Q4 2022 Central Pacific Financial Corp Earnings Call
I'd like to turn the call over to Mr. David Morimoto Senior Executive Vice President Chief Financial Officer. Please go ahead.
Thank you.
Thank you all for joining us as we review our 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 todays 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.
Now I'll turn the call over to our President and CEO Arnaud if martinez. Thank.
Thank you David.
Sure 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.
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.
Majority of visitors are from the U S mainland.
Visitors from Japan are about 20% of <unk>.
Pre pandemic levels.
And we are optimistic.
The Japan counts will continue to trend up as a country is now fully reopen.
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 and increased 13, 7% compared to the same month in 2019.
Hotels in Hawaii continues to perform well.
With total statewide hotel occupancy at 71%.
And an average daily rate of $440 and December up 4% from a year ago.
Hawaii is employment and housing sectors remain solid.
Our statewide seasonally adjusted unemployment rate was at three 3% in November 2022.
And as forecasted by the University of Hawaii, Economic research organization to be fairly stable in 2023.
Housing prices in Hawaii remains very strong.
With a total Oahu median single family home price at $1.1 million in 2022, which is up 11, 6% from the previous year.
Reflecting in national trend home sales has 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 market.
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 Cps, we 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 and 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 two 5% sequential quarter.
For the full year 2022.
The loan portfolio grew by $454 million or eight 9%.
The growth was diversified across all loan types as we continue to focus on prudently 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 lap our maintenance unsecured consumer loan portfolio run offs until the national economic outlook improves.
With that said, we expect runoff in our unsecured consumer book.
Moderate overall loan growth in 2023, which.
Which we expect to be in the mid single digit percent range.
During the fourth quarter total deposits increased by $180 million or two 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.
By market continues to be rational on deposit pricing.
CPB strong and stable core deposit base.
<unk> us to keep deposit repricing beta mode.
Insistent 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 needs.
Finally, I'm personally very excited to start 2023, and 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, we 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 Arnaud.
Turning to our earnings results net income for the fourth quarter was $28 2 million or <unk> 74 cents per diluted share.
Return on average assets was 109%.
Return on average equity was 18 three zero percent.
Our efficiency ratio was $59 five 6% in the fourth quarter.
For the full 2022 year net income was 73 9 million or EPS of $2 68.
Importantly, full year 2022 pretax 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 zero by $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 317%.
Excluding the impact from PPP.
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 re pricing to product segmentation.
Thus far our interest bearing deposit repricing beta 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 bully income.
This included certain nonrecurring debt benefits totally zero point $6 million.
As well as the higher income driven by equity market gains.
Other operating expenses totaled $44 million in the fourth quarter down one 6 billion 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 $45 million.
$2 5 million per quarter, as we continue to invest in our people facilities and technology. Despite.
Despite that we expect positive operating leverage which will drive more efficiency ratio overtime.
Our effective tax rate declined to 24, 9% in the fourth quarter as a result of higher tax exempt.
Fully income.
Going forward, we expect the effective tax rate to be in the 25% to 26% range.
Our capital position remained strong during the fourth quarter, we repurchased 241000 shares at a total cost of $4 $9 million, alright 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 Adam <unk>, Our Chief Credit Officer, Adam <unk>.
Thank you David.
Our asset quality remains solid in the fourth quarter.
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 standard and 83% of our loan portfolio is in Hawaii.
The lending we do on the U S mainland loans, typically commercial and commercial real estate participation with larger banks and markets we're familiar with.
And our consumer purchases are from established lending partners.
All mainland loans meet our credit underwriting guideline.
Believe we have minimal exposure to sectors that could be impacted by an economic downturn.
Our construction portfolio is just 3% of total loans.
Mainland consumer unsecured portfolio is 3% of total loans.
At December 31st nonperforming assets to total assets were seven basis points or $5 $3 million.
Total criticized loans were just one 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 115% of outstanding Mountain.
In the fourth quarter, we recorded a zero point $6 million.
For credit losses, due to loan portfolio growth and net charge offs.
Now I'll turn the call back to Arnold.
No.
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 are 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.
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 speaker phone. Please remember to pick up your handset before asking your question no pause here briefly as questions are registered.
Okay.
The first question is from the line of David Feaster with Raymond James. Please proceed.
Hey, good morning, everybody.
David maybe just maybe just starting on on the funding side and talking about some of the competitive dynamics that you're seeing in Hawaii, you talked about it being a more rational market and that's what we've seen historically just curious how you think about deposit growth and the competitive dynamics, there and any other.
Updates on on your the other.
Deposit initiatives that you've been working on both from the Japanese and the tech side.
And just any thoughts on deposit growth to fund the loan.
Loan growth that you talked about.
Yeah. Thanks, Dave This is Arnold.
And then ill.
If David wants to add comments as well.
But you know as I mentioned in the earlier comments.
We were successful in bringing in.
About $180 million, mostly it was from our time deposit campaigns that we ran in Q4.
The way we look at this is that it.
While deposit rates have increased.
We're looking at funding costs in general.
<unk>.
The time deposit rates that we.
<unk> offered in the Q2, where we're better off better alternatives to the more wholesale borrowings.
