Central Pacific Financial - Q2 2024

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp second quarter 2024 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. This call is being recorded and will be available for replay shortly after its completion on the company's website at www.cpb.bank. I'd like to turn the call over to Miss Dayna Matsumoto, Group SVP, Director, Finance and Accounting. Please go ahead.

Dayna Matsumoto (Senior VP and Director of Finance and Accounting)

Thank you, Jessica, and thank you all for joining us as we review the financial results of the second quarter of 2024 for Central Pacific Financial Corp. With me this morning are Arnold Martines, who was recently appointed Chairman of our board, in addition to his role as 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 website at cpb.bank. During the course of today's call, management may make forward-looking statements. While we believe these statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected.

For a complete discussion of the risks related to our forward-looking statements, please refer to slide 2 of our presentation. And now, I'll turn the call over to our Chairman, President, and CEO, Arnold Martines.

Arnold Martines (Chairman, President and CEO)

Thank you, Dayna, and aloha, everyone. We appreciate your interest in Central Pacific Financial Corp, and we are pleased to share our latest updates and results with you. We had a strong second quarter, highlighted by NIM expansion, core deposit growth, and improving net charge-offs. With half the year behind us, I am pleased with the results and have a positive outlook for the rest of the year. Our team is successfully navigating the challenges of the current economic environment. While this continues to impact loan growth and demand, we are seeing positive trends developing. I'm also proud of the recognition we recently received by Forbes as one of America's best banks and best in-state bank for Hawaii in 2024. With that said, I'd like to provide an update on the Hawaii market before turning it over to my team to cover the quarter's results in more detail.

Hawaii overall is experiencing modest economic growth due to higher inflation and continued pressures on tourism, particularly the Japanese market, where headwinds and exchange rate persist. Conversely, construction and defense spending in Hawaii are at all-time highs and helping to offset the impacts we are seeing from other sectors of the economy. In the month of June, total statewide visitor arrivals were down 1.9% from the prior year and were about 92% of pre-pandemic levels in 2019. Visitors from Japan were up 28% from a year ago, yet remained about 50% of the same month in 2019. For the island of Maui, total visitors in June were about 78% of the prior year, as recovery following the wildfires continues at a slow but steady pace.

Total statewide hotel occupancy in June was 76%, down 1.2% from a year ago, with an average daily rate of $373, down 3.7% from a year ago. Hawaii's statewide seasonally adjusted unemployment rate was 2.9% in June and continues to outperform the national unemployment rate of 4.1%. Hawaii real estate values remain very strong. The Oahu median single-family home price was $1.12 million, and the median condo sales price was $530,000 in June, reflecting year-over-year increases of 6.7% and 3.9%, respectively. Home sales volumes in the first half of the year were up 6.7% for single-family homes, but down 5.8% for condos compared to the prior year.

Homes continue to move quickly with a median of 15 days on the market. Overall, we remain optimistic about Hawaii's economic outlook and believe the state economy will continue to grow modestly and demonstrate resiliency. I'll now turn the call over to David Morimoto, our Chief Financial Officer. David?

David Morimoto (Senior EVP and CFO)

Thank you, Arnold. Turning to our earnings results, net income for the second quarter was $15.8 million, or $0.58 per diluted share. Return on average assets was 0.86%, return on average equity was 12.42%, and our efficiency ratio was 64.26%. In the second quarter, our total loan portfolio decreased by $17.8 million, or 0.3% sequential quarter, which included a $19.2 million decrease in mainland consumer loans. Sequential quarter growth in our commercial real estate and C&I portfolios was offset by runoff in consumer and residential mortgage loans. The pace of the net decline in total loans is slowing, and we expect modest loan growth in the second half of the year.

