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spk06: Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Fourth Quarter 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 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. 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.
spk00: Thank you, Greg, and thank you all for joining us as we review the financial results of the fourth quarter 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. 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.
spk08: 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. It is 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 fourth quarter, 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. The team will provide additional detail and insights on our fourth quarter 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. Total visitor spending was $1.96 billion 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 $428, 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%. 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. In December, the Oahu median single-family home price was $1 million, 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 market. 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 community stronger in the future. I'll now turn the call over to David Morimoto, our Chief Financial Officer. David? Thank you, Arnold.
spk04: Turning to our earnings results, net income for the fourth quarter was $14.9 million, or 55 cents per diluted share. Return on average assets was 0.79%, Return on average equity was 12.55% 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. Our total loan portfolio decreased by 70 million or 1.3% sequential quarter primarily due to us continuing to let our mainland loan portfolio run off and partially offset by growth in our Hawaii commercial real estate and CNI portfolios. Our total deposit portfolio decreased by 27 million 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 noninterest-bearing DDA is continuing to slow. Net interest income for the fourth quarter was $51.1 million and decreased by $0.8 million from the prior quarter, primarily due to higher funding costs. The net interest margin was 2.84 in the fourth quarter, a decline of four basis point sequential quarter. Our total cost of deposits was 1.22% in the fourth 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 received float swap, we expect our NIM to trough in the first half of this year. As Arnold mentioned, during the fourth quarter, we completed a balance sheet repositioning where we sold an office real estate building and utilized the $5.1 million pre-tax gain to improve prospective earnings through an investment portfolio restructuring of approximately $30 million at a loss of $1.9 million in a branch lease termination where we incurred a one-time charge of $2.3 million. Overall, the three 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 million. Fourth quarter other operating income was $15.2 million, which includes the aforementioned gain on office sale and investment portfolio restructuring loss. Additionally, we had higher BOLI income in the fourth quarter, which was driven by the equity market rally and offset by higher deferred compensation expense. Other operating expenses totaled $42.5 million in the fourth quarter, and included the charge on the early branch lease termination. Our effective tax rate declined to 22.3% in the fourth quarter, primarily due to higher tax-exempt BOLI income. Going forward, we expect our normalized effective tax rate to be 24 to 25%. During the fourth quarter, we did not repurchase any shares. Finally, our Board of Directors declared a quarterly cash dividend of 26 cents per share payable on March 15 to shareholders of record on February 29. Our Board of Directors also authorized a new share repurchase plan to repurchase up to 20 million of our common stock in 2024. I'll now turn the call over to Anna Hu, our Chief Credit Officer. Anna?
spk01: Thank you, David. Our asset quality remained strong in the fourth quarter, with non-performing assets at nine 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. 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% and 71 weighted average months to maturity. The retail portfolio has a weighted average loan to value of 64% and 61 weighted average months to maturity. Our loan exposure to the Lahaina Maui area was $111 million or 2% of total loans before the August wildfire. Since then, balances have paid down slightly to $103 million or 1.9% of total loans as of December 31st. We estimate that $90 million or 87% of the total Lahaina Maui loans outstanding were not directly impacted by the wildfire and $11 million or 11% that were directly impacted have sufficient insurance and land value coverage. We are monitoring the remaining $2 million of Lahaina loans which includes primarily consumer unsecured and small business loans. The U.S. mainland loan portfolio continued to decline during the fourth quarter due to the continued runoff in the mainland consumer portfolio to $308 million, or 5.7% of total loans as of December 31st, compared to $452 million a year ago. Net charge-offs were $5.5 million for the fourth quarter, which equates to 41 basis points annualized as a percent of average loans. The increase in net charge-offs were primarily from our mainland consumer portfolio. 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 $63.9 million or 1.18% of outstanding loans. In the fourth quarter, we recorded a $5 million provision for credit losses on loans primarily due to net charge off. Additionally, we recorded a $0.3 million credit to the provision for unfunded commitments or a total provision for credit losses of $4.7 million 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. Arnold?
spk08: 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 will be happy to address any questions you may have.
spk06: Great, thank you. And at this time, I would like to remind everyone, in order to ask a question, press star and then the number one on your telephone keypad. Once again, star one on your telephone keypad. And we'll pause just a moment to compile the Q&A roster. And it looks like our first question comes from the line of David Feaster with Raymond James. David, please go ahead. Hey, good morning, everybody. Hey, David.
spk01: Good morning.
spk02: 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 can see loan growth accelerate, especially on the mortgage front maybe? How do you think about your ability to reprice deposits lower if we do get Fed cuts?
spk08: 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. It has to be better than last year for sure. You know, we're building a strong loan pipeline as we move into the first half of 2024. We see most of the activity in the CRE and CNI 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. So, with all that said, we anticipate full year 2020 for 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, you know, 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 road or investment goals. So let me maybe have David cover some of the repricing part of your question.
spk03: Yeah.
