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Edited Transcript of CPF.N earnings conference call or presentation 28-Oct-20 5:00pm GMT

·31 min read

Q3 2020 Central Pacific Financial Corp Earnings Call HONOLULU Jan 8, 2021 (Thomson StreetEvents) -- Edited Transcript of Central Pacific Financial Corp earnings conference call or presentation Wednesday, October 28, 2020 at 5:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Anli Ngo Central Pacific Financial Corp. - President & Director * Anna M. Hu Central Pacific Financial Corp. - Executive VP & Chief Credit Officer * Arnold D. Martines Central Pacific Financial Corp. - Group EVP of Revenue * David S. Morimoto Central Pacific Financial Corp. - Executive VP, CFO & Treasurer * Paul K. Yonamine Central Pacific Financial Corp. - Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Andrew Brian Liesch Piper Sandler & Co., Research Division - MD & Senior Research Analyst * David Pipkin Feaster Raymond James & Associates, Inc., Research Division - Research Analyst * Jacquelynne Chimera Bohlen Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research * Laurie Katherine Havener Hunsicker Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Central Pacific Financial Corp. Third Quarter 2020 Conference Call. (Operator Instructions) This call is being recorded, and will be available for replay shortly after its completion the on 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, sir. -------------------------------------------------------------------------------- David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [2] -------------------------------------------------------------------------------- Thank you, Greg, and thank you all for joining us as we review the financial results of the third quarter of 2020 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. We have prepared a slide presentation that we will refer to in our remarks today. The presentation 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 2 of our presentation. And now I'll turn the call over to Paul. -------------------------------------------------------------------------------- Paul K. Yonamine, Central Pacific Financial Corp. - Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you, David, and good morning, everyone. 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 7-day average number of infections and positivity rate of 54% and 2.2%, respectively, as of October 26. After several delays to initial targeted dates, 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 2,000 per day since March and 30,000 per day pre-pandemic. Additionally, on October 22, Oahu made progress by moving to Tier 2 of its recovery plan, as it met the requirement of having the 7-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 platform, 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 in full function machines and implemented this quarter an 8 p.m. Hawaii time cutoff for same-day ATM deposit processing, the latest cutoff 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 deferrals decreased by nearly 50% as a significant portion resumed payments. 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. I'd like to now turn the call over to Catherine to share more about our pandemic preparedness plan and the work of our CPB Foundation. Catherine? -------------------------------------------------------------------------------- Anli Ngo, Central Pacific Financial Corp. - President & Director [4] -------------------------------------------------------------------------------- Thank you, Paul. Our pandemic preparedness plan continues to be in place, and we have not had any disruption in our business. We currently have 28 branches open to fully serve our customers, 4 branches remained temporarily closed due to the pandemic. During the third quarter, we consolidated 3 in-supermarket branches into our larger neighboring branches, as the in-market branches were too small to allow for adequate social distancing. We are on track with 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 programs. Third quarter, our foundation was 1 of the 2 presenting sponsors of the Maid 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 3-day launch weekend, contrast to the 60,000 attendees for the festival in-person that recorded in earlier years. The online festival enabled 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 towards this successful initiative. I'd like to turn the call over now to Arnold Martines, our Executive Vice President and Chief Banking Officer. Arnold? -------------------------------------------------------------------------------- Arnold D. Martines, Central Pacific Financial Corp. - Group EVP of Revenue [5] -------------------------------------------------------------------------------- Thank you, Catherine. In the third quarter, we were able to grow our loan portfolio by $27 million, despite the soft 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 continued to outperform, with record levels of production resulting in $4.3 million in mortgage banking income for the quarter, it was 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 SBA. As expected, as businesses spends their PPP funding, saw a quarter-over-quarter decline in our core deposit balances of $109 million. Despite that, our core deposit balances remained 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, 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 to 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, while exploring and engaging new opportunities and our customer base during this unprecedented time. Now I would like to turn the call over to Anna Hu, our Executive Vice President and Chief Credit Officer, to provide details on our credit and portfolio risk management activities. Anna? -------------------------------------------------------------------------------- Anna M. Hu, Central Pacific Financial Corp. - Executive VP & Chief Credit Officer [6] -------------------------------------------------------------------------------- Thank you, Arnold. 