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Text: As always, we appreciate your interest in Central Pacific Financial Corp.
The state of Hawaii, as well as our company, continues to manage well through the COVID-19 pandemic.
While the state of Hawaii experienced an uptick in infections in the late summer, which led to a second government mandated shutdown, the infection rate has recently dropped with the latest seven-day average number of infection and positivity rate of 54 and 2.2%, respectively as of October 26.
After several delays to initial targeted days, the state of Hawaii reopened out-of-state tourism on October 15 for visitors that provide evidence of a negative COVID-19 test.
This is a key step in the process of Hawaii's economic recovery.
In the first week after reopening, we've been pleasantly surprised by the daily air arrival numbers, which have been in the 5,000 to 8,000 range per day compared to less than 2000 per day since March and 30,000 per day pre-pandemic.
Additionally, on October 22, Oahu made progress by moving the Tier 2 of its recovery plan as it met the requirement of having the seven-day average COVID cases at less than 100 and positivity rate of less than 5%.
Tier 2 allows Oahu to further reopen certain parts of the economy.
At Central Pacific, we continue to push forward with our key RISE2020 strategy, while at the same time prudently managing through the pandemic.
In August, we launched our new online and mobile banking platforms, which includes many industry-leading features and functionality.
The new digital platforms have been very well received by the market with an Apple mobile app rating of 4.8 out of 5.
Additionally, we continue to replace our entire ATM network and full function machines and implemented this quarter an ATM Hawaii Time cut-off for same-day ATM deposit processing, the latest cut-off time of all banks in the state.
The revitalization of our building headquarters is progressing well and is on track for an opening date in January 2021.
We continue to thoroughly review and regularly monitor our loan portfolio to appropriately manage the credit risk in the pandemic environment.
During the third quarter, our total balance of loans on payment deferral decreased by nearly 50% as a significant portion resumed payment.
At the end of the quarter, our loans on deferral was down to only 6% of total loans, excluding PPP loans.
Last week, we announced that we successfully completed a $55 million private placement subordinated note offering.
We believe this will also -- excuse me, we believe this will allow the bank to continue to support our customers and community, while also providing future capital flexibility.
Our pandemic preparedness plan continues to be in place and we have not had any disruption in our business and we have 28 branches open to fully serve our customers.
Four more branches remain temporarily closed due to the pandemic.
During the third quarter, we consolidated three in-supermarket branches into our larger neighboring branches as the end market branches were too small to allow for adequate social distance.
We are on track for consolidating the fourth previously disclosed branch in the fourth quarter.
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 each workday.
We believe the actions taken will continue to enable us to provide a safe environment for both our employees and customers.
The CPB Foundation continues to be active in helping the community with relevant and timely program.
Third quarter, our foundation was one of the two presenting sponsors of the Made in Hawaii festival, featuring more than 200 Hawaii small businesses and 10,000 products.
The festival, previously held at our local Honolulu arena, pivoted quickly to become an online marketplace this year, attracting over 100,000 unique visitors over the three-day launch weekend, contrast to the 60,000 attendees for the festival in person that recorded in earlier years.
The online festival enables struggling small businesses to sell their Hawaii-made products year round to a wide base of local, national and international shoppers, bringing in much needed revenue during the current challenging environment, and is a good step forward to economic diversification through exporting.
We are glad that our foundation was able to provide support toward this successful initiative.
In the third quarter, we were able to grow our loan portfolio by $27 million despite the tough operating environment.
Growth was broad-based, including residential mortgage, home equity, commercial mortgage and construction loans.
Growth in these loan categories was partially offset by declines in our consumer and C&I loan portfolio.
Driven by a record low interest rate environment, our residential lending team continue to outperform with record levels of production, resulting in $4.3 million in mortgage banking income for the quarter with more than double the income from the same quarter a year ago.
During Q3, our bankers continue to engage our business customers that we assisted through the Paycheck Protection Program.
Most importantly, we continue to advocate for the broader business community impacted by COVID-19.
We recently launched our PPP forgiveness portal and have begun the process of assisting our customers applying for forgiveness from the FDA.
As expected, as businesses spent their PPP funding, we saw a quarter-over-quarter decline in our core deposit balances of $109 million.
Despite that, our core deposit balances remain up over $650 million year-to-date.
Additionally, our cost of total deposits declined by 7 basis points to 13 basis points.
Providing best-in-class digital technology remains a key priority for us.
In Q3, we launched our new consumer mobile platform and are nearly complete with the rollout of our new ATM fee, as Paul mentioned earlier.
We are seeing strong adoption and utilization of both digital channels.
Our ATM deposit volume has substantially increased from a year earlier due primarily to the enhanced deposit functionality now available through our ATMs, and deposit volume has also increased for our new consumer mobile platform from a year earlier.
As we move into the fourth quarter, our bankers will continue to remain vigilant, given the tough operating environment but laser focused to support our customers by exploring and engaging new opportunities to expand our customer base during this unprecedented time.
At September 30, the loan portfolio totaled $5.03 billion with 54% consumer and 46% commercial.
During the quarter, we continued monitoring the loan portfolio and provided support to our customers as they navigated through the uncertainty in the marketplace.
