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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 2022 Conference Call. During today's presentation, all parties will be in a 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.cp.cp.bank. I'd like to turn the call over to Mr. David Morimoto, Senior Executive Vice President, Chief Financial Officer. Please go ahead.
spk08: Thank you, Hannah. And thank you all for joining us as we review the financial results for the fourth quarter of 2022 for Central Pacific Financial Corp. With me this morning are Arnold Martinez, our new President and Chief Executive 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. 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 presentation. And now, I'll turn the call over to our President and CEO, Arnold Martinez.
spk05: Thank you, David. Aloha and good morning, everyone. We appreciate your interest in Central Pacific Financial Corp. As we normally do, I'll start with an update on the Hawaii market and a summary of our strong fourth quarter results. Then I'll turn it over to the team to provide additional detail and insights on our financial and credit metrics, as well as other key updates. The Hawaii tourism sector continues to perform well, with visitor arrivals holding at about 90% of pre-pandemic levels. the majority of visitors are from the U.S. mainland. Visitors from Japan are about 20% of pre-pandemic levels, and we are optimistic that the Japan counts will continue to trend up as the country is now fully reopened and the yen value has improved recently. The Japan government also upgraded its 2023 growth projections in December, based on expectations for higher business expenditure, substantial wage hikes, and robust domestic demand. Japan may avoid the global growth slowdown, which will translate to greater visitors to Hawaii, helping offset a potential slowdown in domestic visitors. Hawaii visitor spending is strong, totaling $1.5 billion in November. an increase of 13.7% compared to the same month in 2019. Hotels in Hawaii continue to perform well, with total statewide hotel occupancy at 71% and an average daily rate of $440 in December, up 4% from a year ago. Hawaii's employment and housing sectors remain solid, Our statewide seasonally adjusted unemployment rate was at 3.3% in November 2022 and is forecasted by the University of Hawaii Economic Research Organization to be fairly stable in 2023. Housing prices in Hawaii remains very strong, with the total Oahu median single-family home price at $1.1 million in 2022 which is up 11.6% from the previous year. Reflecting a national trend, home sales have cooled in 2022 due to rising mortgage rates. The number of single-family home sales was down 23% in 2022 compared to a year ago. We view this as more of a moderation in the markets. and believe the Hawaii housing market remains healthy with continued strong demand and low inventory. This combined with the fact that tourism is expected to remain strong and the Hawaii economy is also supported in a big way by a huge and growing military presence, it is our strong belief that Hawaii is less likely to experience a material downturn compared to most other U.S. markets. Overall, we remain optimistic about the Hawaii market and believe CPF will continue to be successful as we remain focused on our strategic pillars, including homeownership, small business, digital adoption, and Japan market development. Moving to our financial results, we ended 2022 with solid loan and deposit growth, an increase in net interest income and strong expense management, which resulted in an improved bottom line. Our total loan portfolio increased by 133 million or 2.5% sequential quarter. For the full year 2022, the loan portfolio grew by 454 million or 8.9%. The growth was diversified across all loan types as we continue to focus on prudent and appropriately priced asset growth. We have a healthy loan pipeline and anticipate continued strong loan growth in 2023 in all loan categories except mainland unsecured consumer. In Q4, we began to let our mainland unsecured consumer loan portfolio runoff until the national economic outlook improves. With that said, we expect runoff in our unsecured consumer book will moderate overall loan growth in 2023, which we expect to be in the mid single digit percent range. During the fourth quarter, total deposits increased by 180 million or 2.7% from the prior quarter as we were successful in acquiring significant time deposits, which enabled us to reduce our borrowings and manage our funding costs. While deposit rates have increased somewhat, the Hawaiian market continues to be rational on deposit pricing. CPB's strong and stable core deposit base enables us to keep deposit repricing betas low. consistent with past tightening cycles. Going into 2023, we have already started to implement strategies to not only retain deposits, but to garner a larger share of core deposits to fund our future asset needs. Finally, I'm personally very excited to start 2023 in my new role as president and CEO. I anticipate a smooth transition with our talented and experienced leadership team. Lastly, I could not be more proud of our exceptional group of employees who remain steadfast in our mission to help meet the needs of our customers and the broader community. I'll now turn the call over to David Morimoto, our Chief Financial Officer. David. Thank you, Arnold.
