Q4 2023 Central Pacific Financial Corp Earnings Call

Okay.

Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the Central Pacific Financial Corp, Fourth quarter 2023 conference call. During today's presentation, all parties will be in a listen only mode.

Operator: Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the Central Pacific Financial Corp. fourth quarter 2023 conference. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open to questions.

Following the presentation the conference will be opened for questions.

Operator: This call is being recorded and will be available for replay shortly after its completion on the company's website at www.cpb.gov. And with that, I'd like to turn the call over to Ms. Dayna Matsumoto, Group Senior Vice President and Director of Finance and Accounting. Please go ahead. 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 of Central Pacific Financial Corp., David Morimoto, Senior Executive Vice President, and Anna Hu, Executive Vice President. Credit. 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.

This call is being recorded and will be available for replay shortly after its completion on the Companys website at Www Dot C. P B Dot bank.

And with that I'd like to turn the call over to MS. Matsumoto Group Senior Vice President and director of Finance and accounting. Please go ahead.

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 our known 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.

Dayna Matsumoto: 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. Now, I'll turn the call over to our President and CEO, Arnold Martines. Thank you, Dayna, and alo

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 and now I'll turn the call over to our president and CEO our node Martinez.

Thank you Dana and Aloha everyone.

Arnold D. Martines: We appreciate your interest in Central Pacific Financial, 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 2020. Also, in a few weeks, we will celebrate our 70th anniversary. It is an honor to lead this institution, continue our legacy of supporting. 2023 was another strong year, to be successfully The Operating Environment Challenge, while continuing to deliver solid results.

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 70 <unk> anniversary.

It is an honor to lead this institution and continue our legacy of supporting the community.

123 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.

Arnold D. Martines: We have a strong balance, and our balanced growth strategy positions us extremely well during the fourth quarter. [inaudible] that were good opportunities to gain greater future returns. We will continue to pursue similar opportunities that align with our strategy. The team will provide additional detail and insights on our fourth quarter financial and credit, But let me start first with an update on Hawaii. 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 $75,000. 90.

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 details 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.

Visitor arrivals to Maui, where 75% of the previous year and total statewide arrivals, where 90% of pre pandemic 2019.

Arnold D. Martines: Statewide, visitors from Japan continue to come, up 92% from a year ago, still lagging behind pre-pandemic only $49. Total visitor spending was $1.96 billion, down 1% from a year ago and up 12%. Total Hotel Occupancy. 72%, up 0.7%, average daily rate of $428,000; don't Hawaii Statewide Seasonally Adjusted Unemployment, 2.9% in December, and continues to outperform the National Unemployment rate of 3.7. The University of Hawaii Economic Research Organization forecasts the state unemployment rate to remain very low. Real estate values in Hawaii are consistently high. In December, the Oahu median single-family home price was $1 million, and the median condo.

Statewide.

As it is from Japan continued to increase up 92% from a year ago, but still lagging pre pandemic levels at only 49% at 2019.

Total visitor spending was 196 billion and 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 statewide seasonally adjusted unemployment rate was two 9% in December and continues to outperform the national unemployment rate of three 7%.

The University of Hawaii, Economic research organization forecast the state unemployment rate to remain very low at two 5% in 2024.

Real estate values in Hawaii are consistently strong.

In December.

Wahoo median single family home price was $1 million.

And the median condo sales price was 510000.

Arnold D. Martines: $510. Home sale volumes continue to be down year over year, but mortgage rates have recently declined. We are starting to see an increase, and with limited inventory, properties continue to move quickly in our market. Overall, we are optimistic about Hawaii's economic recovery. Liesch, David Feaster, David Morimoto, Arnold Martines, Unknown Executive, Dayna Matsumoto, Central Pacific Financial Corp. Hawaii's economy is proving to be resilient, and we hope to turn unfortunate events, like the Maui wildfires, into opportunities to rebuild [inaudible] David.

Wholesale 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.

<unk> continue to move quickly in our markets.

Overall, we are optimistic about Hawaii economic outlook.

While the state faces some headwinds and uncertainty.

Why is economy is proving to be resilient and we hope to turn unfortunate events like the Maui wildfires into opportunities to rebuild.

To make our island communities stronger in the future.

I'll now turn the call over to David Morimoto, Our Chief Financial Officer, David.

Thank you Arnaud.

David S. Morimoto: Thank you, Arnold. Turning to our earnings results, net income for the fourth quarter was $14.9 million, or $0.55 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 portfolio. 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.

Turning to our earnings results net income for the fourth quarter was $14 $9 million or <unk> 55 per diluted share.

