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spk02: and welcome to the Central Pacific Financial Corp. Second Quarter 2021 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. If you require operator assistance, please press star then zero. I'd like to turn the call over to Mr. David Morimoto, Chief Financial Officer. Please go ahead.
spk05: David Morimoto Thank you, Andrew, and thank you all for joining us as we review the financial results for the second quarter of 2021 for Central Pacific Financial Corp. With me this morning are Paul Yonemune, Chairman and Chief Executive Officer Catherine Knowles, President, Arnold Martinez, Executive Vice President and Chief Banking Officer, and Anna Hu, Executive Vice President and Chief Credit Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation 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 two of our presentation. And now I'll turn the call over to Paul.
spk03: Thank you, David, and good morning, everyone. As always, we appreciate your interest in Central Pacific Financial Corp. Let me start first with some positive updates on the Hawaii economic recovery. Visitor arrivals from the U.S. mainland to Hawaii have returned much quicker than anticipated, a good sign for economic recovery. The daily arrival count has averaged about 30,000 per day since June, which is nearly at pre-pandemic level. In early July, the state of Hawaii began allowing arriving passengers to skip pre-tested of full vaccination against COVID in the U.S. Although we are not immune to the spike caused by the Delta variant, Hawaii's COVID infection rates continue to be at very low levels, with our infection rates currently at the lowest in the nation. Nearly 60% of our state population is fully vaccinated as of July 21, 2021. The state of Hawaii unemployment rate declined to 7.7% in the month of June and is forecasted by the University of Hawaii Economic Research Organization to decline to 4.8% in 2022. The housing market in Hawaii remains hot with the median single family home price at $979,000 in the month of June. Our financial results for the second quarter were very strong, with quarterly pre-tax income reaching a new record high. With increased confidence in the Hawaii economic recovery and our continued solid asset quality, liquidity, and capital, we resumed share repurchases during the second quarter and continue to pay our quarterly cash dividends. Against this backdrop, we are very optimistic about our future business prospects. Digital continues to be a key strategic priority for us. Enhancements to our online and mobile banking platforms are being made on a continual basis. Additionally, in the second quarter, we issued new contactless debit cards to all of our customers and increased mobile deposit adoption among our customer base. Further, online chat is now available and online appointment schedule is coming soon to make banking easier and more convenient for our customers. We continue to work diligently on product and service development in the digital area. I'd like to turn the call over to Catherine Null, our president. Catherine.
spk09: Thank you, Paul. First, I'd like to provide an update on the credit area. We are pleased that our clients have weathered through the challenges of the pandemic. Nearly all of the loans we granted COVID-related payment deferrals have returned to pay status. As of June 30th, we have just $3.5 million in loans remaining on deferral, the majority of which are residential mortgages. Additionally, our classified assets declined during the quarter to $42 million. and our non-performing assets remain near historic lows at just nine basis points of total assets. I'd also like to share about our recent developments in the environmental, social, and governance, or ESG, area. In the second quarter, we were pleased to publish our first annual 2020 ESG report. A link can be found in my presentation. We continue to develop our ESG reporting and look forward to providing further updates CPB's legacy of helping the small business community is one of the pillars of our ESG program and remains a key priority for us. Last week, we were pleased to announce a new program run by our CPB Foundation called WE by Rising Tide. This program supports women entrepreneurs as we believe they are key to building a strong and resilient economy. As part of this program, we selected our first cohort of 20 women entrepreneurs from seven different business sectors that will participate in a 10-week series of workshops on financial management, marketing, and leadership, and receive free advertising and networking benefits. Support of our employees is another pillar of our ESG program. We believe that investing in our employees is critical to our success. During the second quarter, We had our annual merit increases, and we made a few key strategic new hires. We also continue to prioritize the health and well-being of our employees, and therefore continue to allow flexible work schedules while developing our hybrid return to office plan. Finally, we are pleased that the second and final phase of our Central Pacific Plaza revitalization was completed last month. We expect smaller office projects to continue as we create collaborative, refreshed, and sustainable workplaces for our employees. We also continue to refresh our branches and evaluate our branch network to meet the changing needs of our customers. I'd like to now turn the call over to Arnold Martinez, our Chief Banking Officer. Arnold?
