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. Third Quarter 2024 Conference Call. [Operator Instructions]
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 SVP, Director, Finance and Accounting. Please go ahead.
Thank you, John, and thank you all for joining us as we review the financial results of the third quarter of 2024 for Central Pacific Financial Corp.
With me this morning are Arnold Martines, Chairman, President and Chief Executive Officer; David Morimoto, Senior Executive Vice President and Chief Financial Officer; Anna Hu, Executive Vice President and Chief Credit Officer; and Ralph Mesick, who recently joined us as Senior Executive Vice President and Chief Risk 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.
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.
Let me start by introducing Ralph Mesick, who joined our executive team as Senior Executive Vice President and Chief Risk Officer. With nearly 40 years of broad experience in the financial services industry here in Hawaii, Ralph's expertise will be invaluable in managing the risk and regulatory environment as we continue to grow into the future.
Shifting now to the third quarter. We continue to achieve improvement in key areas of our balance sheet with meaningful NIM expansion and core deposit growth as well as continued strong liquidity, asset quality and capital positions. Given the broader economic and rate environment, loan growth remained challenged, but with rates starting to move down, we see positive trends developing.
Our results this quarter included $3.1 million in pretax expenses related to our evaluation and assessment of a strategic opportunity. While the parties are no longer currently engaged in discussions, we remain interested in the opportunity under the right terms and conditions. Overall, our card trends are favorable and we remain confident in future growth opportunities and our ability to successfully navigate and capitalize on the changing economic landscape.
During the quarter, we also opened a new state-of-the-art branch in Kahului, Maui. The branch is well equipped to serve the consumer and business needs of the Maui community and will create ongoing opportunities for growth in this key market as we look to expand our presence on the neighbor islands.
We continue to monitor the market conditions in Hawaii and remain optimistic about the resilience of our local economy. Hawaii is expected to have stable growth with continued strength in the construction industry, offsetting slight weakness in the tourism sector.
The Hawaii construction industry generated $11.8 billion in 2023, a 10% increase from the prior year. In the first 7 months of 2024, the value of private building permits increased 19% and the number of residential units authorized were up over 50% compared to the prior year.
On the visitor front, year-to-date through August, total statewide visitor arrivals were down 2.2% from the prior year and were about 92% of pre-pandemic levels in 2019. Visitors from Japan were up 38% from a year ago, yet remained about 45% of the first 8 months in 2019. For the island of Maui, total visitors year-to-date through August were about 83% of the prior year.
Hawaii's statewide seasonally adjusted unemployment rate remained very low at 2.9% in September and continues to outperform the national unemployment rate of 4.1%.
Hawaii real estate values remained strong. The Oahu median single-family home price was $1.1 million in September, reflecting a year-over-year increase of 6%. Home sales volumes year-to-date were up 5.8% for single-family homes, but down 5.6% for condos compared to the prior year. With home inventories increasing combined with a gradual decline in mortgage rates, more buyers who are on the sidelines may be encouraged to reenter the housing market.
Overall, Hawaii's economy is robust and well positioned for stronger growth in the coming years.
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 third quarter was $13.3 million or $0.49 per diluted share. Excluding the $3.1 million in pretax expenses related to the strategic opportunity, net income and diluted EPS were $15.7 million and $0.58, respectively.
In the third quarter, our total loan portfolio decreased by $41 million or 0.8% sequential quarter. Growth continues to come from commercial real estate and C&I portfolios, offset by runoff in the other loan types.
Our total deposit portfolio remained relatively flat sequential quarter. Importantly, we did see a favorable deposit mix shift with a reduction in our higher-cost government time deposits of $69 million, offset by an increase in core deposits and other time deposits. Average balances of noninterest-bearing DDA deposits were fairly flat sequential quarter and remains at 28% of total deposits.
Net interest income for the third quarter was $53.9 million, an increase by $1.9 million from the prior quarter. The net interest margin was 3.07%, up 10 basis points sequential quarter. The net interest income and NIM expansion were driven by the increase in yields on our investment securities and loan portfolios, while our cost of funds remain relatively stable. Total cost of deposits decreased by 1 basis point to 1.32% in the third quarter.
