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spk00: Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp fourth quarter 2021 conference call. During today's presentation, all parties will be in listen only mode. Following the presentation, the conference will be open for questions. 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 Mr. David Morimoto, Chief Financial Officer. Please go ahead.
spk05: Thank you, Charlie, and thank you all for joining us as we review the financial results of the fourth quarter of 2021 for Central Pacific Financial Corp. With me this morning are Paul Yonamine, Chairman and Chief Executive Officer, Catherine Null, Executive Vice Chair, Arnold Martinez, President and Chief Operating Officer, and Anna Hu, Executive Vice President and Chief Credit Officer. We have prepared two supplemental side presentations that provide additional details on our earnings release and are 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 two of our presentations. And now I'll turn the call over to our chairman and CEO, Paul Yonomide.
spk08: Good morning, everyone. As always, we appreciate your interest in Central Pacific Financial Corp. We are beginning the 2022 year with much excitement and optimism. Our financial results for 2021 are among our best ever. In fact, this is the best earnings report since before the great recession. Our recently announced executive leadership promotions went into effect starting January 1st, and our teams are energized and ready to continue our digital transformation. In addition to our earnings release this morning, we announced the launch of our banking as a service strategy, and our team is pleased to share more details today. After an in-depth evaluation of the banking as a service market, we identified an opportunity to enter this fast growing market in a way that leverages our strengths. To maximize our impact as a banking as a service provider, we will focus on partnering with select FinTech companies to create strategic customized programs resulting in new differentiated financial products. There is strong demand for this type of banking as a service offering in the market today. We believe this creates a great opportunity for us to expand our reach beyond Hawaii and will drive future revenue generation to increase the value of the CPF franchise. Last quarter, we announced the launch of our new product, Shaka Checking. It is Hawaii's first and only digital bank account from a local financial institution. Shaka allowed us to test the product development and launch strategies that we will leverage in our future mainland banking as a service programs. The Shaka account demand has far surpassed our initial expectations. We opened over 3,300 Shaka accounts since its launch in early November. It's obvious Shaka is serving a key need with a younger tech-savvy audience in Hawaii. It has a strong value proposition that includes getting your paycheck up to two days early, no ATM fees, and 24 by 7 digital convenience, among other benefits. As part of our banking as a service initiative to drive additional growth beyond Hawaii, we are also pleased to announce that we will be making an equity investment and bank sponsorship of Swell, a new fintech company that we played a major role in developing. Swell is scheduled to launch in mid 2022, and we believe will provide a differentiated product offering that the market needs today. Swell's mission is to provide retail banking services to people via one integrated app that includes a digital checking account with a line of credit. Elevate is another equity investor in Swell and will be providing the systems and servicing for the Swell line of credit. There is a revenue sharing agreement in place between Swell, Elevate and CPF. And Elevate is also providing a credit enhancement structure to us. We are currently evaluating additional banking as a service partnerships to create even more value for CPF and plan to announce further developments later in 2022. Finally, we are announcing the exciting new banking as a service initiative We remain committed to Hawaii and to continuing to build a successful and profitable franchise here. Here to talk about the Hawaii economy and our strong position here is Catherine Ngo, our Executive Vice Chair. Catherine.
spk01: Thank you, Paul. I'll start by giving an update on the Hawaii environment. We were pleased to have a strong visitor holiday travel season with the daily average air arrivals over 25,000 in November through December. Our statewide unemployment rate continued to decline and was at 6% in November 2021. And while we were not immune to the COVID case spike related to the Omicron variant, our state has been able to manage through it, particularly as our vaccination rate is strong at approximately 75%. We have also not seen any significant slowdown in Hawaii business activity or investment due to Omicron. The housing market in Hawaii remains very hot with our median single family home price holding at just over $1 million. Overall, the Hawaii economy remains on track for recovery. Our asset quality continues to be very strong with non-performing assets at just eight basis points of total assets as of December 31st. Additionally, total criticized loans were at about 1.5% of total loans. Finally, during the quarter, we had net recoveries of $900,000. I'd like to now turn the call over to Arnold Martinez, our President and Chief Operating Officer. Arnold?
