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spk01: Thank you for standing by, and welcome to the Central Pacific Financial Corporation Third 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.cdb.bank. I'd like to turn the call over to Mr. David Morimoto, Executive Vice President, Chief Financial Officer. Please go ahead.
spk04: Thank you, Betsy. And thank you all for joining us as we review the financial results of the third quarter of 2021 for Central Pacific Financial Corp. With me this morning are Paul Yonamine, Chairman and Chief Executive Officer, Catherine Ngo, 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 our Chairman and CEO, Paul Yonemune.
spk05: Thank you, David, and good morning, everyone. As always, we appreciate your interest in Central Pacific Financial Corp. I'd like to comment on some exciting news we sent out yesterday regarding some key executive management promotions to be effective January 1, 2022. They are as follows. Catherine Ngo, currently president of CPF and president and CEO of CPB, will become executive vice chair of the bank and the holding company. Arnold Martinez, currently EVP and chief banking officer, will be promoted to president and Chief Operating Officer of the bank and the holding company. David Morimoto, currently Executive Vice President and CFO, will be promoted to Senior Executive Vice President and CFO of the bank and holding company. And Kevin Dahlstrom, currently EVP and Chief Marketing Officer, will become EVP and Chief Strategy Officer of the bank and holding company. Catherine will continue to serve on the CPB Executive Committee responsible for the management of the bank. Working collaboratively with Catherine and myself, all three of the individuals promoted have played a key role in our financial success the past several years, and I am pleased that they will continue to be part of the team. Our focus on our four key business pillars will continue as before. These include residential lending, small business, Japan market development, and digital expansion. We will also continue to be active in the commercial real estate, CNI, and consumer segments with a focus on driving digital solutions to provide an exceptional customer experience. Our transformation to become a digital first bank is underscored with the upcoming launch of Shaka Checking, Hawaii's first and only digital bank account from a local financial institution. We are preceding the November 8th launch with the state's largest ever social media influencer marketing campaign. We have over 2,000 people on the wait list who are looking to be the first to sign up for Shaka. Product benefits include the opportunity to get your paycheck up to two days early, a reimbursement of ATM fees up to $20 a month, and a higher-than-average return on funds in the account. We feel this product and other digital products like it will help to galvanize our position as the digital banking leader in Hawaii. We will, however, continue to leverage our branch network updating and modernizing our facilities, and investing in the talent required to deliver these products to market with the strong customer service we are known for. Like the rest of the country, the state of Hawaii experienced a spike in COVID case counts in August and September related to the Delta variant. To address this, our state put in place certain measures to curb further spread of the virus And we are pleased the state has been able to get the Delta variant under control as we have seen a rapid decline in case counts in recent weeks. Given this positive trend, earlier this month, the governor implemented the easing of restrictions on gatherings and events on Oahu. And last week, the governor announced welcoming back fully vaccinated domestic travelers for business or pleasure starting November 1st. Our statewide vaccination rate has risen to over 70% as many employers in the state have mandated vaccinations to protect their employees, their customers, and the community in general. With these positive developments, local economists are projecting that visitor numbers will once again continue to rise and Hawaii will have a strong holiday travel season. The state of Hawaii unemployment rate declined to 6.6% in the month of September and is forecasted by the Department of Business, Economic Development, and Tourism to decline further to 6.4% in 2022. The housing market in Hawaii remains very hot with our median single-family home price surpassing the $1 million mark this past quarter. Overall, the Hawaii economy remains on track for recovery. I'd like to now turn the call over to Catherine Null, our president. Catherine?
spk07: Catherine Null Thank you, Paul. Our financial results for the third quarter were very strong, with quarterly pre-tax income again reaching a new record high. Our core loan growth picked up as anticipated, and we are on track for a strong second half of the year. Our successful PPP effort continues to deliver strong fee income as forgiveness continues. Our asset quality continues to be strong with non-performing assets at just 10 basis points of total assets as of September 30th. Additionally, total classified assets were less than 1% of total loans. Nearly all of the loans we granted COVID-related payment deferrals have returned to pay status. As of September 30th, we have just $1.3 million in loans remaining on deferral. Finally, net charge-offs declined to just $0.2 million in the third quarter. Shifting to our employees, we are very pleased that 95% of our employees are now fully vaccinated against COVID-19. To protect our employees and customers, we started weekly COVID testing in September with a small group of unvaccinated employees. We also offered a $500 cash incentive for unvaccinated employees who got vaccinated after September 1st. I'd like now to turn the call over to Arnold Martinez, our Chief Banking Officer. Arnold?