spk04: Thank you, Katherine. In the second quarter, our core loan portfolio increased by $103 million. or 2.3% sequential quarter, which was offset by PPP paydowns of $163 million. Year over year, our core loan portfolio decreased by 3.7%. The core loan growth was broad-based across all loan categories except G&I, which, as everyone knows, was the customer segment most impacted by the pandemic and now in recovery. Our residential market production continues to be very strong, with total production in the second quarter of nearly 280 million and total net portfolio growth in residential mortgage and home equity of 48 million from the previous quarter. We wrapped up 2021 new PPP originations during the second quarter with over 4,600 loans, totaling more than 321 million. I am proud of our team for maintaining a leadership role in supporting our small business customers and the broader business community. PPP forgiveness is also progressing well, with 70% of the loans originated in 2020 already forgiven and paid on through June 30th. Assisting our customers with the forgiveness process has been a key priority for the bank as the local economy begins to recover and our business customers begin to pivot from surviving be thriving again. During the second quarter, with confidence that the national economic recovery was gaining strength and the local economy was on its way to recovery, we resumed our consumer lending programs on the mainland and in Hawaii. During the quarter, we purchased an auto loan portfolio from one of our established partners and also restarted other consumer programs on an ongoing full basis for consumer direct and indirect loans on the mainland and in Hawaii. While it was prudent for us to suspend our consumer programs last year, despite what we experienced in the economic downturn, both our mainland and Hawaii consumer portfolios performed well, augmented by the support from federal stimulus programs. With Hawaii's economic recovery expected to take direction, combined with our healthy loan pipeline, we anticipate strong loan growth for the second half of the year. On the deposit front, we saw a strong inflow of deposits with total core deposits increasing by $279 million, or about 5% sequential quarter growth. On a year-over-year basis, total core deposits increased by $705 million, or 13.8%. Additionally, our average cost of total deposits fell steady in the second quarter at just six basis points. Finally, I want to mention that as the Hawaii economy is recovering and consumer confidence is increasing, we are seeing positive trends in transactional fee income recovery, including investment services fees. I'll now turn the call over to David Morimoto, our Executive Vice President and Chief Financial Officer. David?
spk05: Thank you, Arnold. That income for the second quarter was $18.7 million, or $0.66 per diluted share. Return on average assets was 1.06%, and return on average equity was 13.56%. Net interest income for the second quarter was $52.1 million, which increased from the prior quarter primarily due to greater recognition of PPP fee income due to higher forgiveness. Net interest income included 7.9 million in PPP net interest income and net loan fees compared to 5.2 million in the prior quarter. At June 30th, unearned net PPP fees was 15.9 million. Net interest margin decreased to 3.16% compared to 3.19 in the prior quarter. The net interest margin normalized for PPP was 2.93% compared to 3.12% in the previous quarter. The normalized NIMS decrease was due to an acceleration of MBS premium amortization, excess balance sheet liquidity, and lower investment and loan yield. Investment MBS premium amortization increased by 900,000 sequential quarter due to an acceleration of prepayments in the second quarter. To mitigate the prepayment risk going forward, we executed a doubting coupon MBS bond swap totaling $175 million. We continue to deploy excess liquidity to the loan and investment portfolios to further support our net interest margins. Second quarter, other operating income remained relatively flat at $10.5 million. During the quarter, there was a decrease in mortgage banking income, which was offset by higher service charges and fees and bank home life insurance income. Other operating expense for the second quarter was $41.4 million compared to $37.8 million in the prior quarter, with much of the increase in the salaries and benefits line. The current quarter increase in salaries and benefits was primarily due to $1.2 million in non-recurring reductions in the prior quarter and $2.8 million in higher incentive compensation and commission accruals, strategic hires to drive forward performance, and annual merit increase. The efficiency ratio increased to 66.2% in the second quarter due to higher other operating expenses We expect the efficiency ratio to moderate and improve over time as we drive positive operating leverage based on our strategic investments. Net charge-offs in the second quarter totaled $0.8 million, with the majority of charge-offs coming from the consumer loan portfolio. At June 30th, our allowance for credit losses was $77.8 million, or 1.68% of outstanding loans excluding the PPP loans. In the second quarter, we recorded a $3.4 million credit to the provision for credit losses due to improvements in the economic forecast and our loan portfolio. The effective tax rate was 23.9% in the second quarter, and going forward, we expect the effective tax rate to be in the 24% to 26% range. Our capital position remains strong, and as Paul noted earlier, we resumed share repurchases this quarter with repurchases of 156,600 shares at a total cost of $4.3 million. We've also repurchased an additional 78,000 shares of common stock month-to-date through July 20th at an average cost of $24.98. Finally, our Board of Directors declared a quarterly cash dividend of 24 cents per share, which was consistent with the prior clause. Thanks, and now we'll return the call to Paul.