Costs that we're looking at.
As far as the market itself.
Further impact of continued fed tightening and yield curve movements on deposit balances 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 were focused in.
Garnering more core deposits.
Our Japan development is going well.
We had we were about $1 billion now in Japan deposits.
That was up about $22 million.
Quarter over quarter, So we feel good about that.
And he is opening up as I mentioned earlier.
We feel good about.
The opportunities that we have.
Bringing in deposits from Japan.
So just generally kind of challenging challenging environment, but.
Team is doing a good job in managing.
Funding costs overall.
Near term and I think.
Longer term, obviously, we are very well positioned.
In the marketplace, David do you want to add anything.
Maybe just a couple of points.
We're fortunate obviously to have a strong core deposit franchise that provides over $6 billion.
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.
I'll also attracting new deposit balances at reasonable costs.
Our deposit pricing strategies that were implemented in this rate cycle are very similar to what we used to be.
2015, 2018 rising rate cycle.
Those strategies were successful then we expect similar results.
And then I think finally, if you exclude government deposits from the sequential quarter growth.
Customer deposits grew 85 million or five 3% linked quarter annualized and I think that's pretty good performance in this oh.
Brady and environment.
No absolutely.
And maybe just kind of.
Taking this into context with kind of a loan growth and the improved pricing side I guess, how do you think about rates incentives and maybe the NIM trajectory as we look forward just.
As we talked about.
Discipline on the deposit deposit side betas are accelerating but.
More rational market and then.
Assets continuing 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.
Of course of the year, yes.
Yeah, Hey, David its David again.
Yeah, we did 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.
<unk> net interest margin right now is three <unk>.
<unk>, so it's kind of guiding to a flattish.
Flattish flattish NIM going forward.
Yeah.
Okay that makes sense.
I just wanted to get your updated thoughts on on the swell banking as a service initiative in and where we are there your thoughts on expansion at this point and whether a L.
<unk> sale impacts that that partnership at all.
Sure good questions David.
Swell is currently in pilot testing.
It's an invitation only so the app is available is operating but we're only inviting customers from the swelling waitlist to join in.
And.
Beta testing, there's about 100 customers that are currently on the platform.
And where we're actually preparing to do.
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.
We are.
As we've talked about over the last several quarters, we've really we've slowed down the rollout of swell as 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.
New Fintech initiatives. So we have decided to slow down and we're observing what's happening in the fintech marketplace.
<unk> strategy has two but its slightly rather than just broad customer acquisition. We're now focused on looking for profitable customers. So rather than millions of unprofitable customers were looking for.
A smaller amount of 100000 of profitable customers and we think thats, a better business model than what we've been seeing more broadly in the fintech space.
Okay.
Yeah, I think that makes complete sense, but does the does the sale of elevate impact that partnership at all or is it kind of a non event.
Oh, yes, sorry, I forgot about that kind of quick questions here.
So as you know elevate is is looking to be sold to park cities accident Management Park city's asset management is the private equity.
Money behind swell.
<unk> Park cities has a long history of working with L O B.
Here too the swell initiative, and then park cities was the largest.
Outside money that you invested in the series a round of swell. So park cities is a very familiar entity to Tel Aviv.
<unk> and CPB.
So it does not affect the plans for slow going for it.
Okay terrific.
Thanks, everybody.
Thanks, Dave Thanks, David.
Thank you Mr <unk>.
The next question is from Andrew Liesch with Piper Sandler. Please proceed.
Hey, everyone. Good morning.
John talked about that.
The deposit mix here.
A lot of it was from the increase was from the successful CD campaigns, how should we look at deposits going forward for that match loan growth as it did this quarter and you think it's going to be more weighted toward.
And then I guess over time do you think the mix of Cds, and noninterest bearing and get back to where they were pre COVID-19 I'm just kind of curious how you think that the funding mix is going to change.
Yes, Andrew this is Arnold I'll start by just saying that I think near term, we're probably going to see a 50 50 mix.
Time deposits and core <unk>.
<unk> coming mainly from new acquisition, new customer acquisition.
Off the top market right now.
As I mentioned earlier I don't I don't see it.
This is a near term dynamic.
That.
US and every other bank.
Has to manage through.
Don't see this as a longer term issue I think we're going to get we're going to get back.
As a bad start to ease.
Rates in the future, we will get back to you know kind of where we were pre pre pandemic.
But it's going to be it's going to be a little bit of a journey.
We're just going to we're just going to manage that effectively.
In the near term not sure if David wants to add anything.
Maybe one additional point Andrew.
On DDA, there's there's obviously a lot of interest in DDA DDA.
DDA as a percent of total total deposits at the end of 2019, so pre pandemic.
98% of total deposits at the end of last year. It was 31, so theres, 3% differential to pre pandemic, that's about 200 million of roughly $200 million in deposits.
We think our baseline PD ratio should be higher than pre pandemic due to our outperformance on PPP lending.
So we're thinking maybe we have 50 or 100 million more normalization on DDA balances and obviously, we're doing everything we can to keep that to the lower end of that range.
Got it that's really helpful color. Thank you.