Other operating income for the quarter increased to $12.7 million, primarily due to higher bank-owned life insurance income. BOLI income is impacted by equity market fluctuations and is typically offset by higher deferred compensation expenses. The normalized run rate on total other operating income is approximately $12 million quarterly.
Other operating expense totaled $46.7 million in the third quarter, which included the $3.1 million in expenses related to the strategic opportunity. Additionally, salaries and benefits and directors deferred compensation expenses were higher during the quarter primarily due to timing and market fluctuations. The normalized run rate on total other operating expense is approximately $42 million quarterly.
Our effective tax rate was 22% in the third quarter and benefited from higher tax-exempt BOLI income and more low income housing tax credits. We believe the effective tax rate will be in the 22% to 24% range going forward.
We did not repurchase any shares in the third quarter. Our Board of Directors declared a quarterly cash dividend of $0.26 per share, which will be payable on December 16 to shareholders of record on November 29.
I'll now turn the call over to Ralph Mesick, our Chief Risk Officer. Ralph?
Thank you, David. Let me start by expressing my gratitude to everyone here at CPB who welcomed me to the bank. I'm particularly thankful for Anna Hu's support and partnership in the risk organization. I've known Anna for a long time and she's an exceptional banker. We're lucky to have her serving as the bank's Chief Credit Officer. I look forward to working with her and the rest of the management team as we build out our capacity to grow thoughtfully and intentionally.
With that, let me turn your attention to our slides covering credit and make a few comments. Our bank continues to enjoy strong asset quality and acceptable credit costs going into the final month of 2024. For the third quarter, the bank's net charge-offs were $3.6 million or 27 basis points annualized on average loans. This represents a 1 basis point decrease from the prior quarter.
Nonperforming assets were $11.6 million or 16 basis points of total assets at quarter end, a slight increase from the prior quarter. The increase was related to just a few residential mortgages placed on nonaccrual. The classification of these loans related to borrower specific life events rather than issues that might suggest broader systemic concerns. Past due loans 90 days plus fell 3 basis points from the prior quarter to just 1 basis point and criticized commercial loans were 62 basis points, down 4 basis points.
Our allowance for credit loss was $61.6 million or 1.15% of outstanding loans. In the third quarter, our provision expense was $2.8 million, representing a $3 million add to the allowance offset by a reduction in amounts reserved for unfunded commitments of about $200,000. Supporting the allowance, we hold a strong level of capital that serves as an additional backstop.
Total risk-based capital was a healthy 15.3% at the end of the third quarter and we maintain a meaningful cushion above regulatory thresholds for a well-capitalized bank.
Finally, as highlighted in the appendix to our presentation, the loan portfolio as of quarter end was balanced and diversified across customer, product, industry, collateral and geography with no outsized exposures in higher-risk segments.
With that, let me turn the call back to Arnold.
Thank you, Ralph. In summary, we had a strong third quarter, and we remain committed to navigating the existing market conditions effectively while supporting our clients and the community and driving value to our shareholders. 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 Instructions] Your first question comes from the line of David Feaster from Raymond James.
I wanted to touch on the loan side. Just kind of looking at the decline in loans, it's pretty broad-based. I'm curious, how much of that's demand-driven versus maybe less appetite for growth and just a timing issue? And just kind of curious how the pipeline is shaping up and your thoughts on the loan growth side going forward.
David, this is Arnold. I'll respond to that question. It basically is a demand issue with the rates being high at this point. We have seen for the whole year kind of muted loan demand. It's more that than it is us being selective or being more cautious about loan growth.
With that said, I'll say that we believe and we know that as rates decline going forward, there is pent-up demand out there. There are folks on the sideline waiting for rates to come down to move forward with projects. As I mentioned earlier in the prepared comments, building permits are up year-over-year. That signals that there's projects in the pipeline. And so we're optimistic for future quarters, especially going into next year that we'll start to see an uptick in loan demand, assuming that the Feds continue to reduce the rates.
The next question comes from the line of Andrew Liesch from Piper Sandler.
On the good expansion here on the margin, it looks like maybe the swap helped out a little bit. I guess what's the run rate going forward? And along those lines, like what are you seeing on deposit competition out in the state?
David?