spk04: Thank you, Catherine. In the fourth quarter, our core loan portfolio increased by $183 million, or 4% sequential quarter, which was offset by PPP forgiveness paydowns of $127 million. Year over year, our core loan portfolio increased by 10%. The core loan growth was broad-based across almost all loan categories. Our residential mortgage production continued to be very strong with total production in the fourth quarter of $354 million as several large condominium projects in Honolulu were completed during the quarter with CPB leading the takeout financing for the homeowners. Total net portfolio growth in residential mortgage and home equity was $146 million in the fourth quarter. For all of 2021, we once again had record residential mortgage production, totaling $1.2 billion, putting us near the top of all residential mortgage lenders in Hawaii. PPP forgiveness continues to progress well, with 99% of the loan balances originated in 2020 and 73% of the balances originated in 2021 forgiven and paid down through December 31st. During the fourth quarter, we continued consumer unsecured purchases with our established vendors on an ongoing flow basis. The purchases during the quarter all were within our established credit limits and had a weighted average FICO score of 750. As of December 31st, total mainland consumer unsecured and auto purchase loans were approximately 5.7% of total loans. Both our mainland and Hawaii consumer portfolios continue to perform well. Our target range for total mainland loans, including commercial and consumer, is around 15% of total loans. With Hawaii's steady economic recovery, We have a healthy loan pipeline in all loan product categories, and we are expecting our favorable loan growth trends to continue in 2022. On the deposit front, we continue to see strong inflow of deposits with total core deposits increasing by 66 million or 1% sequential quarter growth. On a year-over-year basis, total core deposits increased by 1 billion or 20%. Additionally, our average cost of total deposits in the fourth quarter was just six basis points. Finally, we plan to build upon our early success with our Shaka digital checking product going into 2022. With this differentiated product and its strong market acceptance, we expect account growth to continue. We will be expanding our relationships with the new to CPB Shaka account holders which represented over 50% of the new accounts, and explore further complementary product offerings using the Shaka brand. I'll now turn the call over to David Morimoto, our Chief Financial Officer. David.
spk05: Thank you, Arnold. Net income for the fourth quarter was $22.3 million, or $0.80 per diluted share. an increase of 1.5 million or six cents per diluted share from the prior quarter. Return on average assets in the fourth quarter was 1.22% and return on average equity was 16.05%. For the full 2021 year, net income was 79.9 million or $2.83 per diluted share. This compares to 37.3 million or $1.32 per diluted share in 2020. Net interest income for the fourth quarter was 53.1 million, which decreased by 3 million from the prior quarter due to less PPP fee income as the forgiveness process winds down. Net interest income included 4.7 million in PPP net interest income and net loan fees compared to 8.6 million in the prior quarter. At December 31st, unearned net PPP fees was $3.5 million. The net interest margin decreased to 3.08% in the fourth quarter compared to 3.31% in the prior quarter. The NIM normalized for PPP was 2.87% in the fourth quarter compared to 2.96% in the prior quarter. The normalized NIM decrease was driven by lower loan yields due to market pricing competition. While we expect market pricing for loans to remain competitive, our new loan origination yield in the fourth quarter approximated our overall loan portfolio yield and our balance sheet is slightly asset sensitive. Fourth quarter other operating income increased to $11.6 million from $10.3 million in the prior quarter. The increase was driven by higher mortgage banking income and higher bank-owned life insurance income. Other operating expense for the fourth quarter was $42.2 million, which included non-recurring expenses of $1.1 million of severance payments, $0.4 million branch consolidation costs, and $0.3 million in promotion expenses related to our Shaka digital checking launch. At the end of 2021, we consolidated one of our Honolulu branches into a nearby branch. We anticipate $0.8 million in annualized savings from this consolidation. With the continued successful customer migration to digital banking services, we plan to consolidate three additional branches in 2022. At the same time, we are continuing to invest in select strategic branch locations, including acquiring real estate and fee and developing fully modernized branches. The efficiency ratio increased to 65.6% in the fourth quarter due to lower net interest income and non-recurring expenses. We remain focused on driving positive operating leverage with our strategic initiatives to continue to improve efficiency. At December 31st, our allowance for credit losses was $68.1 million, or 1.36% of outstanding loans, excluding PPP loans. In the fourth quarter, we recorded a $7.4 million credit to the provision for credit losses due to continued improvements in the economic forecast and our loan portfolio. as well as net recoveries during the quarter of $0.9 million. The effective tax rate was 25.4% in the fourth quarter, and going forward, we continue to expect an effective tax rate to be in the 24 to 26% range. Our capital position remained strong, and during the fourth quarter, we repurchased 305,000 shares at a total cost of $8.4 million, or an average cost per share of $27.64. Yesterday, our Board of Directors approved a new share repurchase authorization of up to $30 million. Finally, our Board of Directors also declared a quarterly cash dividend of 26 cents per share which was an increase of one cent or 4% from the prior quarter. And now I'll return the call to Paul.
