Central Pacific Financial Corp. (NYSE:CPF) Q3 2023 Earnings Call Transcript October 25, 2023
Central Pacific Financial Corp. misses on earnings expectations. Reported EPS is $0.49 EPS, expectations were $0.52.
Operator: Good afternoon, ladies and gentlemen. Thank you for standing by. And welcome to the Central Pacific Financial Corporation Third Quarter 2023 Conference Call [Operator Instructions]. This call is being recorded and will be available for a replay shortly after its completion on the company's Web site 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, Abby, and thank you all for joining us as we review the financial results of the third 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 Web site 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 President and CEO, Arnold Martines.
Arnold Martines: Thank you, Dayna, and aloha, 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 wildfire in Lahaina, Maui in August was devastating, and I want to first thank our employees, customers and all of you for your continued support. While it will be a long road to recovery, Maui is strong and resilient. Central Pacific Bank is committed to servicing and supporting our Maui community to the fullest. We were fortunate that our Lahaina branch was unimpacted by the fires and reopened late August, which enabled us to help meet the needs of the community.
The Hawaii tourism industry has been affected by the Maui wildfires with a significant drop in visitor arrivals to Maui in August compared to a year ago. With government officials now encouraging visitors back to Maui, we hope the negative impacts will be short lived and Maui visitor counts will return to normal. Fortunately, we continue to see increases in visitors to the other islands, and overall, the Hawaii state economy is expected to have limited impact. In the month of August, a total of 769,000 visitors came to the State of Hawaii, which was down 7% from a year ago and 83% of prepandemic levels. Total visitor spending was $1.58 billion in August, down 9% from a year ago, and up 5% from August 2019. Total statewide hotel occupancy in August was 74%, down 3% from a year ago, with an average daily rate of $370, down 4% from a year ago.
Hawaii statewide seasonally adjusted unemployment rate continued to decline to 2.8% in September and is outperforming the national unemployment rate of 3.8%. Year-over-year statewide nonfarm payroll increased by 6,600 jobs or 1.1%. Unemployment claims on May have surged following the fires, but is expected to gradually recede with government leaders focused on supporting businesses and reopening areas of West Maui unaffected by the fires to help start the -- restart the island's economy. Real estate values in Hawaii continue to hold up firmly. The Oahu median single family home price remains at $1.1 million and the median condo sales price was $533,000 in September. While home sales volumes continue to be down year-over-year, there is still strong demand and limited inventory with properties staying on the market for a median of 20 days.
47% of single family homes sold at or above original asking price in September, an indication of the sustained demand and strength of Hawaii real estate despite mortgage rates reaching levels higher than we've seen in the last 20 years. Strong construction activity in Hawaii continues to drive economic growth. Our governor recently issued an emergency proclamation on housing that will help accelerate housing development to address the lack of inventory and affordable housing in the state. Additionally, major infrastructure improvement projects as well as large federal military projects continue to be on the roadmap for the state. On top of this, Maui reconstruction efforts will be a priority and the state will need to balance construction worker demand and a likely increase in construction costs.
In the third quarter, we continue our focus on growing relationship based deposits and I'm pleased that we were once again successful in growing total deposits. As part of our strong risk management focus, we continue to moderate loan growth. But with that said, our loan portfolio churn is resulting in favorable repricing and deposit costs continue to be managed at levels lower than our peers. I'll now turn the call over to David Morimoto, our Chief Financial Officer. David?
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David Morimoto: Thank you, Arnold. Turning to our earnings results. Net income for the third quarter was $13.1 million or $0.49 per diluted share. Return on average assets was 0.70%. Return on average equity was 10.95%, and our efficiency ratio was 63.91%. During the third quarter, we continued to strengthen our balance sheet and liquidity positions with a quarter end cash position in excess of $400 million and total deposit growth of $69 million. Average total deposit balances also grew by $63 million sequential quarter. Our loan portfolio remained relatively flat during the quarter as we selectively grew certain portfolios with appropriate risk reward opportunities and continued to add other portfolios run off. We remain on hold with our Mainland unsecured consumer portfolio as we continue to monitor the national economic outlook and the ongoing performance of consumer lending.
