Central Pacific Financial Corp. (NYSE:CPF) Q4 2022 Earnings Call Transcript

Central Pacific Financial Corp. (NYSE:CPF) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Good afternoon, ladies and gentlemen. Thank you for standing by. And welcome to the Central Pacific Financial Corp. Fourth Quarter 2022 Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. 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 Mr. David Morimoto, Senior Executive Vice President, Chief Financial Officer. Please go ahead, sir.

David Morimoto: Thank you, Hannah and thank you all for joining us as we review the financial results for the fourth quarter of 2022 for Central Pacific Financial Corp. With me this morning, our Arnold Martines, our new President and Chief Executive Officer, and Anna Hu, Executive Vice President and Chief Credit Officer. We have prepared a supplemental slide presentation that provides additional details on our release and is available in the investor relations section of our website at cpb.bank. During the course of 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 projectors. 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, Arnold Martines.

Arnold Martines: Thank you, David. Aloha, and good morning everyone. We appreciate your interest in Central Pacific Financial Crop. As we normally do, I’ll start with an update on the Hawaii market and a summary of our strong fourth quarter results. Then I’ll turn it over to the team to provide additional detail and insights on our financial and credit metrics, as well as other key updates. The Hawaii tourism sector continues to perform well with visitor arrivals holding at about 90% of pre-pandemic levels. The majority of visitors are from the U.S. Mainland. Visitors from Japan are about 20% of pre-pandemic levels, and we are optimistic that the Japan counts will continue to trend up as a country is now fully reopened and the yen value has improved recently.

The Japan government also upgraded its 2023 growth projections in December based on expectations for higher business expenditure, substantial wage hikes, and robust domestic demand. Japan may avoid the global growth slowdown, which will translate to greater visitors to Hawaii, helping offset a potential slowdown in domestic visitors. Hawaii visitors spending is strong, totaling 1.5 billion in November, an increase of 13.7% compared to the same month in 2019. Hotels in Hawaii continue to perform well with total statewide hotel occupancy at 71% and an average daily rate of $440 in December, up 4% from a year ago. Hawaii’s employment and housing sectors remain solid. Our statewide seasonally adjusted unemployment rate was at 3.3% in November, 2022, and is forecasted by the University of Hawaii Economic Research Organization to be fairly stable in 2023.

Housing prices in Hawaii remains very strong with a total Oahu median single family home price at 1.1 million in 2022, which is up 11.6% from the previous year. Reflecting a national trend, home sales have cooled in 2022 due to rising mortgage rates. The number of single family home sales was down 23% in 2022 compared to a year ago. We view this as more of a moderation in the market and believe the Hawaii housing market remains healthy with continued strong demand and low inventory. This combined with the fact that tourism is expected to remain strong and the Hawaii economy is also supported in a big way by a huge and growing military presence, it is our strong belief that Hawaii is less likely to experience a material downturn compared to most other U.S. markets.

Overall, we remain optimistic about the Hawaii market and believe CPF will continue to be successful as we remain focused on our strategic pillars, including home ownership, small business, digital adoption, and Japan market development. Moving to our financial results. We ended 2022 with solid loan and deposit growth, an increase in net interest income, and strong expense management, which resulted in an improved bottom line. Our total loan portfolio increased by $133 million or 2.5% sequential quarter. For the full year 2022, the loan portfolio grew by $454 million or 8.9%. The growth was diversified across all loan types as we continue to focus on prudent and appropriately priced asset growth. We have a healthy loan pipeline and anticipate continued strong loan growth in 2023 in all loan categories except Mainland, unsecured consumer.

In Q4, we began to let our Mainland unsecured consumer loan portfolio runoff until the national economic outlook improves. With that said, we expect runoff in our unsecured consumer book will moderate overall loan growth in 2023, which we expect to be in the mid single digit percent range. During the fourth quarter, total deposits increased by $180 million or 2.7% from the private quarter as we were successful in acquiring significant time deposits, which enabled us to reduce our borrowings and manage our funding costs. While deposit rates have increased somewhat, the Hawaiian market continues to be rational on deposit pricing. CPB strong and stable core deposit base enables us to keep deposit repricing betas low, consistent with past tightening cycle.

Going into 2023, we have already started to implement strategies to not only retain deposits, but to garner a larger share of core deposits to fund our future asset needs. Finally, I’m personally very excited to start 2023 in my new role as President and CEO. I anticipate a smooth transition with our talented and experienced leadership team. Lastly, I could not be more proud of our exceptional group of employees who remain steadfast in our mission to help meet the needs of our customers and the broader community. I’ll now turn the call over to David Morimoto, our Chief Financial Officer. David?

David Morimoto: Thank you, Arnold. Turning to our earnings results. Net income for the fourth quarter was $20.2 million or $0.74 per diluted share. Return on average assets was 1.09%. Return on average equity was 18.3%, and our efficiency ratio was 59.56% in the fourth quarter. For the full 2022 year, net income was $73.9 million or EPS of $2.68. Importantly, full year 2022 pretax, pre-provision income excluding PPP income increased by $29.1 million or 45% year-over-year. Net interest income for the fourth quarter was $56.3 million and increased by $0.9 million from the prior quarter as our increase in loan balances and yields outpaced the increase in our funding costs. The reported net interest margin remained flat at 3.17%.

