Q1 2024 Central Pacific Financial Corp Earnings Call
Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the Central Pacific Financial Corp, first quarter 'twenty 'twenty four conference call. During today's presentation, all parties will be in listen mode only.
Following the presentation. The conference will be opened for questions. This call is being recorded and will be available for replay shortly after its completion on the company's website at www dot.
<unk> Dot bank I'd like to turn the call over to Mr. Ian It's shimada.
Senior Vice President and director of Finance and accounting. Please go ahead.
Thank you Allie and thank you all for joining us as we review the financial results of the first quarter of 'twenty 'twenty four for Central Pacific Financial Corp.
With me. This morning are our node 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 web site at C. P. B Dot bank.
During the course of todays call management May make forward looking statements. While we believe these statements are based on reasonable assumptions they are.
Involve risks that may cause actual results to differ materially from those projected.
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 Arnaud Martinez.
Okay.
Thank you Dina and Hello.
Hi, everyone.
We appreciate your interest in Central Pacific Financial Corp, and we are pleased to share our latest updates and results with you.
Arnold D. Martines: We had a special start to 2024.
With the celebration of our 17th anniversary in mid February where we took time to honor her founding.
As many of you know our bank was started by World War two D C veterans to help the underserved in Hawaii.
We celebrated the special occasion with our many long standing loyal customers and employees.
Consistent with our founders 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 details 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 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.
It remains about 48% over the same month in 2019.
As it relates to Maui.
Total visitors in February we're about 78% the prior year as recovery following the wildfires wildfires continues.
Total statewide hotel occupancy in March was 75% down one 9% from a year ago with an average daily rate of $384 <unk>.
0.9% from a year ago.
Arnold D. Martines: Hawaii statewide seasonally adjusted unemployment rate was three 1% in March.
Arnold D. Martines: <unk> continues to outperform the national unemployment rate of three 9%.
The University of Hawaii Economic research organization forecast.
Arnold D. Martines: <unk> unemployment rate.
It remained very low at two 7% in 2024.
Arnold D. Martines: In the area of Hawaii real estate values.
Wahoo median single family home price increase back up to $1.1 million and the median condo sales price was 500000 in March.
Arnold D. Martines: Home sales volumes in the first quarter were up six 1% for single family homes.
But down seven 1% for condos compared to the prior year.
With the demand for housing remains strong is welcoming to see inventory levels, increasing with a seven 4% increase in the active inventory for single family homes in March.
Overall, we remain optimistic about Hawaii economic outlook.
Although the impact 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 the economy continued to grow modestly in 2024.
I'll now turn the call over to David Morimoto, Our Chief Financial Officer, David.
Thank you Arnaud.
Turning to our earning earnings result, net income for the first quarter was $12 9 million or 48 cents 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 run off in the mainland consumer loan portfolio and partially offset by growth in our Hawaii commercial real estate portfolio, where they are.
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 three 3% sequential quarter, which included $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 283% down only one basis point sequential quarter.
Our total cost of deposits was 132% in the first quarter and our cycle to date, although deposit repricing beta was 24%.
Our pay fixed receive float swap on $115 million of municipal Securities started on March 31.
And at current rates adds approximately $1 million in pre tax income what are they.
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 $46 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 we will continue to be in the 23% to 25% range going forward.
During the first quarter, we repurchased 49960 shares at a total cost of $900000.
Our board of directors declared a quarterly cash dividend of 26 cents per share, which will be payable on June 17th to shareholders of record on May 31.
I'll now turn the call over to Anna Hu, our Chief Credit Officer Anna.
David our asset quality remained strong in the first quarter with favorable trends in criticized loans and net charge offs non.
Nonperforming 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%.
Commercial real estate portfolio represents 26% of total loans.
And is 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 three 4% and five 4% of total loans respectively.
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 65% and 59 weighted average months to maturity.
Our Maui 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 U S mainland consumer loan portfolio continued to run off to $274 million or five 1% of total loans as of March 31, compared to $429 million a year ago.
