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spk06: 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. 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 Ms. Dana Matsumoto, Group Senior Vice President and Director of Finance and Accounting. Please go ahead.
spk05: 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 Arnold Martinez, President and Chief Executive Officer, David Borimoto, 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 two of our presentation. And now, I'll turn the call over to our President and CEO, Arnold Martinez.
spk03: Thank you, Dana. Aloha, everyone. We appreciate your interest in Central Pacific Financial Corp. As we normally do, I'll start with an update on the Hawaiian 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, totaling $1.69 billion in May. an increase of 19% compared to the same month in 2019. Hotels in Hawaii continue to perform well, with total statewide hotel occupancy in June at 77%, up 1% from a year ago, and an average daily rate of $389, down 2% from a year ago. Hawaii's seasonally adjusted unemployment rate continued to decline to 3% in June and is outperforming the national unemployment rate of 3.6%. Year-over-year statewide non-farm payroll increased by 17,000 jobs, or 2.7%. Labor market conditions are overall quite favorable in Hawaii. Real estate values in Hawaii remains a key strength. The O'ahu median single-family home price continues to be around $1.1 million, and the median condo sales price was $510,000 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 construction job counts are up 5%. Government contracts awarded in Hawaii total $3.2 billion in the first quarter of 2023, which included a significant $2.8 billion award to Hawaii firms for the Pearl Harbor Naval Shipyard Replacement Project. Overall, the Hawaii market continues to have 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-based. CPB'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 a strong focus on liquidity, and while some deposit makeshift continues, we were successful in growing total deposits. Our teams remain very focused on generating relationship-based deposits, and we see upside opportunities 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, Arnold.
spk00: Turning to our earnings results, net income for the second quarter was 14.5 million, or 53 cents per diluted share. Return on average assets was 0.78%. Return on average equity was 12.12%. And our efficiency ratio was 63.17%. Our balance sheet and liquidity position strengthened in the second quarter with our loan and investment portfolios modestly declining, growth in the deposit portfolio, and a 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 and ensuring appropriate pricing and structure on 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 will 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. PPB continues to benefit from a granular and stable core deposit portfolio. Deposit flows and activity have 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 decreased 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 2.96% 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 $0.6 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 23,750 shares at a total cost of $0.4 million. or an average cost per share of $14.92. Our board of directors declared a quarterly cash dividend of 26 cents per share, which will be payable on September 15th to shareholders of record on August 31st. 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.
spk04: Thank you, David. We continue to have strong asset quality with non-performing assets at 15 basis points of total assets and criticized loans at 1.3% of total loans. While we saw an uptick in non-performing assets, it was related to two Hawaii construction loans to a single borrower, which were 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 30th, 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 3.5% of total loans and low retail exposure at 4.5% 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 levels for the mainland consumer portfolio remain within our original expectations, and we currently believe these higher loss levels are peaking with a leveling off thereafter in subsequent quarters. Our allowance for credit losses was $63.8 million or 1.16% 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 $0.2 million provision for unfunded commitments or 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. Arnold?
spk03: 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 who work tirelessly 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.
spk06: Thank you. Ladies and gentlemen, if you have a question, please press star 1 on your telephone keypad. Your first question comes from the line of Andrew Leisch with Piper Sandler. Please go ahead.
spk02: Hey, good morning, everyone. Good morning, Andrew. Hey, Andrew. I'd just like to talk a little bit on loan growth here. So the pay down or the plan decline in the consumer mainland, is that like a normal pace that we should be assuming every quarter?
spk03: Andrew, this is Arnold. Yeah, basically we're looking at $40 to $50 million per quarter.
spk02: Got it. Okay. And then how's the pipeline for the rest of the portfolio turning? Can that be offset with what you're seeing in the local economy? 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? Is production going to be strong enough to offset those paydowns?
spk03: Andrew, the pipeline continues to be pretty robust, but we're being more selective in what we're doing given the operating environment. We'll make those decisions on asset growth just based on overall deposit levels and deposit growth as we move forward in the coming quarters.
spk02: Got it. Okay. Then shifting gears to the margin came in here a bit to 90s. David, how do you think that trends here going forward? There's certainly been some pressures on funding costs. And maybe if some of these higher rate loans pay down, how much more margin pressure do you think you're going to see?
spk00: Yeah. Hey, Andrew. We're monitoring closely the second derivative, the rate of change in 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're pleased with the DDA balances staying roughly stable sequential quarter. So again, we're hoping, we're cautiously optimistic that the second derivative rate of changes will start to moderate and we can see some moderation in the pressure on the net interest margin. So for the next couple quarters, the slightly conservative guide is 280 to 290 on the NIM. Got it.
spk02: You said the cycle to date into sparing deposit beta is in line with your expectations. Have your expectations changed on where you think that's going to peak?
spk00: Yeah, 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 peaks at 30% rather than 25%.
