Central Pacific Financial Corp (CPF) 2020 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to Central Pacific Financial Corp.'s Fourth Quarter 2020 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.

Now I'd like to turn the call over to Mr. David Morimoto, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Nick. Thank you all for joining us as we review the financial results for the fourth quarter of 2020 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. The start of 2021 is a very exciting time for Central Pacific. We are pleased to announce that we have successfully completed our RISE2020 initiative, which positions us extremely well in the current environment and for the future. Earlier this week, we had a grand opening for the fully renovated Central Pacific Plaza lobby, which features a modernized made branch, co-working space for small businesses and nonprofits and a large open lobby that welcomes the community and bring fresh new energy to downtown Honolulu.

We also completed our RISE2020 milestones on digital banking with a new online and mobile banking platform that launched in the third quarter and the completion of our full ATM network upgrade in the fourth quarter. You may have noticed that we have a fresh new look in our slide presentation this quarter. This is part of an exciting new brand design that we just launched. The new brand reflects both the company's unique history and our bright future ahead. We had strong financial results for the fourth quarter and full year of 2020.

While net income was impacted by onetime expenses and higher provisions for credit losses, our core pretax pre-provision earnings were solid. We continue to thoroughly review and regularly monitor our loan portfolio to appropriately manage the credit risk in the pandemic environment. During the fourth quarter, our total balance of loans on payment deferrals decreased significantly and was down to 3% of total loans, excluding PPP loans at year-end. Finally, our Board of Directors declared a quarterly cash dividend of $0.23 per share and approved a new share repurchase authorization.

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

Thank you, Paul. The state of Hawaii continues to manage through the COVID-19 pandemic. We are vaccinating our residents as quickly as possible and have worked through the first tier of first responders and frontline medical workers. We have recently opened 2 mass vaccination sites in Honolulu as we move to the next tier, which includes the elderly population.

Our COVID infection rate in the state of Hawaii is currently the second lowest in the nation on a per capita basis. The tourism economy remains open with the requirement for a negative COVID test to avoid quarantine. The daily visitor arrival counts have recently been in the 5,000 to 8,000 range per day, but is still significantly down compared to a year ago. We are optimistic that with the mass vaccination initiatives, we will start to see a Hawaii economic recovery in 2021. At Central Pacific, we continue to operate with the highest standards of health, safety and social distancing.

We've successfully consolidated 4 branches into neighboring branches in 2020, 3 of which were in-store branches that had too small of a footprint for adequate social distancing. We expect to retain customers and deposits from these closed branches as we continue to provide exceptional service at our other branches and through our digital channels. Much of our back office teams continue to work flexible remote schedules, and all employees are required to complete a daily online health questionnaire prior to starting work each day. We believe the actions we've taken will continue to enable us to provide a safe environment for both our employees and customers.

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 fourth quarter, excluding PPP loan payoffs of $112 million, the bank grew its loan portfolio by $46 million, driven by growth in commercial, construction, residential mortgages, HELOC and commercial mortgages. Our residential lending team continued to outperform with record levels of production, resulting in $5.4 million in mortgage banking income for the quarter. For the 2020 year, mortgage banking income was $13.7 million, which was more than double the income from the previous year, augmented by over $1 billion in loan production.

During the fourth quarter, we received and processed a significant amount of PPP forgiveness applications, which resulted in the recognition of $5.4 million in fee income. We continue to process PPP forgiveness applications and recently started accepting new PPP loan applications for both first draw and second draw loans from our business customers. Additionally, our team continues to engage and remain steadfast in our support of our customers and for the broader business community impacted by COVID-19.

Core deposits during the fourth quarter increased by $132 million, which is consistent with year-end seasonal inflows, augmented by our frontline business development efforts. For the 2020 year, core deposits decreased by $787 million. Additionally, our cost of total deposits declined by 4 basis points from the prior quarter and is now down to 9 basis points. Providing best-in-class digital technology for our customers remains a key priority for us.

In 2020, we launched our new consumer mobile and online platform and completed the rollout of our new ATM fleet. We are seeing strong adoption and utilization of these new digital tools by our customers. And just yesterday, we launched a new platform that will allow our customers and other consumers to open a new personal checking or savings account online or apply for a consumer loan online. Our team is laser-focused on adding additional digital products and services this year, and we look forward to updating you in the coming quarters.

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 and portfolio risk management activities. Anna?