Nonperforming 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 loan that moved into non accrual status.
Majority of these loans are well seasoned with strong loan to values.
Criticized loans decreased to $34 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 seven basis points decrease from the previous quarter.
Our allowance for credit losses was $63 $5 million or 118% 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 remains strong and we continue to monitor the economic environment closely.
Now I'll turn the call back to Arnold Arnold.
Thank you Anna in summary, we believe that with our exceptional team.
Combined with our strong liquidity capital and credit positions.
We're 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.
Now opening the floor for a question and answer session. If you'd like to ask a question. Please press star and number one on your telephone keypad. Our first question comes from David Feaster from Raymond James Your line is now open.
Hey, good morning, everybody.
Good morning, David Delaney.
Maybe just touching on the loan side and you talked about a healthy pipeline I'm curious maybe the complexion of the pipeline where are you seeing opportunities today and if you could touch on some of the competitive dynamics, what's you're hearing from your borrowers and maybe how you think about loan growth just given the continued runoff in the consumer portfolio.
Yes, Thanks, Steve This is Arnold.
I'll just start by saying that we believe we will see more normalization in the environment as 2024 progresses.
And I mentioned this at the last quarter's earnings <unk> 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'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.
Why is decisions on risk risk reward as we as we move forward.
Terrific. That's helpful and then maybe touch on the other side.
Touching on deposits curious some of the underlying trends that youre seeing.
You know, whether you have seen inflows or 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 in other ways that you can optimize your funding base.
David Let me just start and now I'll turn it over to David Morimoto.
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.
So.
We've been very cognizant of balancing.
Those decisions so.
So that we can.
Improve our position or NIM expansion in the future, but I'll turn it over to David for more more color on on deposit inflows and outflows.
Thanks Arnaud.
Yes, David the first quarter total deposits were down $230 million sequential quarter, but.
As we noted in our release the $140 million was intentional government.
Cost of government CD runoff.
So when you look at the the core or normalized deposit run off the 90 million. It works out to roughly 1%, one 5% sequential quarter or 6% linked quarter annualized.
That was a little bit more run off than we've been experiencing but that was it was primarily due to seasonal cash needs by customers.
Some of it was related to the high enough fire.
But also it was.
Businesses needing to use some cash so we do think that the first quarter was a transitional quarter. We think we'll gain traction going forward again, we're highly focused on core deposit growth in the small business sector. We have a couple of promotions.
Coming out on.
What we call our business exceptional collyn, it's our flagship small business checking account.
And then so we are we are still targeting full year 'twenty for <unk>.
Total deposit growth in the low single digit range. So we do expect to make up.
For the first quarter.
Could you maybe elaborate a bit on like the trends within the first quarter.
How much of the outflows were in January and kind of the progression throughout the quarter.
On the core deposit trends.
Yes, David I think it was pretty pretty much throughout the quarter.
Think it was.
Heavily weighted one way or the other.
Okay, and then maybe just as it relates to the margin got it putting it all together you talked about the swaps kicking in and that we're very confident that the margin is trough I'm curious how do you think about the margin trajectory over the course of the year.
<unk>.
And you know other opportunities that you are considering to maybe manage great sensitivity.
Protecting gets fed cuts.
Yes sure David.
Again, the balance sheet is relatively well matched from interest rate risk standpoint.
The interest rates swap started on March 31 of this year.
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.
Our forward guide on the net interest margin is in the 290% to 3% range.
Which is a nice uptick from the $2 83 in the first quarter.
Okay.
Do you have does that include rate cuts and how much of that as it comes in this last quarter with the.
The swaps kick in.
Yes, we don't anticipate any rate cuts.
In this quarter I think where we are now is probably 1% to two cuts in the second half of the year.
Arnold D. Martines: But for over the next couple of quarters, we think the $290 a 3% NIM guide is good David.
Terrific. Thanks, everybody.
Question comes from Andrew Liesch from Piper Sandler Your line is now open.
