Earnings Call Transcript - CPF Q4 2024

Operator, Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. And welcome to the Central Pacific Financial Corp. Fourth Quarter 2024 Conference Call. This call is being recorded and will be available for replay shortly after its completion on the company's website at www.cpb.bank. I'd like to turn the call over to Ms. Dayna Matsumoto, Group SVP, Director, Finance and Accounting. Please go ahead.

Dayna Matsumoto, Group SVP, Director, Finance and Accounting

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. With me this morning are Arnold Martines, Chairman, President and Chief Executive Officer; David Morimoto, Senior Executive Vice President and Chief Financial Officer; Ralph Mesick, Senior Executive Vice President and Chief Risk Officer; and Anna Hu, Executive Vice President and Chief Credit Officer. 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. During the course of today's call, management may make forward-looking statements. While we believe these statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to our forward-looking statements, please refer to slide 2 of our presentation. And now I'll turn the call over to our Chairman, President and CEO, Arnold Martines.

Arnold Martines, Chairman, President and CEO

Thank you, Dayna, and thank you everyone for joining us today. We appreciate your interest in Central Pacific Financial Corp, and we are pleased to share our latest updates and results with you. In the fourth quarter, through our team's strong execution and diligent oversight, we once again achieved meaningful NIM expansion and core deposit growth. At the same time, we continue to maintain strong liquidity, asset quality, and capital positions. In the fourth quarter, we began to see loan opportunities pick up, and we are on track for growth in 2025. 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. 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. Let me next provide an update on the Hawaiian market. Overall, the economy continues to expand at a modest pace and remains resilient. We continue to see significant strength in construction and military spending, while the tourism sector is expected to slightly improve in 2025. The Hawaii construction industry continues to grow and is being led by residential and government construction. 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. Construction payroll jobs reached 43,000 in October 2024, a new record for Hawaii. In the area of tourism, in the month of November 2024, total statewide visitor arrivals were up 5.3%, and visitor spending was up 2% from the prior year. This was the fourth consecutive month with year-over-year growth in both visitor arrivals and spending. The recovery of visitors from Japan continues to be slow, but fortunately was offset by stronger U.S. visitor arrivals. 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. 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. Rebuilding efforts will provide a boosted economy over time, and the state remains committed to supporting Maui and building a stronger island for the future. Hawaii's state-wide, seasonally adjusted unemployment rate remained very low at 3% in December and continued to outperform the national unemployment rate of 4.1%. Hawaii real estate values remained strong and ended 2024 very high. The Oahu median single-family home price was $1.05 million in the month of December, reflecting a year-over-year increase of 5.8%. Home sales for the month were up 25.3% for single-family homes and up 18.8% for condos compared to the prior year. Home inventories generally are increasing, and we anticipate that the positive momentum will continue into 2025. 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.

David Morimoto, Senior Executive Vice President and Chief Financial Officer

Thank you, Arnold. 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. We sold $106.5 million in securities and recognized a pretax loss of $9.9 million. The proceeds were reinvested at current market yields, which were approximately 280 basis points higher than the yields on the securities sold. The transaction is projected to increase prospective annualized net interest income by $2.7 million and net interest margin by four basis points. Excluding the investment securities loss, adjusted fourth quarter net income was $19 million or $0.70 per diluted share. For the full year 2024, net income was $53.4 million or $1.97 per diluted share. Excluding the investment securities loss 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. 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. Our total deposit portfolio grew by $61 million, which included core deposit growth of $74.2 million offset by lower reliance on government CDs. The deposit mix again shifted favorably with demand deposits increasing by $50.9 million in the fourth quarter. Net interest income for the fourth quarter was $55.8 million and increased by $1.9 million from the prior quarter. The net interest margin was 3.17%, up 10 basis points on a sequential quarter basis. Total costs of deposits decreased by 11 basis points to 1.21% in the fourth quarter. The net interest income and NIM expansion were primarily driven by a reduction in our funding costs, while earning asset yields remained fairly stable, a reflection of our disciplined approach to pricing and spread management. Other operating income for the quarter was $2.6 million and was impacted by the investment repositioning loss of $9.9 million. The adjusted other operating income excluding the loss was $12.5 million. Other operating expense totaled $44.2 million in the fourth quarter and reflects the decline from the third quarter, which included the $3.1 million expenses related to the strategic opportunity. Additionally, fourth quarter expenses included a $1.4 million impairment charge on intangible assets. The intangible assets were related to the 12 FinTech apps that the company developed in 2022. 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. Our Board of Directors declared a quarterly cash dividend of $0.27 per share, an increase of $0.01 or 3.8% from the prior quarter. The dividend will be payable on March 17th to shareholders of record on February 28th. Additionally, our board approved a new share repurchase authorization for up to $30 million in 2025. 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.

