Central Pacific Financial Corp (CPF) 2021 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to Central Pacific Financial Corp. First Quarter 2021 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 Mr. David Morimoto, Executive Vice President, Chief Financial Officer. Please go ahead.

Thank you, Kate, and thank you all for joining us as we review the financial results for the first quarter of 2021 for Central Pacific Financial Corp. With me this morning are Paul Yonamine, Chairman and Chief Executive Officer; Catherine Ngo, President; Arnold Martines, 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 2 of our presentation.

And now I'll turn the call over to Paul.

Thank you, David, and good morning, everyone. As always, we appreciate your interest in Central Pacific Financial Corp. In the first quarter of 2021, Central Pacific completed several key milestones. We completed our RISE2020 initiative, which included the revitalization of our Central Pacific Plaza lobby, digital banking enhancement and other revenue and efficiency initiatives. Additionally, as we continue our commitment to best-in-class digital banking technology, in the first quarter, we implemented further upgrades and enhancements to our consumer online and mobile banking systems. And we launched our new small business online banking system.

Further, this quarter, we launched a new online platform for opening consumer deposit accounts and consumer term loan. During the first quarter, Central Pacific stepped up again to support our small business community by originating over 3,600 PPP loans, totaling over $290 million. We are proud of our hard-working team of employees that have enabled us to accomplish these milestones and results. We continue to be highly focused on building upon these successes and achieving our financial targets.

Our financial results for the first quarter were very strong with the highest quarterly pre-tax income since 2007. We also continue to have solid asset quality, liquidity and capital. Based on our strong results and financial position, our Board of Directors increased our quarterly cash dividend to $0.24 per share.

I'd like to now turn the call over to Catherine to provide an update on our state's and company's pandemic status. Catherine?

Thank you, Paul. The State of Hawaii is making progress towards economic recovery. Our unemployment rate declined 9% in March and while still elevated is significantly down from its peak of 22% in April last year.

Our tourism industry is returning with our Safe Travels program running well and the potential for a vaccine passport program starting in the late summer. Visitor arrivals have recently been averaging nearly 20,000 per day or about 2/3 of pre-pandemic levels. Real estate in Hawaii continues to be extremely strong with the median price for a single-family home on Oahu hitting a record high of $950,000 in March.

The State of Hawaii continues to have a very low COVID infection rate with the lowest case rate in the nation on a per capita basis. Our vaccination progress is also quite good with over 30% of our residents fully vaccinated, currently putting us the eighth highest state in the nation. With these strong stats, the state continues to safely reopen. At Central Pacific, we are deemed an essential service and, therefore, our employees were given access to the COVID vaccination starting in March, and many are fully vaccinated at this point.

I'd like to turn the call over now to Arnold Martines, our Executive Vice President and Chief Banking Officer. Arnold?

Thank you, Catherine. In the first quarter, our total loan portfolio increased by $174 million, primarily due to the new rounds of PPP loan originations. Net of PPP loan originations, we grew our commercial construction, commercial mortgage and home equity portfolios, which was offset by declines in our commercial and industrial, residential mortgage and consumer loan portfolios.

The new round of PPP loan origination in Q1 required us to shift resources and attention to supporting our business customers with their second draw of PPP applications. In Q1, we processed over 3,600 PPP loans totaling over $290 million, which represented over 50% of the loans we funded in 2020. Concurrently, our teams continue to assist our existing PPP borrowers that are applying for forgiveness from the SBA resulting in approximately $100 million in paydowns in Q1. To date, inclusive of forgiveness applications processed in 2020 and through March 31, we have processed over 3,600 forgiveness applications resulting in $234 million in PPP loan paydowns.

Our team continues to engage and support our small business customers to help meet their needs with our broader banking product and service offerings. To date, we have expanded banking relationships with approximately 20% of the new to PPP small business customers. Core deposits during the first quarter increased by $410 million or about 8% sequential quarter, which was supported by a PPP loan funding and other government stimulus. Additionally, our cost of total deposits declined by 3 basis points from the prior quarter and is now down just to 6 basis points. As the economic recovery in Hawaii gains traction, our bankers will continue to engage and support our customers and build a healthy pipeline of new business for the bank.

Now I would like to turn the call over to Anna Hu, our Executive Vice President and Chief Credit Officer, to provide details on our credit portfolio risk management activities. Anna?

