CPF - NYSE

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp. Second Quarter 2024 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 SVP, Director Finance and Accounting. Please go ahead.

Thank you, Jessica and thank you all for joining us as we review the financial results of the second quarter of 2024 for Central Pacific Financial Corp. With me this morning are Arnold Martines, who was recently appointed Chairman of our Board in addition to his role as 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 2 of our presentation. And now I'll turn the call over to our Chairman, President and CEO, Arnold Martines.

Thank you, Dayna and hello, everyone. We appreciate your interest in Central Pacific Financial Corp. and we are pleased to share our latest updates and results with you. We had a strong second quarter highlighted by NIM expansion, core deposit growth and improving net charge-offs. With half the year behind us, I am pleased with the results and have a positive outlook for the rest of the year. Our team is successfully navigating the challenges of the current economic environment. While this continues to impact loan growth and demand, we are seeing positive trends developing. I'm also proud of the recognition we recently received by Forbes as one of America's Best Banks and Best In-State Bank for Hawaii in 2024. With that said I'd like to provide an update on the Hawaii market before turning it over to my team to cover the quarter's results in more detail. Hawaii overall is experiencing modest economic growth due to higher inflation and continued pressures on tourism particularly the Japanese market where headwinds and exchange rate persists. Conversely construction and defense spending in Hawaii are at all-time highs and helping to offset the impacts we are seeing from other sectors of the economy. In the month of June, total statewide visitor arrivals were down 1.9% from the prior year and were about 92% of pre-pandemic levels in 2019. Visitors from Japan were up 28% from a year ago yet remained about 50% of the same month in 2019. For the island of Maui, total visitors in June were about 78% of the prior year as recovery following the wildfires continues at a slow, but steady pace. Total statewide hotel occupancy in June was 76% down 1.2% from a year ago with an average daily rate of $373 down 3.7% from a year ago. Hawaii statewide seasonally adjusted unemployment rate was 2.9% in June and continues to outperform the national unemployment rate of 4.1%. Hawaii real estate values remain very strong. The Oahu median single-family home price was $1.12 million and the median condo sales price was $530,000 in June reflecting year-over-year increases of 6.7% and 3.9% respectively. Home sales volumes in the first half of the year were up 6.7% for single-family homes but down 5.8% for condos compared to the prior year. Homes continue to move quickly with a median of 15 days on the market. Overall, we remain optimistic about Hawaii's economic outlook, and believe the state economy will continue to grow modestly and demonstrate resiliency. 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 $15.8 million or $0.58 per diluted share. Return on average assets was 0.86%, return on average equity was 12.42%, and our efficiency ratio was 64.26%. In the second quarter, our total loan portfolio decreased by $17.8 million or 0.3% sequential quarter, which included a $19.2 million decrease in Mainland consumer loans. Sequential quarter growth in our commercial real estate and C&I portfolios was offset by runoff in consumer and residential mortgage loans. The pace of the net decline in total loans is slowing and we expect modest loan growth in the second half of the year. Our total deposit portfolio decreased by $36.4 million or 0.5% sequential quarter, which included a $41.6 million decrease in high-cost government time deposits. Core deposits grew during the quarter by $16.7 million. Net interest income for the second quarter was $51.9 million, an increase by $1.7 million from the prior quarter. The net interest margin was 2.97% in the second quarter, up 14 basis points sequential quarter. Net interest income and NIM expansion was driven by the increase in yields on our investment securities and loan portfolios while our cost of funds remain relatively stable. Interest income on investment securities during the quarter included $0.9 million from our swap on $115 million of municipal securities that started on March 31 of this year and has a five-year term. Our total cost of deposits remained relatively flat at 1.33% and our cycle-to-date total deposit repricing beta also remained at 24%. Second quarter, other operating income increased to $12.1 million due to stronger mortgage banking and investment services income. Other operating expense totaled $41.2 million, an increase from $40.6 million in the prior quarter, primarily due to higher salaries and benefits expense. Our effective tax rate was 23.4%, and we believe it will continue to remain in the 23% to 25% range. We did not repurchase any shares in the second quarter. Our Board of Directors declared a quarterly cash dividend of $0.26 per share, which will be payable on September 16 to shareholders of record on August 30. I'll now turn the call over to Anna Hu, our Chief Credit Officer. Anna?