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 resumed their monthly payments. 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 3-month deferral, followed by a second 3-month deferral. While a significant number of customers have returned to making loan payments, we expect some consumer customers will require a loan payment modification due to the continued elevated unemployment rate. In the commercial and commercial real estate loan portfolio, we provided loan payment deferrals for $133 million in total loan balances. The 2 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 loan -- low loan-to-value ratios and, in the foodservice category, are supported by owners 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 deferrals 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 mention 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 conditions and external funding and support. Approximately 12% of special mention balances and 5% of classified balances also received PPP loans. Additional details on loans rated special mention and classified can be found on Slides 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. I'll now turn the call over to David Morimoto, our Executive Vice President and Chief Financial Officer. David? -------------------------------------------------------------------------------- David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [7] -------------------------------------------------------------------------------- Thank you, Anna. 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 forecast and not an increase in actual loan losses. Additionally, our pretax 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. 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 cost of $0.3 million related to the 3 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 positions remain strong, and we continue to perform robust stress testing. We recently completed subordinated note offering strengthens our capital ratios, which further allows us to support our customers and the community 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 30. Now I will return the call to Paul. -------------------------------------------------------------------------------- Paul K. Yonamine, Central Pacific Financial Corp. - Chairman & CEO [8] -------------------------------------------------------------------------------- Thank you, David. 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 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. On behalf of our management team and employees, 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. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Jackie Bohlen with KBW. -------------------------------------------------------------------------------- Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [2] -------------------------------------------------------------------------------- I wanted to start off with balance sheet liquidity management. Against other trends that we've seen, you did a really great job at managing your cash balances in the quarter and I just wanted to look going forward and see if you think there's any more PPP runoff or other liquidity runoff that you expect? And if you don't see that and you do start to have some sort of a mismatch perhaps between loan and deposit growth, I understand you've got PPP running off, what liquidity management plans are for that? -------------------------------------------------------------------------------- David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [3] -------------------------------------------------------------------------------- Jackie, it's David. Yes, I think, right now, the outlook is that we hope to have the PPP loan forgiveness process, so the reduction in PPP loan balances, closely mirror the rundown on the PPP balances in our deposits. So that's the current outlook, especially with the recent announcement on accelerated forgiveness for small dollar PPP loans. -------------------------------------------------------------------------------- Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [4] -------------------------------------------------------------------------------- Okay. And so I guess where -- to the extent that you may have excess liquidity, if that does happen, are you looking at securities reinvestments? Or would you look to keep that in cash? -------------------------------------------------------------------------------- David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [5] -------------------------------------------------------------------------------- Yes. Right now, the plan, Jackie, is to keep the investment portfolio roughly at its current size of about $1.1 billion. To the extent we have excess liquidity, we are optimistic that we'll see some net loan growth as the economy starts to rebound. So we are looking cautiously optimistic to see some stronger net loan growth outside of PPP loans. And then, obviously, to the extent that we do end up with excess liquidity, it could be put to work in the investment portfolio. -------------------------------------------------------------------------------- Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [6] -------------------------------------------------------------------------------- Okay. So then, how are you -- I'm understanding where you're coming from, from a liquidity management position, how are you