Thank you, Arnold. At year-end, the loan portfolio totaled $4.96 billion, with 55% consumer and 45% commercial. During the quarter, we continued to monitor the loan portfolio and provided support to our customers as they continue to navigate through the ongoing changes in the marketplace. We assisted our customers by providing additional loan payment deferrals, as needed, and we were pleased to see a significant number of borrowers resume making their monthly loan payments.

At quarter end, the total balance of loans on payment deferrals declined to $120 million or 3% of the total loan portfolio, excluding PPP balances. Our re-deferral rate was 15% and was primarily driven by residential loans where payment deferrals were extended to 9 months. During the quarter, we saw a significant decline in consumer loans on deferral as customers returned to making loan payments. Of the approximately 4,200 consumer loans that returned to payments, only 7% are granted a short-term loan modification with 93% resuming payment at contractual terms.

In the commercial and commercial real estate loan portfolios, the total balance of loans on payment deferrals declined to $47 million or 1% of the total loan portfolio, excluding PPP balances. The highest exposure by industry continues to be real estate and rental and leasing, totaling $33 million, a decline of $14 million sequential quarter. The loans in the real estate and rental and leasing industry are supported by low loan-to-value ratios. The majority of these borrowers are expected to resume making loan payments at the end of their 6-month loan payment deferrals. Loan payment deferrals for our high-risk industries totaled $12 million or 0.3% of the total loan portfolio, excluding PPP balances.

As of January 20, our total balance of loans on payment deferrals decreased further to $101 million or 2% of total loans, excluding PPP balances. Additional details on our loan payment deferrals can be found on Slides 20 and 21. During the quarter, criticized loans declined by $4.5 million sequential quarter to $192 million or 4.2% of the total loan portfolio, excluding PPP balances. Special mention loans declined by $6.3 million to $142 million or 3.1% of the total loan portfolio, excluding PPP balances, and classified loans increased by $1.7 million to $50 million or 1.1% of the total loan portfolio, excluding PPP balances.

We sold a classified and nonaccrual commercial real estate loan at par of $4.2 million and settled a payoff of another classified and nonaccrual commercial real estate and commercial loan at 92 or $2.9 million. Approximately 32% of special mention balances and 10% of classified balances also received PPP loans. Additional details on loans rated special mention and classified can be found on Slides 22 and 23. Overall, we continue to believe our proactive approach to working with our customers and our disciplined credit management and diversified loan portfolio has allowed us to remain strong and our asset quality to remain stable through these unprecedented times. This will continue to serve us well into the future.

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 fourth quarter of 2020 was $12.2 million or $0.43 per diluted share. Return on average assets in the fourth quarter was 74 basis points, and return on average equity was 8.87%. For the full 2020 year, net income was $37.3 million or $1.32 per diluted share. Return on average assets was 0.58%, and return on average equity was 6.85%.

Pretax pre-provision earnings for 2020 was $88.2 million compared to $84.2 million in 2019. 2020 pretax pre-provision earnings were the highest CPF has generated since the Great Recession. Our 2020 earnings were impacted by higher provision for credit loss expense due to the current COVID-19 pandemic. Additionally, in the fourth quarter, there were several one-time expenses, which totaled $5.9 million. Net interest income for the fourth quarter was $51.5 million, which increased from the prior quarter due to accelerated recognition of PPP fee income as PPP loans were forgiven by the SBA.

Net interest income included $6.3 million in PPP net interest income and net loan fees compared to $3.4 million in the prior quarter. The net interest margin increased to 3.32% in the fourth quarter compared to 3.19% in the prior quarter. The increase was due to the aforementioned PPP fee income recognition. The NIM normalized for PPP was 3.17% in the fourth quarter compared to 3.26% in the prior quarter. The decrease is due to lower loan and investment yields and the new subordinated debt interest expense.

Fourth quarter other operating income totaled $14.1 million compared to $11.6 million in the prior quarter. The increase was primarily due to higher mortgage banking income of $1.1 million sequential quarter. Additionally, in the current quarter, we realized a gain on sale of securities of $0.2 million compared to a loss on sale of securities of $0.4 million in the prior quarter.

Other operating expense for the fourth quarter was $45.1 million, which was an increase of $8.1 million compared to the prior quarter. The increase was largely driven by onetime expenses totaling $5.9 million, which related to employee incentives and benefits, branch consolidation costs, litigation settlements, debt prepayment fees and other onetime expense accruals. Additionally, in the current quarter, there was higher deferred compensation expense related to equity market volatility and higher computer software expense related to our technology initiatives.