Return on assets return on average assets was 0.79%.

Return on average equity was 12, 55% and our efficiency ratio was 64, 2%.

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 one 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 C&I 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.

David S. Morimoto: From an average balance standpoint, the trends indicate the movement out of non-interest 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 points sequentially. 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, receive float swap, we expect our NIM to peak 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.

Average balance standpoint, the trends in the Cape the movement out of noninterest bearing DDA is continuing to slow.

Okay.

Net interest income for the fourth quarter was $51 1 million and decreased by zero point $8 million from the prior quarter, primarily due to higher funding costs.

The net interest margin was 284 in the fourth quarter, a decline of four basis point sequential quarter.

Our total cost of deposits was 122% 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.

And with that positive trend as well as the expected benefit from our pay fixed receive 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 utilize the $5 1 million pre tax gain to improve prospective earnings through an investment portfolio restructuring of approximately 30 million.

At a loss of one $9 million.

A branch lease termination, where we incurred a one part one time charge of $2 3 million.

Overall, the three nonrecurring transactions positions, our balance sheet for improved future performance.

David S. Morimoto: Overall, the three non-recurring transactions position our balance sheet for improved future performance, which we estimate to be an increase to annual pre-tax income of $2 million. For the 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. 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 between 24 and 25%. During the fourth quarter, we did not repurchase any shares.

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 bully 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.

Okay.

Our effective tax rate declined to 22, 3% in the fourth quarter, primarily due to higher tax exempt 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 <unk> 26 per share payable on March 15 to shareholders of record on February 29.

Anna M. Hu: Finally, our Board of Directors declared a quarterly cash dividend of $0.26 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 2020. I'll now turn the call over to Anna Hu, our Chief Credit Officer.

Florida 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, Adam Thank you David.

Anna M. Hu: Thank you, David. Our asset quality remains strong in the fourth quarter, with non-performing assets at nine basis points of total assets. Criticized Loans, to 0.92% of Total Loans. Our loan portfolio continues to be well diversified by loan type and index. Over 75% of the loan portfolio is real estate secured with a weighted average loan-to-value. The 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 2020. Our commercial real estate office and retail exposure remains low at 3.5% and 4.8% of total loans. 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.

Asset quality remained strong in the fourth quarter with nonperforming assets at nine basis points of total assets and criticized loans decreasing to zero point, 92% of total loans.

<unk> 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 three 5% and four 8% of total loans respectively.

The office portfolio has a weighted average loan to value of 56% and 71 weighted average months to maturity.

Our 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.

Anna M. Hu: 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 30. 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.

Since then balances have paid down slightly to $103 million or one 9% of total loans as of December 31st.

We estimate.

At $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.

Anna M. Hu: We are monitoring the remaining $2 million of Lahaina loans, which include 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 load. The increase in net charge-offs was primarily from our mainland consumer portfolio.

We are monitoring the remaining $2 million of Lahaina alone, 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 run off in the mainland consumer portfolio to $308 million or five 7% of total loans as of December 31st.

<unk>, two $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.

Anna M. Hu: 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.

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 has peaked and we.

Will improve going forward overall.

Overall, our loan portfolio remains solid.

Our allowance for credit losses was $63 9 million or $1, one 8% of outstanding loans.

Anna M. Hu: In the fourth quarter, we recorded a $5 million provision for credit losses on loans primarily due to net debt. Additionally, we recorded a $0.3 million credit to the provision for unfunded commitments, for 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. [inaudible] Thank you, Anna.

In the fourth quarter, we recorded a $5 million provision for credit losses on loans, primarily due to net charge offs.

Additionally, we recorded is 0.3 million dollar credit.

<unk> for unfunded commitments for a total provision for credit losses of $4 $7 million during the quarter.

Overall, our strong risk management culture, and conservative underwriting policies continued 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 D. Martines: In summary, we are pleased with our progress and results for 2020. 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 product as we celebrate our 70 years of serving Hawaii this year. I want to thank you for your continued support and confidence in our. At this time, we'll be happy to address any questions. Great, thank you.

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.

Great. Thank you and at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Once again star one on your telephone keypad and we'll pause for just a moment to compile the Q&A roster.

Operator: 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. 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.

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.

Arnold D. Martines: Hey, David. Maybe I'm just a high level, but 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, you know, especially on the mortgage front? Maybe it just, how do you think about your ability to reprice deposits lower if we do get Fed cuts? Thanks, David. This is Arnold.

Hey, David.

Maybe.