spk03: Thank you, David. In summary, Central Pacific has a solid financial credit, liquidity, and capital position, and we continue to make positive, forward progress on our core business strategy. Further, we remain committed to providing support to our employees, customers, and the community as we continue to progress through the economic recovery. On behalf of our management team and employees, thank you for your continued support and confidence in our organization. At this time, we'll be happy to address any questions you may have. Thank you. Back to you, Andrew.
spk02: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Andrew Leash with Piper Sandler. Please go ahead.
spk01: Hi, good morning, everyone. Just want to touch on loan growth here. It's nice to see the strength in the quarter. How large was the consumer auto purchase?
spk04: Yeah, hi, Andrew. This is Arnold. So, you know, in the quarter, we did have a – we did make an auto loan portfolio purchase of $36 million. And in addition to that, you know, as I mentioned in my earlier comments, we resumed, you know, both our in-school for Hawaii and for the mainland consumer.
spk01: Got it. Yeah, so some good organic growth even beyond that purchase. Okay, that's good to know. And then on the residential front, it looks like you guys retained more on the balance sheet. and so then had a resulting decrease on the mortgage banking income. What's the outlook? How's the pipeline for that business right now, and what's your plans right now as far as retaining more on the balance sheet versus selling? How should we be looking at portfolio growth versus gain-on-sale revenue?
spk04: Yeah, so, Andrew, on resi production for Q3, we're looking at the 250 to – $260 million range. We feel pretty confident on ready production for the second half of the year. We have several projects, great projects, that are completing in the early fourth quarter where that's going to supersize ready production. And to your question with regard to the mix between portfolioing and selling, You know, we're at the near term. We're purporting more of the loans just because we are, as you know, we are doing really well with our PPP forgiveness process. And, you know, we're getting a lot of resolving acceleration of fee income there. So we think that, you know, near term is opportunistic for us to just go ahead and put more in the portfolios.
spk01: Got it. Okay, that's really helpful. And of the remaining $435 million of PPP, any sense on timing on how long that's going to stick around?
spk04: Yeah, so, you know, as of June 30th, the PPP net ongoing fees were about $15.9 million. As far as forgiveness in the Q3, we're thinking we're going to be in the $160 million-ish range for forgiveness, so probably a few more quarters for us to get the PPP loan buffer down sheet.
spk01: Okay, great. Thanks for taking my questions on the loan portfolio. I'll step back. Thank you.
spk02: The next question comes from Jackie Bolin with KBW. Please go ahead.
spk06: Hi, everyone. Good morning. David, thank you. Thank you for the color on the premium amortization and then the bond swap. That's helpful. I'm just wondering what impact do you expect the swap itself to have on the forward yield within the margin?
spk05: Yeah, Jackie, the bonds that we purchased, the yields were in the 160 to 170 area. So, you know, really the intent of the purchase was to try to manage, better manage forward prepayment risk with the down in coupon trades. So, you know, what we're hoping for is, you know, the first quarter portfolio yield was closer to 190. It dropped down to 155 due to accelerated premium amortization. We're hoping to get the yield back to the 165, 170 area in the third quarter and going forward. So, you know, there is an opportunity to pick up about five basis points on the... PPP normalized NIM if we're successful in managing the investment portfolio.
spk06: Okay. So the swap is effective immediately?
spk05: Yeah. It was done in June. Okay.
spk06: I just know some of them can be delayed. So that's great. Thank you. And then, you know, I understand the comments related to mortgage and kind of taking advantage of some of the The PPP liquidity and adding additional production into the portfolio. I'm just wondering how you're thinking about other cash deployment. Number one, if you're seeing deposits continue to flow in. I mean, growth has just been incredible over the past year and a half. And number two, what you plan to do with all those funds.
spk05: Yeah, I'll start, Jackie. So obviously, the first choice always is funding net loan growth. And as Arnold mentioned, we do have a nice pipeline, and we are expecting stronger growth in the second half of the year than we experienced in the first half. And like we said, second quarter, we felt good about the growth there. But we do expect things to accelerate in the back half of the year. So that would be the first option. But again, to the extent we find ourselves with excess liquidity, we are open to continuing to increase the investment portfolio. I think we're about at 20% of assets. So there still is room to add assets there.
spk06: Okay. Would you ever look to, I know that the percent of the Hawaii portfolio versus the mainland portfolio can fluctuate in any given quarter. Given the excess liquidity, would you ever look to bring the mainland portfolio up a bit? And I'm referring to loan purchases. Or are you pretty happy with where that's at and you'll look more to securities?
spk05: Yeah. I think what we've guided to, Jackie, is roughly 10% to 15% of the total portfolio to be comprised of mainland. So we're still in that range, and that's still the current thought process. But obviously, to the extent that we find ourselves with excess liquidity and there's better risk-reward opportunities on the mainland, I think it would be prudent for us to take a look at those.
