Q1 2024 Central Pacific Financial Corp Earnings Call

Participants

Dayna Matsumoto; Group Senior Vice President and Director of Finance and Accounting; Central Pacific Financial Corp

Arnold Martines; President, Chief Executive Officer, Director; Central Pacific Financial Corp

David Morimoto; Chief Financial Officer, Senior Executive Vice President of the Company and Bank; Central Pacific Financial Corp

Anna Hu; Executive Vice President, Chief Credit Office of the Company and the Bank; Central Pacific Financial Corp

David Feaster; Analyst; Raymond James Financial, Inc.

Andrew Liesch; Analyst; Piper Sandler Companies

Presentation

Operator

Good afternoon, ladies and gentlemen, thank you for standing by, and welcome to the Central Pacific Financial Corp. first quarter 2024 fourth conference call. 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 Nishimura. It's Senior Vice President and Director of payments and accounting. Please go ahead.

Dayna Matsumoto

Thank you, Ali, and thank you all for joining us as we review the financial results of the first quarter 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. Dot 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 2 of our presentation, and now I'll turn the call over to our President and CEO, Arnold Martinez.

Arnold Martines

Thank you, Dana, and hello, 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 two VC veterans to help the underserved in Hawaii. We celebrated this special occasion with our many long-standing loyal customers and employees consistent with our founder's 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 first quarter 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 first quarter financial performance.
But as usual, let me start with an update on the Hawaii market. The Hawaii economy continues proved 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, it 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 remains about 48% of the same month in 2019. As it relates to male, total visitors in February were about 78% of prior year as recovery following the wildfires, wildfires continues.
Total statewide hotel occupancy in March was 75%, down 1.9% from a year ago with an average daily rate of $384, 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% University of Hawaii Economic Research Organization forecast the state and 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 increase back up to $1.1 million and the median condo sales price was $500,000 in March. Home sales volumes in the first quarter were up 6.1% for single-family homes, but down 7.1% for condos compared to the prior year. With the demand for housing remaining strong, it's welcoming to see inventory levels increasing with a 7.4% 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 billion 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.
I'll now turn the call over to David Morimoto, our Chief Financial Officer. David?

David Morimoto

Thank you, Arnold. Turning to our earning earnings results, net income for the first quarter was $12.9 million or $0.48 per diluted share. Return on average assets was 0.70%. Return on average equity was 10.33% and our efficiency ratio was 66%. In the first quarter, our total loan portfolio decreased by $37.6 million, or 0.7% 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 second quarter and beyond is healthy, and we continue to take a balanced approach to loan growth. Our total deposit portfolio decreased by $228.7 million or 3.3% sequential quarter, which included a $139 million decrease in high-cost government time deposits. During the quarter, we reduced excess liquidity and pay down our highest cost deposits, which will help our NIM going forward.
Net interest income for the first quarter was $50.2 million and decreased by $1 million from the prior quarter. The net interest margin was 2.83%, down only 1 basis point sequential quarter. Our total cost of deposits was 1.32% in the first quarter in our cycle to date, although deposit repricing beta was 24%. Our pay fixed received floating swaps on $115 million of municipal securities started on March 31 and at current rates adds approximately $1 million in pretax income quarterly.
We believe our NIM has bottomed and will expand modestly in the coming quarters. First quarter other operating income was $11.2 million, which normalized following the nonrecurring gain on office sale and investment portfolio restructuring loss in the fourth quarter. Other operating expenses totaled $40.6 million in the first quarter. Also normalizing after we took the charge on the early branch lease termination in the fourth quarter of last year. Our effective tax rate was 23.5%, and we believe will continue to be in the 23% to 25% range going forward. During the first quarter 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?

Anna Hu

Thank you, David. Our asset quality remained strong in the first quarter with favorable trends in criticized loans and net charge-offs. Non-performing assets increased slightly due to one-off residential mortgage loan situations. However, we are well collateralized and are not 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. 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 it's 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.
Our Mali related loan deferrals have nearly all returned to regular payment status with just two loans remaining on deferral with a total principal balance of $1.3 million. The US mainland consumer loan portfolio continue to run off to $274 million or 5.1% of total loans as of March 31 compared to $429 million a year ago. Non-performing assets were $10.1 million or 0.14% of total assets, an increase of $3.1 million from the prior quarter, primarily due to residential mortgage loans that moved into non-accrual status.
Majority of these loans are well-seasoned with strong loan to values. Criticized loans decreased to $30.4 million or 0.56% 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 $4.5 million for the first quarter or 0.34% of average loans on an annualized basis. This reflects a 7 basis points decrease from the previous quarter. Our allowance for credit losses was $63.5 million or 1.18% of outstanding loans.
In the first quarter, we recorded a $4.1 million provision for credit losses on loans primarily due to net charge-offs. Additionally, we recorded a $0.2 million credit to the provision for unfunded commitments for a total provision for credit losses of $3.9 million during the quarter. Overall, our credit quality remained strong, and we continue to monitor the economic environment closely.
Now I'll turn the call back to Arnold. Arnold?

Arnold Martines

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.

Question and Answer Session

Operator

I'm opening the floor for question-and-answer session. (Operator Instructions)
David Feaster, Raymond James.

David Feaster

Hey, good morning, everybody.

David Morimoto

Good morning, David.

Arnold Martines

Morning, David.

Anna Hu

Morning.

David Feaster

Maybe just touching on the loan side, you talked about a healthy pipeline. I'm curious maybe the complexion of the pipeline where you see an opportunity 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 continued runoff in the consumer portfolio?