Thank you, Arnold. At March 31, the loan portfolio totaled $5.1 billion with 53% consumer and 47% commercial. Approximately 78% of the total loan portfolio, excluding PPP balances, is real estate secured. At quarter end, the total balance of loans on payment deferrals declined significantly by $80.7 million sequential quarter to $39.5 million or 0.9% of the total loan portfolio, excluding PPP balances. Additional payment deferrals were provided on residential loans and consumer loans. We anticipate continuing to provide assistance through repayment plans and loan modifications over the next several months. We had no payment deferrals in our commercial real estate and commercial and industrial loan portfolios at quarter end. Total loans on payment deferrals further declined to $32.5 million as of April 21.

During the quarter, criticized loans declined by $10.5 million sequential quarter to $181.7 million or 4% of the total loan portfolio, excluding PPP balances. Special mention loans declined by $14.7 million to $127.8 million or 2.8% of the total loan portfolio, excluding PPP balances. And classified loans increased by $4.2 million to $53.9 million or 1.2% of the total loan portfolio, excluding PPP balances. The decrease in special mention loans are primarily due to loans being upgraded as a result of improvements in our borrowers' operating performance. The increase in classified loans are primarily due to residential and consumer loans.

We continue to monitor our borrowers in the high-risk industries of foodservice and accommodation where $44 million is rated special mention, and $8 million is rated classified. Approximately 27% of total special mention balances and 8% of total classified balances also received PPP loans. Additional details on our high-risk industries loans and loans rated special mention and classified can be found on Slide 11, 13 and 14. Overall, our asset quality remains strong, and we expect to see continued improvement in our loan portfolio.

I'll now turn the call over to David Morimoto, our Executive Vice President and Chief Financial Officer. David?

Thank you, Anna. Net income for the first quarter was $18 million or $0.64 per diluted share. Return on average assets in the first quarter was 1.07%, and return on average equity was 13.07%. Net interest income for the first quarter was $49.8 million, which decreased from the prior quarter primarily due to less recognition of PPP fee income due to lower forgiveness. Net interest income included $5.2 million in PPP, net interest income and net loan fees compared to $6.3 million in the prior quarter. At March 31, unearned net PPP fees for Rounds 1 and 2 was $5.8 million and net fees for Round 3 was $14.5 million.

The net interest margin decreased to 3.19% in the first quarter compared to 3.32% in the prior quarter. The decrease was due to the lower PPP fee income recognition as well as lower loan yields. The net interest margin normalized for PPP was 3.12% in the first quarter compared to 3.17% in the prior quarter.

Third quarter other operating income totaled $10.7 million compared to $14.1 million in the prior quarter. The increase was primarily due to lower mortgage banking income of $2.5 million and lower income of bank-owned life insurance of $0.4 million. Other operating expense for the first quarter was $37.8 million, which was a decrease of $6.8 million compared to the prior quarter. The prior quarter included onetime expenses totaling $5.9 million. Additionally, in the current quarter, $0.8 million in PPP loan origination costs were deferred from salaries and benefits.

The efficiency ratio decreased to 62.5% in the first quarter compared to 68.2% in the prior quarter primarily due to the onetime expenses in the prior quarter. Net charge-offs in the first quarter totaled $0.7 million compared to net charge-offs of $1.8 million in the prior quarter. At March 31, our allowance for credit losses was $81.6 million or 1.80% of outstanding loans excluding the PPP loans. This compares to 1.83% as of the prior quarter end.

In the first quarter, we recorded a $0.8 million credit to the provision for credit losses due to improvements in the economic forecast utilized in our CECL methodology. The effective tax rate was 23.2% in the first quarter, a slight decline from the prior quarter as we recognize the benefit for capital loss carrybacks. Going forward, we expect the effective tax rate to be in the 24% to 26% range.

Our liquidity and capital positions remain strong, and we continue to perform robust stress-testing. Finally, as Paul noted earlier, our Board of Directors declared a quarterly cash dividend of $0.24 per share, which was an increase from the $0.23 in the prior quarter.

Thanks, and now I will turn the call to Paul.

Thank you, David. In summary, Central Pacific has a solid financial, credit, liquidity and capital position, and we continue to make positive forward progress on our strategy. Further, we remain committed to providing support to our employees, customers and the community as we progress through the economic recovery. 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.

(Operator Instructions) Our first question is from David Feaster from Raymond James.

I just wanted to start out on growth. It sounds like the PPP program was a distraction in the quarter. Just curious how originations have trended, how the pipeline's shaking -- shaping up, heading into the second quarter and then just maybe where you're seeing demand and kind of the pulse of the client, the customer.