spk08: Thanks, David. Central Pacific had a solid fourth quarter in 2021 year. Looking forward, we are very excited about the key items we announced today, which we believe will position us extremely well and enable us to deliver greater shareholder value in the near and long term. In summary, we had record 2021 earnings. We increased our quarterly cash dividend by 4%. We will continue share repurchases under our new $30 million board-approved authorization. We launched our banking-as-a-service strategy, which started with our successful Shaka digital checking launch in Hawaii. And upcoming soon, we will expand to the mainland with our Swell FinTech investments, as well as other selected partners. Further, we remain committed to providing support to our employees, customers, and the community as we continue to progress through the economic recovery. 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. Back to you, Charlie. Thank you.
spk00: If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, it is star followed by two. Our first question comes from Andrew Light of Piper Sandler. Your line is open. Please go ahead.
spk06: Hi, good morning, everyone. Thanks for taking the questions. We got a question on some questions on the banking as a service initiative. like the long-term plan that this can provide for you. But I'm just curious what the revenue sharing agreement that you discussed, is this based on loan growth, deposit growth, a combination of both? How should we be thinking about how this could benefit the CPF's bottom line?
spk08: Yeah, thank you. This is Paul in the meeting. It is both, Andrew. And, you know, we have it structured between the three organizations, between Swell, Elevate, and CPS. And as we iterate, you know, with our launch this year and we have further learnings, there could be certain adjustments to that revenue sharing arrangement. And we will be glad to share more details on that as we get further along in the year.
spk06: Certainly look forward to hearing that. And then the, I guess the, I guess the law sharing on, or the credit protection that elevates providing our, just to explain that a little bit more, are they in a first spot position? How, and obviously you don't need to go into too many details right now, as it's still pretty early stages, but how is that broadly structured?
spk08: Sure. You know, this is Paul again. So, you know, first, before I get into that, you know, I really want to commend Anna Hu, our chief credit officer. You know, CPF has a history of keeping a very pristine loan portfolio. I think we know how to really take a hard look at credit. And it's some of those best practices that gets baked in to this banking as a service strategy. Again, among the three organizations, We have a very solid credit management structure. And for CPF, as the bank sponsor to this fintech operation, we will be in a position to dictate the credit guidelines, and we'll be monitoring that very closely, definitely weekly, if not even daily. You know, be rest assured that the way we have it structured in terms of managing risk I believe we have three lines of defense. We have what we do here at CPF already, but also with Elevate, that is a proven fintech lender with over 20 years of experience, and also Swell, who is led by our former chief strategy officer and chief marketing officer, Kevin Dahlstrom. Uh, you know, I might just add that, um, uh, one of the, one of the core strengths that we have on this particular bank sponsorship is the relationships that we have, uh, with the other two organizations. Um, again, Kevin, uh, leading being the CEO of swell and also at elevate. Where, um, the, uh, chief strategy officer of elevate is, uh, is a board of directors for CPS and our former, um, uh, chairman. my predecessor, John Dean, also serves on the board of Elevate. So relationships, at the end of the day, is what is going to harvest the real benefit of even a pure digital play.