The efficiency ratio increased to 68.8% in the fourth quarter compared to 60.9% in the previous quarter, primarily due to the onetime expenses. Excluding onetime expenses of $5.9 million, the fourth quarter efficiency ratio would have been 59.8%. Net charge-offs in the fourth quarter totaled $1.8 million compared to net charge-offs of $1.3 million in the prior quarter. At December 31, our allowance for credit losses was $83.3 million or 1.83% of outstanding loans, excluding PPP loans. This compares to 1.79% coverage as of the prior quarter end.

The buildup of credit reserves was largely driven by the economic forecast utilized in our CECL methodology. The effective tax rate was 23.7% in the fourth quarter. And going forward, we expect the ETR to continue to be in the 24% to 26% range. Our liquidity and capital positions remain strong, and we continue to perform robust stress testing. With the $55 million subordinated note offering we completed in the fourth quarter, our CPF total risk-based capital ratio increased to 15.2% as of December 31.

Thanks, and now we'll return the call to Paul.

Thank you, David. In summary, Central Pacific continues to make positive forward progress on our strategy, while at the same time, manage well through the COVID-19 pandemic. We have a solid financial credit, liquidity and capital position. As the economic recovery gradually begins, we remain committed to supporting our employees, customers and the community. 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. Back to you, operator.

(Operator Instructions) First question comes from David Feaster of Raymond James.

I wanted to start out on growth. Exclusive of PPP, loan growth was better than expected, and it was great to see. And it seems like originations might be accelerating. Just curious what you're seeing on the loan demand front. How your pipeline is looking? And just maybe some expectations in terms of growth near term? Kind of is this mid- single-digit rate reasonable for 2021?

Yes. Thanks, David. And as I've always touched on in prior quarters, one of the biggest changes, I think, this past year has been, we fundamentally really changed the mindset, introducing a more sales culture. And naturally we build the practice and diligence around credit, of course. But Arnold Martines has been really driving a lot of what we call our pipeline management. And Arnold, you probably have a good view on what kind of loan growth we can expect going forward. So maybe you can comment on that.

Yes. Thanks, Paul. So we're very optimistic in 2021. We -- although there's still impact here on COVID, we're looking forward to better days as we move into the year. And so -- and our loan pipeline looks good, as does our deposit pipeline, as we move into the first half of the year. So we're looking -- this year, we expect loan growth to be in the mid- to high single digits.

And also, David, this is Paul again, that we've been very fortunate with still a very robust Hawaii residential market. And a lot of new homeowners have been quite interested in the level of services that CPB had to offer. And we're really gaining a lot of market share, I think, on -- especially on purchase mortgages.

Okay. That's good color. And then maybe just elsewhere, where are you seeing strength? And like -- and within -- by segment? And can you just talk about the competitive landscape? And what kind of payoffs and paydowns that, that assumes? And then, lastly, it's just kind of interesting to see the pretty decent growth out of the U.S. Mainland. Just curious your thoughts on the Hawaiian Islands versus the U.S. Mainland growth?

Yes. I think -- well, before touching on Mainland, here locally, I mean, given the type of coverage we were able to achieve, especially with the PPP loans, that's established a lot of new relationships for us. And that's translated to a lot of new opportunities for us. Second is the real estate. Again, the real estate market, as I referred to earlier, 1/3 is really around this new mindset and culture that I think we have that's driving a lot more business. It remains very competitive.

But again, I think this organization has really stepped up a lot more. And I -- as Arnold touched on, it's a mid- to high single-digit growth going forward, and we feel pretty comfortable about that. Naturally, Hawaii is still -- compared to the Mainland, given the downturn in the tourism industry, we have some specific challenges for this Hawaii market. But we're really hoping that with the vaccine and other herd immunity, so to speak, to happen, hopefully, in the latter part of the year, that the tourists will come back, and we'll be able to resume even more exciting opportunities.

All right. That's helpful. And then just kind of following up on your -- I mean, you guys were immensely successful in the PPP program. And really, like you said, it's driving a lot of customer acquisition. Just curious your appetite -- you guys are already taking some applications. Just curious your appetite for this next round of PPP and maybe kind of the volumes that you could expect out of there? And whether you're focused on using that as another customer acquisition tool?

Yes. So we did have a really good effort last year. As you know, we did about 7,200 loans or over $550 million. So we're looking very positively at that as really tailwinds for us to be able to build new business relationships in the market. We have started taking in new PPP applications in this current round. We've received over 3,000 applications. Most of it are second draw applications, requests. So our team is busy working through that process at this moment.

