Q4 2024 Central Pacific Financial Corp Earnings Call
Speaker Change: During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.
Speaker Change: This call is being recorded and will be available for replay shortly after its completion on the company's website at www.cpb.bank.
Speaker Change: I would now like to turn the call over to Ms. Dayna Matsumoto, Group SVP, Director, Finance and Accounting. Please go ahead.
Dayna Matsumoto: Thank you, Dustin, and thank you all for joining us as we review the financial results of the fourth quarter and full year of 2024 for Central Pacific Financial Corp.
Arnold Martinez: With me this morning are Arnold Martinez, Chairman, President, and Chief Executive Officer.
Speaker Change: David Morimoto, Senior Executive Vice President and Chief Financial Officer Ralph Misik, Senior Executive Vice President and Chief Risk Officer and Anna Hu, Executive Vice President and Chief Credit Officer
Speaker Change: We have prepared a supplemental slide presentation that provides additional details on our earnings release and is available in the investor relations section of our website at cpb.bank.
Speaker Change: 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.
Speaker Change: 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 Chairman, President, and CEO, Arnold Martines.
Speaker Change: In the fourth quarter, through our team's strong execution and diligent oversight, we once again achieved meaningful name expansion and core deposit growth.
Speaker Change: At the same time, we continue to maintain strong liquidity, healthy quality, and capital positions.
Speaker Change: We completed an investment portfolio repositioning in the fourth quarter, which impacted our current quarter results, but will lead to significant income accretion in 2025 and beyond. David will cover this transaction in more detail shortly.
Speaker Change: Overall, we had a strong year in 2024, and I'm proud of our team's accomplishments. We are entering 2025 with confidence and optimism for another strong year.
Speaker Change: Let me next provide an update on the Hawaii market. Overall, the economy continues to expand at a modest pace and remains resilient.
Speaker Change: We continue to see significant strength in construction and military spending, while the tourism sector is expected to slightly improve in 2025.
Speaker Change: The total value of construction in 2024 based on the first half of the year annualized would exceed $13 billion, a meaningful increase from the prior year's high of $11.8 billion.
Speaker Change: Construction payroll jobs reached 43,000 in October 2024, a new record for Hawaii.
Speaker Change: This was the fourth consecutive month with year-over-year growth in both visitor arrivals and spending.
Speaker Change: The recovery of visitors from Japan continues to be slow, but fortunately was offset by stronger U.S. visitor arrivals.
Speaker Change: At this point we are uncertain what the impact on visitor arrivals will be from the LA wildfires, but we continue to pray for the people of Southern California impacted by this tragedy.
Speaker Change: Maui's recovery and rebuilding continues but will be a long process. The good news is that Maui has regained more than half of the jobs lost to the 2023 wildfires. However, visitor arrivals and housing needs continue to be challenges.
Speaker Change: Rebuilding efforts will provide a boost to the economy over time and the state remains committed to supporting Maui building a stronger island for the future.
Speaker Change: Hawaii's statewide seasonally adjusted unemployment rate remained very low at 3% in December and continued to outperform the national unemployment rate of 4.1%.
Speaker Change: Hawaii real estate values remain strong and ended 2024 very high.
Speaker Change: The O'ahu median single family home price was $1.05 million in the month of December, reflecting a year-over-year increase of 5.8 percent.
Speaker Change: Home sales for the month were up 25.3% for single-family homes and up 18.8% for condos compared to the prior year.
Speaker Change: Home inventories generally are increasing and we anticipate that the positive momentum will continue into 2025.
Speaker Change: Overall, while some economic uncertainty exists, Hawaii's economy has proven to be resilient and is positioned to continue to modestly grow in 2025, which would translate to increased growth opportunities for Central Pacific as well. I'll now turn the call over to David.
Thank you, Arnold.
David Morimoto: Turning to our earnings results, net income for the fourth quarter was $11.3 million, or $0.42 per diluted share. As Arnold noted, our results were impacted by an investment portfolio repositioning completed in the fourth quarter.
David Morimoto: We sold 106.5 million in securities and recognized a pre-tax loss of $9.9 million.
David Morimoto: Transaction is projected to increase prospective annualized net interest income by $2.7 million and net interest margin by 4 basis points.
