Central Pacific Financial Q4 2023 Earnings Call Transcript

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Provided by Quartr
January 31, 2024

There are 6 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Q4 2023 Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for This call is being recorded and will be available for replay shortly after its completion on the company's website atwww.cpb.

Operator

Bank. And with that, I'd like to turn the call over to Ms. Dana Matsumoto, Group Senior Vice President and Director of Finance and Accounting. Please go ahead.

Speaker 1

Thank you, Greg, and thank you all for joining us as we review the financial results of the Q4 of 2023 for Central Pacific Financial Corp. With me this morning are Arnold Martinez, President and Chief Executive Officer David Morimoto, Senior Executive Vice President and Chief Financial Officer and Anna Hu, Executive Vice President and Chief Credit Officer. We have prepared a supplemental slide presentation that provides Additional details on our release and is available in the Investor Relations section of our website at cpb. Bank. During the course of today's call, management may make forward looking statements.

Speaker 1

While we believe these statements are based on reasonable assumptions, They involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to our forward looking statements, Please refer to Slide 2 of our presentation. And now, I'll turn the call over to our President and CEO, Arnold Martinez.

Speaker 2

Thank you, Dana, and aloha, everyone. We appreciate your interest in Central Pacific Financial Corp. And we are pleased to share with you Our latest updates and results. We are proud of the recognition we recently received by Newsweek as one of the best regional banks in America for 2024. Also in a few weeks, we will celebrate our 70th anniversary.

Speaker 2

It's an honor to lead this institution and continue our legacy of supporting the community. 2023 was another strong year for us as we successfully navigated the operating environment challenges, while continuing to deliver solid results. We have a strong balance sheet and our balanced growth strategy positions us extremely well for the future. During the Q4, we completed a few balance sheet repositioning transactions that were good opportunities to gain greater future returns and efficiencies. We will continue to pursue similar opportunities that align with our strategy in 2024.

Speaker 2

The team will provide additional detail and insights on our Q4 financial and credit metrics. But let me start first with an update on the Hawaii market. The Hawaii Tourism Industry continues to do well with Maui visitors recovering faster than anticipated. In the month of December, visitor arrivals to Maui were 75% of the previous year and total statewide arrivals were 90% of pre pandemic 2019. Statewide visitors from Japan continue to increase, up 92% from a year ago, but still lagging pre pandemic levels at only 49% at 2019.

Speaker 2

Total visitor spending was 1.96 $1,000,000,000 in December, down 1% from a year ago and up 12% from December 2019. Total hotel occupancy in December was 72%, up 0.7% from a year ago, with an average daily rate of $4.28 down 3% from a year ago. Hawaii's statewide seasonally adjusted unemployment rate was 2.9% in December and continues to outperform The national unemployment rate of 3.7 percent. The University of Hawaii Economic Research Organization Forecast the state unemployment rate to remain very low at 2.5% in 2024. Real estate values in Hawaii are consistently strong.

Speaker 2

In December, the Oahu median single family home price was 1,000,000 and the median condo sales price was $510,000 Home sale volumes continue to be down year over year, But with mortgage rates recently declining slightly, we are starting to see an increase in contract signings and with limited inventory, Properties continue to move quickly in our markets. Overall, we are optimistic about Hawaii's economic outlook. While the state faces some headwinds and uncertainty, Hawaii's economy is proving to be resilient and we hope to turn unfortunate events like the Maui wildfires into opportunities to rebuild and to make our island communities stronger in the future. I'll now turn the call over to David Morimoto, our Chief Financial Officer. David?

Speaker 3

Thank you, Arnold. Turning to our earnings results. Net income for the Q4 was $14,900,000 or $0.55 per diluted share. Return on average assets was 0.79%, Return on average equity was 12.55 percent and our efficiency ratio was 64.12%. At year end, our balance sheet reflected further strengthening of our liquidity position with higher levels of cash as we continue to be balanced with our loan growth.

Speaker 3

Our total loan portfolio decreased by $70,000,000 or 1.3 percent sequential quarter, primarily due to us continuing to let our Mainland loan portfolio runoff and partially offset by growth in our Hawaii commercial real estate and C and I portfolios. Our total deposit portfolio decreased by $27,000,000 or 0.4% sequential quarter as we ran off some higher cost government time deposits. Total core deposits remained relatively flat despite some continued migration from demand deposits to CDs. From an average balance standpoint, the trends indicate the movement out of non interest bearing DDA is continuing to slow. Net interest income for the Q4 was $51,100,000 and decreased by $800,000 from the prior quarter, primarily due to higher funding costs.