Our total deposit portfolio decreased by $36.4 million or 0.5% sequential quarter, which included a $41.6 million decrease in high-cost government time deposits. Core deposits grew during the quarter by $16.7 million. Net interest income for the second quarter was $51.9 million, an increase by $1.7 million from the prior quarter. The net interest margin was 2.97% in the second quarter, up 14 basis points sequential quarter. Net interest income and NIM expansion was driven by the increase in yields on our investment securities and loan portfolios, while our cost of funds remained relatively stable.

Interest income on our investment securities during the quarter included $0.9 million from our swap on 115 million of municipal securities that started on March 31st of this year and has a five-year term. Our total cost of deposits remained relatively flat at 1.33%, and our cycle-to-date total deposit repricing beta also remained at 24%. Second quarter other operating income increased to $12.1 million due to stronger mortgage banking and investment services income. Other operating expense totaled $41.2 million, an increase from $40.6 million in the prior quarter, primarily due to higher salaries and benefits expense. Our effective tax rate was 23.4%, and we believe it will continue to remain in the 23%-25% range.

We did not repurchase any shares in the second quarter. Our board of directors declared a quarterly cash dividend of $0.26 per share, which will be payable on September 16th to shareholders of record on August 30th. I'll now turn the call over to Anna Hu, our Chief Credit Officer. Anna?

Anna Hu (EVP and Chief Credit Officer)

Thank you, David. Our asset quality remained strong in the second quarter, and our lending and credit risk strategy continues to be based on diversification, consistent underwriting standards, strong collateral, and a focus on stable segments and industries that we have solid expertise in. Nearly 80% of the loan portfolio is real estate secured, with a weighted average loan-to-value of 63%. Our commercial real estate office and retail exposure remains low at 3.2% and 5.5% of total loans, respectively. The office portfolio has a weighted average loan-to-value of 55% and 69 weighted average months to maturity. The retail portfolio has a weighted average loan-to-value of 65% and 65 weighted average months to maturity.

All of our Maui-related loan deferrals have returned to regular payment status, and we are not anticipating any significant issues to cause us concern regarding our Maui portfolio. Non-performing assets were $10.3 million, or 0.14% of total assets, which was relatively flat from the prior quarter. Criticized loans were $35.3 million, or 0.66% of total loans, a slight increase from the prior quarter, but remains at historically low levels. Total net charge-offs were $3.8 million for the second quarter, or 0.28% of average loans on an annualized basis. This reflects a six basis points decrease from the previous quarter. Our allowance for credit losses was $62.2 million, or 1.16% of outstanding loans.

In the second quarter, our provision for credit losses on loans declined to $2.4 million due to a decline in net charge-offs. Additionally, we recorded a $200,000 credit to the provision for unfunded commitments for a total provision for credit losses of $2.2 million during the quarter. Overall, our credit quality remains strong, and we continue to monitor the economic environment closely. Now, I'll turn the call back to Arnold. Arnold?

Arnold Martines (Chairman, President and CEO)

Thank you, Anna. In summary, we had a strong second quarter. Despite market uncertainties that persist, we have a positive outlook for the rest of the year, and we continue to focus on executing on our core strategies while remaining nimble. I want to thank 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.

Operator (participant)

Thank you so much. To ask a question, please press star, then the number one on your telephone keypad. And if you would like to withdraw your question, please press star one again. Your first question comes from the line of David Feaster with Raymond James. David, your line is open.

David Feaster (Director)

Hi. Good morning, everybody.

Arnold Martines (Chairman, President and CEO)

Good morning, David.

David Feaster (Director)

I wanted to follow up on kind of the Maui side. You know, we've got the anniversary of the wildfires coming up. I'm curious, maybe where we are just from your standpoint in terms of the rebuild and the local economy. It's great to hear that we're not expecting any issues as loans come off deferral. That's extremely encouraging. But I'm just curious, what are you seeing there and your just, you know, your pulse of the local economy in that market?

Arnold Martines (Chairman, President and CEO)

Yeah. So, David, this is Arnold. You know, as I mentioned earlier, you know, the visitor arrivals, the visitor counts are still at about 78%, but it is improving in a steady way. I think that the, you know, the progress with regard to the things that have to be determined to move forward in a more deliberate way is coming together. You know, we're starting to see some homes being rebuilt, and I'm pretty optimistic that the community is coming together.