David Morimoto: Excluding the investment securities loss, adjusted fourth quarter net income was $19 million, or 70 cents per diluted share.
David Morimoto: For the full year of 2024, net income was $53.4 million, or $1.97 per dinosaur's share.
David Morimoto: Excluding the investment securities lost in the fourth quarter and the strategic opportunity expenses in the third quarter, adjusted full-year 2024 net income was $63.4 million or $2.34 per diluted share.
David Morimoto: In the fourth quarter, the pace of our loan portfolio decline slowed with a sequential quarter decrease of $9.8 million, or 0.2%. Our loan pipeline and demand have increased in recent months, and we believe we are positioned to produce net loan growth in 2025.
David Morimoto: Our total deposit portfolio grew by 61 million dollars, which included core deposit growth of 74.2 million dollars, offset by a lower reliance on government CDs.
David Morimoto: The deposit mix again shifted favorably with demand deposits increasing by $50.9M in the fourth quarter.
David Morimoto: Net interest income for the fourth quarter was $55.8 million and increased by $1.9 million from the prior quarter.
David Morimoto: So that interest margin was 3.17%, up 10 basis points on a sequential quarter basis.
David Morimoto: Total cost of deposits decreased by 11 basis points to 1.21% in the fourth quarter.
David Morimoto: The Net Interest Income and NIM Expansion were primarily driven by a reduction in our funding costs, while earning asset yields remained fairly stable.
David Morimoto: A reflection of our disciplined approach to pricing and spread management.
David Morimoto: Other operating income for the quarter was $2.6 million and was impacted by the investment repositioning loss of $9.9 million.
David Morimoto: The adjusted other operating income, excluding the loss, was $12.5 million.
David Morimoto: Other operating expenses totaled $44.2 million in the fourth quarter and reflect the decline from the third quarter, which included the $3.1 million expenses related to the strategic opportunity.
David Morimoto: Additionally, fourth quarter expenses included a $1.4 million impairment charge on intangible assets. The intangible assets were related to the Swell FinTech Act that the company developed in 2022.
David Morimoto: Our effective tax rate was 15.4% in the fourth quarter and benefited from a true-up to low-income housing tax credits. We believe the effective tax rate will be in the 21 to 23% range going forward, which is more consistent with historical trends.
We did not repurchase any shares in the fourth quarter.
David Morimoto: Our Board of Directors declared a quarterly cash dividend of $0.27 per share, an increase of 1 cent or 3.8 percent from the prior quarter.
David Morimoto: The dividend will be payable on March 17th to shareholders of record on February 28th.
David Morimoto: Additionally, our board approved a new share repurchase authorization for up to $30 million in 2025.
David Morimoto: The increase in the dividend and share repurchase authorization reflects our strengthening outlook for earnings and capital.
I'll now turn the call over to Ralph.
Thank you, David, and good morning, everyone.
David Morimoto: Our bank continues to enjoy strong asset quality and acceptable credit costs in the fourth quarter of 2024. Net charge offs were 3.8 million dollars or 29 basis points on annualized average loans.
David Morimoto: The increase came from losses on two credits in the C&I segment totaling $600,000.
David Morimoto: These losses were attributed to idiosyncratic events, and excluding them, net charge-offs for the fourth quarter would have declined to $3.2 million.
David Morimoto: We continue to see consumer net charge offs trend lower this quarter. Non-performing assets were 11 million dollars or 15 basis points of total assets at quarter end, a slight decrease in the prior quarter.
David Morimoto: Past due loans, 90 days plus, or just one basis point of total loans, and the level of criticized loans remain flat at 62 basis points.
David Morimoto: In the fourth quarter, our provision expense was $800,000. In the quarter, we added $1.4 million to the allowance, with that increase partly offset by a reduction of $600,000 in the amount reserved for unfunded commitments.
David Morimoto: Supporting the allowance, we hold a strong level of capital. Total risk-based capital with a healthy 15.4% at the end of the fourth quarter. This provides a meaningful capital cushion above regulatory thresholds for a well-capitalized bank.
David Morimoto: As highlighted in the presentation, the loan portfolio as of quarter end was balanced and diversified across customer, product, industry, collateral type, and geography with no outsized exposures in higher risk segments.