spk06: Got you. That's great. Thank you for all that detail. I was not aware of that. And just one question for you, David. You mentioned the balance sheet being slightly asset-sensitive. Could you go into a little bit more details on that? You guys have such a low-cost sticky deposit base that I would think that it'd be a little bit more than slightly asset sensitive. So what are the different factors that play there?
spk05: Yeah. Hey, Andrew. Yeah, the slightly asset sensitive, as you're aware, Hawaii banks tend to have a larger concentration in residential mortgage loans on their balance sheet than say mainland banks. And that's just a function of the market. It's pretty commonplace in Hawaii. And those loans tend to have fixed rates. So similar to the other local banks, you know, we have 50 to 60% of our loan portfolio is fixed rate. But it is funded by very strong, large and stable core deposit base. So our modeling our current modeling in say, plus 100 rate environment, has net interest income increasing about 5%. That modeling currently contemplates three tightenings in 2022 with the first occurring in March. And our core deposit rate betas on average are about 15%. And that's based on historical experience.
spk06: Got it. That's very helpful. Thanks for taking all the questions today. I really appreciate it.
spk05: Thanks, Andrew.
spk00: Our next question comes from David Feaster of Raymond James. Your line is open. Please go ahead.
spk06: Hey. Good morning, everybody.
spk07: I just wanted to maybe just following up on that margin question. Appreciate that sensitivity and just kind of reading maybe between the lines on your prepared remarks, it kind of feels like we're about at the trough. Do you think we have trough, or do you think that the first quarter is going to be the low point and that we can start expanding as, you know, hopefully we start getting rising rates and an improving earning asset makes just some of the growth, given the growth initiatives that you've talked about? Okay.
spk05: Yeah, David, you know, the margin guidance for the next couple quarters is probably 285 to 295, you know, on a core basis. So it is where we believe the net interest margin on a core basis has troughed. As mentioned in the prepared remarks, the new volume loan yields approximate the portfolio yield, likewise on the investment portfolio side. So that's the expectation on that interest margin.
spk07: Okay. And then, you know, it's great to see the early success that you guys have had from the Shaka Digital Checking Account Initiative. Could you just maybe give us some insights into how much deposit growth you've generated from those 3,300 clients so far that you've onboarded and just how you think about growth going forward and maybe where you're seeing some early success on the cross-selling front?
spk04: Yeah, David, this is Arnold. Yeah, so we were pretty pleased with the success of the Shaka product and the launch. As you know, we just launched that in November of last year, so it's probably a little early for us to talk about the growth, the actual balance growth. We probably will talk about that in future quarters as the accounts start to mature. But I can tell you that we are focused on cross-sell and engaging and activating these new customers. As I mentioned in my opening remarks, more than 50% of the accounts opened are new customers to CPB, so we're pretty excited and more to come on reporting on success here in future quarters.
spk07: So it sounds like that the 123 million of deposit growth we saw, we're only starting to see a limited impact of that growth thus far. We should expect, you know, kind of deposit growth to remain relatively strong through 22.
spk04: That's correct. In fact, you know, on the subject of deposit growth, I'll just mention that, you know, we're looking as far as full year guidance for you at the mid single digits. for growth in deposits. And we feel pretty good about that. We think there will be some outflows as the economy continues to take traction and recover. Our customers will have confidence in being able to span again. But with that said, the things that we're doing, the Shaka launch, but even the rebrand last year, and just the vibe that we've created, we feel pretty confident that we'll continue to see nice deposit growth this year.
spk07: Okay. And then could you just maybe talk a bit about your outlook for expenses as we go into 22? You know, we hear a lot about inflationary pressures, just weighing on expenses for the industry. You got several tech initiatives obviously ongoing, but it seems like maybe a lot of the expenses are already in the run rate, just given what we did last year. And I'm just curious how you think about expenses as we head into 22, what good core run rates
spk05: inflationary rate might be just cognizant of a seasonally higher first quarter as well yeah hey David it's uh David um yeah I I think your your commentary was uh right right on point you know um as we've stated previously we we started the investments um in our initiatives uh last year actually it It was the prior year, but it did ramp up last year. And that was designed because we knew we had the tailwinds of PPP income and credit provisioning. So because we had those tailwinds, we started investing last year. So the outlook for expenses now is roughly flat. I would say it's probably 40 to 42 million per quarter. is is the guide so um it's like a zero to plus two percent year over year increase is what we're looking at for 2022. okay that's helpful thanks everybody thanks david as a reminder if you would like to ask a question please press star followed by one on your telephone keypad now
spk00: Our next question comes from Laurie Hunsicker of Compass Point. Your line is open. Please go ahead.