We remain nimble and well positioned for future opportunities when the operating environment improves. Net interest income for the third quarter was $51.9 million and decreased by $0.8 million from the prior quarter, primarily due to higher funding costs. The quarter-over-quarter decrease in net interest income continues to narrow as assets reprice up and the pace of deposit cost increases upside. The net interest margin was 2.88% in the third quarter, a decline of 8 basis points sequential quarter. Our total cost of deposits was 108 basis points in the third quarter and our cycle to date total deposit repricing beta was 21%, which remains within our expectations. With the current higher for longer interest rate forecast, the pay fixed received float interest rate swap that we put on last year continues to increase in value and will support our future earnings.
The swap payments will begin on March 31, 2024 and it is currently 340 basis points in the money on a notional balance of $115.5 million. Third quarter other operating income was $10 million, which decreased by $0.4 million from the prior quarter, primarily due to lower BOLI income driven by equity market volatility and offset by lower deferred compensation expense. Other operating expenses totaled $39.6 million in the third quarter, a decrease of $0.3 million from the prior quarter. The decrease was primarily due to lower salaries and employee benefits related to deferred compensation as well as the ongoing management of our FTE count. Our effective tax rate was 24.9% in the third quarter and we continue to expect it to be in the 24% to 25% range going forward.
Our Board of Directors declared a quarterly cash dividend of $0.26 per share, which will be payable on December 15th to shareholders of record on November 30th. During the third quarter, we repurchased a nominal 4,500 shares at a weighted average price of $16.7. And now I'll turn the call over to Anna Hu, our Chief Credit Officer. Anna?
Anna Hu: Thank you, David. Our asset quality remained strong in the third quarter with nonperforming assets at 9 basis points of total assets and criticized loans at 1.09% of total loans. Our loan portfolio continues to be well diversified by loan type and industry sectors. Over 75% of the loan portfolio is real estate secured with a weighted average loan to value of 60%. Our commercial real estate portfolio represents 25% of total loans and is diversified across all asset types with 5% of this portfolio maturing over the next 12 months. Our CRE office and retail exposure remains low at 3.5% and 4.5% of total loans, respectively. 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 65% and 64 weighted average months to maturity. The US Mainland loan portfolio declined in the third quarter to 16% of total loans, which included a continued decrease in the Mainland consumer portfolio to $345 million or 6% of total loans as of September 30th. Our loan exposure to the Lahaina, Maui area was a manageable $111 million or 2% of total loans before the wildfires in August. Since then, balances have paid down slightly to $107 million or 1.9% of total loans. We estimate that $78 million of the total Lahaina, Maui loans outstanding was not impacted by the fires as of September 30th. Additional updates continue to be collected from our borrowers. Insurance, FEMA and unemployment benefit assistance processing also continues.
To support our borrowers, we have provided three to six month loan payment deferrals and have granted total deferrals on 142 loans totaling $32.7 million in balances. Overall, at this time, we do not anticipate material credit impacts in the Maui wildfire and will continue to monitor the situation. Net charge-offs were $3.9 million for the third quarter, which equates to 28 basis points annualized as a percent of average loans. The increase in net charge-offs were primarily from our maintenance, unsecured consumer portfolio, which have lower recoveries. We believe the losses are leveling off due to the seasoning of the portfolio and the performance remains within our original expectations. Our allowance for credit losses was $64.5 million or 1.17% of outstanding loans.
In the third quarter, we recorded a $4.5 million provision for credit losses on loans primarily due to net charge-offs. Additionally, a $0.4 million provision for unfunded commitments or a total provision for credit losses of $4.9 million during the quarter. Overall, given our strong risk management culture and history of conservative underwriting policies, our loan portfolio remains well positioned to withstand the near term pressures from the environment. We continue to monitor the economic environment closely and are being selective and thoughtful about the loans we're adding to our portfolio. Now I'll turn the call back to Arnold. Arnold?
Arnold Martines: Thank you, Anna. In summary, we continue to execute on our strategies as we navigate the current environment. Our liquidity, capital and credit remains solid, and our teams continue to be focused on building relationships and serving our community. 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.