While, you know, there's still a lot of emotions and, obviously, a lot of folks were impacted, people are starting to come together, and we're optimistic that, you know, we'll start to see forward movement in the months and, you know, within the year ahead.

David Feaster (Director)

That's great. And then maybe just touching on the deposit side. I mean, the deposit cost control, the core deposit growth has been great. I mean, that's it's really impressive to just see one basis point of deposit cost growth. Curious, how do you think about deposits, and the deposit growth initiatives? Where are you having success, and what's driving that? And just where are you seeing the cost of new deposits? I mean, basically trying to figure out, do you think funding costs can stabilize here and continue to grow, or are we more focused on optimizing the base, just given the slower loan growth profile we just talked about?

Arnold Martines (Chairman, President and CEO)

So, David, I'll start, and then I'll turn it over to David Morimoto. You know, our team has done a really good job with regard to just focusing on our customers, focusing on our core business. You know, small business market has been a real strength of ours, and we continue to see, because of the efforts of our employees, just a steady growth of new customers, and obviously, what follows is deposit balances. But let me ask David to speak with regard to cost.

David Morimoto (Senior EVP and CFO)

Hey, hey, David. Yeah, I think, you know, like you mentioned, we are very pleased with the second quarter results. The team did a great job of staying close to their customers and building new relationships. So we did see stabilization, especially in non-interest-bearing DDA. The non-interest-bearing DDA declined by $1 million sequential quarter, and obviously, we're hoping that we continue to have that great success, and then we start growing core deposits going forward.

David Feaster (Director)

I guess kind of thinking through that, would you expect? Like, just trying to think of the size of the balance sheet, right? I mean, as to the extent that we do get core deposit growth, would you expect to continue to optimize the funding base and maybe let some of the CDs roll off? Or would you expect and basically kind of have a stable kind of asset base and expect improving profitability, or would you expect the balance sheet to continue to grow? Just kind of curious how you think about that, 'cause that ultimately plays into the margin question as well.

David Morimoto (Senior EVP and CFO)

Yeah. Yeah, sure, David. You know, I think the keys to the balance sheet size are core deposit growth and good risk-reward loan opportunities. You know, I think we're getting to the point where you know, things are lining up, the stars are lining up, where we could see you know, positive progress on both of those fronts. And if we do, that will allow us to grow the balance sheet, balance sheet footings. You know, I think we've done a lot on the optimization of the funding base. You know, and I think if we start seeing a good, better risk reward on the loan opportunity side, you know, we could see the balance sheet grow.

You know, it's not going to grow by a lot, but there would be opportunities to grow it.

David Feaster (Director)

Okay. That's helpful. Thanks, everybody.

David Morimoto (Senior EVP and CFO)

Thanks, David.

Operator (participant)

Your next question comes from the line of Andrew Liesch with Piper Sandler. Andrew, your line is open.

Andrew Liesch (Senior Equity Research Analyst)

Thanks. Good morning, everyone. Just a question on the loan growth here. Some good C&I on the mainland. I'm curious, what was behind that?

Arnold Martines (Chairman, President and CEO)

Anna, you want to answer the question?

Anna Hu (EVP and Chief Credit Officer)

Sure. Hi, Andrew. This is Anna. So we primarily saw the growth in our SNC portfolio. We had the opportunity to participate in a new name, as well as top off on a couple of existing SNC credits that we were already in. So that's primarily what drove our second quarter growth on the C&I book on the mainland.

Andrew Liesch (Senior Equity Research Analyst)

Got it. Any other opportunities for that to continue, or do you think the portfolio maybe stabilizes from here?

Anna Hu (EVP and Chief Credit Officer)

We continue to monitor and look at opportunities and would certainly say that as it presents itself, we would be interested.