spk02: Got it. All right. Thank you for taking the questions. I'll step back. Thanks, Andrew. Thanks, Andrew.
spk06: Your next question comes from the line of David Feaster with Raymond James. Please go ahead.
spk01: Hi. Good morning, everybody. Good morning, David. Maybe just staying on the deposit front, I was hoping you could touch on the flows that you guys have seen. You know, if I – I'd 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 end of period, it seems like that might be the case for y'all as well. But I'm just curious, you know, how not interest bearing balances have trended throughout the quarter. Similarly, how deposit costs trended and maybe what, what are you seeing? What's the early read on core deposits in the third quarter?
spk00: Hey, David. It's David. Yeah, as we mentioned, we started to see some moderation of deposit flows. So, obviously, the whole entire industry has been challenged with mix shift and 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. And on deposit flows, I think what we generally see is as we come off quarter end, there's a little bit of runoff, and then we make it up as we approach the subsequent quarter end. And those flows continue to occur.
spk01: Okay. And then 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'm just curious how you think... You know, just how you think about deploying the liquidity. Is this a normalized level or what drove that? And then, you know, just plans on, you know, driving core deposit growth going forward.
spk00: Yeah, yeah, David. Yeah, there was a little bit of a liquidity bill during the quarter and that was purposeful. I think that's probably the appropriate amount of unbalanced sheet liquidity in the current environment. So I wouldn't anticipate it growing significantly more from there. And then on just net interest income, yeah, we realize we got a little bit of a headwind from the mainland consumer portfolio. But as Arnold mentioned, we're know looking for opportunities um you know going forward we we have we have a healthy loan pipeline and um you know we'll we'll lean into that as we feel more comfortable with the deposit balances and where are you where are you seeing i'm sorry go ahead oh david sorry this is arnold let me just add that you know our continued focus on the small business market which is you know our
spk03: one of our pillars is really helping us drive deposit growth. So the team's doing a really good job in focusing on that segment and continuing to build new relationships that bring in new core deposits.
spk01: 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? 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?
spk03: Yeah, so it's, you know, your observation is a good one. That's exactly how we're, you know, we're seeing things, you know, with regard to having a healthy pipeline but being very selective in, you know, risk-adjusted returns. Maybe David can comment on, you know, some of the segments that we're looking at that we believe, you know, are good risk, can get us good risk-adjusted returns in the current operating environment.
spk00: Yeah, thanks, Arnold. Yeah, David, the small business, the CNI area is obviously a good opportunity. You know, you get decent loan yields there, generally bank base rate or prime, you know, floating type of rates. And then as Arnold mentioned, they also bring in core deposits. So that area continues to be a focus on construction, There continues to be a decent amount of construction activity within the state of Hawaii. And again, there you have floating rates either generally off of sulfur with decent margins, decent spreads. So those are some of the areas that we're focused on.
spk01: Okay. That makes sense. And then last one for 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, we've got revenue headwinds and cost savings, but at the same time, you know, trying to continue to invest in the franchise because 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.
spk00: Yeah, David, that's really what it is, right? It's a it's a balancing game, right? You know, we have loan opportunities, but we need to balance that with, you know, the availability of deposits. So we're balancing that to help manage the revenue side. And then, you know, to the extent that we continue to see revenue headwinds, we will continue to manage expenses very prudently. But as you say, we need to continue to invest in key areas, and we continue to do that. So it is definitely a balancing game between revenue and expenses, but we're highly focused on getting back to positive operating leverage.
spk01: Okay, that's helpful. Do you think this kind of $40 million run rate is a good core expense run rate?
spk00: yeah i i think you know i think 39 to 40 and um you know with with our commitment to be nimble so to the extent that the operating environment remains difficult we'll we'll need to manage expenses appropriately and david this is arnold let me just add that you know as we've mentioned in previous quarters we we are um very focused on on uh harvesting
spk03: more of the investment that we made in technology. So there is traction there. We are making progress in being able to automate and to focus on building out a more efficient back office system and processes. Okay.
spk01: That's helpful. Thanks, everybody.
spk06: Your next question is a follow-up from Andrew Leitch of Piper Sandler. Please go ahead.
spk02: Hey, everyone. Thanks for taking the follow-up here. Just on the non-interest income side, down about 5% from prior quarter. I think some of those were outsized, though, some of those line items. But is this around $10.5 million the right place to be thinking about going forward?
spk00: Yeah, the guidance there, Andrew, would have been 10 to 11. So you're spot on. Got it.
spk02: Great. You've covered everything else that I've wanted to ask. Thanks so much.
spk03: Thank you, Andrew.
spk06: There are no further questions at this time. I will turn the call to Arnold Martinez for closing remarks.
spk03: 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.
spk06: This concludes today's conference call. Thank you for joining. You may now disconnect your lines.
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