And this is Paul. I might add that we are stipulating that companies coming to us with new applications, we do want them to be customers of CPB, and we're already seeing many companies converting to CPB as a result. Many thanks to our employees who did a great job on the first round of PPP. So -- absolutely, David. I think this is one of the few ways of bringing new money into the state. We're again using technology, getting the teams together to step it up, make sure that we bring more monies into the state. I think the community and our customers and prospective customers are aware of that.

Next question is from Andrew Liesch of Piper Sandler.

I just wanted to talk about the consumer deferrals. You had -- obviously, you had some good comments this morning. But in the past, you just referenced maybe some concern just with a higher unemployment rate. With how things have trended, have a lot of these concerns been alleviated? Or is there anything on the horizon that you see that might give you some pause?

Yes, I'll start and then turn it to Anna for detail. But yes, you'll have noted in the supplemental deck on Slide 20 just the improvement in the numbers for consumer deferrals. And you see now that we're just at $2.3 million and 149 deferrals. If you compare that to where we were last year, we were at a high one point of over 4,000 consumer deferrals. So I think the reason for the improvement is, certainly, we had stimulus money coming into Hawaii. But the other is there is some return of tourism, and we reported earlier on the numbers.

And so we do see visitors back and people -- even the local residents out to the restaurants. So that, of course, increases employment levels and then the ability of consumers to repay on debt. And the last thing I'll share is that while we expected of those 4,000 consumers that were on deferrals to need some kind of assistance or a repayment plan, there really were just a small number, maybe 300, that requested repayment plans. All of the others went back to payment for the contractual terms on the note.

Got it. Okay. That's really helpful and encouraging. The -- I'm sorry -- then continuing on to mortgage banking. That line item was pretty strong this quarter. How is that pipeline shaping up? It sounds like there's been some good progress on the purchase side, taking market share. How do you see that business playing out for the next 2 quarters?

Yes. So this is Arnold. It looks really good. In the fourth quarter, we had total originations of about $350 million -- $354 million, excuse me. And that compared to $230 million in the third quarter. We believe the first quarter originations will be roughly $240 million. And we anticipate the gain on sale income although to decrease. And this is -- the reason for that is because the spreads are starting to normalize, and we plan to shift some of the production originations to our portfolio. So that's our plan for the first -- kind of going into the first quarter.

Got it. Did you say $350 million for the fourth quarter or $250 million?

For the fourth quarter, it was $354 million.

Got you. Great. And then one other question. Arnold, you referenced some new digital products and services that looking forward to update us on. Anything you can maybe tease us with right now? What are the things you got looking to launch or expand?

We're going to keep that for discussion later in future quarters, but stay tuned. We have some exciting things coming.

Next question is from Jackie Bohlen of KBW.

I just wanted to start with expenses. You've made tremendous progress on RISE2020. And now that a lot of that work has been behind you and you're going to start seeing some -- more of the revenue benefits. Just wondering how you're thinking about expenses both from a baseline to start with now that those costs are behind you? But also from -- just as you continue to implement these strategies, what kind of other growth we might see as well kind of offsetting some of that?

Yes. Jackie, it's David. I'll start there. So the fourth quarter total expenses were roughly $45 billion (sic) [$45 million]. As we've discussed, there was about $6 million in there that we deem one-timers. On a normalized basis, the fourth quarter was roughly $39 million. What we're guiding to going forward is a range of $39 million to $41 million, so up -- a slight uptick from where we were in the fourth quarter on a normalized basis. And I know you mentioned that the RISE expenses are behind us. What I will state is that much of the RISE expense, the dollar RISE expense was capitalized. It was -- a lot of it was in the building. And so while the work on RISE2020 is behind us, some of that expenses is bleeding into the expense forecast going forward as we start amortization.

So Jackie, as we -- this is Paul Yonamine. As we mentioned before, for example, like the investment on the building infrastructure, it's amortized over 39 years, and we've always baked that into all of our forecast. The other thing is that we were able to put in technologies that maybe 10, 15 years ago used to cost them arm and a leg. Nowadays, everything is cloud-based, and we're able to go best-in-class technology. But going forward, you pay for the licenses. But needless to say, those license costs also drive the top line. It becomes more accretive to us, especially as it gets stickier with our customers. So again, RISE2020, the actual investment, so to speak, is behind us. We're going to be recognizing costs, but we anticipate a lot of that to be very accretive for us in terms of driving revenue.