Andrew Liesch (Senior Equity Research Analyst)

Gotcha. Very helpful. And then I guess similarly, the commercial real estate in Hawaii, what was the driver behind that, and how is that pipeline shaping up here for the rest of the year?

Anna Hu (EVP and Chief Credit Officer)

Hi, Andrew. This is Anna again. For commercial real estate in Hawaii, we had a couple of commercial real estate transactions that we closed on during the second quarter. And I would say from a pipeline standpoint, we have a good pipeline that we're looking at working through for the remainder of the year.

Andrew Liesch (Senior Equity Research Analyst)

Great. Any expected payoffs on any of the portfolios that might hinder the pace of growth? Perhaps on the construction side, that might be a little higher from a payoff perspective, just kind of forecast what the net pace might be here.

Anna Hu (EVP and Chief Credit Officer)

Yeah, we are expecting a few payoffs here and there in the construction book, as well as the commercial real estate, but we will be looking to try to fill that up and replace.

Andrew Liesch (Senior Equity Research Analyst)

Gotcha. All right, very helpful. And then, David, on the margin, obviously some good expansion here. And as we've heard, some good success on the core deposit front. I wouldn't expect to see the margin rise this much again, but, I mean, how are you thinking about the margin here going into the second half of the year, especially now that the swap is benefiting it?

David Morimoto (Senior EVP and CFO)

Yeah, sure. And Andrew, I think the way to look at the net interest margin forecast is if you break down the 14 basis points sequential quarter increase that we saw in the second quarter, roughly 6 basis points of that was organic. Now, that was a result of interest earning asset repricing outpacing interest-bearing liability. So 6 basis points organic, 5 basis points was related to the interest rate swap, and 3 basis points was related to reduction of excess balance sheet liquidity. As I said, the reduction of balance sheet liquidity is kind of nearing the end, and then the.

Andrew Liesch (Senior Equity Research Analyst)

Mm-hmm.

David Morimoto (Senior EVP and CFO)

Swap is just going to be in our, you know, net interest margin going forward. But it's really that six basis points and how much we can continue that going forward. So right now, the net interest margin guidance for the next couple of quarters is 3%-3.10%.

Andrew Liesch (Senior Equity Research Analyst)

Got you. Does that incorporate any rate cuts? And I guess, how, with some of the movements that, that and some of the shifting that you've done over the last couple of years, how do you think the margin will react to a rate cut?

David Morimoto (Senior EVP and CFO)

Yeah. So our forecast for the remainder of this year incorporates two 25 basis points cuts, 25 basis point cuts in September and December. So that is incorporated into our-- that 3%-3.10% guidance. You know, as we've mentioned before, our net interest margin, our interest rate risk is relatively well matched. The balance sheet is relatively well matched. We do believe that there would be some opportunity for benefit from Fed interest rate cuts toward the back half of the year and into 2025. But again, we're not, you know, overly asset sensitive or liability sensitive, so it-- the rate cuts will help, but it's not a material mover.

I think if you look at our range on our net interest margin over the last 3-4 years, it's probably in the 3.30%, that the high end is probably in the 3.30%, so that's probably the upside for the foreseeable future.

Andrew Liesch (Senior Equity Research Analyst)

Got it. That, that's very helpful. And just shifting to the non-interest income side, looks like you had some success there on mortgage banking. Was there any MSR write-up there, or was that a true gain on sale number that we should be looking at?

David Morimoto (Senior EVP and CFO)

Yeah, that was a true gain on sale. We did have better origination volume in the second quarter. Things got better in the second quarter relative to the first quarter. But that was a good result there. And then the other driver of the sequential quarter increase was in our retail investment sales area. That area had a good quarter, and that's expected to likely continue in the back half of the year.

Andrew Liesch (Senior Equity Research Analyst)

Great. That's, that's some good color. Thank you so much for taking the questions. I'll step back.

David Morimoto (Senior EVP and CFO)

Thanks, Andrew.