spk04: Hey, David. You know, on the potential for rate cuts and, you know, what our plans are on the deposit pricing side, you know, As we saw last year, you know, we implemented a product segmentation strategy. We created some higher yield options for customers that were seeking higher yields. And those accounts obviously have high betas. And so we would anticipate that those high beta accounts would react pretty much, you know, 100% beta with the move in market rates. So on an overall basis, you know, 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, you know, both in the rising rate environment and a falling rate environment. we don't see really large swings in our net interest margin. Our net interest margin tends to stay in a pretty well-defined range. Hopefully that helps Dave.
spk02: Yeah, that's terrific. 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 deposit growth as we look forward? So many 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 in some of your initiatives.
spk04: Yeah, I can start, David. It's David again. You know, on the, you know, again, core deposits. as a whole were relatively flat sequential quarter, which is positive. There was some continued migration within core deposits out of DDA into interest-bearing. However, Dana Matsumoto did a good analysis, and we've been tracking the quarterly average balances of DDA. Early in 2023, the sequential quarter declines were about $80 to $90 million a quarter out of DDA. And then in the third quarter, it declined to $55 million. And in the fourth quarter, it declined to $30 million. 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 are really focused on that. Okay.
spk02: That's helpful. And then maybe last one for me, just touching on the capital priorities. You know, 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. Just curious your thoughts on capital priorities given the strength of your capital base.
spk04: Yeah, 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. 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.
spk02: Okay. Terrific. 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?
spk04: Yeah, our baseline forecast, our internal baseline forecast has 325 basis point cuts in 2024, but nothing in the first quarter. So, again, I think the important thing to note on the net interest margin is the interest rate swath. the forward starting interest rate swap that we put in in early 2020. So it goes live in April 1, April 1 of 2024. And again, we're paying fixed at 210 and we're receiving Fed funds floating. So at the current time, we're at 340. 240 basis points in the money on $115 million. So by our forecast, if there are the 325 basis points cuts in 2024, the swap will add $1.8 million in net interest income to basis points to NIM, $0.05 to EPS.
spk03: Terrific.
spk07: That's helpful. Thanks, everybody.
spk06: Thank you, David. And just as a reminder, again, if you'd like to ask a question, it is star one on your telephone keypad. Once again, star one on your telephone keypad. And our next question comes from the line of Andrew Leash with Piper Sandler. Andrew, please go ahead.
spk05: Thanks. Good morning, everyone. So just to touch base on the kind of the repositioning of the securities and the $2 million and then the offices as well, the $2 million, how much of that Do you think it's going to flow to the bottom line versus redeployed or reinvested back into the franchise?
spk08: Andrew, that's a good question for David.
spk05: Thanks, Adam.
spk04: Yeah, again, like all banks, we continue to invest in the franchise. 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, you know, with some software, new software implementations. So, I think the way to answer your question is it likely won't all flow to the bottom line, but what I would probably guide you to is, you know, our quarterly run rate guidance So we're still guiding to 40 to 41 million per quarter or full year 2024 guidance in the 160 to 164 million dollar 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 to offset the full inflationary impact such that the annualized growth rate and expenses is in the low single-digit range. Got it. That's helpful.
spk05: 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? Because outside of some of the losses in the mainland consumer book, the credit performance has been excellent. So I'm just curious, what's driving in the CECL model the reserve ratio a bit higher?
spk04: Yeah, Andrew. Like all CISO models, there's a baseline economic forecast. 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 the basis point. And, you know, I think it was primarily related to the mainland consumer charge-offs. So, you know, mainland consumer has been 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, you know, all consumers were buoyed by the the fiscal stimulus. So it feels like it's rising a lot, but it's really only normalizing back to probably our normal expectations.
spk03: I'm not sure. Does that address your question, Andrew? Yeah, absolutely.
spk05: And then you alluded to it earlier that the high level of cash balances at quarter end or year end, what's What are you thinking with those? Are those going to be redeployed somewhere? Are there some more deposit declines in certain areas that can be used to fund? Just how should we think about the cash going forward?
spk04: Yeah, there was additional cash billed during the fourth quarter, and I forgot to mention. So we had four basis points of sequential quarter NIM deterioration in the fourth 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. The fortress balance sheet is good. It's fortressed enough. So we probably won't grow it any further, and we are looking at options to reduce on-balance sheet liquidity somewhat.
spk05: Got it. So right now, maybe just hold it and send funds and earn that before another option for it?
spk04: yeah yeah you know obviously fed funds yielding 550 or close to 550 that's that's not a not a bad yield in in currently um the challenge is it's not going to stay there right so um that's where we're redeploying some of the unbalanced liquidity could make sense got it um that covers all uh all my questions thanks i'll step back thanks andrew thank you andrew
spk06: Again, if you would like to ask a question, press star and the number one on your telephone keypad, star and the number one. 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.
spk08: Thank you, Greg. And thank you very much for participating in our earnings call for the fourth quarter of 2023. We look forward to future opportunities to update you on our progress. Thanks very much.
spk07: Thank you, Arnold.
spk06: And ladies and gentlemen, that does conclude today's call. Thank you all for joining, and you may now disconnect.
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