Central Pacific Financial Corp Q1 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, thank you for standing by, and welcome to Central Pacific Financial Corp. First Quarter 2021 Conference Call. During today's presentation, all parties will be in 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 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.

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 system 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 loans. 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 hardworking team of employees that have enabled us to accomplish these milestones and results. We continue to be highly focused on building upon the 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 and company's pandemic status. Catherine?

Thank you, Paul. The State of Hawaii is making progress toward economic recovery. Our unemployment rate declined to 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 Travel program running well and the potential for a vaccine passport program starting in the late summer.

Thank you, Catherine. In the first quarter, our total loan portfolio increased by $174 million, primarily due to the new round 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, 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 application. 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 team continues to assist our existing PPP borrowers to apply 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 31st, 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 CPB small business customers. Total deposits during the first quarter increased by $410 million or about 8% sequentially, which was supported by PPP loan fundings and other government stimulus. Additionally, our cost of total deposits declined by three basis points from the prior quarter and is now down just to six basis points. As the economic recovery in Hawaii gains traction, our bankers will continue to engage and support our customers until a healthy pipeline of new business for the bank.

Thank you, Arnold. At March 31st, 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 sequentially to $39.5 million or 0.9% of the total loan portfolio, excluding PPP balances. Additional payment deferral 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 21st. During the quarter, criticized loans declined by $10.5 million sequentially 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 is primarily due to loans being upgraded as a result of improvements in our borrowers' operating performance. The increase in classified loans is primarily due to residential and consumer loans. We continue to monitor our borrowers in the high-risk industries of food service and accommodation or $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 industry loans and loans rated special mention and classified can be found on slides 11, 13, and 14. Overall, our asset quality remained 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%.

We will now begin the question-and-answer session. Our first question is from David Feaster from Raymond James. Go ahead.

Hey, good morning, everybody.

Hey David.

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 is shaping up heading into the second quarter? And then just maybe where you're seeing demand in kind of the pulse of the client, the customer?

Sure David. And before I pass on to Arnold Martinez, our Chief Banking Officer, I might just also, as you probably know, the 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 PPP continue 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 is we have been in previous calls, we're still very committed to meet the high-single digit growth on loan for the balance of the year. But let me have Arnold touch a little bit more about our pipeline and some other details. Arnold?

Yes, thanks Paul. So, we feel very good about our pipeline. The pipeline is really healthy, particularly in our CRE area. Our residential production in the first quarter was pretty strong at $300 million. The overall outlook for our portfolio with regard to CRE, residential, looking at restarting, we see the market conditions improving. We're looking at restarting our consumer lending in Hawaii and 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. Can you provide insight into how much of the new customer acquisition from the PPP program is attributed to the new hires versus the increased sentiment among your investor base due to the improved economic outlook?

Yes, on the PPP non-customer conversion - we 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 PPP 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, so really nice new business for the bank.

Yes, 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 deposits as a result of that. And now, as we continue to harvest things and with the economy returning, we are quite hopeful that we'll be seeing some growth in other areas of banking. So, again it's right on course.

Okay, that's good color. And then I guess with all this excess liquidity, it sounds like organic growth has come in, but just any thoughts on potential loan purchases to supplement the organic growth? And then, I guess just taking it all together, how do you think about the core NIM going forward? Do you think we can get to stay in that 305, 315 realm? And that we're kind of approaching a trough as growth accelerates and earning asset mix improves?

David, are you referring to stock repurchases or loan purchases?

Loan pool purchases.

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

Yes, David, so as you know, what is our past issues. We always have considered mainland - so mainland loan purchases, portfolio purchases to augment our Hawaii originations, and that's always an option that we will behold if the risk-reward opportunity is there relative to what we're seeing locally. So that is always available. And then the second part to 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 305, 350 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 disclosed that 8 basis points of that was related to less PPP fee income due to slower forgiveness. The remaining fine, about one to two basis points of that is due to excess liquidity on the balance sheet. So really the balance sheet re-pricing is down to three to four basis point sequential quarter. So, we're getting close.

Okay, that's great color. Thanks, everybody.

Thank you, David.

Our next question is from Jackie Bohlen from KBW. Go ahead.

Hi, good morning, everyone. I want 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 that play on that?

Yes, we have experienced significant deposit growth alongside loan growth. It's important to note that the deposit growth will surpass just the PPP deposits related to loan origination. There was definitely some organic deposit growth mentioned by Paul. In terms of capital decision-making, even with our balance sheet just below $7 billion, we still believe we have excess capital. We plan to restart the repurchase plan in May, and its utilization will be at management's discretion, influenced by share price and our outlook for the balance sheet moving forward. We are confident about taking advantage of that opportunity as part of our capital management strategy. We are becoming more optimistic about 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 are definitely back on the table. Okay, just wanted to add that color.

Okay, great. Now, that's good color that's it only within the last month that it's things 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've talked about the potential for PPP deposit outflows to mere 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 experiencing some solid organic growth, despite some outflows in the deposit portfolio as small businesses begin to spend some of their funds. Overall, we are seeing very encouraging organic growth. Roughly speaking, in Q1, we estimate it to be about $170 million due to this growth. We feel confident about the strong organic growth and the momentum we have built. However, as a caution, we do expect continued outflows in the upcoming quarters as spending continues and some of the stimulus funds are depleted.

Okay. It appears that deposits are up 7% on an absolute basis, which seems to be influenced by some outflows related to the 2020 PPP. While there has been improvement from the 2021 PPP, there is also notable organic growth as we transition some of those 2020 customers into full relationships, but the numbers aren't adding up.

That's correct.

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

Okay. Great. Thank you, everyone.

Thank you.

Our next question is from Andrew Liesch from Piper Sandler. Go ahead.

Hi, good morning everyone.

Good morning.

The follow-up question on the mortgage press release that was pretty strong at $300 million. It looked like the portfolio declined in mortgage banking revenue, had declined as well and is a little bit short of my forecast. What's some of the trends you're seeing on the mortgage front, the gain on sale number come back, are you going to portfolio more of the residential production? How does that all shake out?

Yes, Andrew, this is Arnold. The gain on sale depends on what we sell compared to the portfolio. Looking at Q2, the production is expected to be quite strong, projected at $260 million to $270 million. In terms of gain on sale, we anticipate it will be in the range of $1.5 million to $3 million. However, this will depend on our decisions regarding what to include in the portfolio versus what to sell based on market conditions and our outlook for 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 I'm going to say 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 and maybe $38.5 million. Is this a good run rate to use that 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 $39 million to $41 million. And I have to say that one thing we've done during the pandemic is demonstrate a lot of restraint on how we spend and whether it be on headcount and other expenses that were still in line with $39 million and $41 million.

Got it. That's really helpful. You've covered all my other questions. Thanks so much. I'll step back.

Thank you.

Our next question is from Laurie Hunsicker from Compass Point. Go ahead.

Yes, hi thanks. Good morning. So, I think I'm just down to one question, obviously no C&I, no accretive deferrals, fabulous. I just want to confirm 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, while the numbers that are down to $39.5 million is primarily loans on forbearance. So, loans that have reinstated return 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 in and, but it's interest-only. Is that interest-only on deferral or is that no longer counted in deferral?

Yes, it's no longer counted.

Okay. So just, so I'm clear. Interest-only are no longer accounted in deferrals?

Correct.

Okay. Okay, that's it. Thank you very much.

Thanks Laurie.

Thanks Laurie.

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

Thank you. This is Yonamine. Thank you very much everyone for participating in our earnings call for the first quarter of 2021. We look forward to the 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.