Just high level I'd like to start on or how you think about the potential impacts of fed cuts, obviously that that would benefit on the credit side, but as you saw.

Since there maybe there is a decent amount of pent up loan demand and we can see loan growth accelerate especially on the mortgage front, maybe just how do you think about your ability to reprice deposits lower if we do get fed cuts.

Yes. Thanks, David This is Arnold I'll I'll start and then I'll turn it over to David for a person for the.

Arnold D. Martines: 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. You know, we do feel good about that this year. We think that, you know, the operating environment is going to normalize a bit, and it has to be better than last year for sure. So, 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 C&I loan categories, but we do expect residential and home equity, and small business to also support growth in 2024.

The second part of your question.

With regard to the.

The loan growth.

Of it.

We do feel good about about that this year.

That the operating environment is going to normalize a bit.

It has to be better than last year for sure.

So 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 C&I loan categories, but we do expect our residential.

The residential and home equity and small business to also support.

Growth in 2024.

Arnold D. Martines: As you know, we continue to let the Mainland Consumer Loan Portfolio run off until we have better visibility on what happens on the U.S. continent from an economic perspective. So with all that said, we anticipate full-year 2024 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 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 will 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. Yeah. Hey, David.

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 a 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 interest rates to your to your point earlier.

But all in all we anticipate an improving operating environment.

Supported by Hawaii's resilient economy, and and I have to.

I'll tell you our bankers are excited and engaged but what we hope to be a good year to help our customers achieve their rotor investment goes so let me maybe have David cover some of the repricing.

Part of your question.

Yes.

David S. Morimoto: 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, 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 data. And so we would anticipate that those high data accounts would react pretty much, 100% 100% beta with a move in the market rate. So, on an overall basis, our expectations are 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 the 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.

Hey, David.

On the potential for rate cuts.

What our plans are on the deposit pricing side.

As we saw last year.

We implemented a product segmentation strategy, we created.

Some higher yield options for our customers that we're seeking.

Higher yields.

And those those accounts, obviously have high betas.

And.

So we would anticipate that those high beta accounts would react pretty much.

100%, 100% beta with a move in market rates.

So an overall basis, our expectations is that rate cuts would be somewhat beneficial to cps in our NIM, but.

Being said that as we've consistently said, we do view the balance sheet as relatively well matched.

No.

Also in the rising rate environment in 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 pretty.

Oh, well defined range.

That helps Steve.

Yeah.

David S. Morimoto: 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 have started to see that reverse course at all. And just how do you think about deposit growth as we look forward, given the many initiatives you've put in place? Have you started to see any benefits from your Japanese partnership or any inflows from insurance proceeds and 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 for some of your initiatives? Yeah, I can start, David. It's David again.

Terrific.

And it's just we were just talking about deposit plus once they've there I was I was hoping you could touch on maybe some of the deposit trends youre seeing.

And some of the drivers of the Niv outflows, whether you're starting to see that reverse course at all and just how do you think about deposit growth as we look forward some of the initiatives you've put in place are you starting to see any benefits from your Japanese partnership or any inflows from insurance proceeds and 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 and some of your initiatives.

Yes.

I can start David it's David again.

David S. Morimoto: You know, on the, 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, Dayna Matsumoto did a good analysis.

Yes.

<unk>.

Again core deposits as a whole were relatively flat sequential quarter, which is which is positive.

There was some continued migration within core deposits out of DDA into interest bearing.

However.

Yes, Dana Dana Matsumoto did a good analysis.

David S. Morimoto: And you know, we've been tracking the quarterly average balances of DDA. And 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, you know, 50 to 55 million. And in the fourth quarter, it declined to 30 million.

We've been tracking the.

Quarterly average balances of DDA.

And early in 2023, the sequential quarter declines were about 80% to $90 million a quarter out of DDA.

And then in the third quarter declined to <unk>.

$55 million in the fourth quarter declined to $30 million and these are all quarterly average balances. So 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.

David S. Morimoto: And these are all quarterly average balances. So, the trend is moving in the right direction. DDA represents about twenty eight percent of total deposits, which is where it was in late twenty nineteen pre-pandemic.

David S. Morimoto: So all indicators are pointing to the outflow or the migration out of non-interest bearing securities continuing to slow. And then, yes, we will need to turn the tide and get it growing again. And the teams are really focused.

So all indicators are pointing to the.

Our floor the migration out of noninterest bearing continuing to slow and then yes, we will need to turn the tide and Kelly Groh growing again and the teams are really focused on that.

Got it.