spk03: Great. Hi, thanks. Good morning. Just sticking with where David was on expenses and so obviously netting out your one-time items, I can see how you're at that $40 to $42 million expense run rate. Can you just help us in terms of timing on when you're three branches are planning to close in 2022? Sure.
spk05: Hey, Laurie. It's David. So under the current plan, and obviously things can change, but under the current plan, we're looking at two consolidations in the second quarter. You know, those branches tend to be smaller branches, so the one-time expense there is roughly $300,000 pre-tax. and prospective annual savings is about $500,000. And then the third consolidation is currently planned in the third quarter. There we have one-time expense of $200,000, prospective annual savings of $400,000. So we're looking at total annual savings about $900,000 from the 2022 consolidations on an annual run rate basis. Okay.
spk03: Okay. And how should we be thinking about core expense growth for 2023? Yeah.
spk05: Laurie, I would say, you know, we're in that 160, you know, 165 on an annual basis in 2022. And then, you know, 2023 is a little ways out. But I would say we're targeting, like, you know, in the 2% to 3% range annual growth. which is really inflation. But there's so much uncertainty right now with regard to COVID, market interest rates, excess balance sheet liquidity, and our banking as a service strategy. So there's a lot of moving parts to the expense line. So I think the bottom line message on expenses is we plan to be nimble as we've been throughout the last several years. and we're going to adjust our expenses based on revenue opportunities. So if there's great revenue opportunities, if our banking as a service strategies gain traction, we'll take advantage of it and we will increase our expenses to take advantage of that if it has commensurate revenue opportunities.
spk03: Okay. That makes sense. Those are great numbers. Thanks for the color on that. Arnold, I just wanted to go back to something you said. You said consumer loans, you were targeting 15% of your book. When is your thought on when consumer loans get to that level? You're currently at 12%. How should we be thinking about that?
spk04: Hi, good morning, Laurie. Actually, when I said 15%, it includes both commercial and consumer. So it's consumer and commercial loans. 15% as a percentage of our total loan portfolio. So right now on the consumer side for the mainland, we're at about 5.7%. And we'll probably be in that 6%, 7% range, I would say. I mean, I don't see us growing more than that in the near term.
spk03: Got it. Okay. And then I guess I just, and this is for all of you, I guess, If you could help us think a little bit about the Swell Elevate FinTech, can you help us think about how much you plan to add in loans over the duration of, you know, 2022, as you're obviously just ramping up, and more importantly, 2023, and what the coupons are looking like on those and anything around FICO?
spk08: Thanks, Lori. I'm going to start on that. This is Paul. And, you know, so as you mentioned as well, you know, in 2022 we will be, you know, ramping things up. We'll be, you know, there'll be an iteration process this year. As we review customer acquisition costs, yields, default rates, you know, we'll be figuring out, you know, how deeply to step on the gas pedal on this. That's one of the real benefits of the relationship with Swell and Elevate is that we have that degree of flexibility as we look at risk going forward. I could tell you that Swell will become a good part of our future growth. Naturally, we continue to see great opportunities here locally. And hopefully when Japan opens up, we'll see many opportunities with Japanese investors coming into Hawaii again. But in terms of this digital play, working with Elevate, again, a very proven fintech lender with over 20 years of experience, and also with Swell, led by an individual who had much to do with our digital strategy here in Hawaii and our in our ad marketing campaign that I think this is a good group that will be driving future potential for us. But, you know, Laurie, at this time, it's really difficult for me to provide you with any specifics on, you know, a number of, you know, loan originations and things during 2023. But once again, I do believe that our initiative with Swell will become a key part of our future growth.