Andrew, it's David. I'll start on that question. Yes, we were pleased with the net interest margin, net interest income sequential quarter expansion. About roughly 2/3, maybe 70% of that was organic, just the impact of repricing on assets and liabilities. So that's positive for the go-forward NIM forecast. Right now, we're forecasting NIM in the next quarter or two in the 3.10% to 3.20% range. So we are positive on net interest income, net interest margin.
On deposit flows, again, the story there has been positive. We've been tracking the average balances, quarterly average balances of noninterest-bearing DDA and our interest-paying checking accounts, IPCA. And those are true core deposits, and we have about $3 billion in average balances there. And what we've been seeing is that the quarterly drawdown on those balances have been diminishing quarter after quarter. And in the third quarter, the average balances were roughly flattish. So we're hopeful that we can turn the corner there and start growing those balances in the future quarters.
Got it. And then have you seen locally any improvement in deposit rates? I know there's maybe some credit unions that have been offering higher rates than other banks. But I'm just curious what you've seen from a competition standpoint.
Yes. As you would expect, Andrew, it's been -- banks have been responding to the 50 basis point rate cut by the Fed. So for ourselves, our current promotional CD, we have a CD promo, 6-month CD promo at 3.75%. That definitely has come down roughly the equivalent of 50 basis points.
Got you. Very helpful. And then is there anything -- just on that strategic opportunity, is there anything you can point to about why you are no longer currently engaged in discussions?
Andrew, this is Arnold. Unfortunately, we remain -- at this point, we cannot comment on this further. We just can't comment further about it.
[Operator Instructions] Our next question comes from the line of David Feaster from Raymond James.
Just kind of following up on the capital side. You guys have been focused on preserving capital in the short run. And with talks stalling like we kind of talked about in the press release, is there any change in your appetite for buybacks or other capital deployment opportunities? Just kind of curious how you're thinking about that.
David, it's David. Yes, we have wanted to improve the TCE ratio, the tangible capital ratio. With it being at 7.3% today, I think we are open to share repurchases. But like we always said, it's a function of the market, but it is something that we will consider as one of the uses of capital going forward. We currently target the Tier 1 leverage ratio like in a range of 8% to 10%, we're at 9.5%. So we are inching towards the higher end of that range. So there is an opportunity to utilize capital, and it's just a function of what options we have for the excess capital going forward.
Okay. Okay. That's helpful. And then sorry, I got disconnected, but maybe hopping back to the loan and the loan growth side. I'm curious, where are you seeing new production yields today? Where are you having the most success driving growth, I guess, as you think about the pipeline? And then where -- could you touch on like the repricing dynamics in the loan portfolio in the next 12 months or so and kind of how roll-off rates are relative to add-on rates?
Sure, David. In the third quarter, weighted average new volume loan yields were about 7.75% as compared to portfolio in the 4.90%. So there was a nice repricing of just runoff, replacing runoff. And we would think that the new volume yields would come down a little in future quarters. So maybe it's closer to 7.25% or 7%. And but we still think there would be a nice incremental pickup from portfolio yields, asset repricing.
And then as far as the growth opportunities, I think it would be similar to what you saw in the third quarter. I think the growth opportunities remain in the commercial sector, commercial real estate and C&I.
Okay. And then just as you kind of touched on the margin a bit, but I mean, with some pretty material positive repricing opportunities, obviously, and seemingly being able to react to the deposit side. I'm curious, how do you think about the trajectory as you think about the margin, assuming more rate cuts are on the horizon? I mean, you're naturally rate sensitive, right, just given the nature of your balance sheet. But just kind of curious, how do you think about the trajectory, contemplating maybe some lag impact in deposit pricing and some of those types of things?
Yes. Yes, David. I know you said we're slightly asset sensitive. I think we -- over the last year, we've become more neutral. So right now, the balance sheet is pretty neutral to interest rate risk. But we do see that there is an opportunity to move the net interest margin back towards our -- where we've been in the past. So we've been in the 3.30% range. There definitely is room to get back to that type of level.
As there are no more further questions at this time, I would like to turn the call back over to the Central Pacific team for closing remarks.
Thank you very much for participating in our earnings call for the third quarter of 2024. We look forward to sharing our progress with you next quarter. Thank you.
That concludes today's meeting. Thank you all for joining. You may now disconnect.