Central Pacific Financial Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 24, 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. 1st Quarter 2024 Conference Call. During today's presentation, all parties will be in listen mode only. Following the presentation, the conference will be open for questions.

Operator

This call is being recorded and will be available for replay shortly after its completion on the company's website at www. Cpb. Bank. I'd like to turn the call over to Ms. Dana Mitsumoto, Group Senior Vice President and Director of Finance and Accounting.

Operator

Please go ahead.

Speaker 1

Thank you, Eli, and thank you all for joining us as we review the financial results of the Q1 of 2024 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 our latest updates and results with you. We had a special start to 2024, first with the celebration of our 70th anniversary in mid February, where we took time to honor our founding. As many of you know, our bank was started by World War II NISI Veterans to help the underserved in Hawaii. We celebrated this special occasion with our many long standing loyal customers and employees.

Speaker 2

Consistent with our founders' mission, in March, we were recognized for the 15th time as SBA Lender of the Year Hawaii District. We are all very proud to continue the legacy. Our financial results in the Q1 reflect our positioning to optimize performance in the coming quarters. We believe we are well positioned with strong liquidity, asset quality and capital and a healthy pipeline. The team will provide additional detail and insights on our Q1 financial performance.

Speaker 2

But as usual, let me start with an update on the Hawaii market. The Hawaii economy continues to prove to be resilient despite headwinds that have impacted recovery. In the month of February, total statewide visitor arrivals measured by the average daily census due to the leap day was about 3% down from the prior year and about 95% of pre pandemic 2019. Visitors from Japan continues to increase, up 77% from a year ago, yet remained about 48% of the same month in 2019. As it relates to Maui, total visitors in February were about 78% the prior year as recovery following the wildfires continues.

Speaker 2

Total statewide hotel occupancy in March was 75%, down 1.9% from a year ago, with an average daily rate of $3.84 down 0.9% from a year ago. Hawaii's statewide seasonally adjusted unemployment rate was 3.1% in March and continues to outperform the national unemployment rate of 3.9%. The University of Hawaii Economic Research Organization forecast the state's unemployment rate to remain very low at 2.7% in 2024. In the area of Hawaii real estate values, the Oahu median single family home price increased back up to 1,100,000 and the median condo sales price was $500,000 in March. Home sales volumes in the Q1 were up 6.1% for single family homes, but down 7.1% for condos compared to the prior year.

Speaker 2

With the demand for housing remaining strong, it is welcoming to see inventory levels increasing with a 7.4 percent increase in active inventory for single family homes in March. Overall, we remain optimistic about Hawaii's economic outlook. Although the impacts from the Maui wildfires have slowed our recovery in the near term, we are getting closer to full recovery. In addition, government and military contracts in Hawaii are at all time highs with $5,000,000,000 in total contracts awarded in 2023. With all of that said, the latest forecast is for the total state economy to continue to grow modestly in 2024.

Speaker 2

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 Q1 was 12,900,000 dollars or $0.48 per diluted share. Return on average assets was 0.70 percent. Return on average equity was 10.33% and our efficiency ratio was 66%.

Speaker 3

In the Q1, our total loan portfolio decreased by $37,600,000 or 0.7 percent sequential quarter, primarily due to planned runoff in the Mainland consumer loan portfolio and partially offset by growth in our Hawaii commercial real estate portfolio, where there are good risk reward opportunities. Our loan pipeline for the Q2 and beyond is healthy and we continue to take a balanced approach to loan growth. Our total deposit portfolio decreased by $228,700,000 or 3.3 percent sequential quarter, which included $139,000,000 decrease in high cost government time deposits. During the quarter, we reduced excess liquidity and paid down our highest cost deposits, which will help our NIM going forward. Net interest income for the Q1 was $50,200,000 and decreased by $1,000,000 from the prior quarter.