thinking about the forward margin then, just in terms of pressures you might have on earning asset yields? And I know that there's maybe a little bit, but not a ton, of room to continue to drop down deposit costs? -------------------------------------------------------------------------------- David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [7] -------------------------------------------------------------------------------- Yes. That's the challenge for the banking industry is the net interest margin outlook. So currently, we're projecting a net interest margin range in 3.10% to 3.20% range for the next couple of quarters. And that incorporates the sub debt offering, and it assumes a conservative reinvestment of the sub debt proceeds. So that's currently assumed to go into investments. So to the extent that we do see some stronger loan growth, that would help. So it incorporates the sub debt offering and it also incorporates some continued core net interest margin pressure as a result of the rate environment that you referenced, Jackie. -------------------------------------------------------------------------------- Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [8] -------------------------------------------------------------------------------- Okay. And then looking at the -- sorry I'm getting a little bit of feedback. Hopefully, you can hear me. Core loan yield versus where new generation was coming on, so I'm looking at the loan yield ex-PPP, and thank you for the data to be able to calculate that. Where are you seeing new originations, loan yields versus the portfolio? -------------------------------------------------------------------------------- David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [9] -------------------------------------------------------------------------------- Jackie, in the third quarter, new loan origination yields were roughly 3%. I will say that, that new loan origination yield is, obviously, very sensitive to the loan mix. So it does bounce around a little depending on the mix of new loans in a particular quarter. But on the third quarter, it was roughly 3%. -------------------------------------------------------------------------------- Paul K. Yonamine, Central Pacific Financial Corp. - Chairman & CEO [10] -------------------------------------------------------------------------------- Jackie, this is Paul. We're going to have to see how -- with the opening of tourism, what the implications will be to the economy. And we're trying to be very cautiously optimistic, and we're hoping that there will be more investments, in general, and more demand. And we're hopeful that, that will show up in net interest margin over time. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- The next question comes from Dave Feaster with Raymond James. -------------------------------------------------------------------------------- David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [12] -------------------------------------------------------------------------------- Just following up on the deposit question. Do you have an estimate for how much PPP deposits are still sitting in deposit accounts and haven't been spent? And then just how successful have you been thus far in migrating the new PPP clients to the bank? And just how deposits are trending and loan growth trending early in the fourth quarter? -------------------------------------------------------------------------------- Paul K. Yonamine, Central Pacific Financial Corp. - Chairman & CEO [13] -------------------------------------------------------------------------------- David, before we respond to that, can you hear us okay? We're having some audio problems, but... -------------------------------------------------------------------------------- David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [14] -------------------------------------------------------------------------------- Yes, I can hear you. -------------------------------------------------------------------------------- Paul K. Yonamine, Central Pacific Financial Corp. - Chairman & CEO [15] -------------------------------------------------------------------------------- Okay. Good. I'm going to have Arnold Martines, our CBO, to respond to that. Arnold? -------------------------------------------------------------------------------- Arnold D. Martines, Central Pacific Financial Corp. - Group EVP of Revenue [16] -------------------------------------------------------------------------------- Good morning, David. So as I mentioned earlier, deposit balances decreased in the third quarter as businesses started to spend their PPP loan proceeds. So to your question, we -- our expectation is that we're going to still have elevated deposits through the next few quarters as the businesses spend the dollars. But we have made really good progress in being able to engage and convert many of the customers that we assisted on the PPP with -- to the bank with operating accounts. It's really difficult, at this point, to really determine what the net amount is going to be just because we have inflows and outflows, obviously. But at some point in the future, we probably will be able to provide a little bit more color on that, David. -------------------------------------------------------------------------------- Paul K. Yonamine, Central Pacific Financial Corp. - Chairman & CEO [17] -------------------------------------------------------------------------------- David, there were over -- well over 2,000 new customers basically through the PPP process, and Arnold and his team is doing a great job converting many of them to become ongoing customers of the bank. So -- and we have some pretty good successes