Hi, everyone.
Good morning, Thanks for taking the questions.
David I, just wanted to just kind of drill down onto the the expense base here. It looks like it came in a little bit lower than I was forecasting but.
Still I mean.
Still pretty good expense control.
I guess, how should we look at expenses going forward I think you referenced.
Press release or in the presentation.
Ongoing efficiency initiatives I'm curious, what those might be and how might that affect <unk>.
And going forward.
Yes, Andrew it's David.
Yes.
As we've been stating now probably for the better part of a year.
<unk> focused on a lot of expense initiatives it tends to be more back office oriented so leveraging technology.
As we've talked about previously.
We implemented <unk>.
Service now workflow automation.
We've connected service now to our core through middleware cord meal source.
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 <unk>.
Leveraging that to see expense efficiencies.
The way I'll show up is not likely and 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 nuts.
Low single digit pace, but have <unk>.
Stronger revenue growth positive operating leverage is obviously the goal.
Got it alright, Thats really helpful color there.
And then I guess shifting back to the margin it looks like maybe you'll be operating off of smaller earning asset base here this quarter with that excess liquidity to pay off some of the higher cost funding.
Arnold D. Martines: But then you also have the earn.
$1 million.
Interest income from the swap.
Speaker Change: Do you think.
Look at where the balance sheet shaken out that net interest income should grow up from here or do you think it's going to stay pretty steady.
Yes, the net interest income guide so again the net interest margin guide is $290. Three net interest income guide is 50% to $52 million a quarter, Andrew which as you know.
An uptick from from the first quarter.
Speaker Change: Got it alright, thanks for that clarification.
Speaker Change: Covered all my other questions I'll step back thanks.
Thanks, guys. Thanks, Andrew.
Again, if you'd like to ask a question. Please press star and number one on your telephone keypad Nexstar and number one on your telephone keypad, we will pause for a brief moment until we get some questions.
Our next question comes from David Feaster from Raymond James Your line is now open.
Hey, Thanks for taking another question.
Just kind of curious about capital priorities.
Speaker Change: <unk>.
Obviously growth is relatively muted at this point you guys were bought back a little bit of stock.
I'm curious, how you're thinking about capital deployment at this point.
David.
David: Hey, David.
David: Yes.
The capital plan Hasnt changed so our dividend payout ratio in the 40% to 50% range.
We do have the share repurchase plan and we will continue to use that judiciously.
Yes.
As you know the banking industry has been.
A little volatile and so there are days, where the overall banking sector is.
Under some downward pressure and we see those as <unk>.
Great buying opportunities for the company as the ultimate insider and we will continue to leverage that opportunity.
That's helpful. And then maybe just broadly touching on credit first.
First on the consumer side.
Curious where do you think we are working through that book with with realizing those losses and then maybe more broadly obviously you got a conservative credit culture I'm curious how you think about credit what you watch closely obviously, there's a heightened focus on CRE.
Curious your thoughts on credit broadly outside of the consumer book as well and how your approach to credit management going forward.
Hi, David This is Donna.
With regards to the consumer side, particularly with the mainland Buck we are continuing the run off 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.
We continue to do mainland to Hawaii consumer lending here in Hawaii, and we have not stopped.
Brian.
But the opportunities I think in the crank harder and or looking at couple of quarters is really in the commercial real estate and small business loans as Arnold mentioned.
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 our consumer portfolio and then as you look at your May be stressed in CRE book and is there anything that youre seeing there or anything that you're watching more closely just from a credit standpoint.
Yeah from the credit quality standpoint on the mainland book, we are optimistic as we 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 are.
Office and retail remained low as a percentage of our total loan book and really not not seeing any issues and their overall credit quality continues to remain very strong.
David: And our loan book.
Terrific. Thank you.
As of right now we don't have any questions I'd like to hand back over to the management for their final remarks.
Thank you Allie and thanks. Thank.
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.
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.
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Yes.
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