Central Pacific Financial Corp
NYSE:CPF
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Central Pacific Financial Corp
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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. Dayna Matsumoto, Group Senior Vice President and Director of Finance and Accounting. Please go ahead.
Thank you, Sarah, and thank you all for joining us as we review the financial results of the second quarter of 2023 for Central Pacific Financial Corp. With me this morning are Arnold Martines, 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 two of our presentation.
And now I'll turn the call over to our President and CEO, Arnold Martines.
Thank you, Dayna. Hello, everyone. We appreciate your interest in Central Pacific Financial Corp. As we normally do, I'll start with an update on the Hawaii market, then I'll turn it over to the team to provide additional detail and insights on our financial and credit metrics as well as other key updates.
The Hawaii tourism industry continues to be well supported by U.S. visitors with total visitor arrivals just slightly under pre-pandemic levels. Visitor spending continues to be robust, 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 state-wide 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 state-wide non-foreign 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 Oahu 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 totaled $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 a healthier outlook compared to the rest of the nation and is projected to avoid a recession.
The Hawaii banking industry is also differentiated from the national industry with a high-value deposit franchise that is predominantly relationship 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 US 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 mix shift continues, we were successful in growing total deposits. Our teams remain very focused on generating relationship based deposits and we see upside opportunity to continue to grow our market share. At the same time, we continue to prudently make asset growth decisions with a strong risk management focus.
I'll now turn the call over to David Morimoto, our Chief Financial Officer. David?
Thank you, Arnold. Turning to our earnings results. Net income for the second quarter was $14.5 million or $0.53 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 runoff 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. CPB 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 $0.26 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.
Thank you, David. We continue to have strong asset quality with nonperforming assets at 15 basis points of total assets and criticized loans at 1.3% of total loans. While we saw an uptick in nonperforming 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 US 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 the 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, our 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?
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 worked 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.
Thank you. [Operator Instructions] Your first question comes from the line of Andrew Liesch with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning, Andrew.
Hey, Andrew.
Good morning.
So I'd just like to talk a little bit on loan growth here. So the pay down in the -- or the planned decline in the consumer Mainland, is that like a normal pace that we should be assuming every quarter?
Andrew, this is Arnold. Yes, basically, we're looking at $40 million to $50 million per quarter.
Got it. Okay. And then how is the pipeline for the rest of the portfolio decline? 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 you think loan growth shakes out? Is it going to be -- is production going to be strong enough to offset those pay downs?
Yes. 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.
Got it. Okay. Then shifting gears to the margin came in here bit 2.90s, I guess. David, how do you think that trends here going forward? There's certainly been some pressures on funding costs and maybe if you're -- some of these higher rate loans pay down. Because the real -- how much more margin pressure do you think you're going to see?
Yes. Hey, Andrew, we're monitoring closely the second derivative, right? 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 are 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 of quarters, the slightly conservative guide is 2.80% to 2.90% on the NIM.
Got it. And you had the cycle-to-date interest-bearing deposit betas in line with your expectations. Have your expectations changed on where you think that's going to peak?
Yes. I think in the past, we thought it was going to peak above where it is today, Andrew. I think now with everything that's transpired maybe it peaks at 30% rather than 25%.
Got it. All right. Thank you for taking the questions. I'll step back.
Thanks, Andrew.
Thanks, Andrew.
Your next question comes from the line of David Feaster with Raymond James. Please go ahead.
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. If 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 you all as well. But I'm just curious how noninterest-bearing balances have trended throughout the quarter? Similarly, how deposit costs trended? And maybe what are you seeing -- what's the early read on core deposits in the third quarter?
Hey, David, it's David. Yes, as we mentioned, we started to see some moderation of deposit flows. So obviously, the 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.
And then just thinking about the move that you guys made in the quarter and the liquidity build with the whole idea that we've got a $40 million or $50 million headwinds on loan growth from the consumer front. And again, you've built deposits and we have the excess liquidity. I'm just curious how you think -- just how you think about deploying the liquidity, is this a normalized level? Or what drove that? And then just plans on driving core deposit growth going forward?
Yes, David. Yes, there was a little bit of a liquidity build during the quarter, and that was purposeful. I think that's probably the appropriate amount of on-balance sheet liquidity in the current environment. So I wouldn't anticipate it growing significantly more from there. And then on just net interest income, yes, we realize we've got a little bit of a headwind from the Mainland consumer portfolio. But as Arnold mentioned, we're looking for opportunities going forward. We have -- we have a healthy loan pipeline and we'll lean into that as we feel more comfortable with the deposit balances.
And where are you still -- where have you seen -- I'm sorry, go ahead.
David, sorry, this is Arnold. Let me just add that our continued focus on the small business market, which is our -- one of our pillars is really helping us drive deposit growth. So the team is doing a really good job in focusing on that segment and continuing to build new relationships that bring in new core deposits.
Okay. That's helpful. And just kind of hearing your commentary, it sounds like the slowdown in growth was really, obviously, excluding the consumer stuff. The slowdown in originations was maybe a bit more intentional as you've been selective rather than a slowing in demand. Is that a fair characterization, especially just given the commentary on the pipeline? And then I guess, where are you still seeing good risk-adjusted returns on that? You talked about the small business just now. But I'm just curious, what segments are still providing good risk-adjusted returns from your perspective?
Yes. So your observation is a good one. That's exactly how we're seeing things with regard to having a healthy pipeline, but very -- being very selective in risk-adjusted returns. But maybe David can comment on some of the segments that we're looking at that we believe are good risk -- can get us good risk-adjusted returns and the current operating environment?
Yes. Thanks, Arnold. Yes, David, the small business, the C&I area is obviously a good opportunity. We -- you get decent loan yields there. Generally, bank base rate or prime 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.
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, you've got revenue headwinds and cost savings, but at the same time, 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?
Yes. David, that's really what it is, right? It's a balancing game, right? We have loan opportunities, but we need to balance that with the availability of deposits. So we're balancing that to help manage the revenue side. And then we're -- to the extent that we're -- we continue to see revenue headwinds were we will continue to manage expenses very prudently. And -- 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.
Okay. That's helpful. And do you think this kind of $40 million run rate is a good core expense run rate?
Yes. I think $39 million to $40 million. And with our commitment to be nimble. So to the extent that operating environment remains difficult, we'll need to manage expenses appropriately.
And David, this is Arnold. Let me just add that, as we've mentioned in previous quarters, we are very focused on harvesting 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. That's helpful. Thanks everybody.
Your next question is a follow-up from Andrew Liesch of Piper Sandler. Please go ahead.
Hey, everyone. Thanks for taking the follow-up here. Just on the noninterest income side, down about 5% from prior quarter. I think some of those were outsized though. Some of those line items. But this around $10.5 million is the right place to be thinking about going forward?
Yes. That the guidance there, Andrew, would have been $10 million to $11 million. So you're spot on.
Got it. Great. You've asked -- you've covered everything else that I've wanted to ask. Thanks so much new.
Thank you, Andrew.
Thank you, Andrew.
There are no further questions at this time. I will turn the call to Arnold Martines for closing remarks.
Thank you, Sarah, and thank you very much everyone else for participating in our earnings call for the second quarter of 2023. We look forward to future opportunities to update you on our progress.
This concludes today's conference call. Thank you for joining. You may now disconnect your lines.