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Text: As always, we appreciate your interest in Central Pacific Financial Corp.
I'd like to start with an update on the COVID-19 pandemic response by the State of Hawaii and our company.
The infection rate in the State of Hawaii continues to remain very low with roughly 1,800 cases as of July 28.
Hawaii continues to have the lowest per capita infection rate in the nation.
Our residents are abiding by government orders including required quarantine, face mask usage and social distancing.
The state's local economy reopened in June and we will be reopening out of state tourism on September 1 through visitors that provide evidence of a negative COVID-19 test.
We believe this is a balanced way to reopen out of state tourism while managing COVID infections.
While the tourism reopening will be at a gradual process it will help to start bringing back the much-needed business to our local economy.
Travel bubbles between Hawaii and other countries of low infection rates continue to be discussed by our government leaders.
At Central Pacific we continue to prudently manage through the pandemic.
In the credit area we have thoroughly reviewed our loan portfolio.
Adjusted risk ratings were warranted and determined that our credit risk is manageable.
Our portfolio is conservative, well diversified and well collateralized.
We continue to proactively work with our customers to help them through the pandemic as demonstrated by our significant Paycheck Protection Program or PPP loan originations and loan payment deferral programs.
Overall, we remain committed to supporting the needs of our customers and community during this time while providing the excellent service that we are known for and maintaining a safe environment.
Our RISE2020 initiative are continuing and making good progress despite the COVID-19 pandemic.
The revitalization of our building headquarters is in full steam with major parts of the construction under way and on track for an opening date in January 2021.
In the area of digital, we are in the final stages of pilot testing our new online and mobile banking platforms and are excited for the public launch in late August.
Finally, we continue to rollout our newly upgraded ATMs throughout our branch network.
We continue to see a decline in branch transaction activity and our digital initiatives have been well timed to meet the changing needs of our customers.
Our pandemic preparedness plan continues to be in place and we have not had any disruption in our business.
We have recently reopened several of our branches that were temporarily closed and are implementing a gradual phase-in return-to-office plan that includes a portion of the workforce continuing with flexible remote work schedules.
Safety remains our utmost priority.
Therefore we have made appropriate changes to our branch and office setup to ensure proper social distancing and hygiene practices.
The actions that we've taken, we believe will continue to enable us to provide a safe environment for both our employees and customers.
The CBD Foundation continues to be active in helping the community with relevant and timely programs.
During the second quarter we ran a Mahalo Meals initiative that provided 1,500 meals to local first responders and frontline heroes.
Additionally, we recently launched a program called bricks to bites, which is helping local businesses through the crisis by providing free services to take their business online and more digital.
We also are continuing communication and engagement with visitors particularly from Japan to keep Hawaii top of mind and encourage their return to Hawaii once the pandemic end and recovery occurs.
Finally, we are continuing to work with government leaders to reopen the Hawaii economy safely with temperature screening and COVID contact tracing program.
The second quarter was highlighted by the company's successful PPP loan origination efforts as well as solid mortgage banking performance.
We originated over 7,200 PPP loans totaling over $550 million to both existing and new customers.
This was a tremendous effort that involved employees throughout the bank.
We were very pleased that our efforts not only supported our customers, but also the broader business community during these unprecedented times.
We are preparing to launch our PPP forgiveness portal and expect to begin the process of assisting our customers that are applying for forgiveness from the SBA in the near future.
Given the low business rate environment, residential mortgage demand was strong, which enabled the company to grow our residential mortgage portfolio by $25 million and generate $3.6 million of mortgage banking income during the second quarter.
Overall for the second quarter, the company grew total loans by $491 million or 10.9% sequential quarter.
This included $526 million in PPP loans and $25 million in residential mortgage as I mentioned earlier, partially offset by declines in other loan categories.
We're also able to grow core deposits by $719 million or 16.7% sequential quarter augmented by the PPP loan funds that were deposited with the bank.
Additionally, we believe part of the increase was a result of a fight to safety by our customers.
Given the volatility in the markets and the current operating environment we were successful in reducing the average cost of total deposits by 16 basis points to 20 basis points.
Our teams continue to be focused on expanding banking relationships with segments less impacted by COVID-19 and we continue to stay in close contact with our customers through increased find outreach efforts given the current operating environment.
Providing best-in-class digital technology remains a key priority for us.
We experienced increased customer usage of digital channels over the last several months due to COVID-19 pandemic with mobile deposit transactions up over 90% and mobile banking enrollments up nearly 15% on a year ago.
The increased digital channel activity creates strong momentum as we prepare to launch our new mobile and online platforms.
In addition, we rolled out new ATMs with enhanced functionality to half of our branches through June 30.
New ATMs at the remaining branches are scheduled to be installed before the end of the year.
During the second quarter we continued with our rigorous approach to reviewing our commercial loan portfolio and actively worked with our customers to determine ongoing financial impact, if any, as well as provided support and guidance through the ongoing uncertainty in the marketplace.
We proactively assisted many of our customers in providing loan payment deferrals, as well as in the application and approval of PPP.
The volume of loan payment deferrals printed peaked in May at $605 million in total loan balances and have since declined to $568 million or 12.7% of our total loan portfolio excluding PPP balances at June 30.
Our consumer loan payment deferrals totaled $66 million and residential loan payments forbearances totaled $177 million.
We continue to support our consumer and residential customers with a second 90-day loan payment deferral or forbearance as needed.