spk02: Thank you, Catherine. In the third quarter, our par loan portfolio increased by $184 million, or 4% sequential quarter, which was offset by PPP forgiveness paydowns of $216 million. Year over year, our core loan portfolio increased by 7%. The core loan growth was broad-based across all loan categories except construction. Approximately $58 million, or 32%, of the quarter's loan growth came from mainland consumer loans. Our residential mortgage production continued to be very strong, with total production in the third quarter of nearly $245 million and total net portfolio growth in residential mortgage and home equity of $72 million from the previous quarter. PPP forgiveness continues to progress well, with 93% of the loan balances originated in 2020 and 40% of the balances originated in 2021 already forgiven and paid down through September 30th. During the third quarter, we purchased an auto loan portfolio for about $20 million from one of our mainland auto loan origination partners. and we continued consumer unsecured purchases on an ongoing flow basis based on our established credit guidelines. The purchase during the quarter had a weighted average FICO score of 750. As of September 30th, total mainland consumer unsecured and auto purchase loans were approximately 5% of total loans. Both our mainland and Hawaii consumer portfolios continue to perform well. Our target range for total mainland loans, including commercial and consumer, is around 15% of total loans. With Hawaii's steady economic recovery, we continue to see a healthy loan pipeline in all loan product categories. As such, we anticipate ending the year with strong loan growth. On the deposit front, we continue to see strong inflow of deposits, with total core deposits increasing by $267 million or 4.6% sequential quarter growth. On a year-over-year basis, total core deposits increased by $1.1 billion, or 21.6%. Additionally, our average cost of total deposits dropped in the third quarter to just five basis points. Finally, as the Hawaii economy continues to recover and investment activity increases, we are focused and prepared to help our customers meet their financial objectives. I'll now turn the call over to David Morimoto, our Chief Financial Officer. David.
spk04: Thank you, Arnold. Net income for the third quarter was $20.8 million, or $0.74 per diluted share, an increase of $2.1 million, or $0.08 per diluted share, from the prior quarter. Return on average assets in the third quarter was 1.15%, and return on average equity was 14.83%. Net interest income for the third quarter was $56.1 million, which increased by $4 million from the prior quarter due to core loan and investment portfolio growth, loan and investment yield improvements, and slightly higher PPP fee recognition. Net interest income included $8.6 million in PPP net interest income and net loan fees compared to $7.9 million in the prior quarter. At September 30th, unearned net PPP fees was $7.9 million. The net interest margin increased to 3.31 percent in the third quarter compared to 3.16 percent in the previous quarter. The NIM normalized for PPP was 2.96 percent in the third quarter compared to 2.93 in the prior quarter. The normalized NIM increase was driven by the increase in the investment portfolio yield, partially offset by an increase in excess balance sheet liquidity. Third quarter other operating income remained relatively flat at $10.3 million. During the quarter, there was a decrease in bank-owned life insurance income of $0.7 million, driven by market fluctuations. This was offset by higher service charges and fees. Other operating expense for the third quarter was $41.3 million, which was in line with the prior quarter. The efficiency ratio decreased to 62.3% in the third quarter due to higher net interest income. We remain focused on driving positive operating leverage with our strategic investments to continue to improve our efficiencies. As part of our ongoing efficiency initiatives, we recently announced the consolidation of our Kapalama branch into a nearby branch in Honolulu at the end of this year. We expect annual future savings of approximately $800,000 from this consolidation. With the continued migration of transactions to digital channels, we will continue to evaluate our branch network. and consider both consolidation as well as expansion opportunities in 2022. At September 30th, our allowance for credit losses was $74.6 million, or 1.55% of outstanding loans, excluding PPP loans. In the third quarter, we recorded a $2.6 million credit to the provision for credit losses due to improvements in the economic forecasts and our loan portfolio. The effective tax rate was 24.7% in the third quarter. Going forward, we continue to expect the effective tax rate to be in the 24 to 26% range. Our capital position remains strong, and during the third quarter, we repurchased 234,700 shares at a total cost of $5.9 million. or an average cost per share of $25.12. Finally, on October 26, our board of directors declared a quarterly cash dividend of 25 cents per share, which was an increase of one cent or 4.2% from the previous quarter. And now I'll return the call to Paul.
spk05: Thank you, David. In summary, Central Pacific had a solid third quarter. We will continue to leverage our investments and innovate to progress towards our strategic targets. At the same time, we maintained our strong credit, liquidity, and capital position. Further, we remain committed to providing support to our employees, customers, and the community as we continue to progress through the economic recovery. Finally, and perhaps more importantly, we approach the future with a highly motivated management team, with optimism and a sense of purpose. This team worked together to lead the implementation of RISE 2020, a multifaceted initiative designed to strengthen our position in the market by investing in our branches, ATMs, and our digital product offerings, as well as continued focus on our four primary lines of business. The results of these efforts are becoming increasingly apparent. With this team, we are well positioned to build on our past accomplishments and success as we continue to focus on service and value to customers, employees, and shareholders. 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. Over to you, Betsy.