Arnold Martines

Yeah. Thanks, David. This is Arnold. I'll just I'll just start by saying that we believe we'll see more normalization in the environment as 2024 progresses. I mentioned this at the last quarter's earnings call, Q1 was a transitional quarter for us, and we are expecting a ramp-up in activity as we move deeper into 2024. We 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 as we move forward.

David Feaster

Terrific. That's helpful. And then maybe touch on the other side, touching on deposits. Curious some of the underlying trends that you're seeing, you know, 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 can optimize your funding base.

Arnold Martines

David, let me just start and then 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 NAM expansion in the future. But I'll turn it over to David for more color on deposit inflows and outflows.

David Morimoto

Yeah. Thanks, Arnold. Yeah, David, on the first quarter, total deposits were down $230 million sequential quarter. But as we noted in our release, the $140 million was intentional, our government, higher-cost government CD runoff. And so when you look at the core or normalized deposit runoff, the $90 million, it works out to roughly 1%, 1.5% sequential quarter or 6% in quarter and annualize that was a little bit more runoff than we've been experiencing, but that was it was primarily due to seasonal cash needs by our customers.
So some of it was related to the line of fire, but also it was a in our businesses needing to use some cash. So we do think that the first quarter was a transitional quarter, we think will gain traction going forward. Again, we're highly focused on core deposit growth in the small business sector. We have a couple of promotions on P&L coming out on what we call our business exceptional account. It's our flagship small business checking account on. And then so we are we are still targeting full year '24 total deposit growth in the low single digit range. So we do expect to meet our target for the first quarter.

David Feaster

Could you maybe elaborate a bit on like the trends within the first quarter? You know, how much of the outflows were in January and kind of the progression throughout the quarter on the core deposit trends?

David Morimoto

Yeah, David, I think it was pretty much throughout the quarter. Yeah, I don't think it was heavily weighted one way or the other.

David Feaster

Okay. And then maybe just as it relates to the margin guide 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, you know, other opportunities that you're considering to maybe manage rate sensitivity and protect against Fed cuts?

David Morimoto

Yeah, sure, David. Again, the balance sheet is all relatively well matched from an interest rate risk standpoint, the interest rate swap started on March 31st of this year, it will add roughly six basis points to the NIM on a quarterly basis, $1 million to quarterly net interest income. 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 first quarter.

David Feaster

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

David Morimoto

Yeah, we don't anticipate any rate cuts on this quarter. I think where we are now is probably one to two cuts in the second half of the year. But for for the next couple of quarters, we think the 2.90% to 3% NIM guide is good data.

David Feaster

Perfect. Thanks, everybody.

Operator

Andrew Liesch, Piper Sandler.

Andrew Liesch

Hey, everyone. Good morning. Thanks for taking the question on David, I just wanted to just kind of drill down on to the expense base here looks like it came in a little bit lower than I was forecasting, but still we still pretty good expense control on, I guess how should we look at expenses going forward, I think you referenced in the press release or in the presentation on sort of some ongoing efficiency initiatives. So curious what those might be and how might that affect expenses going forward?

David Feaster

Yes. Andrew, it's David on. Yes, as we've been stating now, probably for the better part of a year, and we've been focused on a lot of expensive initiatives, it tends to be more back office oriented. So leveraging technology on, as we've talked about previously, we implemented ServiceNow workflow automation. We've connected ServiceNow to our core two middleware called MuleSoft. 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 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.

Andrew Liesch

Got it. That's really helpful color there. And then I guess shifting back to the margin, 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 earn the $1 million of interest income from the swap. So you think if you just look at where the balance sheet taking out that net interest income should grow from here? Or do you think it's going to stay pretty steady?

David Morimoto

Yeah, the net interest income guide. So the again, the net interest margin guide is 2.90% to 3%. Net interest income guide is probably $50 million to $52 million a quarter, Andrew, which is an uptick from the first quarter.

Andrew Liesch

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

David Morimoto

Thanks.

Arnold Martines

Thanks, Andrew.

Operator

(Operator Instructions)
David Feaster, Raymond James.

David Feaster

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

David Morimoto

Hey, David. Yeah, if the capital plan hasn't changed, so our dividend payout ratio in the 40% to 50% range, we do have the share repurchase plan, and we'll continue to use that judiciously on yield. As you know, though, the banking industry has been a little volatile and so there are days where the overall banking sector is on 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.

David Feaster

That's helpful. And then maybe just broadly touching on credit, no. First on the consumer side, no, 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, which you watch closely. Obviously, there's a hyper focus on CRE. I'm just kind of curious your thoughts on credit broadly outside of the consumer book as well and how your approach to credit management going forward?

Anna Hu

Hi, David, this is Anna. So with regards to the consumer side, particularly with the mainland book. We are continuing in the runoff mode, but we are looking and watching closely at the economy and the market conditions as to when we would get back into the mainland consumer lending. We continue to do. 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 realm, the and the small business loans, as Arnold mentioned.

David Feaster

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

Anna Hu

Yeah. From the credit quality standpoint on the mainland booking, we are optimistic as we can. We believe that the charge-offs have stabilized in the mainland portfolio, and now 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 their. Overall credit quality continues to remain very strong in our loan book.

David Feaster

Perfect. Thank you.

Operator

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

Arnold Martines

Thank you, Ali, and I think thank you to all of you for participating in our earnings call for the first quarter 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.