Sure, David. And before I pass it on to our -- to Arnold Martines, our Chief Banking Officer, I might just also -- as you probably know, first quarter is always a slow start quarter to begin with. But despite all of that, again, the whole team working hard on the PPP loans. I think CPB continues to win that loyalty and recognition in the community. We continue to bring over new accounts into the bank. And what I can tell you, as we have been in previous calls, we're still very committed to mid- to high single-digit growth on loans for the balance of the year. But let me ask Arnold touch a little bit more about our pipeline and some other details. Arnold?

Thanks, Paul. Yes. So we feel very good about our pipeline. Pipeline is really healthy, particularly in the -- our CRE area, our resi. Residential production in the first quarter was really strong at $300 million. The overall outlook for our portfolio with regard to CRE, resi, looking at restarting, we see the market conditions improving. We are looking at restarting our consumer lending in Hawaii, our small business lending. We feel pretty good moving into the year that we're going to see some nice loan growth as we progress in the quarters to come.

Okay. That's helpful. And I guess within that pipeline, how much of this -- you talked about the new customer acquisition from PPP. Do you have any sense of how much is new client acquisition from the new hires in the PPP program? Was it just increased sentiment among your investor base and the improved economic outlook?

Yes. So on the PPP non-customer conversion, we -- as you guys -- as you know, we did a -- we just did a great job last year with the PPP effort. And all the new clients that we were able to bring in the quarter, we've already converted about 20% of those customers to CPB, and that's the trend leading to some nice deposit growth in the $45 million to $60 million range for us. We have a very focused effort on converting more of these customers throughout this year. And I do believe, to your point, that we're going to see some nice new customer acquisition as a result, some really nice new business for the bank.

David, this is Paul. Let me just kind of chime in as well. So I think in the first quarter, we've seen a lot of new accounts as a result of a lot of the PPP work that Arnold referenced. And we've definitely seen deposit growth as a result of that. And now, as we continue to harvest things and the economy returning, we are quite hopeful that we'll be seeing some growth in other areas of banking. So I think again it's right on course.

Okay. That's good color. And then I guess just with all this excess liquidity, it sounds like organic growth's come in but just any thoughts on potential loan purchases to supplement the organic growth? And then I guess just taking it all together, I guess, how do you think about the core NIM going forward? Do you think we can kind of stay in that 3.05%, 3.15% realm and that we're kind of approaching a trough as growth accelerates and earning asset mix improves?

David, did you mean stock purchase -- stock repurchase or your loan purchase?

Loan pool purchase.

All right. David, do you want to take that?

Yes, yes. David, so as you know, based on our past history, we always have considered mainland -- some mainland loan purchases -- portfolio purchases to augment our Hawaii originations. And that's always an option that will avail ourselves of if the risk/reward opportunity is there relative to what we're seeing locally. So that is always available.

And then the second part of your question on the net interest margin, core net interest margin excluding PPP, the guidance remains the same consistent with prior quarter that you mentioned, the 3.05%, 3.15% net of PPP. We're still hopeful that we can have the net interest margin, the core net interest margin trough around middle of this year. Just to give you a little more color, so the reported NIM was down 13 basis points. We pulled -- we disclosed that 8 basis points of that was related to less PPP fee income due to slower forgiveness. The remaining by about 1 to 2 basis points of that is due to the excess liquidity on the balance sheet. So really the balance sheet repricing is down to 3 to 4 basis points sequential quarter. So we're getting close.

Our next question is from Jackie Bohlen from KBW.

I wanted to start on NIM. Balance sheet management as it relates to capital, I mean obviously you're having tremendous deposit growth and it's increasing the balance sheet, so just wondering how you're thinking about that, number one? And number two, if it had any impact on no share repurchases in the quarter or if there were other factors at play on that?

Hey, Jackie. It's David. Yes, obviously -- yes, very strong deposit growth -- deposit and loan growth, but as you can tell, the deposit growth exceeded -- it goes beyond just PPP deposits -- PPP loan origination deposits. So there was definitely some organic deposit growth that Paul referenced to. How it plays into the capital decision-making even with a balance sheet being where it is just short of $7 billion, we still believe we have some excess capital. And we are looking to restart the repurchase plan in May. The degree to which it's utilized is going to be at management's discretion obviously. It's going to be a function of share price and our outlook for the balance sheet going forward. But we are thinking we're going to avail ourselves of that opportunity that lever on capital management going forward. We are getting more comfortable with the economic outlook.