We expect that a majority of our consumer customers who took a first 90-day loan payment deferral has taken or planning to take a second 90-day deferral due to their continued unemployment status.
The majority of the residential mortgage forbearances were still in their initial 90-day forbearance period at June 30, but we are starting to see some borrowers resume payments and come off of forbearance with the total accounts dropping from a peak of 467 at May 31 down to 350 at June 30.
In our commercial and commercial real estate loan portfolio we provided loan payment deferrals of $318 million in total loan balances.
The highest amount was in the real estate and rental and leasing category of $167 million or 3.7% of the total loan portfolio, excluding PPP balances and comprised of 129 loans.
The majority of the loans in this category are investor commercial real estate loans supported by seasoned real estate investors and strong loan-to-value ratio.
We have not begun a second round of loan payment deferrals yet in the commercial and commercial real estate loan portfolio but expect to do so at a lower volume and on a case-by-case basis.
Additional details on our loan payment deferrals can be found on slides 13 and 14.
During the quarter special mention loans increased by $6.8 million sequential quarter to $116 million or 2.6% of the total loan portfolio excluding PPP balances.
The largest exposure is in the real estate and rental and leasing category, which totaled $59 million or 1.3% of the total loan portfolio excluding PPP balances.
The loans in this category were downgraded primarily due to the temporary closure of tenants in commercial properties.
However, we have strong sponsorship and seasoned investors with strong loan-to-value ratios and are confident these borrowers will be able to weather through the economic downturn.
Approximately 24% of special mentioned balances also received PPP loans.
Additional details on our special mention portfolio can be found on slide 15.
Classified loans increased approximately $21 million sequential quarter to $47 million or 1% of the total loan portfolio excluding PPP balances.
The increase during the quarter was due primarily to two loans that were experiencing challenges prior to COVID-19.
Approximately 10% of classified balances also received PPP loans.
We continue to feel very good about our residential home equity and commercial real estate loan portfolio.
The weighted average origination loan to values in these portfolios are 61%, 63% and 60% respectively.
These loans comprise of approximately $3.4 billion or 76% of our total loan portfolio excluding PPP balances.
Overall, we believe our disciplined approach to credit and our diversified loan portfolio will help us weather through these unprecedented times.
Net income for the second quarter of 2020 was $9.9 million or $0.35 per diluted share.
Return on average assets in the second quarter was 0.61% and return on average equity was 7.34%.
Our earnings continue to be impacted by higher provision for credit loss expense due to the current COVID-19 pandemic.
Our pre-tax pre-provision earnings for the second quarter was $23.5 million, which increased by $3 million or 15% sequential quarter.
Net interest income for the second quarter was $49.3 million, which increased by $1.4 million on a sequential quarter basis.
The increase includes $2.5 million in PPP net interest income and net loan fees.
The net interest margin decreased to 3.26% in the second quarter compared to 3.43% in the prior quarter.
The decrease was due to lower yielding PPP loans as well as the lower interest rate environment.
The second quarter NIM normalized for PPP was 3.31%.
Second quarter other operating income totaled $10.7 million compared to $8.9 million in the prior quarter.
The increase was primarily due to higher mortgage banking income of $3.2 million and higher BOLI income of $1.4 million.
This was partially offset by lower service charge and fee income.
Other operating expense for the second quarter was $36.4 million, which was relatively flat to the prior quarter.
In the current quarter PPP loan origination cost of $2.2 million was capitalized and deferred, which reduced salaries and benefits.
This was offset by higher commissions and bonuses, as well as higher deferred compensation expense due to stock market volatility.
Net charge-offs in the first quarter totaled -- in the second quarter totaled $2.9 million compared to net charge-offs of $1.2 million in the prior quarter.
The charge-offs primarily came from the Hawaii consumer loan portfolio and the C&I portfolio.
At June 30, our allowance for credit losses was $67.3 million or 1.35% of outstanding loans.
Excluding the PPP loan portfolio, which is guaranteed by the SBA, our allowance for credit losses was 1.50% of total loans.
The efficiency ratio improved to 60.8% in the second quarter compared to 63.9% in the previous quarter.
The decrease was primarily due to higher net interest income and other operating income.
The effective tax rate decreased to 23% in the second quarter due to higher tax exempt bank-owned life insurance income.
Going forward, we expect the effective tax rate to be in the 24% to 26% range.
Our liquidity and capital positions remained strong and we continue to perform robust stress testing.
Our Board declared a quarterly cash dividend of $0.23 per share, which will be payable on September 15 to shareholders of record at the close of business on August 31.
Finally, we decided to consolidate four branches on the Island of Oahu later this year into existing nearby branches.
This decision was driven by increased customer adoption of online and mobile banking and our RISE2020 commitment to best-in-class digital banking technology.
As a result of these consolidations we expect annual expense savings of approximately $1.8 million.
We also expect to incur one-time charges associated with the consolidations of approximately $0.3 million in the third quarter and $1.4 million in the fourth quarter.
In summary, Central Pacific continues to manage well through the COVID-19 pandemic.
We have a solid financial credit, liquidity, and capital position to 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'll be happy to address any questions you may have.

user
central pacific financial corp q2 earnings per share $0.35.
q2 earnings per share $0.35.
net interest income for q2 of 2020 was $49.3 million, compared to $45.4 million in year-ago quarter.

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