spk08: Turning to our earnings results, Net income for the fourth quarter was 20.2 million for 74 cents per diluted share. Return on average assets was 1.09%. Return on average equity was 18.30%. And our efficiency ratio was 59.56% in the fourth quarter. For the full 2022 year, Net income was $73.9 million, or EPS of $2.68. Importantly, full-year 2022 pre-tax, pre-provision income, excluding PPP income, increased by $29.1 million, or 45% year-over-year. Net interest income for the fourth quarter was $56.3 million, an increase by $0.9 million from the prior quarter as our increase in loan balances and yields outpaced the increase in our funding costs. The reported net interest margin remained flat at 3.17%. When excluding the impact from PPP, the net interest margin increased by three basis points, sequential quarter. Our total cost of deposits was 41 basis points in the fourth quarter. We continue to manage deposit repricing through product segmentation, and thus far, our interest-bearing deposit repricing data has been approximately 15%. Fourth quarter other operating income was $11.6 million, which increased by $2 million from the prior quarter, primarily due to higher BOLI income. This included certain non-recurring death benefits totaling $0.6 million, as well as the higher income driven by equity market gains. Other operating expenses totaled $40.4 million in the fourth quarter, down $1.6 million from the prior quarter. The decrease was primarily driven by one-time lower occupancy and advertising costs, totaling approximately $1 million. Our expense run rate will increase modestly in 2023 to the range of $40.5 million, $42.5 million per quarter as we continue to invest in our people, facilities, and technology. Despite that, we expect positive operating leverage, which will drive a lower efficiency ratio over time. Our effective tax rate declined to 24.9% in the fourth quarter as a result of higher tax exempt Foley income. Going forward, we expect the effective tax rate to be in the 25 to 26% range. Our capital position remained strong and during the fourth quarter, we repurchased 241,000 shares at a total cost of $4.9 million for an average cost per share of $20.41. The Board of Directors approved a new annual share repurchase authorization of up to $25 million for 2023. Additionally, our Board of Directors declared a quarterly cash dividend of 26 cents per share, which will be payable on March 15 to shareholders of record on February 28. And now I'll turn the call over to Anna Hu, our Chief Credit Officer. Anna?
spk02: Thank you, David. Our asset quality remains solid in the fourth quarter. Our loan portfolio is strong and well diversified with over 75% real estate secured with a weighted average LTV of 63%. We continue with our conservative underwriting policies, including tight LTV and concentration standards, and 83% of our loan portfolio is in Hawaii. For the lending we do on the U.S. mainland, loans are typically commercial and commercial real estate participation with larger banks in markets we are familiar with, and our consumer purchases are from established lending partners. All mainland loans meet our credit underwriting guidelines. We believe we have minimal exposure to sectors that could be impacted by an economic downturn. Our construction portfolio is just 3% of total loans, and our mainland consumer unsecured portfolio is 3% of total loans. At December 31st, non-performing assets to total assets were seven basis points, or $5.3 million. Total criticized loans were just 1.4% of total loans. Our net charge-offs were $1.7 million for the fourth quarter, which equates to 12 basis points annualized as a percent of average loans. Our allowance for credit losses was $63.7 million, or 1.15% of outstanding loans. In the fourth quarter, we recorded a $0.6 billion provision for credit losses due to loan portfolio growth and net charge-off. Now, I'll turn the call back to Arnold.
spk05: Arnold? Thank you, Anna. Central Pacific Bank had a great year in 2022, and we continue to be well-positioned to continue to deliver strong performance in 2023. We have prudent and disciplined risk management and the right leadership team to move us forward as we continue to create shareholder value for our investors. 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.
spk00: If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of David Feaster with Raymond James. Please proceed.
spk04: Hey, good morning, everybody. Hi, David. Maybe just maybe just starting on, on the funding side and talking about some of the competitive dynamics in, that you're seeing in Hawaii, you talked about it being a more rational market and that's what we've seen historically, you know, just curious, you know, how you think about deposit growth and the competitive dynamics there and any other updates on, on your, um, the other deposit initiatives that you've been working on both from the Japanese and the tech side, um, And just any thoughts on deposit growth to fund the loan growth that you talked about?
