Central Pacific Financial Corp. (NYSE:CPF) Q2 2023 Earnings Call Transcript July 29, 2023
Operator: 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.
Dayna Matsumoto: 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.
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%.
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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?
David Morimoto: 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.
Anna Hu: 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?
Arnold Martines: 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.