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are 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 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from Andrew Leash of Piper Sandler. Please go ahead.
spk03: Hi, good morning, and congratulations on the promotions. Thanks. Just wanted to ask about the margin and the securities purchases here. With the recent rise in the 10-year and the steeper curve, does this increase your appetite to add more to the securities books?
spk04: Hey, Andrew. It's David. Yeah, you know, obviously with the recent rise in the 10-year, you know, we are looking to continue to redeploy excess liquidity into both loan growth and potentially continue to grow the investment portfolio. It has been nice to see that, you know, mortgage spreads have not come in to totally offset the increase in in treasuries. So we find the agency MBS market quite attractive right now.
spk03: Got it. And then can you just remind us what you purchased during the quarter, what sort of yields you were getting?
spk04: On the investments, new purchase yields was a weighted average 170, which compares to the current portfolio yield of roughly 185. So we're getting pretty close to where things are at parity.
spk03: Got it. Very helpful. And then just turning to loan growth, really good color there on what you got in the quarter. But on the CNI, you had really nice increases in both Hawaii and on the mainland. What's driving the growth in those two markets?
spk02: Hi, this is Arnold. So, you know, we've been very lucky to have some of our new talent that we've acquired. coming over to the bank, as well as our team in their business development efforts. So we've made a lot of great traction in building a nice, strong pipeline in those areas. You know, I want to say that, you know, we're really proud of the efforts in the third quarter. We had solid loan growth in all loan categories, except for a modest decline in construction. But that really was more because of timing on paydowns on construction loans. And so, yeah, we're really pleased with the efforts of the team.
spk03: Got it. That's very helpful. I'll step back. Thanks for taking the questions.
spk01: The next question comes from David Feaster with Raymond James. Please go ahead.
spk06: Hi. Good morning, everybody. Hi, David.
spk07: Good morning.
spk06: I just kind of wanted to follow up on that last line of questioning and just kind of get your sense on thoughts on the organic growth outlook, just given the hires that you've made and the strength of the pipeline and the production that you're generating. We kind of talked high single digits. You've knocked that out of the park. Just curious your thoughts on growth going forward and expectations for production as well.
spk02: Yeah, thanks a lot. This is Arnold. As we move into Q4, our pipeline looks pretty strong across all loan categories. I think the improving economic conditions in Hawaii is going to help to build our pipeline as we move forward. Looking at Q4, CRE is resi and consumer will probably be the drivers for us. For resi, we expect to have somewhat of a supercharged quarter. We're looking at production in the $300 million to $320 million range, really augmented by a few high-rise projects that have completed, in which we're the lead takeout lender. And then with regard to how that translates to gain on sale, you know, we're looking at 1.2 to 1.5 million range in Q4. And, you know, as we start to shift back to a normal mix between sale and portfolio of loans, I think, you know, I've mentioned in the past quarter and past quarters that, you know, we've, because of the PPP fee income, we've been opportunistic about putting more of the RESI loans in the portfolio, but we're starting to see a shift in that as we move forward in the future. Okay.
spk06: No, that's great, Collin. And then just maybe touching on expenses, appreciate the detail on the branch closure. Could you maybe just talk about some of the puts and takes as we look forward, just balancing the continued investments that you have with the cost-saving initiatives that we've talked about, just What do you think is a good run rate going forward as we head into 22 and just some of the, you know, puts and takes within that line?
spk04: Hey, David, it's David. Right now, we're sticking with the quarterly guidance of $40 to $42 million on total on the operating expense. We think that's a good run rate. Okay.
spk06: Okay. And then just maybe on the deposit front, you know, it sounds like this, the new, new mobile platform, the Shaka initiative, and then you've got the Japan initiative. Just, it sounds like the early read on Shaka is pretty good with 2000 folks that are, you know, already trying to sign up. Just curious what you're seeing on the Japan side and then expectations for this and deposit growth going forward.
spk05: Thanks, David. This is Paul Yanamine. You know, interestingly, even during the pandemic, when the Japanese can't travel to Hawaii, really, because they have their quarantine measures still in place, we've seen a rise on deposits from our Japanese customers. So we're, you know, quite optimistic that once travel resumes, which will probably be hopefully early next year, you know, it's still really difficult to tell. that we'll see a bump up on more deposits coming into Hawaii. We plan to very proactively reconnect with a lot of our Japanese customers, prospects, to see if we can continue building our deposit base as well. As far as the Shaka checking account is concerned, we started our social media program just three weeks ago We're quite pleased that there's over 2,000 people on the wait list. You know, some of the challenges in front of us is to, you know, once we launch Shaka Checking on November 8th, is to convert them into customers, which we feel quite optimistic about. But we will continue doing a lot of proactive marketing to try and increase more new customers, you know, with that platform.