We assisted our customers in providing a second loan payment deferral if needed, and we were pleased to see a significant number of borrowers resume their monthly payment.
At quarter end, the total balance of loans on payment deferrals declined to $291 million or 6.5% of our total loan portfolio, excluding PPP balances.
Our redeferral rate was 31% and was primarily driven by consumer, small business and residential loans.
These loans were initially granted a three-months deferral followed by a second three-months deferrals.
While a significant number of customers have returned to making loan payments, we expect some consumer customers will require a loan payment modifications due to the continued elevated unemployment rate.
In the commercial and commercial real estate loan portfolio, we provided loan payment deferral for $133 million in total loan balances.
The two highest exposures by industry is real estate and rental and leasing, totaling $47 million or 1% of the total loan portfolio, excluding PPP balances, and foodservice totaling $46 million or 1% of the total loan portfolio, excluding PPP balances.
The majority of the loans in the real estate category are supported by low loan-to-value ratios and in the foodservice category are supported by owner with good liquidity and access to capital.
We expect some of our borrowers will need a loan modification at the end of their second loan payment deferral, which will be evaluated on a case-by-case basis.
Loan payment deferral for our high-risk industries totaled $66 million or 1.5% of the total loan portfolio, excluding PPP balances.
Additional details on our loan payment deferrals can be found on Slides 20 and 21.
During the quarter, criticized loans increased by $34 million sequential quarter to $197 million or 4.4% of the total loan portfolio, excluding PPP balances.
Special mentioned loans increased by $33 million to $149 million or 3.3% of the total loan portfolio, excluding PPP balances.
And classified loans increased by $1.5 million to $48 million or 1.1% of the total loan portfolio, excluding PPP balances.
Loan downgrades were the result of our continued assessment of borrower risk, based on the borrower's near-term strategy and outlook, management strength and actions they've taken, overall financial condition, and external funding and [Technical Issues].
Approximately 12% of special mentioned balances and 5% of classified balances also received PPP loans.
Additional details on loans rated special mention and classified can be found on Slide 22 and 23.
Overall, we continue to believe our proactive and disciplined approach to credit and our diversified loan portfolio will allow us to remain strong through these unprecedented times.
Net income for the third quarter of 2020 was $6.9 million or $0.24 per diluted share.
Return on average assets in the third quarter was 0.42% and return on average equity was 4.99%.
Our earnings continue to be impacted by higher provision for credit loss expense due to the current COVID-19 pandemic.
Importantly, the third quarter increase in our provision was largely driven by the economic forecasts and not an increase in actual loan losses.
Additionally, our pre-tax, pre-provision earnings for the third quarter was $23.7 million, which increased slightly from the prior quarter.
Net interest income for the third quarter was $49.1 million, which remained relatively flat on a sequential quarter basis.
Net interest income included $3.4 million in PPP net interest income and net loan fees.
The net interest margin decreased to 3.19% in the third quarter compared to 3.26% in the prior quarter.
The decrease was due to lower yielding PPP loans, as well as the lower interest rate environment.
The net interest margin normalized for PPP was 3.26% in the third quarter compared to 3.31% in the prior quarter.
Third quarter other operating income totaled $11.6 million compared to $10.7 million in the prior quarter.
The increase was primarily due to higher mortgage banking income of $0.8 million.
Additionally, in the current quarter, we reinstated certain service charges that were temporarily suspended due to the pandemic.
This resulted in an increase in service charges on deposit accounts and other service charges and fees.
Other operating expense for the third quarter was $37.0 million which was an increase of $0.5 million compared to the prior quarter.
The increase was driven by increases in several expense line items and also included branch consolidation costs of $0.3 million related to the three in-store branch closures, previously noted.
Net charge-offs in the third quarter totaled $1.3 million compared to net charge-offs of $2.9 million in the prior quarter.
The charge-offs primarily came from the consumer loan portfolio and the C&I portfolio.
At September 30, our allowance for credit losses was $80.5 million or 1.79% of outstanding loans, excluding PPP loans.
This compares to 1.50% as of the prior quarter end.
The efficiency ratio remained relatively steady at 60.9% in the third quarter compared to 60.8% in the prior quarter.
The effective tax rate increased to 24.3% in the third quarter due to lower tax-exempt bank-owned life insurance income.
Going forward, we expect the effective tax rate to continue to be in the 24% to 26% range.
Our liquidity and capital position remains strong and we continue to perform robust stress testing.
The recently completed subordinated note offering strengthens our capital ratios, which further allows us to support our customers and the communities during the pandemic, and positions the company well for the future.
The subordinated notes are considered Tier 2 capital and is anticipated to increase our CPF total risk-based capital ratio by approximately 120 basis points.
Our Board declared a quarterly cash dividend of $0.23 per share, which will be payable on December 15 to shareholders of record at the close of business on November 30th.
In summary, Central Pacific continues to make positive forward progress on our strategies, while at the same time manage well through the COVID-19 pandemic.
We have a solid financial credit, liquidity and capital position that enable us to weather the storm.
As the economic recovery gradually begins, we remain committed to providing support to our employees, customers and the community.
At this time, we will be happy to address any questions you may have.

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compname reports q3 earnings per share $0.24.
q3 earnings per share $0.24.

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