When excluding the impact from PPP, the net interest margin increased by three basis points sequential quarter. Our total cost of deposits was 41 basis points in the fourth quarter. We continued to manage deposit repricing to product segmentation, and thus far our interest bearing deposit repricing beta has been approximately 15%. Fourth quarter other operating income was $11.6 million, which increased by $2 million from the prior quarter, primarily due to higher BOLI income. This included certain non-recurring death benefits totally $0.6 million, as well as the higher income driven by equity market gain. Other operating expenses totaled $40.4 million in the fourth quarter down $1.6 million from the prior quarter. The decrease was primarily driven by one-time lower occupancy and advertising cost totaling approximately $1 million.

Our expense run rate will increase modestly in 2023 to the range of $40.5 million — $42.5 million per quarter as we continue to invest in our people, facilities and technology. Despite that, we expect positive operating leverage, which will drive a lower efficiency ratio over time. Our effective tax rate declined to 24.9% in the fourth quarter as a result of higher tax exempt fully income. Going forward, we expect the effective tax rate to be in the 25% to 26% range. Our capital position remains strong and during the fourth quarter, we repurchase 241,000 shares at a total cost of $4.9 million for an average cost per share of $20.41. The Board of Directors approved a new annual share purchase authorization of up to $25 million for 2023. Additionally, our Board of Directors declared a quarterly cash dividend of $0.26 per share, which will be payable on March 15th to shareholders of record on February 28th.

And now I’ll turn the call over to Anna Hu, our Chief Credit Officer. Anna?

Anna Hu: Thank you, David. Our asset quality remains solid in the fourth quarter. Our loan portfolio is strong and well diversified with over 75% real estate secured with a weighted average LTV of 63%. We continue with our conservative underwriting policies, including tight LTV and concentration standards, and 83% of our loan portfolio is in Hawaii. For the lending we do on the U.S. Mainland, loans are typically commercial and commercial real estate participation with larger banks and markets we are familiar with, and our consumer purchases are from established lending partners. All Mainland loans meet our credit underwriting guidelines. We believe we have minimal exposure to sectors that could be impacted by an economic downturn.

Our construction portfolio is just 3% of total loans, and our Mainland consumer unsecured portfolio is 3% of total loans. At December 31st, non-performing assets to total assets were 7 basis points, or $5.3 million. Total criticized loans were just 1.4% of total loans. Our net charge-offs were $1.7 million for the fourth quarter, which equates to 12 basis points annualized as a percent of average loans. Our allowance for credit losses was $63.7 million or 1.15% of outstanding loans. In the fourth quarter, we recorded a $0.6 million provision for credit losses due to loan portfolio growth and net charge-off. Now, I’ll turn the call back to Arnold. Arnold?

Arnold Martines: Thank you, Anna. Central Pacific Bank had a great year in 2022, and we continue to be well-positioned to continue deliver strong performance in 2023. We have prudent and disciplined risk management and the right leadership team to move us forward as we continue to create shareholder value for our investors. Thank you for your continued support and confidence in our organization. At this time, we will be happy to address any questions you may have.

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Q&A Session

Operator: The first question is from the line of David Feaster with Raymond James. Please proceed.

David Feaster: Hey, good morning everybody.

Arnold Martines: Hi, David.

David Feaster: Maybe just maybe starting on the funding side and talking about some of the competitive dynamics in — that you’re seeing in Hawaii. You talked about it being a more rational market, and that’s what we’ve seen historically. Just curious, how you think about deposit growth and the competitive dynamics there? And any other updates on your — the other deposit initiatives that you’ve been working on, both from the Japanese and the tech side. And just any thoughts on deposit growth to fund the loan growth that you talked about?

Arnold Martines: Yeah. Thanks David. This is Arnold and I’ll start and then I’ll — if David wants to add comments as well. But as I mentioned in the earlier comments, we were successful in bringing in about $180 million. Mostly it was from our time deposit campaigns that we ran in Q4. The way we look at this is that, while deposit rates have increased, we’re looking at funding costs in general. And the time deposit rates that we offered in the Q4 were better alternatives to the — to more wholesale borrowings costs that we were looking at. As far as the market itself, I mean, further impact of continued Fed tightening and yield curve movements on deposit bonds is yet to be seen. So, obviously, we’re actively managing our funding sources and ensuring that we’re optimizing performance to this operating environment.

And with regard to where we’re focusing, of course, we’re focused in garnering more core deposits. Our Japan development is going well. We had — we’re about a $1 billion now in Japan deposits, and that was up about $22 million quarter-over-quarter. So, we feel good about that. Japan is opening up as I mentioned earlier, and we feel good about the opportunities that we have in — bringing in deposits from Japan. So, generally, kind of challenging environment, but, teams doing a good job in managing funding costs overall near term. And I think, longer term, obviously, we’re well very well positioned in the marketplace. David, you want to add anything?

David Morimoto: Yeah. Maybe just a couple points. Yeah. We’re fortunate obviously to have a strong core deposit franchise that provides over $6 billion in stable, relatively low cost funding. As Arnold mentioned in the current rate cycle, we are proactive in using CD specials to retain some more rate sensitive balances with CPB, while also attracting new deposit balances at reasonable cost. Our deposit pricing strategies that we’re implementing in this rate cycle are very similar to what we used in the 2015, 2018 rising rate cycle. Those strategies were successful then, and we expect similar results. And then, I think finally, if you exclude government deposits from the sequential quarter growth, customer deposits grew $85 million or 5.3% linked-quarter annualized, and I think that’s pretty good performance in this operating environment.