early on, and we're still working on it. -------------------------------------------------------------------------------- David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [18] -------------------------------------------------------------------------------- Okay. That's helpful. And then just kind of taking your commentary about hoping for some loan growth as the economy recovers. I mean, we've got the reopening started, things are trending a bit better than expected early on. Just curious how you're -- what your thoughts are on the pulse of the local economy? How your pipeline is trending? And just any updates on what you're hearing from clients and customers? -------------------------------------------------------------------------------- Paul K. Yonamine, Central Pacific Financial Corp. - Chairman & CEO [19] -------------------------------------------------------------------------------- Sure. So we still see a fair amount of strength in what I would call the non-tourism sector, especially around construction. I mean, we had such a vast shortage of housing, even before COVID, and that continues. So for many of the housing developments that are coming online, I mean, it's a very robust market. And we're quite pleased of the fact that we continue to be a lead takeout lender on a lot of these large housing projects. At the same time, the military sector continues to be very robust with a lot of new investments by the federal government and the Department of Defense here in Hawaii. So that's ongoing. Clearly, the reservations and the concerns are somewhat tacked onto the tourism sector. And with the opening on October 15, we don't see a huge spread on COVID. And we can continue to welcome more tourists in here. By tourists, meaning, investors as well. I think we should be able to expect a gradual uptick on opportunities, and that's tourism-related as well. And that would fare very well for us. -------------------------------------------------------------------------------- David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [20] -------------------------------------------------------------------------------- Okay. That's great color. I appreciate that. And then just last one. You guys have done a great job managing expenses in the face of these revenue headwinds. Just curious whether there's anything more onetime in nature in this that kept it lower and -- or whether this is a good expense run rate going forward? And then whether the new digital platform, I mean, that's a huge initiative for you all, I know, just whether there's any efficiencies or any potential cost savings coming from that as we go forward? -------------------------------------------------------------------------------- Paul K. Yonamine, Central Pacific Financial Corp. - Chairman & CEO [21] -------------------------------------------------------------------------------- The digital platform, David, already is, I think, Arnold and David touched on, we're seeing dramatic change of consumer behavior today. A lot more mobile deposits, a lot more usage of the ATM. Definitely, people having quite an affinity to our new mobile platform, and we expect that to continue. We're going to be following that closely as to what the implications on changing consumer behavior and the effectiveness of our digital platform for us to continue to look at our branch network. As Catherine touched on, we closed 3 in-store branches. And we're going to continue taking a hard look at what else we could do, while not inconveniencing our customers. And so that will probably be something out there, but we don't have anything on the table today, but we're going to take a hard look at it. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- The next question comes from Andrew Liesch with Piper Sandler. -------------------------------------------------------------------------------- Andrew Brian Liesch, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [23] -------------------------------------------------------------------------------- I just want to touch on credit here. Saw a little bit of increase in criticized loans. But notwithstanding, they're still very low as a percentage of the portfolio. And you did have a little bit of an increase in the provision here. It seems like that's related to those couple commercial borrowers that you mentioned. But I mean, how are you looking at the allowance from here? You've certainly built the reserve nicely this year, as you adopted CECL and just with some of the qualitative and quantitative overlays. But do you think there's more reserve building to be done? Or do you think this is kind of a good level of where it could kind of plateau for a while as we move through and the economy rebounds? -------------------------------------------------------------------------------- David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [24] -------------------------------------------------------------------------------- Andrew, it's David. We feel good. We feel good about where -- we feel we're appropriately reserved as of 9/30. The outlook going forward is going to be a function of the economy, the economic forecast, the reopening of tourism in the local economy and net charge-offs and loan migration. We're appropriately reserved at 9/30. And then to the extent that things trend positively, and the reserve coverage level could come down, or vice versa. If they were to go the other way, we would be directionally consistent with that. So it's -- yes, it's hard to give you a precise answer, other than to say it's going to be directionally consistent with what we see in the economy and the credit portfolio. -------------------------------------------------------------------------------- Andrew