David S. Morimoto: That's helpful. And then maybe the 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, I just want to know your thoughts on capital priorities, given given the strength of your capital base. Yeah, David, the capital, capital management remains consistent. So you know, we'll continue to pay the quarterly cash dividend at similar payout levels. And then, you know, beyond that, we are open to all alternatives, right?

That's helpful.

And then maybe last one from me just touching on the capital priorities you talked about a pause last quarter on the buyback.

Made several balance sheet.

Moves, but those are capital neutral I'm, just curious maybe your appetite for additional securities restructurings.

Our share repurchases, we put in the new program.

This quarter just curious your thoughts on capital priorities, given given the strength of your capital base.

Yes, David.

Capital Capital management is remains consistent so we'll continue to pay.

Pay the.

Quarterly cash dividend at similar similar payout payout levels.

And then.

Beyond that we are we are.

Open to all alternatives right. We do have the the board provide us another authorization on the share repurchase plan and then like you said there are still opportunities to do.

David S. Morimoto: You know, the board has given 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, we'll, we'll make the decisions that we believe are prudent. [inaudible] Okay, terrific.

Further our balance sheet restructurings, and we'll be evaluating those options against each other and.

With the buyback where the ultimate insider. So we'll we'll make the decisions that we believe are prudent.

Beyond the cash dividend.

Okay terrific and just confirm it sounds like the margin guidance Youre talking about for a trough in the first half that does incorporate rate cuts.

David S. Morimoto: And just confirming, it sounds like the margin guidance you're talking about for a trough in the first half does incorporate rate cuts. Yeah, our baseline forecast, our internal baseline forecast has 325 basis point cuts in 2024, but nothing in the first quarter. So, yeah, again, I think that the important thing to note on the net interest margin is the interest rate swap, you know, the forward starting interest rate swap that we put in in early 2020. So it goes live on April 1, April 1 of 2024.

Yes.

Our baseline forecast, our internal baseline forecast is $3 25 basis point cuts.

2024.

But nothing in the first quarter.

So.

Again, I think that the.

Good thing to note on the net interest margin is the.

Interest rate swaps the forward starting interest rate swap.

We've put in in early 2020.

So.

It goes live.

<unk>.

April one April one of 2024 and again.

David S. Morimoto: And again, we're paying fixed at $210, and we're receiving fed funds flowing. So at the current time, we're 340, 340 basis points in the money on 115 million. So by our forecast, if there are the three 25 basis points cuts in 2024, the swap will add $1.8 billion in net interest income to NIMS. $0.05 to each.

We're paying fix at 210.

And we're receiving fed funds floating.

At the current time were $3 4200, 40 basis points in the money on $115 million.

So by our our forecast if there if there are the $3 25 basis points cut cuts in 2024.

The swap will add one 8 billion and net interest income two basis points to NIM.

<unk> <unk> to EPS.

David S. Morimoto: Terrific. That's helpful. Thanks, everybody. 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, And our next question comes from the line of Andrew Liesch with Piper Sandler. Andrew, please go ahead. Thanks. Good morning, everyone.

Terrific.

Thanks, everybody.

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 Liesch with Piper Sandler Andrew. Please go ahead.

Thanks, Good morning, everyone.

Arnold D. Martines: So just to touch base on the kind of repositioning of the securities and the $2 million, and then the offices as well. $2 million. How much of that do you think is going to flow to the bottom line versus redeploy or reinvested back into the business? Andrew, that's a good question for David. Thanks. Thanks, Arnold.

Just to touch base on the kind of the repositioning of the securities and the $2 million and then the offices as well $2 million how much of that do you think is going to flow to the bottom line.

Versus redeploying or reinvested back into the franchise.

And Joe Thats, a good question for David.

Thanks Todd.

[laughter], Yeah again like all banks, we we continue to invest in the franchise. We as you know Andrew we've had multiple.

David S. Morimoto: Yeah, again, like all banks, you know, we we we continue to invest in the franchise. You know, we, as you know, Andrew, we've had multiple technology initiatives. First, we started with customer-facing technology enhancements.

Technology initiatives.

First we started with customer facing technology enhancements more recently, we've been focused on the back office.

David S. Morimoto: More recently, we've been focused on the back office, you know, with some software, new software implementation. 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 our quarterly run rate guidance on OOE, so we're still guiding to $40 to $41 million per quarter or full year 2024 guidance in the $160 to $164 million 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, you know, what I would say is that we are finding some offsets, and we will find some offsets to offset the full inflationary impact such that the annualized growth rate and expenses are in the low single-digit range. I got it.