Speaker 3

The net interest margin was 2.84 in the 4th quarter, a decline of 4 basis points sequential quarter. Our total cost of deposits was 1.22% in the 4th quarter And our cycle to date total deposit repricing beta was 23%, which remains within our expectations. Our margin compression continues to narrow and with that positive trend as well as the expected benefit from our pay fix We see float swap. We expect our NIM to trough in the first half of this year. As Arnold mentioned, during the Q4, we completed a balance sheet repositioning where we sold an office real estate building and utilized the $5,100,000 pre tax gain to improve prospective earnings through an investment portfolio restructuring of Approximately $30,000,000 at a loss of $1,900,000 in a branch lease termination where we incurred a one time charge of $2,300,000 Overall, the 3 non recurring transactions positions our balance sheet for improved future performance, which we estimate to be an increase to annual pre tax income of $2,000,000 4th quarter other operating income was $15,200,000 which includes the aforementioned gain on office sale and investment portfolio restructuring loss.

Speaker 3

Additionally, we had higher BOLI income in the 4th quarter, which was driven by the equity market rally and offset by higher deferred compensation expense. Other operating expenses totaled $42,500,000 in the 4th quarter and included the charge on the early branch lease termination. Our effective tax rate declined to 22.3% in the 4th quarter, primarily due to higher tax exempt OLE income. Going forward, we expect our normalized effective tax rate to be 24% to 25%. During the Q4, we did not repurchase any shares.

Speaker 3

Finally, our Board of Directors declared a quarterly cash dividend of 0.26 dollars per share payable on March 15 to shareholders of record on February 29. Our Board of Directors also authorized new share repurchase plan to repurchase up to $20,000,000 of our common stock in 2024. I'll now turn the call over to Anna Hu, our Chief Credit Officer. Anna?

Speaker 1

Thank you, David. Our asset quality remained strong in the 4th quarter With non performing assets at 9 basis points of total assets and criticized loans decreasing to 0.92% of total loans. Our loan portfolio continues to be well diversified by loan type and industry sector. Over 75% of the loan portfolio is real estate secured with a weighted average loan to value of 62%. Our commercial real estate portfolio represents 25% of total loans and is diversified across all asset types with 8% of outstanding balances in this portfolio maturing in 2024.

Speaker 1

Our commercial real estate office and retail exposure remains low at 3.5% and 4.8% of total loans, respectively. The office portfolio has a weighted average loan to value of 56 percent 71 weighted average months to maturity. The retail portfolio has a weighted average loan to value of 64% 61 weighted average months to maturity. Our loan exposure to the Lahaina, Maui area was $111,000,000 or 2% of total loans before the August wildfire. Since then, balances have paid down slightly to $103,000,000 or 1.9 percent of total loans as of December 31.

Speaker 1

We estimate that $90,000,000 or 87% of the total Lahaina Maui loans outstanding were not directly impacted by the wildfire and $11,000,000 or 11% that were directly impacted have sufficient insurance and land value coverage. We are monitoring the remaining $2,000,000 of Lahaina loans, which includes primarily consumer unsecured and small business loans. The U. S. Mainland loan portfolio continued to decline during the Q4 due to the continued runoff in the Mainland consumer portfolio The $308,000,000 or 5.7 percent of total loans as of December 31, compared to $452,000,000 a year ago.

Speaker 1

Net charge offs were $5,500,000 for the 4th quarter, which equates to 41 basis points annualized as a percent of average loans. The increase in net charge offs were primarily from our This portfolio continues to run off as new purchases remain on hold as a prudent measure. With that said, we believe that our losses in this portfolio have peaked and will improve going forward. Overall, our loan portfolio remains solid. Our allowance for credit losses was $63,900,000 or 1.18 percent of outstanding loans.

Speaker 1

In the 4th quarter, we recorded a $5,000,000 provision for credit losses on loans primarily due to net charge offs. Additionally, we recorded a $300,000 credit to the provision for unfunded commitments or a total provision for credit losses of $4,700,000 during the quarter. Overall, our strong risk management culture and conservative underwriting policies continue to serve us well. Our loan portfolio credit quality remains strong and we continue to monitor the economic environment closely. Now I'll turn the call back to Arnold.

Speaker 1

Arnold?

Speaker 2

Thank you, Anna. In summary, we are pleased with our progress and results for 2023. We believe with our strong liquidity, capital and credit, we are well positioned to continue to deliver results with a focus on our mission of serving our customers and the broader community. As we celebrate our 70 years of serving Hawaii this year, I want to thank you for your continued support and confidence in our organization. At this time, we'll be happy to address any questions you may have.