Operator (participant)

Thank you. I just want to remind folks, if you would like to ask a question, simply press star, then the number one on your telephone keypad to get your question into the queue. Our next question comes from the line of David Feaster with Raymond James. David, your line is.

David Feaster (Director)

Hi, guys. Hi.

David Morimoto (Senior EVP and CFO)

Back, David.

David Feaster (Director)

Thanks for, thanks for letting me take a couple more. Maybe just touching on credit, you know, first, I guess on the consumer side, curious what you're thinking there and what you're seeing. Seems like things have improved. And then just broadly, what you're seeing on the credit front, you know, obviously, you know, we've got a really low level of NPAs, but, and conservative underwriting, but what you're watching closely, you know, just any trends that you're seeing and thoughts on managing the credit book going forward?

Anna Hu (EVP and Chief Credit Officer)

Hi, David, this is Anna. So, you know, we continue to monitor really the consumer book. Our overall asset quality, you know, within our C&I CRE book remains very strong. So it continues to be consumer.

We continue to monitor here locally as well as on the mainland, but our outlook is that, you know, we are anticipating to look at opportunities to start picking up on consumer again.

David Feaster (Director)

Okay.

That's great. And then maybe just kind of going back to the margin question a little bit. You know, it's great to see the increase in loan yields. Could you just touch a bit on the repricing in the loan book that you're expecting in the next, you know, 12-24 months, where roll-off rates are on those maturing loans, and kind of how new loan yields are trending?

David Morimoto (Senior EVP and CFO)

David, yeah, I think we've mentioned in the past, the runoff on the loan portfolio averages out to about $175 million-$200 million a quarter. So, you know, runoff rates are pretty much near the portfolio rate, so in the 4.50%-5% range. The new loan yields, in the second quarter, new weighted average new loan yields was 7.65%.

David Feaster (Director)

Okay. Okay. So I mean, kind of, so it seems like maybe this kind of pace of loan yield expansion is probably sustainable, especially if we can start getting more growth. Is that the right way to think about it?

David Morimoto (Senior EVP and CFO)

Yeah. I think what you saw in the second quarter was without growth. You see just the impact of, you know, the repricing. And then to the extent.

David Feaster (Director)

Yeah.

David Morimoto (Senior EVP and CFO)

That we can start adding some net growth to the portfolio, that should be helpful, helpful to the margin.

David Feaster (Director)

Yeah, that's pretty powerful. And then just last one, you touched on the strength of defense spending. I'm curious, how does that play into your growth? Is that a C&I opportunity, or is it just a positive from a local economic benefit? Just kind of curious how, you know, defense spending can impact the bank.

Arnold Martines (Chairman, President and CEO)

Yeah, David, this is Arnold. You know, I would say that, you know, those defense spending translate or cascade to a lot of businesses here in Hawaii. So it does, it does have, you know, broader impact, to the, economy. Lots of small businesses benefit from it. So, so, you know, it's a, it's a good thing, and, and we believe that, it's going to continue as we move forward, given, you know, given kind of what's going on in the world today.

David Feaster (Director)

Okay. That's helpful. Thank you. Yeah.

David Morimoto (Senior EVP and CFO)

David, maybe I can just add to what Arnold shared. You know, from a more specifically on a banking standpoint, it's actually both. It is a loan and deposit opportunity. A lot of the relationships, the government contractors start on the deposit side, but once they get business, once they get contracts, they all need lines of credit. So it actually is on both sides of the balance sheet.

David Feaster (Director)

Okay. That makes sense. Thank you.

David Morimoto (Senior EVP and CFO)

Thanks, David.

Operator (participant)

Thank you. That is all the questions we have in our queue. I will now turn the call back over to Miss Matsumoto for closing remarks.

Dayna Matsumoto (Senior VP and Director of Finance and Accounting)

Thank you very much for participating in our earnings call for the second quarter of 2024. We look forward to future opportunities to update you on our progress. Thank you.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.