Thank you, David. Our asset quality remained strong in the second quarter and our lending and credit risk strategy continues to be based on diversification consistent underwriting standards, strong collateral and a focus on stable segments and industries that we have solid expertise in. Nearly 80% of the loan portfolio is real estate secured with a weighted average loan-to-value of 63%. Our commercial real estate office and retail exposure remains low at 3.2% and 5.5% of total loans respectively. The office portfolio has a weighted average loan-to-value of 55% and 69 weighted average months to maturity. The retail portfolio has a weighted average loan-to-value of 65% and 65 weighted average months to maturity. All of our Maui related loan deferrals have returned to regular payment status. And we are not anticipating any significant issues to cause us concern regarding our Maui portfolio. Non-performing assets were $10.3 million or 0.14% of total assets, which was relatively flat from the prior quarter. Criticized loans were $35.3 million or 0.66% of total loans, a slight increase from the prior quarter, but remains at historically low levels. Total net charge-offs were $3.8 million for the second quarter or 0.28% of average loans on an annualized basis. This reflects a six basis points decrease from the previous quarter. Our allowance for credit losses was $62.2 million or 1.16% of outstanding loans. In the second quarter, our provision for credit losses on loans declined to $2.4 million due to a decline in net charge-offs. Additionally, we recorded a $0.2 million credit to the provision for unfunded commitments for a total provision for credit losses of $2.2 million during the quarter. Overall, our credit quality remains strong. And we continue to monitor the economic environment closely. Now, I'll turn the call back to Arnold. Arnold?

Thank you, Anna. In summary, we had a strong second quarter. Despite market uncertainties that persist, we have a positive outlook for the rest of the year and we continue to focus on executing on our core strategies while remaining nimble. I want to 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.

Thank you so much. [Operator Instructions] Your first question comes from the line of David Feaster with Raymond James. David, your line is open.

Hi. Good morning, everybody.

Good morning, David.

I wanted to a follow-up on kind of the Maui side. We've got the anniversary of the wildfires coming up. I'm curious, maybe where we are just from your standpoint in terms of the rebuild in the local economy? It's great to hear that, we're not expecting any issues as loans come off deferral. That's extremely encouraging. But I'm just curious, what are you seeing there and just your pulse of the local economy in that market?

Yeah. So David, this is Arnold. As I mentioned earlier, the visitor arrivals the visitor accounts are still at about 78%. But it is improving in a steady way. I think that the progress with regard to the things that have to be determined to move forward in a more deliberate way is coming together. We're starting to see some homes being rebuilt and I'm pretty optimistic that the community is coming together. And while there's, still a lot of emotions and obviously a lot of folks were impacted. People are starting to come together and we're optimistic that we'll start to see forward movement in the months and within the year ahead.

That's great. And then, maybe just touching on the deposit side, I mean the deposit cost control the core deposit growth has been great. I mean it's really impressive to just see one basis point of deposit cost growth. Curious, how do you think about deposits and the deposit growth initiatives? Where are you having success? And what's driving that? And just where are you seeing the cost of new deposits? I mean, basically trying to figure out, do you think funding costs can stabilize here and continue to grow? Are we more focused on optimizing the base, just given the slower loan growth profile that we just talked about?

So David, I'll start, and then I'll turn it over to David Morimoto. Our team has done a really good job with regard to just focusing on our customers, focusing on our core business. Small business market has been a real strength of ours. And we will continue to see because of the efforts of our employees just a steady growth of new customers and obviously what follows is deposit balances. But let me ask David to speak with regard to cost.

Hey David, yes. I think like you mentioned, we are very pleased with the second quarter results. The team did a great job of staying close to their customers and building new relationships. So we did see stabilization, especially in noninterest-bearing DDA. The noninterest-bearing DDA declined by $1 million sequential quarter. And obviously, we're hoping that we continue to have that great success and then we start growing core deposits going forward.

And I guess kind of thinking through that, would you -- just trying to think of the kind of the size of the balance sheet, right? I mean to the extent that we do get core deposit growth, would you expect to continue to optimize the funding base and maybe let some of the CDs roll off? Or would you expect and basically kind of have a stable kind of asset base and improving profitability? Or would you expect the balance sheet to continue to grow? Just kind of curious, how you think about that because that ultimately plays into the margin question as well.

Yes. Yes. Sure, David. I think the keys to the balance sheet size are core deposit growth and good risk reward loan opportunities. I think we're getting to the point where things are lining up. The stars are aligning where we could see positive progress on both of those fronts. And if we do, that will allow us to grow the balance sheet footings. I think we've done a lot on the optimization of the funding base. And I think if we start seeing a good better risk reward on the loan opportunity side, we could see the balance sheet grow. It's not going to grow by a lot, but there would be opportunities to grow it.