Ralph Mesick, Senior Executive Vice President and Chief Risk Officer

Thank you, David, and good morning, everyone. Our banks continue to enjoy strong asset quality and acceptable credit costs in the fourth quarter of 2024. Net charge-offs were $3.8 million or 29 basis points on annualized average loans. This represents a two basis point increase from the prior quarter. The increase came from losses on two credits in the C&I segment totaling $600,000. These losses were attributed to idiosyncratic events and excluding them, net charge-offs for the fourth quarter would have declined to $3.2 million. We continue to see consumer net charge-off trends lower this quarter. Nonperforming assets were $11 million or 15 basis points of total assets at quarter end, a slight decrease in the prior quarter. Past due loans, 90 days plus, are just one basis point of total loan, and the level of criticized loans remains flat at 62 basis points. Our allowance for credit loss was $59.2 million or 1.11% of outstanding loans. 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. 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. As highlighted in the presentation, the loan portfolio as of quarter end was balanced and diversified across customer, product, industry, collateral types, and geography with no outsized exposures in higher risk segments. I should note that there are none of the loans secured by properties in Southern California were in areas impacted by the recent wildfires. Finally, I want to share that Central Pacific Bank recently became a Fed member bank effective January 24, 2025. With this, our primary bank regulator changed from the FDIC to the FRB. 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 Martines, Chairman, President and CEO

Thank you, Ralph. In summary, we had a solid fourth quarter and a 2024 year. We are excited about 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.

Operator, Operator

And our first question comes from David Feaster from Raymond James.

David Feaster, Analyst

Hi, good morning, everybody. I just wanted to follow up on your comments here in the prepared remarks. You talked about loan growth opportunities picking up, that's extremely encouraging. I was hoping you could expand on that. How much of that is increased activity from your bankers and just being proactive versus increased demand and just hoping you could touch on sentiment where you've seen the most opportunity and just how you think about organic growth this year.

Arnold Martines, Chairman, President and CEO

Yes, thank you, David. This is Arnold. You are correct. We are optimistic about loan growth. We noticed an increase in loan growth during the fourth quarter, and we believe that this momentum will carry into 2025. Our pipeline for the first quarter looks very promising. Our team has been actively engaging in the market, and we have also recently brought on more lending team members from within the market who we think will support our overall growth plans for this year. So, yes, David, we feel quite optimistic about 2025.

David Feaster, Analyst

Could you just, I mean that's great. So how do you think about the pace of growth? What do you see some of the key drivers of that?

Arnold Martines, Chairman, President and CEO

So we will see growth in the commercial and the commercial real estate segments. That's where we see fairly healthy demand and that's going to translate 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 organic growth from C&I and from CRE.

David Feaster, Analyst

Okay. And then on the other side of the coin, your deposit performance was extremely impressive to see NIB growth at that pace is definitely exceptional. Where are you seeing an opportunity to drive that growth? And then just touch on the competitive landscape for deposits. Quite receptive to reduce deposit costs. Just kind of curious what you're seeing on that side.

David Morimoto, Senior Executive Vice President and Chief Financial Officer

Hey, David, good morning. Yes, we were very pleased with the team's performance on deposits, as we were able to grow core deposits while also decreasing overall deposit costs, which was a great outcome. It's worth mentioning that in the fourth quarter, particularly in the DDA growth area, we gained from some seasonal DDA deposits amounting to around $40 million. Besides that, it has been a lot of consistent effort. The teams have done an excellent job leveraging our market position, and we’ve successfully moved some new relationships to CPB. Overall, we are very happy with the rise in core deposits and the current increase in total deposit costs.

David Feaster, Analyst

That's terrific. And just the last one for me, how do you think about expenses? Obviously, we've got decent visibility into improving NII trajectory, with growth potentially accelerating margin expansion. 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?

David Morimoto, Senior Executive Vice President and Chief Financial Officer

Yes, that's the objective. That's always been the objective, right David, is a positive operating leverage. We're going to see it in 2025. On the OE side, I think the near-term guidance is probably in the 42.5 to 43.5 range. and I think if you run that through for the year, it's a slight increase to normalize 2025. But we will grow revenues faster than expenses.

Operator, Operator

And now our next question comes from the line of Andrew Liesch from Piper Sandler.