spk02: Got it. That's helpful. Thanks, everybody. Thanks, Stephen.
spk01: As a reminder, if you have a question, please press star then 1 to be joined into the queue. The next question comes from Laurie Hunziker with CompassPoint. Please go ahead.
spk08: Yeah, hi. Thanks. Good morning. Just hoping that you could help us think about net interest margin a little bit. Obviously, PPP impact was outsized this quarter and helpful. There's 7.9 million unamortized fees remaining that you provided. So if we think about most of that happening in the fourth quarter, into the first quarter, how should we think about what margin is looking like as we kind of move past that? And, you know, specifically, too, you know, any comments? I mean, your cost of deposits is remarkably low. Your core deposits, XDD, is sitting at three basis points. There's just no more movement there. So, I guess, how should we be putting everything together? Any help, any guidance you can give us would be appreciated.
spk04: Sure. Hey, Laurie, it's Adira. So when you normalize for PPP, the core NIM was 296 in the third quarter, which was a three basis point expansion from the second quarter. And what we're guiding to for the next few quarters is a NIM in the 290 to 3% range. So we're hoping that the NIM is, you know, relatively at its trough, and we can start to hopefully see increases as we roll into 2022. But, you know, the sequential quarter NIM, the three basis points expansion, the majority of that came from our bond swaps that we executed in the investment portfolio. So we were successful in doing the bond swaps, the down in coupon MBS bond swaps, which brought the premium amortization under control. So that was the majority of the sequential quarter increase. So loan and deposit, core loan and deposit yields were relatively flattish sequential quarter, which obviously is a good thing. And then now if we can drive asset yields up from here, we'll see some margin expansion.
spk08: Got it. Got it. Okay, thanks. And then I guess along those lines with your auto purchasing, in the $20 million book that you purchased, when in the quarter was that? Was that early, late, middle? Or maybe more broadly, if you don't have that right at your fingertips, do you have the auto information, just, you know, what's Hawaii, what's mainland, and just generally how we should think about where that book is going to grow?
spk02: Yeah, Laurie, this is Arnold. Yeah, I don't know. I don't have that information right at hand on when that auto purchase closed, but we can get back to you on that. That's not a problem. As far as the mix and the strategy, I mean, right now we have basically both auto loans and unsecured on the mainland. And I believe it's like a 40-60 split, 40 auto, 60 unsecured consumer. As far as the strategy is concerned, we look at the mainland kind of more holistically. from a perspective of our total loan portfolio. So we've always looked at about a 15% mainland to total loan portfolio. And we try to manage the consumer and the CRE and the SNIC exposure on the mainland. And so that's kind of, you know, how we've looked at it. And I can assure you that we also have a fairly disciplined risk management team process behind all of this. You know, we've been doing this, as you know, for a while. And, you know, between our line of business management as well as our credit management, you know, Anna Hu and our credit folks, we pretty have a pretty strong grasp on this. I think, as I mentioned earlier, you know, the Hawaii economy is trailing the mainland. And so it was opportunistic for us, as we announced earlier in the second quarter, I believe, that when we restarted our consumer loan programs, that it was opportunistic for us to kind of start that movement on the mainland. And it's actually performed very well for us, and we're very, very pleased with the overall efforts and the performance of those portfolios.
spk08: Great. Thanks. That's helpful. And just one more question, I guess maybe for you as well as David. So your reserves to loans are now 148 or 155 X PPP. Just any guidance you can give us there on where you think that eventual number settles down? I mean, as we're trying to model in provision and obviously your credit is looking pristine, how should we be thinking about where reserves to loans would most likely settle?
spk04: Yeah, Laurie, it's David. Laurie, so the ACL and the ACL coverage ratio, as we've stated previously, is going to be consistently, directionally consistent with the net impact of the economic forecasts, net charge-offs, loan migration, and net loan growth. But what I think we're seeing across the industry and what, you know, we're expecting here at CPF is that the ACL to total loans coverage ratio will gradually revert back to the day one CISO coverage ratio, which was in the 115 to 120 of loans area. Great. That's helpful.
spk08: Thank you so much.
spk04: Thanks, Laurie.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Paul Yonamine for any closing remarks.
spk05: Thanks, Betsy. Thank you very much, everyone, for participating in our earnings call for the third quarter of 2021. We look forward to future opportunities to update you on our progress. Thank you.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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