With software.

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.

Our quarterly run rate guidance on <unk>.

O E.

So we're still guiding to $40 million to $41 million per quarter or full year 2020 for guidance in the $160 million to $164 million range and then if you normalize 2023 for the nonrecurring it ends up being like a low single digit annual.

Lives growth rate, which we believe is reasonable considering the <unk>.

<unk> pressures that we're all dealing with so.

What I would say is we.

We are finding some offsets we will find some offsets for the to offset the full inflationary impact such that the annualized growth rate of spend is in the low single digit range.

Got it Thats helpful.

David S. Morimoto: That's helpful. A 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?

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 seasonal model, that's causing that to happen because outside of the some of the losses in the mainland consumer book the credit performance has been excellent. So I'm just curious like what's driving in the seasonal model. This.

David S. Morimoto: Because outside of the losses in the mainland consumer book, the credit performance has been excellent. So I'm just curious, like what's driving the CECL model, the reserve ratio being a bit higher? Yeah, yeah, Andrew.

The reserve ratio a bit higher.

Yeah Andrew.

David S. Morimoto: So, like all SESA models, there's a baseline economic forecast; we use Moody's. So we subscribe to Moody's for our economic forecast. And, you know, then, you know, there's the qualitative factor, the qualitative overlay on top of, I think I think the grinding higher, you know, it increased the basis point.

No.

<unk> see some models there is out there as a baseline economic forecast we use the Moody's so we subscribe to Moody's for our economic forecasts and.

And then yes.

There's the qualitative factor is the qualitative overlay on top of that.

I think I think the grinding higher it increased one basis point.

And yes, I think it was primarily related to.

David S. Morimoto: And yeah, I think it was primarily related to the mainland consumer charge-offs. So, you know, the 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 fiscal stimulus. So it feels like it's rising a lot, but it's really only normalizing back to probably our normal expectation. I'm not sure that addresses your question, Andrew. Yeah, absolutely.

The mainland consumer charge offs. So so mainland consumer has been in the one area that we've seen a little bit of <unk>.

Credit deterioration, although I would say that the deterioration is from <unk>.

Have normally.

Christine period of time, where.

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.

I'm not sure does that address your question Andrew Yeah.

Absolutely.

David S. Morimoto: And then you alluded to it earlier that the high level of cash balances at quarter-end or year-end, 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 the growth? Just how should we think about the cash going forward? Yeah, there was an additional cash bill 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 were 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 I think we've done enough there.

You alluded to it earlier that the high level of cash balances.

At quarter end or year end, what what are you thinking about those.

We redeployed somewhere there are some more deposit declines in certain areas that that can be used to fund.

Just how should we think about the cash going forward.

Yeah. There was there was additional cash build 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.

That is to not increase on balance sheet liquidity further I think.

We've done enough there.

David S. Morimoto: The Fortress balance sheet is good, and it is profitable enough. So we probably won't grow it any further. And we are looking at options to reduce on-balance sheet liquidity somewhat. Got it right now, maybe just just hold it and said funds and earn that before another option for it. Yeah, yeah, yeah, obviously Fed funds yielding 550 or close to 550. That's not a bad yield in. Currently, the challenge is it's not going to stay there, right? So that's where we're redeploying some of the unbalanced liquidity.

<unk> balance sheet is good is for interested enough. So we probably won't grow it any further and we are looking at options to reduce on balance sheet liquidity somewhat.

Got it right now maybe just just hold it in fed funds and earn that before.

Another option for it.

Yeah, Yeah, Yeah, obviously fed funds EOD of $5 50, or close to $5 50.

That's not a not a bad yield.

Currently.

The challenge is it's not going to stay there right. So that's where we're redeploying some of the on balance sheet liquidity could make sense.

Got it.

David S. Morimoto: That covers all my questions. Thanks. I'll step back, http://thebusinessprofessor.com. Thank you, Andrew. Again, if you would like to ask a question, press star and the number one on your telephone keypad. And it looks like we have no further questions, so at this time, I will turn the call back over to Arnold Martinez. Arnold, the floor is yours. 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. Thank you, Arnold. And ladies and gentlemen, that does conclude today's call. Thank you all for joining, and you may now go.

That covers all my questions. Thanks, I'll step back.

Thanks, Andrew.

Thank you Andrew.

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.

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.

Thank you Arnold and ladies and gentlemen that does conclude today's call. Thank you all for joining and you may now disconnect.

Okay.

Okay.

Okay.

[music].

Okay.

Okay.

Yeah.