Okay. That's very helpful. And I mean, I would guess that based on -- and I realized that this was a very long-term guidance and there's inflation and everything else. But the variance between the $39 million to $41 million versus the historical $36 million to $38 million that we had spoken about in many, many quarters past, is that primarily just the amortization and then general lift in compensation and everything else? Or is there anything else built into that?

Yes, Jackie. It's what you mentioned. And then it's also a little bit of incremental investment in ourselves in further digital opportunities and in strategic areas of our team. We continue to build and invest in ourselves, as Paul mentioned, obviously, to drive future revenue. But that's kind of the delta there.

Okay. And then just one last one. The new buyback authorization, just curious on your thoughts regarding when you might look at starting that, if it was more just to keep the flexibility on the table? Or if it's something that's an active discussion right now?

Yes. Jackie, it's more of the former. We wanted to have the authorization in place. So it's there for our use in the future. We are not restarting repurchases at this time. But we are hopeful that we will be able to later this year, and it will be somewhat a function of better visibility on the Hawaii economic recovery and the strengthening of our profitability. We did get a bit of good news on the economy this morning on the Hawaii. The state unemployment rate came out at 9.3%, which was down from mid 10s in November. And it's dramatically down from -- it peaked at 24% in April of last year, and now we're down to 9%. So that obviously is some good news.

Great. And congratulations everyone on having the renovated Plaza behind you. That must be really excited. I guess I for one can't wait to see it in person once we're all up and traveling again.

Thanks, Jackie.

Jackie, just for your information, in addition to the earnings supplement on our IR website -- webpage, there is an analyst package on the -- on RISE2020, the revitalization of the Plaza and our new online mobile banking platform.

(Operator Instructions) Next question is from Laurie Hunsicker of Compass Point.

Anna, I wondered if I could start with you. I think you mentioned that as of January 20, deferrals were down even further to $101 million. And I just wondered if you had a -- just even a high level breakdown in terms of the $101 million. What was the corresponding on consumer, on commercial? And if you have it on pre-C&I, if you have it on resi consumer?

Yes, sure. I'll start with residential. That came down to $53 million; and the commercial real estate came down to $40 million; for C&I, down to $6 million; and consumer came down a little bit at $2 million.

Came to $2 million. Okay. Okay. Great. I mean your deferral trends are fabulous. So David, maybe just a question for you. As you all sit with very thick reserves, ex-PPP, you're 183 basis points. Is it conceivable given what you said on loan growth, given where your charge-offs are, and certainly, this is making assumptions around COVID, but is it conceivable that we could be seeing you run at round numbers of a $3 million per quarter loan loss provision? How do you think about that?

Yes. Yes. Laurie, as we normally respond to this question, the quarterly provisioning is going to be a function of the economic forecast, net charge-offs and loan migration trends, basically, the performance of the portfolio. Again, we're cautiously optimistic on the economic forecast front with the reduction in the unemployment rate. So I think it's just going to be directionally consistent with what we see with the economic forecast and our loan portfolio performance.

Okay. Okay. And then around NIM, stripping out the PPP, did you strip out just the $3 million to arrive at the 3.17%? In other words, you had $6.3 million of PPP in your net interest income this quarter, but $3 million was sort of the immediate recognition of forgiveness. I assume that -- I did it round numbers and I came up with 3.18% and so on. I'm assuming that for the 3.17%, you used $3 million. Is that correct?

No, we use the $6.3 million, the number that's in the earnings release.

You used the full $6.3 million to get down to 3.17%?

Yes. The $6.3 million.

Okay. And then just last question. So 3 of the branches you closed were in-store branches. Can you just remind us of your 31 branches, how many are in-store branches and just how you're thinking about in-store branching?

So Laurie, it's Catherine. So as you mentioned, we closed 3 of the 4 in-store branches. And the reason for that was those in-store branches were particularly small. So we were not able to provide for the social distancing. But the other one in-store branch is larger, and we do intend to continue to operate that one.

Okay. So just to clarify, of your total 31 branches, you only have 1 branch left that is in-store?

That's in-store. That's correct.

This concludes our question-and-answer session. Now I'd like to turn the conference over to Mr. Paul Yonamine for any closing remarks. Please go ahead.

Great. Thank you very much for all of you for joining us this morning. And we look forward to further engaging with all of you. Thank you very much. Goodbye.

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