Andrew Liesch, Analyst

Hey, everyone. Thanks. Everyone, good morning. Just a question around the margin here, obviously some great expansion in the quarter, good performance there, and you spoke in the past about maybe the longer-term range being called between like 2.80 and 3.30, but with the expansion of your thought and the benefit from the securities repositioning. I mean do you think you get above 3.30 here later on this year?

David Morimoto, Senior Executive Vice President and Chief Financial Officer

Andrew, it’s David. Yes, we're consciously optimistic that that range will be proven conservative. We're very pleased, second consecutive quarter of greater than 3.5% sequential quarter NII increase and second consecutive quarter of 10 basis points of NIM expansion. And the jumping off point for the first quarter is quite positive. The December month-to-date NIM was actually 3.29%, loan yield was 4.95%, and total positive cost was down to 1.14%. So everything is trending in the right direction. The team is prepared to continue to execute on what we've been doing, and we're cautiously optimistic that the margin will be higher.

Andrew Liesch, Analyst

Got it. That's really helpful. The average loan yield then up four basis points compared to the quarterly average, have the rate cuts had much of an effect on any asset classes? It just seems like this is more positive than I would have expected elsewhere on loan repricing, maybe we can talk about what sort of repricing characteristics you have coming up.

David Morimoto, Senior Executive Vice President and Chief Financial Officer

Yes, I think we've been fortunate that we've been able to maintain the pricing discipline. We've been very focused on that. So in the fourth quarter, we were able to actually increase some of our loan pricing, and the portfolio was relatively on the lower side to begin with. The fourth quarter new volume yield of the loan portfolio averaged out to 7.40. The portfolio is down at 4% range, or high fours, it's accretive.

Andrew Liesch, Analyst

Got it. Yes, that's really helpful. I guess then on the deposit side, I know there's 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 fourth quarter effect on the funding cost side, or do you think competition might limit that Fed rate cut?

David Morimoto, Senior Executive Vice President and Chief Financial Officer

Yes, while we experienced two strong quarters regarding net interest income and net interest margin, the drivers behind them were quite different. In the third quarter, this was mainly influenced by assets on the balance sheet, while in the fourth quarter, it was primarily due to liabilities. Moving forward, we anticipate continued expansion in net interest margins, but we expect this to be more balanced. We see ongoing opportunities in funding, but we also expect to find opportunities on the asset side. Additionally, the total deposit cost decreased to 1.14 in December.

Operator, Operator

Our next question comes back to the line of David Feaster from Raymond James.

David Feaster, Analyst

Hi. Just a couple of other follow-ups. I was hoping you could touch on credit. Appreciate your commentary on two idiosyncratic C&I issues. Just hoping 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, that book continues to run down. You think we're through the worst of it. Just kind of curious what you're seeing there, too.

Ralph Mesick, Senior Executive Vice President and Chief Risk Officer

David, this is Ralph. The couple of situations that we talked about were one-off situations. One included a small loss on a performing SNC loan that we had sold, and then the other one was related to a business principal that passed away. So, those types of things, they come up from time to time. But that was quite unusual. I think when we look at the consumer charge-offs, we're down for the quarter; we had some issues with a 2022 vintage that represented more of the loss that we saw in 2025. But actually we've come down from that. The peak losses probably occurred in the fourth quarter of 2023. And even in the past, two trends are improving, and then when you look into the NPAs, 90% of that is secured by one to four single-family residences, so I think they are well-margin to ensure eventual principal repayment. And then I think if we look forward and we consider the four indicators of credit risk, the level of NPAs, the past dues 90 days, and the criticized loans, what you're seeing is a pretty positive trend. So I think that bodes well for our near-term credit costs and our budget expectations for 2025.

David Feaster, Analyst

Okay, that's great. And then I was just hoping to touch on capital priorities. You got a really strong balance sheet; you got the dividend increase this quarter. The new buyback authorization. You've been active in restructuring securities. You kind of did a little bit of everything, right? I'm just curious your plans as we look forward. What's most interesting to you and plans for deploying capital?

David Morimoto, Senior Executive Vice President and Chief Financial Officer

David, it’s David. Yes, capital ratios have been building and are quite healthy today, higher end of our target ranges. So as far as capital priorities go, we'll continue to pay our quarterly cash dividend, which we just increased to $0.27 per share, roughly a 40% payout ratio. The remaining 60% will be used to support organic balance sheet growth, open market share repurchases, potential additional balance sheet positioning, and/or M&A. Obviously, we like our current capital flexibility and we evaluate it on an ongoing basis. So, it is somewhat of an ongoing analysis.

Operator, Operator

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 to Ms. Dayna Matsumoto for closing remarks.

Dayna Matsumoto, Group SVP, Director, Finance and Accounting

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.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.