Speaker 3

The net interest margin was 2.83 percent, down only 1 basis point sequential quarter. Our total cost of deposits was 1.32 percent in the 1st quarter and our cycle to date total deposit repricing beta was 24 percent. Our pay fixed received float swap on $115,000,000 of municipal securities started on March 31 and at current rates adds approximately $1,000,000 in pretax income quarterly. We believe our NIM has bottomed and will expand modestly in the coming quarters. 1st quarter other operating income was $11,200,000 which normalized following the non recurring gain on office sale and investment portfolio restructuring loss in the 4th quarter.

Speaker 3

Other operating expenses totaled 40.6 $1,000,000 in the Q1 also normalizing after we took the charge on the early branch lease termination in the Q4 of last year. Our effective tax rate was 23.5 percent and we believe we'll continue to be in the 23% to 25% range going forward. During the Q1, we repurchased 49,960 shares at a total cost of $900,000 Our Board of Directors declared a quarterly cash dividend of $0.26 per share, which will be payable on June 17 to shareholders of record on May 31. 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 Q1 with favorable trends in criticized loans and net charge offs. Non performing assets increased slightly due to one off residential mortgage loan situation. However, we are well collateralized and are anticipating any losses. Our lending and credit risk strategy continues to be based on diversification, consistent underwriting standards supported by strong collateral and a focus on stable segments and industries that we have solid expertise in.

Speaker 1

Nearly 80% of the loan portfolio is real estate secured with a weighted average loan to value of 63%. Our commercial real estate portfolio represents 26% of total loans and is diversified across all asset types with 7% of outstanding balances in this portfolio maturing in the remainder of 2024. Our commercial real estate office and retail exposure remains low at 3.4% and 5.4% of total loans, respectively. The office portfolio has a weighted average loan to value of 56% and 71 weighted average months to maturity. The retail portfolio has a weighted average loan to value of 65% and 59 weighted average months to maturity.

Speaker 1

Our Maui related loan deferrals have nearly all returned to regular payment status with just 2 loans remaining on deferral with a total principal balance of $1,300,000 The U. S. Mainland consumer loan portfolio continued to run off to $274,000,000 or 5.1 percent of total loans as of March 31, compared to $429,000,000 a year ago. Non performing assets were $10,100,000 or 0.14 percent of total assets, an increase of $3,100,000 from the prior quarter, primarily due to residential mortgage loans that moved into non accrual status. A majority of these loans are well seasoned with strong loan to value.

Speaker 1

Criticized loans decreased to $30,400,000 or 0.56 percent of total loans, a decrease of 36 basis points from the previous quarter and continues a downward trend over the last three quarters. Net charge offs were $4,500,000 for the Q1 or 0.34 percent of average loans on an annualized basis. This reflects a 7 basis points decrease from the previous quarter. Our allowance for credit losses was $63,500,000 or 1.18 percent of outstanding loans. In the Q1, we recorded a $4,100,000 provision for credit losses on loans primarily due to net charge offs.

Speaker 1

Additionally, we recorded a $200,000 credit to the provision for unfunded commitments for a total provision for credit losses of $3,900,000 during the quarter. Overall, our credit quality remains strong and we continue to monitor the economic environment closely. Now I'll turn the call back to Arnold. Arnold?

Speaker 2

Thank you, Anna. In summary, we believe that with our exceptional team combined with our strong liquidity, capital and credit positions, we are well positioned for success. I want to 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.

Operator

Our first question comes from David Feaster from Raymond James. Your line is now open.

Speaker 4

Hey, good morning everybody.

Speaker 3

Good morning, David. Good morning, David. Good morning.

Speaker 4

Maybe just touching on the loan side, you talked about a healthy pipeline. I'm curious maybe the complexion of the pipeline, where are you seeing opportunities today? And if you could touch on some of the competitive dynamics, what you're hearing from your borrowers and maybe how you think about loan growth just given the continued runoff in the consumer portfolio?

Speaker 2

Yes. Thanks, Dave. This is Arnold. I'll just start by saying that we believe we'll see more normalization in the environment as 2024 progresses. And I mentioned this at the last quarter's earnings call.