Hey, Jackie. This is Paul. Just add to that, the spike in tourism has really kicked in since spring break. Prior to that, I mean it was still somewhat slow. And so a lot of the economic indicators for Hawaii are very positive now, but that was really just within this last month or so. So looking forward, as David mentioned, stock repurchases, they're definitely back on the table. And just wanted to add that color.

Okay. Great. No, that's good color that it's only within the last month that things are looking more positive. And just in terms of flow, and I realize this is probably next to impossible to predict, but I know in the past, we have talked about the potential for PPP deposit outflows to mirror PPP loan forgiveness. Obviously, with the new stimulus, it makes it challenging to kind of look at those trends. But just wondering if you're seeing the anticipated outflow that you might have expected or if those deposits are proving to be a little stickier.

Yes. Jackie, this is Arnold. We are seeing some nice organic growth despite obviously some outflows in the deposit portfolio given that the small businesses are going to spend some of that money. But no, we're seeing some nice -- really nice organic growth. I'd say that this is a real rough number, but in Q1, we're probably looking at -- we are thinking it's about $170 million roughly of outflows because the money is being spent, so we feel pretty good about the difference being really strong growth -- organic growth and momentum for us. Although I will say, as a caveat, there will continue to be some outflows in the coming quarters given the expectation that people will continue spending money and obviously, some of the stimulus money will flow out as well.

Okay. So it sounds like -- and obviously, I'm looking at on an absolute basis, deposits up 7%, but it sounds like that's a factor of some outflows related to 2020 PPP, obviously inflows from 2021 PPP but also some good organic growth as you convert some of those 2020 customers over to full relationships.

That's correct.

Did that sum that up?

That's correct.

And Jackie, this is Paul again. We are still looking forward to mid-single-digit growth in deposits for the year. So -- and now with the economy coming back, hopefully, businesses will further stimulate and we can work from there.

(Operator Instructions) Our next question is from Andrew Liesch from Piper Sandler.

The follow-up question on the mortgage products, you said was pretty strong at $300 million. It looked like the portfolio declined and mortgage banking revenue had declined as well, and it was a little bit short of my forecast. I guess, what's some of the trends you're seeing on the mortgage front? Can the gain on sale number come back? Are you going to portfolio more of the residential production? Where -- how does that all shake out?

Yes, Andrew. This is Arnold. Clearly, as you know, the gain on sale is a function of what we sell versus what we portfolio. And looking at Q2, we're -- overall the production is going to be really strong. We're looking at $260 million, $270 million production. As far as gain on sale, we're probably looking in the $1.5 million to $3 million range. But again, it's a function of what we decide to portfolio versus what we sell based on what we're seeing in the marketplace and in our views of the future.

Got it. What are you seeing on gain on sale spreads? Have those narrowed at all?

The spreads are starting to normalize, so we are seeing some normalization in the spreads, Andrew.

Okay. Great. That's helpful. And then on the other side, expenses declined nicely on a core basis. Obviously, some of that was from the deferred comp. But is this a good -- if I add that back in, maybe $38.5 million, is this a good run rate to use then going forward? Or do you think expenses could rise from here as economic activity comes back to when you have more customer transactions?

We continue to guide to $39 million to $41 million. I have to say that one thing we've done during the pandemic is demonstrated a lot of restraint on how we spend whether it be on head count and other expenses, but we're still in line with $39 million to $41 million.

Our next question is from Laurie Hunsicker from Compass Point.

So I think I'm just down to one question. Obviously, no C&I, no CRE deferrals, fabulous. I just want to confirm the -- to the extent that loans have returned to partial payment, meaning they're interest-only deferrals, are those included in the deferral number?

Yes. So our -- while the numbers that are down to $39.5 million is primarily loans on forbearance, so loans that have reinstated or returned are not in that number. Is that the question you're asking, Laurie?

No. So if you've got a loan that was previously on deferral and now it's back and it's -- but it's interest only, is that interest only on deferral or is that no longer counted in deferral -- in your deferral [count]?

Yes, it's no longer counted. It would be...

Okay. So just so I'm clear, interest-onlies are no longer counted in deferrals?

Correct.

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Yonamine for closing remarks.

Thank you. It's Paul Yonamine. Thank you very much, everyone, for participating in our earnings call for the first quarter of 2021. We look forward to future opportunities to update you on our progress. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.