Got it. That’s helpful. Thanks everybody.

And your next question comes from the line of Andrew Liesch with Piper Sandler. Andrew, your line is open.

Thanks. Good morning everyone. Just a question on the loan growth here. Good C&I on the Mainland. I'm curious what was behind that?

Anna, you want to answer the question?

Sure. Hi Andrew, this is Anna. So we primarily saw the growth in our SNC portfolio. We have the opportunity to participate in a new name, as well as top off on a couple of existing SNC credits that we were already in. So that's primarily what drove our second quarter growth on the C&I book on the Mainland.

Got it. Any other opportunities for that to continue or do you think the portfolio maybe stabilizes from here?

We continue to monitor and look at opportunities and would certainly say that as it presents itself, we would be interested.

Got you, very helpful. And then, I guess similarly the commercial real estate in Hawaii, what was the driver behind that? And how is that pipeline shaping up here for the rest of the year?

Hi Andrew, this is Anna again. For commercial real estate in Hawaii, we had a couple of commercial real estate transactions that we closed on during the second quarter. And I would say from a pipeline standpoint, we have a good pipeline that we're looking at working through for the remainder of the year.

Great. Any expected payoffs on any of the portfolios that might continue the pace of growth? Perhaps on the construction side that might be a little higher from a payoff perspective. Just kind of forecast what the net pace might be here.

Yes. We are expecting a few payoffs here and there in the construction book as well as the commercial real estate, but we will be looking to try to fill that up and replace.

Got you. All right. Very helpful. And then David on the margin obviously some good expansion here as we've heard some good success on the core deposit front. I wouldn't expect to see the margin rise this much again. But I mean, how are you thinking about the margin here going into the second half of the year, especially now that the swap is benefiting it?

Yes sure. Andrew. I think the way to look at the net interest margin forecast is, if you break down the 14 basis points sequential quarter increase that we saw in the second quarter, roughly six basis points of that was organic. That was a result of interest earning asset, repricing, outpacing interest-bearing liabilities. So 6 basis points organic, 5 basis points was related to the interest rate swap and 3 basis points was related to reduction of excess balance sheet liquidity. As I said, the reduction of balance sheet liquidity is kind of nearing the end and then the swap is just going to be in our net interest margin going forward. It's really that 6 basis points and how much we can continue that going forward. So right now, the net interest margin guidance for the next couple of quarters is 3% to 3.10%.

Got you. Does that incorporate any rate cuts? And I guess, how with some of the movements and some of the shifting that you've done over the last couple of years, how do you think the margin will react to a rate cut?

Yes. So, our forecast for the remainder of this year incorporates to 25 basis points cuts. 25 basis point cuts in September and December. So that is incorporated into our 3% to 3.10% guidance. As we've mentioned before, our net interest margin -- our interest rate risk is relatively well matched. The balance sheet is relatively well matched. We do believe that there would be some opportunity for benefit from Fed interest rate cuts for the back half of the year and into 2025. But again, we're not overly asset sensitive or liability sensitive. So, the rate cuts will help but it's not a material mover. I think if you look at our range on our net interest margin over the last three, four years, it's probably in the 3.30%. That the high end is probably in the 3.30%, so that's probably the upside for the foreseeable future.

Got it. That's very helpful. And just shifting to the non-interest income side. Looks like you got some success on mortgage banking. Was there any MSR write-up there or was that a true gain on sale number that we should be looking at?

Yes. That was a true gain on sale. We did have better origination volume in the second quarter. Things got better in the second quarter relative to the first quarter. But that was a good result there. And then the other driver of the sequential quarter increase was in our retail investment sales area. That area had a good quarter. And that's expected to likely continue in the back half of the year.

Great. That’s a good color. Thank you so much for taking the question. I’ll step back.

Thanks, Andrew.

Thank you. [Operator Instructions] Our next question comes from the line of David Feaster with Raymond James. David, your line is open.

Hi, guys.

Hi.

Thanks for let me take a couple more. Maybe just touching on credit. First, I guess on the consumer side curious, what you are thinking there and what you're seeing? It seems like things have improved. And then just broadly, what you're seeing on the credit front? Obviously, you've got a really low level of NPAs and conservative underwriting. But what are you watching closely? Just any trends that you're seeing and thoughts on managing the credit book going forward?

Thanks, David.

Thank you. That is all the questions we have in our queue. I will now turn the call back over to Ms. Matsumoto for closing remarks.

Thank you very much for participating in our earnings call for the second quarter of 2024. We look forward to future opportunities to update you on our progress. Thank you.