Speaker 2

Q1 was a transitional quarter for us and we are expecting a ramp up in activity as we move deeper into 2024. We're seeing strength in the commercial real estate segment as well as our core small business loans area. So, we do have a healthy pipeline albeit that it is based on a lower demand in the marketplace. As far as the landscape, given the fact that volume is down overall in the market, It does continue to be competitive. So we're making wise decisions on risk reward as we move forward.

Speaker 5

Terrific. That's

Speaker 4

helpful. And then maybe touching on the other side, touching on deposits, curious some of the underlying trends that you're seeing, whether you've seen inflows or impacts from the wildfires and maybe how the Japanese initiative is trending? And then just how do you think about driving core deposit growth and funding growth going forward and other ways that you're looking to optimize your funding base?

Speaker 2

David, let me just start and I'll turn it over then to David Morimoto. But I'll just say that the team has done a good job to manage growth and cost of deposits. It's a balancing act in this economic environment. And so we've been very cognizant of balancing those decisions, so that we can improve our position for NIM expansion in the future. But I'll turn it over to David for more color on deposit inflows and outflows.

Speaker 3

Yes. Thanks, Arnaud. Yes, David. Yes, the Q1 total deposits were down 230,000,000 sequential quarter, but as we noted in our release, the 140,000,000 was intentional government higher cost government CD runoff. So when you look at the core or normalized deposit runoff, the $90,000,000 it works out to roughly 1.5% sequential quarter or 6% linked quarter annualized.

Speaker 3

That was a little bit more runoff than we've been experiencing, but that was it was primarily due to seasonal cash needs by customers. So some of it was related to the Lahaina fire, but also it was businesses needing to use some cash. So we do think that the Q1 was a transitional quarter. We think we'll gain traction going forward. Again, we're highly focused on core deposit growth in the small business sector.

Speaker 3

We have a couple of promotions coming out on what we call our business exceptional account. It's our flagship small business checking account. And then so we are still targeting full year 2024 total deposit growth in the low single digit range. So we do expect to make up the Q1.

Speaker 4

Could you maybe elaborate a bit on like the trends within the Q1? How much of the outflows were in January and kind of the progression throughout the quarter on the Yes, I don't think

Speaker 3

it was heavily weighted one Yes, I don't think it was heavily weighted one way or the other.

Speaker 4

Okay. And then maybe just as it relates to the margin, kind of putting it all together, you talked about the swaps kicking in and that we're very confident that the margin has troughed. Curious, how do you think about the margin trajectory over the course of the year and other opportunities that you're considering to maybe manage rate sensitivity and protect against Fed cuts?

Speaker 3

Yes. Sure, David. Again, the balance sheet is relatively well matched from an interest rate risk standpoint. The interest rate swap started on March 31st this year. It will add roughly 6 basis points to the NIM on a quarterly basis, dollars 1,000,000 to quarterly net interest income.

Speaker 3

So we'll get the full effect of that this quarter. So our forward guide on the net interest margin is in the 2.90% to 3% range, which is a nice uptick from the 2.83% in the Q1.

Speaker 4

And do you have does that include rate cuts? And how much of that is comes in this next quarter with the swaps kicking in?

Speaker 3

Yes. We don't anticipate any rate cuts in this quarter. I think where we are now is probably 1 to 2 cuts in the second half of the year. But for the next couple of quarters, we think the 2.90% to 3% NIM guide is good, David.

Speaker 4

Terrific. Thanks, everybody.

Operator

Question comes from Andrew Liesch from Piper Sandler. Your line is now open.

Speaker 5

Hi, everyone. Good morning. Thanks for taking the question. David, I just wanted to just kind of drill down on to the expense base here. It looks like it came in a little bit lower than I was forecasting, but still pretty good expense control.

Speaker 5

I guess how should we look at expenses going forward? I think you referenced in the press release or in the presentation on some ongoing efficiency initiatives. Yes,

Speaker 3

as Yes. As we've been stating now probably for the better part of the year, we've been focused on a lot of expense initiatives. It tends to be more back office oriented, so leveraging technology. As we talked about previously, we implemented ServiceNow workflow automation. We've connected ServiceNow to our core through a middleware called MioSoft.