David Morimoto: I should note that none of the loans secured by properties in Southern California were in areas impacted by the recent wildfires.
Arnold Martinez: We believe this reflects a natural step as we continue to position the bank for future growth. And with that, let me turn the call back to Arnold.
Arnold: Thank you, Ralph. In summary, we had a solid core fourth quarter in a 2024 year.
Speaker Change: We are excited for the Outlook in 2025 and are focused on supporting our clients and the community and driving value to our shareholders 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
Speaker Change: As a reminder, if you'd like to ask a question, please press star and the number 1 on your telephone keypad.
Speaker Change: And our first question comes from the line of David Feaster from Raymond James.
Hey, good morning everybody!
Speaker Change: I just wanted to follow up on your commentary on the preparing marks. You know you talked about loan growth opportunities picking up. That's extremely encouraging. I was hoping you could expand on that. You know how much of that is
Speaker Change: You know increased activity from your bankers and just being proactive versus increased demand And you know just hoping you could touch on you know sentiment where you're seeing the most opportunity And just how you think about organic growth this year
Speaker Change: Yeah, thanks David. This is Arnold. Yeah, you know, you're right, you know, we did we are optimistic about loan growth. We saw a pickup in loan growth in the fourth quarter and we believe that momentum is going to continue through 2025. Our pipeline for the for Q1 is very healthy.
I think our team has been very proactive.
lending team members from within the market.
Speaker Change: that we believe will augment the overall growth plans for this year. So yeah, so David, we're pretty optimistic about 2025.
Speaker Change: Could you just, I mean that's great. So how do you think about the pace of growth, you know, what do you see some of the key drivers of that?
Speaker Change: primarily for the growth that we're going to see. We're doing some consumer purchases on the auto side, but primarily the growth is going to come from, you know, organic growth from CNI and from CRE.
Lookout.
Speaker Change: And then on the other side of the coin, your deposit performance was
Speaker Change: ...extremely impressive. You know, to see NIB growth at that pace is definitely exception to the rule.
Speaker Change: Where do you see an opportunity to drive that growth, you know, and then just touching on the competitive landscape for deposits, you know, client reception to reduce deposit costs. Just kind of curious what you're seeing on that side.
David Morimoto: I'm going to turn the call over to David. David can respond to your question on deposits.
while also reducing overall total deposit costs.
David Morimoto: was a great outcome. One thing to note on the fourth quarter, especially in the DDA growth area, we did benefit from some seasonal DDA deposits in the fourth quarter, totaling roughly 40 million dollars.
David Morimoto: But other than that, it's been a lot of blocking and tackling. The teams have been doing a great job utilizing our market position, and we've been able to move some new relationships to CPB.
Speaker Change: That's terrific. And, you know, just last one for me. How do you think about expenses? Obviously, we've got a pretty decent visibility into an improving NII trajectory, you know, with growth potentially accelerating, margin expansion.
Speaker Change: How much of that do you think flows to the bottom line? Are you contemplating potentially accelerating some investments to further support growth or just kind of curious how you think about expenses and potential positive operating leverage?
Speaker Change: Yeah, yeah, that's the objective. That's always been the objective, right, David, is a positive operating leverage, and we're going to see it in 2025.
Speaker Change: On the OE side, you know, I think the near-term guidance is probably the 42.5 to 43.5 range. You know, and I think if you run that through for the year, I think it's a slight increase to normalize 2025.
but we will grow revenues faster than expenses.
Terrific. Thanks, everybody.
Thank you, David.
The End.
Speaker Change: Thank you. And again, if you'd like to ask a question, please press star and the number one on your telephone keypad.
Speaker Change: And our next question comes from the line of Andrew Leach from Piper Sandler.
Lines open, everyone. Thanks, everyone. Good morning.
Speaker Change: Just a question around the margin here, obviously some great expansion in the quarter, good performance there. You spoke in the past about maybe the longer term range being, call it between like 280 and 330, but
Speaker Change: With the expansion you just saw and the benefit from the security's repositioning. I mean do you think you get above 330 here later on this year?
We're consciously optimistic that that range will be proven conservative.
Speaker Change: quite positive. The December month-to-date NIM was actually $329, loan yield was $495, and total deposit cost was down to $114.