spk03: Okay, and so Elevate is subprime. Are you intending to do subprime, subprime unsecured? No, we're not. Okay.
spk08: So we are not intending to do – I'm sorry?
spk03: So what is the line in the sand of how low you're going to go on FICO? Can you help us understand that?
spk08: Right. So our focus right now, Laurie, is to look at what we call near-prime. But mind you that Elevate, being in the subprime space for roughly 20 years, they have considerable experience and IP in terms of assessing. They've automated the process of assessing the creditworthiness of potential prospects. And so we will be leveraging a lot on Elevate's current lending management system. It's already built. There's nothing that we need to rebuild. And actually, that's another great feature of this current alliance that we have and why we're not showing a great deal of more expense on our books today. because it really is the coming together of existing technologies and business processes.
spk03: Okay, so how, sorry, what is your definition of near prime? How do you think about that on the FICO?
spk05: David, what was the FICO score? Yeah, Laurie, it's in the 650 area, but what I will say, Laurie, and we will be happy to share more details as we get closer to launch and as we get to launch of Swell. But there is a desire to keep some of this behind the curtain for now. But what I will say with regard to Near Prime is we're not going with necessarily just a FICO definition of Near Prime. As you're well aware, a lot of the online digital lenders today have multiple and sometimes hundreds of different inputs into their credit models, and FICO being one of the hundred inputs. And so, you know, while it is an input, it is not the only input that we'll rely on, and we're going to be focused on more of the digital lending experience of Elevate.
spk03: Okay, great. And then just last question.
spk08: All again, Laurie. If I could just add again, the near prime segment in the continental U.S. is probably the most underserved segment in terms of credit today. So we've done a fair amount of analysis. And so as David has covered, it doesn't just boil down to FICO scores. And this is really what we're counting on with Elevate with their 20 years of experience. and how to identify and segment that near prime group.
spk03: Okay. And sorry, just two more questions. What is your target launch date then for Swell? When do we start to see these add to your balance sheet? What's your best guess?
spk05: Laurie, as we've disclosed, we're targeting mid-2022, so I'd say 630.
spk03: Okay, great. And then lastly, can you just share with us a little bit about Kevin? I'm not familiar with Kevin Dillstrom. Just any high-level thoughts you can share with us would be great. Thank you.
spk08: All right. Thanks, Lori. So Kevin was with Central Pacific Financial Corp for two years. We were very fortunate to bring him on board after a great stint with Mr. Cooper in the continental U.S. one of the largest online digital mortgage lenders. And prior to that, and at Mr. Cooper, he was the chief marketing officer there, very involved in the rebranding, a lot of the social influencer strategy, and basically driving their digital marketing initiatives. Prior to that, actually, Kevin worked for Elevate as well, where he was also the chief marketing officer. Again, this goes back to this strength that we have on relationships. We all know each other, which I find extremely important as becoming a bank sponsor. I think, as a matter of fact, it's a critical success factor as banks sponsor fintechs. that they have that type of relationship, you know, that's been built up over the years. You know, Central Pacific Financial Corp, if you, you know, and many thanks to, you know, all of the people who follow us, but we have had a good history of hitting our targets this past three years, especially in the digital arena. You know, Kevin was very involved in the development the final implementation of our new mobile and online platform, which is now rated 4.8 on Apple and Android. And I believe could be the highest rated platform now in the state of Hawaii. And we're quite proud about that. You know, it took a lot of work, but we execute it and we got it done. And so it's a lot of that discipline that Kevin brings to the Swell organization, along with his marketing capabilities. And we're very, you know, we're looking very positively to the future as a result of that.
spk03: Great, thanks. I'll leave it there.
spk00: There are no further questions at this time, so I'll turn the call back over to Paul Iannomine, Chairman and CEO, for closing remarks.
spk08: Great. Thank you very much for participating in our earnings call for the fourth quarter of 2021. We look forward to future opportunities to update you on our progress. Thank you.
spk00: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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