Speaker 3

So we've been spending the last year a lot of on the foundation building of those technologies. And now we're starting to we're really at the beginning of leveraging that to see expensive efficiencies. And the way it will show up is not likely in reduction of expenses, but what we hope to do is be able to grow revenue obviously faster than our expenses. So keep the expense base relatively flat, maybe growing at low single digit pace, but have stronger revenue growth. So positive operating leverage is obviously the goal.

Speaker 5

Got it. All right. That's really helpful color there. And then I guess shifting back to the margin, it looks like maybe you'll be operating off a smaller earning asset base here this quarter with that excess liquidity used to pay off some of the higher cost funding. But then you also have the earned that $1,000,000 of interest income from the swap.

Speaker 5

So do you think if you just look at where the balance sheet taken out that net interest income should grow from here or do you think it's going to stay pretty steady?

Speaker 3

Yes. The net interest income guide, so again, the net interest margin guide is 29,800,000 or 3. Net interest income guide is probably $50,000,000 to $52,000,000 a quarter, Andrew, which is an uptick from the Q1.

Speaker 5

Got it. All right. Yes, thanks for that clarification. You've covered all my other questions. I'll step back.

Speaker 5

Thanks.

Speaker 2

Thanks, Andrew. Thanks,

Operator

Andrew. Our next question comes from David Feaster from Raymond James. Your line is now open.

Speaker 4

Hey, thanks for taking another question. Just kind of curious about capital priorities. Obviously, growth is relatively muted at this point. You guys were bought back a little bit of stock. Curious how you think about capital deployment at this point?

Speaker 3

Hey, David. Yes, the capital plan hasn't changed, so dividend payout ratio in the 40% to 50% range. We do have the share repurchase plan and we'll continue to use that judiciously. As you know, the banking industry has been a little volatile. And so there are days where the overall banking sector is under some downward pressure and we see those as great buying opportunities for the company as the ultimate insider and we'll continue to leverage that opportunity.

Speaker 4

That's helpful. And then maybe just broadly touching on credit. First on the consumer side, curious where you think we are working through that book with realizing those losses and then maybe more broadly, obviously, you've got a conservative credit culture. I'm curious how you think about credit, what you're watching closely. Obviously, there's a hybrid focus on CRE.

Speaker 4

Just kind of curious your thoughts on credit broadly outside of the consumer book as well and how you're approaching credit management going forward?

Speaker 1

Hi, David. This is Anna. So with regards to the consumer side, particularly with the mainland book, we are continuing the runoff mode, but we are looking and watching closely at the We continue to do the mainland consumer lending. We continue to do mainland Hawaii consumer lending here in Hawaii and we have not stopped on that front. But the opportunities I think in the current quarter and the forward looking couple of quarters is really in the commercial real estate and the small business loans as Arnold mentioned.

Speaker 4

Okay. Maybe touching on the credit quality side though, Mike, I'm curious, what are some of the trends? Do you think we've worked through all the issues in consumer portfolio? And then as you look at your and maybe stress the CRE book, is there anything that you're seeing there? Or anything that you're watching more closely just from the credit standpoint?

Speaker 1

Yes. From the credit quality standpoint on the Mainland book, we're optimistic as can we believe that the charge offs have stabilized in the Mainland portfolio and we're optimistic that those numbers will start coming down. With respect to the commercial real estate book, we really are not seeing any issues there. Our office and retail remain low as a percentage of our total loan book and really not seeing any issues in there. Overall credit quality continues to remain very strong in our loan book.

Speaker 4

Terrific. Thank you.

Operator

As of right now, we don't have any questions. I'd like to hand back over to the management for the final remarks.

Speaker 2

Thank you, Ali, and thank you to all of you for participating in our earnings call for the Q1 of 2024. We look forward to future opportunities to update you on our progress. Thanks very much.

Operator

Thank you everyone for attending today's conference call. We hope you have a wonderful day. You may now all disconnect. Have a wonderful day.

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Central Pacific Financial Q1 2024
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