Operator

And it looks like our first question comes from the line of David

Speaker 4

Maybe just high level, I'd like to start on how you think about the potential impacts of Fed cuts. Obviously, that would benefit on the credit side. But is your sense there that maybe there's a decent amount of pent up loan demand and we could see growth accelerate, especially on the mortgage front maybe and just how do you think about your ability to reprice deposits lower if we do get Fed cuts?

Speaker 2

Thanks, David. This is Arnold. I'll start and then I'll turn it over to David for the second part of your question. With regard to the loan growth side of it, we do feel good about that this year. We think that the operating environment is going to normalize a bit, has to be better than last year for sure.

Speaker 2

So we're building a strong loan pipeline as we move into the first half of twenty twenty four. We see most of the activity in the CRE and C and I loan categories, but we do expect residential and home equity and small business to also support growth in 2024. As you know, we continue to let the mainland consumer loan portfolio run off until we have better visibility on what happens in the U. S. Continent from an economic perspective.

Speaker 2

So with all that said, We anticipate full year 2024 loan growth to be in the low single digit percentage range. I'll just add that we see Q1 as a transitional quarter for loan growth, given that some folks are waiting to see what happens with the interest rates to your point earlier. But all in all, we anticipate an improving operating environment supported by Hawaii's resilient economy. And I have to tell you, our bankers are excited and engaged for what we hope to be a good year to help our customers achieve their growth or investment goals. So Let me maybe have David cover some of the repricing

Speaker 3

part of your question. Yes. Hey, David. On the potential for rate cuts and what our plans are on the deposit pricing side, As we saw last year, we implemented a product segmentation strategy. We created higher yield options for customers that were seeking higher yields.

Speaker 3

And those accounts obviously have high betas. And so we would anticipate that those high data accounts would react pretty much 100% beta with the move in market rate. So on an overall basis, our expectations is that rate cuts would be somewhat beneficial to CPF and our NIM. But having said that, as we've Consistently said, we do view the balance sheet as relatively well matched. So Both in the rising rate environment and a falling rate environment, we don't see really large swings in our net interest margin.

Speaker 3

Our net interest margin tends to stay in a pretty well defined range. Hopefully that helps Dave.

Speaker 5

Yes. That's terrific.

Speaker 4

And since we were just talking about deposits, let's stay there. I was hoping you could touch on maybe some of the deposit trends you're seeing And some of the drivers of the NIB outflows, whether you started to see that reverse course at all? And just how do you think about growth as we look forward, some of the initiatives you've put in place. Have you started to see any benefits from your Japanese partnership or Any inflows from insurance proceeds in the wildfires or just kind of curious, again, some of the drivers of the flows in the quarter and then kind of the outlook going forward and some of your initiatives?

Speaker 3

Yes, I can start David. It's David again. On the again core deposits As a whole, we're relatively flat sequential quarter, which is positive. There was some continued migration within core deposits So out of DDA into interest bearing. However, Dana Matsumoto did a good analysis We've been tracking the quarterly average balances of DDA and Early in 2023, the sequential quarter declines were about $80,000,000 to $90,000,000 a quarter out of DDA.

Speaker 3

And then in the Q3, it declined to $55,000,000 And in the 4th quarter, it declined to $30,000,000 And these are all quarterly average balances. So the trend is moving in the right direction. DDA represents about 28% of total deposits, which is where it was in late 2019 pre pandemic. So all indicators are pointing to The outflow or the migration out of non interest bearing continuing to slow. And then yes, we will need to turn the tide and get it growing again and the teams

Speaker 5

are really focused on that. Okay.

Speaker 4

That's helpful. And then maybe last one for me, just touching on the capital priorities. You talked about a pause last quarter on the buyback. You've made several balance sheet moves, but those are capital neutral. I'm just curious, maybe your appetite For additional securities restructurings or share repurchases, we put in the new program this quarter.

Speaker 4

Just curious your thoughts on capital priorities given the strength of your capital base?

Speaker 3

Yes, David. The Capital management remains consistent. So we'll continue to pay the quarterly cash dividend at similar payout levels. And then Beyond that, we are open to all alternatives, right? We do have The Board provided us another authorization on the share repurchase plan.

Speaker 3

And then like you said, there are Still opportunities to do further balance sheet restructurings and we'll be evaluating those options against each other. And with the buyback, we're the ultimate insider. So we'll make the decisions that we believe are prudent beyond the cash dividend.

Speaker 5

Okay, terrific.

Speaker 4

And just confirming, it sounds like the margin guidance you're talking about for a trough in the first half, that does incorporate rate cuts?