spk06: Okay. So I would guess then, is it fair to say that that balance and everything will largely depend on organic lending opportunities in Hawaii?
spk05: Yeah.
spk06: Okay. Great. Thank you.
spk05: Thanks, Jackie.
spk02: Again, if you have a question, please press star, then 1. The next question comes from Laurie Hunziker with CompassPoint. Please go ahead.
spk07: Hi, thanks. Good morning. I just wanted to go back to Andrew's question around auto. Can you help us think about the $36 million that you purchased What is the split between Hawaii and the U.S.? What's the FICO? And then I think that's bringing your auto book to about 300 million, but if you have an exact number there and then what the split there is between Hawaii and mainland and then also what the FICO is running and just how big potentially you would grow that book. Thanks.
spk03: Hi, Laurie. This is Paul. We might have to get back to you on some of those details. Arnold, do you have any color on that?
spk04: I think what I can say to you, Laurie, is that the mainland economy recovered quicker than Hawaii. And so as we started to resume our consumer programs, our consumer lending programs, we obviously started with Mainland, and now we're moving very quickly to restart the Hawaii programs. So I'd say that my expectation is the split between Hawaii and mainland consumer growth is going to normalize as we move to resume Hawaii consumer lending in the coming quarters.
spk07: Yeah, go ahead.
spk05: Sorry, Laurie. Just to add, you're right. The total auto portfolio is just under $300 million. It's $290 million. and 210 of that is in Hawaii, and roughly 80 is on the mainland. All of those numbers were as of 6.30.
spk07: Great. And then do you have a FICO score?
spk05: I'll circle back with you on that.
spk08: Actually, Dari, this is Anna. For the mainland portfolio, our weighted average FICO was 757.
spk07: Okay, great. And the new purchases you're doing, are they right around the same FICO?
spk08: Yes. It's about $750.
spk07: Okay. Okay. Okay, great. And then I guess just generally thinking about how big you would potentially grow that book. Any thoughts there? So that's round number 6% of loans, but how big would you like to take that?
spk04: So, Laurie, this is Arnold. So right now the, you know, the main income super loan portfolio is about $213 million or about 4%. of our total loan portfolio. And it's a good split mix between consumer, unsecured, and auto. And as far as the growth, I think we look at overall percentage, mainland versus Hawaii, the 10 to 15% range, as David mentioned. My expectation is that You know, we're going to grow more in Hawaii, as David mentioned, and not as much on the mainland. You know, so I hope that helps you a little bit.
spk07: It does. And I guess just to put you guys on the spot a little bit, I just want to make sure. You're not doing – the plan is not to purchase anything subprime. Is that correct? That's correct. Okay. Okay. And then I just wondered, and I love that you are an outsized PPP lender. I think that's great. But as we look forward to 2022, and that's not in there that, as you mentioned, you know, there are 15.9 million of unamortized fees. As we're kind of putting all of that together, your net interest income run rate is going to be, I don't know, 45, 46 million per quarter. Am I thinking about that the right way? That's taking your margin down to somewhere in the 270, 275 range, even assuming a pickup. Or am I missing something? Or maybe the better question is, can you help us think a little bit about 2022 on the margin side? So, yeah.
spk05: So if I understand the question correctly, Laurie, I think what you're saying is once we get past PPP fee income, you know, what do we expect on net interest income and net interest margin, correct? Correct. Yeah. Yeah, you know, I think the plan is, you know, what we're doing is we realized that we were an outsized PPP lender, Obviously a good thing. And we realize we're benefiting from this non-recurring fee income in 2021. And what we're trying to do is we're trying to use that fee income to strategically invest to provide positive operating leverage in future periods starting in 2022. And we're trying to replace that income. So the expectation in 2022 is that over time, maybe not the first quarter of 2022, but over time, we get net interest income back into the $50 million range. So it doesn't drop back down to $45 million.
spk03: Yeah. Hi, Lori. This is Paul. So as Arnold mentioned earlier as well, we're at seeing a lot of success in the purchase mortgage area. You know, we've been guiding to mid to high single digit growth, you know, for the balance of the year for 2021. And with some of the portfolioing and, you know, trying to leverage the PPP fee income this year, you know, we feel that next year, in addition to some of the growth that we'll have for the balance of the year plus, You know, our record of driving more growth, you know, that will be driving net interest income in 2022.
spk07: Great. Thank you very much.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Paul Yonomine, CEO, for any closing remarks.
spk03: Thank you very much for participating in our earnings call for the second quarter of 2021. We look forward to future opportunities to update you on our progress. Thank you.
spk02: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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