Brian Liesch, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [25] -------------------------------------------------------------------------------- Okay. Understandable. The -- on the deferral slide of the presentation, just referenced the commercial mortgage, construction, C&I loans, that you expect 25% to resume regular payments here this quarter. What are the other 75% telling you? Are they -- how do they feel about their situation? Do you think they may need to come back and need more deferral time as we move into next year? Yes, just curious what the tone of those borrowers is right now. -------------------------------------------------------------------------------- Anli Ngo, Central Pacific Financial Corp. - President & Director [26] -------------------------------------------------------------------------------- Anna? -------------------------------------------------------------------------------- Anna M. Hu, Central Pacific Financial Corp. - Executive VP & Chief Credit Officer [27] -------------------------------------------------------------------------------- Okay. Andrew, this is Anna. Yes, so I think in our residential, our commercial, real estate and our C&I book, we are seeing very positive downward trends in customers moving back to payment. What we're really focused on is probably the consumer. Again, the unemployment rate in September was about 15%. And so there is some uncertainty around the outlook that we continue to monitor to watch, and then to actively work with our customers as well to provide assistance. -------------------------------------------------------------------------------- Andrew Brian Liesch, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [28] -------------------------------------------------------------------------------- Okay. And then just on the balance of PPP loans that are remaining, or I guess, all of them, what's been the sense that you guys have gotten from the SBA? So the process is going pretty slowly, but in speaking with their customers, how long do you think these loans stick around on the balance sheet before they're repaid and forgiven? -------------------------------------------------------------------------------- Arnold D. Martines, Central Pacific Financial Corp. - Group EVP of Revenue [29] -------------------------------------------------------------------------------- Yes. So Andrew, this is Arnold. So as I mentioned earlier, we opened our portal just recently, and I'll just give you kind of a flavor. As of October 26, we had 76 loans in our pipeline totaling $20 million, submitted to the SBA for forgiveness. And we've had, thus far, 4 loans for $158,000 approved by the SBA. Our expectation is that we're probably going to see most of the forgiveness happen in 2021, just given what we're seeing as far as the turnaround times and just the activity that's coming through our forgiveness portal. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- (Operator Instructions) The next question comes from Laurie Hunsicker with Compass Point. -------------------------------------------------------------------------------- Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [31] -------------------------------------------------------------------------------- Just wanted to stay with Andrew's question on PPP. Can you just remind us, as of September 30, what the net processing fees are remaining on your PPP book? -------------------------------------------------------------------------------- David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [32] -------------------------------------------------------------------------------- Laurie, it's David. So the total net processing fees were roughly $19 million. And as of 9/30, we still had roughly $15 million to go -- to be earned. -------------------------------------------------------------------------------- Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [33] -------------------------------------------------------------------------------- $15 million. Perfect. $15 million. Okay. Great. And then can you -- and David, maybe this is a question for you, or for you, Anna. Can you give us a little bit of color on the 2 commercial credits? What types they were? -------------------------------------------------------------------------------- Anna M. Hu, Central Pacific Financial Corp. - Executive VP & Chief Credit Officer [34] -------------------------------------------------------------------------------- Laurie, this is Catherine. Are you talking about the commercial credits in nonperforming? -------------------------------------------------------------------------------- Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [35] -------------------------------------------------------------------------------- Yes, I'm sorry. The 2 commercial relationships totaling $15 million that you all had said you don't expect to see further loss, but obviously, we have movement there. Just wondered what they were. And then what that extra piece of $3 million in secured collateral is? Just any other color you can give us. -------------------------------------------------------------------------------- Anli Ngo, Central Pacific Financial Corp. - President & Director [36] -------------------------------------------------------------------------------- Yes, sure. I'll start, and then maybe Anna will provide more detail. But yes, we did see that $7.6 million increase in NPAs quarter-over-quarter. And I'll share with you, half of that amount, real estate secured actually was paid off this past Monday. And then the other half, the other piece, is a real estate secured loan on a property here in downtown Honolulu, and the loan-to-value on