Speaker 3

Yes. Our baseline forecast, our internal baseline forecast has 3 25 basis point cuts in 2024, but nothing in the Q1. Okay. So Again, I think that the important thing to note on the net interest margin is the interest rate swap. The forward starting interest rate swap that we put in, in early 2020.

Speaker 3

So, it goes live in April 1, 2024. And again, we're paying fixed at 210 and we're receiving Fed funds floating. So at the current time, we're 3 40 basis points in the money on $115,000,000 So by our forecast, If there are the 3 25 basis points cuts in 2024, the swap will add $1,800,000 in net interest income, 2 basis points to NIM, dollars 0.05 to EPS.

Speaker 4

Terrific. That's helpful. Thanks everybody.

Speaker 3

Thank you, David.

Operator

And our next question comes from the line of Andrew Liesch with Piper Sandler. Andrew, please go ahead.

Speaker 5

Thanks. Good morning, everyone. So just to touch base on the kind of the repositioning of the securities And the $2,000,000 and then the offices as well. The $2,000,000 how much of that do you think is going to flow to the bottom line versus the redeploy or reinvested back into the franchise?

Speaker 2

Andrew, that's a good question for David. Thanks,

Speaker 3

Yes. Again, like all banks, we continue to invest in the franchise. We As you know, Andrew, we've had multiple technology initiatives. First, we started with customer facing Technology enhancements. More recently we've been focused on the back office with some software new software implementations.

Speaker 3

So, I think the way to answer your question is It likely won't off flow to the bottom line. But what I would probably guide you to is Our quarterly run rate guidance on OE, so we're still guiding to $40,000,000 to $41,000,000 per quarter or full year 2024 guidance in the $160,000,000 to $164,000,000 range. And then if you normalize 2023 for the non recurring, it ends up being like a low single digit annualized growth rate, which we believe is reasonable considering the inflationary pressures that we're all dealing with. So What I would say is we are finding some offsets. We will find some offsets for the to offset the full inflationary impact such that the annualized growth rate and expenses is in the low single digit range.

Speaker 5

Got it. That's helpful. Good way to think about it. I've noticed that the reserve ratio has been grinding higher the last Few quarters. I guess, what are some of the drivers of the CECL model that's causing that to happen?

Speaker 5

Because outside of The losses in the mainland consumer book, the credit performance has been excellent. So I'm just curious like what's driving in the CECL model this the reserve ratio a bit higher?

Speaker 3

Yes, Andrew. So like all CECOM models there is a baseline economic for We use the Moody's. So we subscribe to Moody's for our economic forecast. And then there's the qualitative factor, the qualitative overlay on top of that. I think the grinding higher, it increased a basis point.

Speaker 3

And I think it was primarily related to the mainland consumer charge offs. So Mainland consumer has been in the one area that we've seen a little bit of credit deterioration. Although I would say that the deterioration is from an abnormally pristine period of time where All consumers were buoyed by the fiscal stimulus. So it feels like it's rising a lot, but it's really only normalizing back to probably our normal expectations. I'm not sure does that address your question, Anju?

Speaker 5

Yes, Absolutely. And then you alluded to it earlier that the high level of cash balances at quarter end or year end, What are you thinking about those? Are those going to be redeployed somewhere? Are there some more deposits declined in certain areas that can be used to fund? Just how should we think about the cash going forward?

Speaker 3

Yes. There was additional cash build during the Q4 and I forgot to mention. So we had 4 basis points of sequential quarter NIM deterioration in the 4th quarter, two basis points of that was a result of the increase in on balance sheet liquidity. And so going forward, the plan is to not increase on balance sheet liquidity further. I think we've done enough there.

Speaker 3

The fortress balance sheet is good, is fortress enough. So, we probably won't grow it any further and we are looking at options to reduce on balance sheet liquidity somewhat.

Speaker 5

Got it. So right now maybe Just hold it in Fed funds and earn that before another option for it?

Speaker 3

Yes. Obviously Fed funds yielding at $5.50 or close to $550,000,000 that's not a bad yield currently. The challenge is it's not going to stay there, right? So, that's where redeploying some of the on balance sheet liquidity could make sense.

Speaker 5

Got it. That covers all my questions. Thanks. I'll

Operator

And it looks like we have no further questions. So at this time, I will turn the call back over to Arnold Martinez for closing remarks. Arnold, the floor is yours.

Speaker 2

Thank you, Greg, and thank you very much for participating in our earnings call for the Q4 of 2023. We look forward to future opportunities to update you on our progress. Thanks very much.

Operator

Thank you, Arnold. And ladies and gentlemen, that does conclude today's call. Thank you all for joining and you may now disconnect.

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Central Pacific Financial Q4 2023
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