spk05: Yeah, thanks, David. This is Arnold. And I'll start, and then I'll, you know, if David wants to add comments as well. But, you know, as I mentioned in the earlier comments, we were successful in bringing in, you know, about $180 million. Mostly it was from our time deposit campaigns that we ran in Q4. You know, the way we look at this is that while deposit rates have increased, you know, we're looking at funding costs in general, and the time deposit rates that we offered in the Q4 were better alternatives to more wholesale borrowings costs that we were looking at. As far as the market itself, I mean, you know, further impact of continued Fed tightening and yield curve movements on deposit balance is yet to be seen. So obviously, we're actively managing our funding sources and ensuring that we're optimizing performance to this operating environment. And with regard to where we're focusing, of course, we're focused in garnering more core deposits. Our Japan development is going well. We're about a billion dollars now in Japan deposits, and that was up about 22 million quarter over quarter. So we feel good about that. Japan is opening up, as I mentioned earlier, and we feel good about the opportunities that we have in bringing in deposits from Japan. So generally kind of challenging environment, teams doing a good job in managing funding costs overall near term. And I think, you know, longer term, obviously, we're very well positioned in the marketplace. David, you want to add anything?
spk08: Yeah, maybe just a couple points. You know, yeah, we're fortunate, obviously, to have a strong core deposit franchise that provides over $6 billion in stable, relatively low-cost funding. As Arnold mentioned, in the current rate cycle, we are proactive in using CD specials to retain some more rate-sensitive balances with CPB, while also attracting new deposit balances at reasonable cost. Our deposit pricing strategies that we're implementing in this rate cycle are very similar to what we used in the 2015-2018 rising rate cycle. um those strategies were successful then and we expect similar results and then i think finally you know if you exclude government deposits from the sequential quarter growth customer deposits through 85 million or 5.3 percent blink quarter annualized and i think that's pretty good performance in in this uh operating environment no absolutely and maybe just
spk04: kind of taking this into context with, you know, kind of the loan growth and the improved pricing side, I guess, how do you think about rate sensitivity and maybe the NIM trajectory as we look forward, just, you know, as we talk about, you know, a discipline on the deposit side, betas are accelerating, but, you know, more rational market and then, you know, assets continue to reprice higher. I'm just curious how you think about your ability to defend the margin and maybe the NIM trajectory as we go out throughout the year and over the course of the year. Yeah.
spk08: Yeah. Hey, David. It's David again. Yeah, you know, we did achieve three basis points of core sequential quarter NIM expansion. Obviously, the velocity of the NIM expansion has been slowing as we've been seeing throughout the industry. The guidance for net interest margin right now is 310 to 320.
spk07: So it's kind of guiding to a flattish NIM going forward.
spk06: Okay. That makes sense.
spk04: And then I just wanted to get your updated thoughts on the S.W.E.L.E. Banking as a Service Initiative and And where we are there, your thoughts on expansion at this point and whether Elevate's sale impacts that partnership at all.
spk08: Sure. Good questions, David. Swell is currently in pilot testing. It's in invitation only. So the app is available. It's operating. But we're only inviting customers from the Swell waitlist to join. And it's in you know, beta testing, there's about 100 customers that are currently on the platform. And we're actually preparing to do, you know, a little bit of a wider launch in the first half of 2023. We're going to do a lot of test marketing and customer acquisition beginning in the first half of this year. But we As we've talked about over the last several quarters, we've really we've slowed down the rollout of swell as a result of what we've been seeing in the broader fintech market. Obviously, there's been a lot of turmoil in the market. The operating environment is not the greatest for launching new fintech initiatives. So we've decided to slow down and we're observing what's happening in the fintech marketplace. the swell strategy has pivoted slightly, you know, rather than just broad customer acquisition, we're now focused on looking for profitable customers. So rather than millions of unprofitable customers, we're looking for, you know, a smaller amount, you know, a hundred thousand of profitable customers. And we think that's a better business model than what we've been seeing more broadly in the FinTech space.