that loan is 32%. -------------------------------------------------------------------------------- Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [37] -------------------------------------------------------------------------------- And what -- sorry, what type of real estate? -------------------------------------------------------------------------------- Anli Ngo, Central Pacific Financial Corp. - President & Director [38] -------------------------------------------------------------------------------- It's a commercial building in downtown Honolulu. -------------------------------------------------------------------------------- Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [39] -------------------------------------------------------------------------------- Okay. So office. Okay. Okay. And then just maybe some comments, if you have them, your hotel book, just looking at your deferrals, you went from 3.3% at June to 28.8%, which is still remarkably low, remarkably low relative to mainland. Remarkably low, just even thinking about the fact that Hawaii isn't open. Can you just help us think about that whole $59 million book? Where you see that going? What you're expecting in terms of, as we look forward, is it going to stay at this level? And then also, can you just remind us what your hotel book looks like in terms of just very approximate properties flag? Are they beachfront? Just any color you can give us would be helpful. -------------------------------------------------------------------------------- Anli Ngo, Central Pacific Financial Corp. - President & Director [40] -------------------------------------------------------------------------------- So I'll start, and then Anna can provide some details. So in our slide deck, on Slide 16, you see our accommodation book of $59 million. And we haven't broken out between C&I and CRE. The book comprises of a number of hotels with strong flags, so international flags and then with strong backers. And so just to give you some color on how we feel about that portfolio. Many of the hotels have reopened with the reopening of tourism on October 15. Anecdotally, we're hearing that the owners are pleasantly surprised on the return of tourists. But I have to say, and along the lines of what Paul mentioned earlier, the continued progress will depend on the continued influx of tourists and then our ability to keep the infection rate down here in Hawaii. -------------------------------------------------------------------------------- Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [41] -------------------------------------------------------------------------------- Sure. And so is that a 6 months deferral then that you all granted? Is that how you're approaching this? -------------------------------------------------------------------------------- Anna M. Hu, Central Pacific Financial Corp. - Executive VP & Chief Credit Officer [42] -------------------------------------------------------------------------------- This is Anna. It's pretty much still on a 3-month by 3-month basis. So with regards to the accommodation at $17 million, we actually feel really good about it. Some of those hotels delayed their opening. So we're looking at a November 1 opening for the couple of hotels that are in that category. -------------------------------------------------------------------------------- Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [43] -------------------------------------------------------------------------------- Okay. No, I mean, it's low considering that Hawaii hasn't been open. Okay. And just -- I mean, along those lines, if I'm looking at your total commercial deferrals, again, really good improvement here going from 19.5% down to 8%. So can you help us think about, with your stock trading, so just kind of to book, how you're approaching something like potentially a buyback? We're seeing more and more smid-cap banks announce buybacks. Just what are your thoughts? And certainly, you obviously have the sub-debt raise, which potentially could also be used to buy back stock. So maybe if you could help us think about -- any thoughts around that, Paul or Catherine? That'd be great. -------------------------------------------------------------------------------- Paul K. Yonamine, Central Pacific Financial Corp. - Chairman & CEO [44] -------------------------------------------------------------------------------- Let me have David respond to that, Laurie. David? -------------------------------------------------------------------------------- David S. Morimoto, Central Pacific Financial Corp. - Executive VP, CFO & Treasurer [45] -------------------------------------------------------------------------------- Laurie, yes, again, I think the Hawaii economic recovery is, obviously, trailing the mainland slightly, with us just reopening tourism. So we're going to be monitoring the recovery of the local economy, as Paul mentioned earlier. And as we gain better visibility on the path forward, we could turn offensive with our robust capital position. And with the stock trading at 75% of tangible book value, that's a pretty good opportunity. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back over to Paul Yonamine for any closing remarks. -------------------------------------------------------------------------------- Paul K. Yonamine, Central Pacific Financial Corp. - Chairman & CEO [47] -------------------------------------------------------------------------------- Great. Thank you very much for participating in our earnings call for the third quarter of 2020. We look forward to future opportunities to update you on our progress. Thank you very much. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.