Just related to that your margin guide is that part of the quarter or for the next several quarters or for the year, just curious where that $3 10 to $3 20 range is good for you.
Yes generally it's for the next couple of quarters. That's what we're looking at obviously the operating environment is very volatile and there's a lot of things can change, but that's what we're guiding for for the next couple of quarters and you.
Certainly that makes sense and then good to see the new the new buyback I guess, how active do you intend to be been pretty active in the last couple of quarters is a similar pace of repurchases reasonable or I guess kind of how you're looking at that.
Yeah, I would say similar we've been repurchasing about 200 to 250 to 200 to 250000 shares per quarter.
Spending roughly about $5 million on repurchases combined with 7 million in quarterly cash dividends.
Roughly 60% return of net income that we've been targeting.
Yeah.
Gotcha.
That is really helpful.
All my questions I'll step back thanks.
Thanks, Andrew.
Thank you Mr. Li.
Once again to ask a question press star one.
The next question is from Laurie Hunsicker with Compass point. Please proceed.
Yes, hi, good morning.
Just.
Maybe circling back to what David was asking on 12.
Can you quantify a little bit more where your small balances are as of December 31st It sounds like there is not a lot there, but when you talk about ramping it up.
2023, what what does that look like and then I guess after that.
Thought you were ceasing mainland unsecured consumer so is this.
Pilot testing, then Justin Hawaii or help us think about that okay.
Okay.
So Laurie as Arnaud good morning, all.
Start.
On the.
Mainly constitute consumer and then I'll turn it over to David and you can you can speak to swell.
But yes, we as I mentioned earlier in my comments we are.
Our suspending.
And then consumer.
Unsecured purchases.
Until such time that we believed the the outlook the national outlook economic outlook.
Is improving so near term.
Pretty much full suspension of the mainland consumer.
Unsecured okay. So.
Uh huh.
As far as you.
Our Hawaii, we're continue to be very active active there.
On consumer.
And you know in our home market and and also we're still we're still looking at auto.
Auto loans as an area, where we believe.
It it's acceptable risk given the what.
What we saw in the past in the last recession.
Actually performed pretty pretty well for us the data points that we're looking at so.
Generally speaking.
We're we're we're open to auto.
But in any event.
On mainly unsecured consumer Richard basically suspending for now.
Until until the national outlook improves and I'll turn it over to David to talk a little bit about this well yeah. Yeah. Just so just a clarification when auto talking about suspending mainland unsecured debt that's on the purchase side Laurie.
We are not suspending swell, but we're continuing the very.
Deliberate and gradual rollout swell.
So at year end to give you an idea we have about a <unk>.
Less than 100 customers on the platform.
Deposit balances are probably less in the aggregate are less than 20000, the loan balances are less than $5.
So its very nominal balances at this point, we are planning to do.
Do some test marketing in this first half of 2023, but we don't anticipate the balance has to be meaningful at all.
So that's where we are we're not.
Yeah, we're not spending swell.
And do you have any follow up questions on slow Laurie yes. So in other words I guess as we think looking out to 2023 and you said you would ramp that up that you're obviously not gonna stay up 5000, a month I guess the question is what are you taking that too or are you taking at the $5 million or you're taking it to 25 million. How are you how are you thinking about that.
Pat.
Hi.
Laurie.
Yeah, you bet.
Oh, yes, sorry for that we had a.
Laurie.
Yes, I'm I'm, Laura can you hear me.
Okay sorry.
We had a technical glitch at ARIA, but we thought we lost you.
No no I would say that.
Swell balances are not going to exceed 10 million in anytime soon.
Perfect.
That's what I was looking for okay.
That's helpful. And then just on the unsecured mainland consumer back that 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 out outside of consumer that.
The consumer piece it looks like you had 1 million seven net charge offs of $1. Three of it came from consumer can you help us think about of that million three how much came from.
The mainland piece that just you know what is your mainland unsecured consumer at at December 31st and then in the quarter how much of.
Much of the mainland charge offs.
Or in total Opex.
Sorry, I'll ask <unk> to respond to the question and sorry, good morning.
So far 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 sell but we did go ahead and release that.
And any additional purchases by the rest of the quarter.
With regard to the charge offs about 900000 is from the mainland in my book.
The breakdown was about 200.
And auto about 280 in our home improvement and about 450, and our unsecured consumer and Thats all related to maintenance.
Perfect that's great. Thank you.
And just going back to the margin.
David do you have a spot Martin.
December .
Yes.
So December spot NIM was $3 17, which is flat to the full quarter.
And then just to give you a little more color spot interest bearing deposit costs.
In December was 73 basis points.
<unk> increased 10 basis points over months.
While December loan yields was for.
For 'twenty.
Kris 12 basis points month over month so.
So I think that the.
All of that data is supportive of the flattish NIM guide that we provided.
Perfect. That's helpful. Thank you I'll leave it there.
Thanks, Laurie Thank you Ms Homestead.
There are no additional questions waiting at this time, so I will turn the call over to Arnold Martinez for any further remarks.
Thanks, a lot.
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.
Yeah.
That concludes today's call. Thank you for your participation you may now disconnect your line.
Sure.
Yes.