spk04: Yeah, I think that makes complete sense. But does the sale of Elevate impact that partnership at all, or is it kind of a non-event?
spk08: Oh, yeah. Sorry, I forgot about that part of the question, Dave. So as you know, Elevate is looking to be sold to Park City's Asset Management. Park City's Asset Management is the private equity money behind Swell. So park cities has a long history of working with elevate prior to the swell initiative. And then park cities was the largest, uh, outside money that invested in the series, a round of swell. So park cities is a very familiar entity to elevate swell and CPB. Um, so it does not affect the plans for swell going forward.
spk04: Okay. Terrific. Thanks, everybody.
spk07: Thanks, David.
spk00: Thank you, Mr. Feaster. The next question is from Andrew Leash with Piper Sandler. Please proceed.
spk03: Hey, everyone. Good morning. Hi, Andrew. I just want to talk about the deposit mix here. A lot of it was from the increase from the successful CD campaign. How should we look at deposits going forward? Does that match loan growth as it did this quarter? And do you think it's going to be more weighted towards CDs? And then I guess over time, do you think the mix of CDs and non-interest-bearing get back to like where they were pre-COVID? I'm just kind of curious how you think the funding mix is going to change.
spk05: Yeah, Andrew, this is Arnold. I'll start by just saying that, you know, I think near-term, you know, we're probably going to see a 50-50 mix, you know, time deposits and core. Core coming mainly from new acquisitions, new customer acquisitions. You know, top market right now. As I mentioned earlier, I don't see it, you know, this is a near-term dynamic that, you know, us and every other bank are has to manage through. I don't see this as a longer-term issue. I think we're going to get back as feds start to ease rates in the future. You know, we'll get back to, you know, kind of where we were pre-pandemic. But it's going to be a little bit of a journey. And, you know, we're just going to manage that effectively in the near term. Not sure if David wants to add anything.
spk08: Just maybe one additional point, Andrew. You know, on DDA, there's obviously a lot of interest in DDA. DDA has a percent of total deposits at the end of 2019. So pre-pandemic, it was 28% of total deposits. At the end of last year, it was 31. So there's 3% differential to pre-pandemic. That's about 2%. 200 million, roughly 200 million in deposits. You know, we think our baseline DDA ratio should be higher than pre-pandemic due to our outperformance on PPP lending. So, you know, we're thinking maybe we have 50 or 100 million more normalization of DDA balances.
spk07: And obviously, we're doing everything we can to keep that to the lower end of that range.
spk03: Gotcha. That's a really helpful caller. Thank you. And then just related to that, your margin guide, is that for the quarter or for the next several quarters or for the year? Just curious what that 310 to 320 range is good for.
spk08: Yeah, generally it's for the next couple of quarters. That's what we're looking at. Obviously, the operating environment is very volatile and a lot of things can change, but that's what we're guiding for the next couple of quarters, Andrew.
spk03: Certainly, that makes sense. And then good to see the new buyback. I guess, how active do you intend to be? You've been pretty active the last couple of quarters. Is a similar pace of repurchases reasonable? Or I guess, kind of how are you looking at that?
spk08: Yeah, I would say similar. We've been repurchasing about 200,000 to 250,000 shares per quarter. spending roughly about $5 million on repurchases combined with $7 million in quarterly cash dividends. So that's roughly the 60% return of net income that we've been targeting.
spk03: Gotcha. That is really helpful. You can put all my questions off that back. Thanks.
spk07: Thanks, Andrew.
spk00: Thank you, Mr. Leach. Once again, to ask a question, press star 1. The next question is from Laurie Hunsaker with CompassPoint. Please proceed. Yeah, hi, good morning.
