Please go ahead.
Hi, everyone. Thanks for taking the follow up here just on the on the noninterest income side.
About 5% from prior quarter I think some of those were outsized, though some.
Some of those line items, but is around $10 5 million at the right place to be thinking about going forward.
Yes.
The guidance there Andrew would've been 10 to 11, so you're spot on.
Got it.
Great.
Or you've covered everything else that I've wanted.
Wanted to ask thanks, so much.
Thank you Andrew.
Okay.
There are no further questions at this time I will turn the call to Arnold Martinez for closing remarks.
Thank you Sarah.
And thank you very much everyone else for participating in our earnings call for the second quarter of 2023, we look forward to future opportunities to update you on our progress.
This concludes today's conference call. Thank you for joining you may now disconnect your lines.
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