Speaker Change: So everything trending in the right direction. Team is prepared to continue to execute on what we've been doing and we're cautiously optimistic that the margin will be higher.
Speaker Change: Have the rate cuts had much of an effect on any asset classes? It just seems like that this is more positive than I've heard elsewhere on loan repricing. Maybe you can talk about what sort of repricing characteristics you have coming up.
Speaker Change: In the fourth quarter, we were able to actually increase some of our loan pricing and, you know, the portfolio was relatively low on the lower side to begin with, right?
Speaker Change: So the fourth quarter new volume yield on the loan portfolio was averaged out to $740,000.
Speaker Change: When your portfolio is down in the 0.4% range or high 4s, it's accretive.
Speaker Change: Got it. Yeah, that's really helpful. I guess then on the deposit side, I know there's a lot of there's a good competition in the state among all the banks, but even do you think there might be some pull through from the Fed rate cuts, the full quarter effect on the on the funding cost side or do you think competition might limit that?
Speaker Change: Yeah, I think, you know, while we had two great quarters on net interest income and net interest margin, they were accomplished quite differently, right? The third quarter was largely on, you know, the asset side of the balance sheet.
Speaker Change: Unknown Speaker The fourth quarter was largely on the liability side of the balance sheet. I think going forward, we'll continue to see that interest margin expansion, but it's likely to be a little more balanced.
Speaker Change: And again, the total deposit cost was down to $114 in the month of December.
Speaker Change: Yeah, awesome. Great to hear that. All right, you've covered all my other questions. I'll step back. Thanks
Thanks, Andrew. Thanks, Andrew.
Speaker Change: Thank you. Our next question comes back to the line of David Feaster from Raymond James.
So the line's open, but...
Bye.
Speaker Change: There's a couple other follow-ups You know, I was hoping you could touch on on credit, you know, appreciate your commentary on to idiosyncratic CNI issues Just hope you could just give a little bit more color on that and what you're seeing on credit broadly and then just in the consumer book
Speaker Change: You know, that book's continued to run down. Do you think we're through the worst of it? Just kind of curious what you're seeing there, too.
Speaker Change: David, this is Ralph. You know, the couple of situations that we talked about, one-off situations...
Speaker Change: One included a small loss on a performing SNCC loan that we had sold, and then the other one was related to a business principal that passed away.
Speaker Change: So, you know, those types of things, you know, they come up from time to time, but that was, you know, quite unusual.
Speaker Change: I think when we look at the consumer charge-offs, you know, we're down for the quarter, you know, we had some issues with a 2022 vintage that represented, you know, some more of the loss that we saw in 2025.
Speaker Change: But actually, we've come down from that. The peak loss has probably occurred in the fourth quarter of 2023, and even the past two trends are improving.
Speaker Change: So I think they're well margined to ensure, you know, eventual principal repayment. And then I think if we kind of look forward and we look at kind of the forward indicators of credit risk.
Unknown Executive, Dayna Matsumoto
Speaker Change: Okay, that's great. And then I was just hoping to touch on capital priorities. You got a, you know, really strong balance sheet, you know, you got dividend increase this quarter, the new buyback authorization, you've been active restructuring securities, you kind of did a little bit of everything, right and organic growth is coming.
Speaker Change: I'm just curious your plans as we look forward. What's most interesting to you and plans for deploying capital?
Speaker Change: Hey David, it's David. Yes, capital ratios have been building and are quite healthy today.
Higher end of our target ranges.
Speaker Change: So, as far as capital priorities, we'll continue to pay our quarterly cash dividend, which we just increased to $0.27 per share, roughly a 40% payout ratio.
potential additional balance sheet positioning and or M&A
Speaker Change: You know, obviously, we like our current capital flexibility, and we evaluate it on an ongoing basis.
for sure. Terrific, thanks everybody.
Thank you very much, David.
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Speaker Change: Thank you. Seeing as there are no more questions in the queue, that concludes our question and answer session. I would now like to turn the call back over to Ms. Dayna Matsumoto for closing remarks.
Speaker Change: Thank you very much for participating in our earnings call for the fourth quarter of 2024. We look forward to sharing our progress with you next quarter. Thank you.
Dayna Matsumoto, Arnold Martines, Unknown Executive, Dayna Matsumoto, Arnold Martines,
Speaker Change: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.