spk01: Just maybe circling back to where David was asking on Swell, can you quantify a little bit more where your Swell balances are as of December 31st? It sounds like they're not allowed there, but when you talk about ramping it up, in 2023 what what does that look like and then i guess off of that i thought you were seizing mainland unsecured consumer so is this pilot testing then just in hawaii or help us think about that thanks so uh laurie this is arnold good morning uh i'll i'll start uh uh on the uh mainland unsecured consumer and then i'll turn it over to david and he can he can speak to uh swell
spk05: But yeah, as I mentioned earlier in my comments, we are suspending mainland consumer unsecured purchases until such time that we believe the outlook, the national outlook, economic outlook is improving. So near term, pretty much full suspension of the mainland consumer unsecured. As far as, you know, Hawaii, you know, we're continuing to be very active there on consumer and, you know, in our home market. And also, we're still looking at auto loans as, you know, an area where we believe it, you know, it's acceptable risk given the, what we saw in the past, in the last recession, It actually performed pretty well as far as the data points that we're looking at. So generally speaking, we're open to auto. But in any event, mainly unsecured consumer, we're just basically suspending for now until the national outlook improves. And I'll turn it over to David to talk a little bit about swell.
spk08: Yeah, and just a clarification. When Arnold's talking about suspending mainland unsecured, that's on the purchase side, Laurie. So we're not suspending swell, but we're continuing the very deliberate and gradual rollout of swell. So at year end, to give you an idea, we have about a, you know, less than 100 customers on the platform the deposit balances are probably less in in the aggregate are less than 20 000 the loan balances are less than 5 000 and and so it's very nominal balances at this point we are planning to um do some test marketing in the first half of 2023 but we don't anticipate the balances to be meaningful at all um and so that that's where we are we're not Yeah, we're not suspending Swell. Do you have any follow-up questions on Swell, Lori?
spk01: Yeah, so in other words, I guess as we think looking out to 2023 and you said you would ramp it up, you're obviously not going to stay at 5,000 in loans. I guess the question is, what are you taking that to? Are you taking it to 5 million? Are you taking it to 25 million? How are you thinking about that?
spk06: Lori? Yeah, are you there? Oh, yeah. Sorry. Hello? We had a... Lori?
spk01: Yes, I'm here. Can you hear me? Okay.
spk08: Sorry. We had a technical glitch on our end, but we thought we lost you. No.
spk06: No?
spk08: I would say that, you know, swell balances are not going to exceed $10 million at any time soon.
spk01: Perfect. Perfect. That's what I was looking for. Okay. That's helpful. And then just on the unsecured mainland consumer book, I had that at $310 million in September. What is that as of December 31st? And then can you help us think about, I mean, your credit is pristine outside of consumer. The consumer piece, it looks like you had $1.7 million of charge-offs. $1.3 million of it came from consumer. Can you help us think about, of that $1.3 million, how much came from consumer? the mainland piece. So just, you know, what is your mainland unsecured consumer at December 31st and then in the quarter, how much of the mainland charge-offs were in total? Thanks.
spk05: Laurie, I'll ask Anna to respond to the question.
spk02: Laurie, good morning. So for our consumer unsecured book at the end of fourth quarter, it was just about 316 million. So we did increase slightly from the 310 we talked about at the end of third quarter. And that was because we had a couple of orders in place that we did need to fulfill. But we did go ahead and really suspend any additional purchases for the rest of the quarter. With regards to the charge-offs, about $900,000 is from the mainland consumer book. You know, the breakdown was about $200,000 in auto, about $280,000 in our home improvement, and about $450,000 in our unsecured consumer. And that's all related to mainland consumer.
spk01: Perfect. That's great. Thank you. And then just going back to margin, David, do you have a spot margin for December?
spk08: yes um so december spot nim was 317 which is flat to the full quarter um and then just to give you a little more color spot interest bearing deposit costs in december was 73 basis points which increased 10 basis points month over month while december loan yields was for were 420 which increased 12 basis points month over month. So I think that all of that data is supportive of the, you know, Flattish SIM guide that we provided.
spk01: Perfect. That's helpful. Thank you. I'll leave it there.
spk07: Thanks, Laurie.
spk00: Thank you, Ms. Hunsaker. There are no additional questions waiting at this time, so I will turn the call over to Arnold Martinez for any further remarks.
spk07: Thanks a lot.
spk05: Thank you very much for participating in our earnings call for the fourth quarter of 2022. We look forward to future opportunities to update you on our progress.
spk06: That concludes today's call. Thank you for your participation. You may now disconnect your line.
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