Central Pacific Financial Corp (CPF) 2022 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Fourth Quarter 2022 Conference Call. (Operator Instructions) 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.

Thank you, Hannah, and thank you all for joining us as we review our financial results for the fourth quarter of 2022 for Central Pacific Financial Corp. With me this morning are 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 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 President and CEO, Arnold Martines.

Thank you, David. Aloha, and good morning, everyone. We appreciate your interest in Central Pacific Financial Corp. 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 prepandemic 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 the country is now fully reopened and the yen value has improved recently.

The Japan government also operated 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 visitor 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 wholesale 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 homeownership, 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 runoffs 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 prior 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 Hawaii 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 cycles. 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?

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 18.30% 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, an increase 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 3 basis points sequential quarter. Our total cost of deposits was 41 basis points in the fourth quarter. We continue to manage the positive 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 nonrecurring debt benefits totaling $0.6 million as well as the higher income driven by equity market gains. Other operating expenses totaled $40.4 million in the fourth quarter, down $1.6 billion from the prior quarter. The decrease was primarily driven by onetime lower occupancy and advertising costs totaling approximately $1 million. Our expense run rate will increase modestly in 2023 to the range of $40.5 million to $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 BOLI income. Going forward, we expect the effective tax rate to be in the 25% to 26% range. Our capital position remained strong. And during the fourth quarter, we repurchased 241,000 shares at a total cost of $4.9 million or an average cost per share of $20.41. The Board of Directors approved a new annual share repurchase 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 15 to shareholders of record on February 28.

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

Thank you, David. Our asset quality remained 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 policy, 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 in 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 31, nonperforming 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-offs.

Now I'll turn the call back to Arnold. Arnold?

Thank you, Anna. Central Pacific Bank had a great year in 2022, and we continue to be well positioned to continue to 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.

(Operator Instructions) The first question is from the line of David Feaster with Raymond James.

Maybe just starting on the funding side and talking about some of the competitive dynamics 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?

Yes. Thanks, Dave. 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 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 gardening more core deposits. Our Japan development is going well. We had -- we're about $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 a challenging environment, but the team is doing a good job in managing funding costs overall near term. And I think longer term, obviously, we're very well positioned in the marketplace. David, do you want to add anything?

Yes. Maybe just a couple of points. 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 costs.

Our deposit pricing strategies that we're implementing in this rate cycle are very similar to what we use 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.

No, absolutely. And maybe just kind of taking this into context with kind of the loan growth and the improved pricing side, I guess, how do you think about rate sensitivity and maybe the NIM trajectory as we look forward just as we talk about discipline on the deposit side, (inaudible) accelerating, but a more rational market and then assets continuing to reprice higher. I'm just curious how you think about your ability to defend the margin and maybe the NIM trajectory as we go out throughout the year and over the course of the year. Yes.

Hey David, it's David again. Yes, we did achieve 3 basis points of core sequential quarter NIM expansion. Obviously, the velocity of the NIM expansion has been slowing as we've been seeing throughout the industry. The guidance for net interest margin right now is 310 to 320. So it's kind of guiding to a flattish NIM going forward.

Okay. That makes sense. And then just wanted to get your updated thoughts on the Swell Banking as a Service initiative. And where we are there, your thoughts on expansion at this point and whether Elevate sale impacts that partnership at all?

Sure. Good question, David. Swell is currently in pilot testing. It's like it's an invitation only. So the app is available, it's operating, but we're only inviting customers from the Swell waitlist to join. And it's in beta testing, there's about 100 customers that are currently on the platform. And we're actually preparing to do a little bit of a wider launch in the first half of 2023. We're going to do a lot of test marketing and customer acquisition beginning in the first half of this year. But it -- as we've talked about over the last several quarters, we've really -- we've slowed down the rollout of Swell as a result of what we've been seeing in the broader fintech market.

Obviously, there's been a lot of turmoil in the market. The operating environment is not the greatest for launching new fintech initiatives. So we've decided to slow down and we're observing what's happening in the fintech marketplace. The Swell strategy has pivoted slightly rather than just broad customer acquisition. We're now focused on looking for profitable customers. So rather than millions of unprofitable customers, we're looking for a smaller amount, 100,000 of profitable customers, and we think that's a better business model than what we've been seeing more broadly in the fintech space.

Yes. I think that makes complete sense. But does the sale of Elevate impact that partnership at all? Or is it kind of a nonevent?

Yes. Sorry, I forgot about that part of the question, Dave. So as you know, Elevate is looking to be sold to Park Cities asset management. Park Cities asset management is the private equity money behind Swell. So Park Cities has a long history of working with Elevate prior to the Swell initiative. And then Park Cities was the largest outside money that invested in the Series A round of Swell. So Park Cities is a very familiar entity to elevate Swell and CPB. So it does not affect the plans for slow going forward.

The next question is from Andrew Liesch with Piper Sandler.

I just want to talk about the deposit mix here. I mean a lot of it was from -- the increase was from the successful CD campaign. How should we look at deposits going forward? So that match loan growth as it did this quarter? And do you think it's going to be more weighted towards CDs? And then, I guess, over time, do you think the mix of CDs and noninterest-bearing get back to like where they were pre-COVID? I'm just kind of curious how you think the funding mix [is going] to change.

Yes, Andrew, this is Arnold. I'll start by just saying that I think near term, we're probably going to see a 50-50 mix time deposits in core, core coming really from a new acquisition, new customer acquisitions, tough market right now. As I mentioned earlier, I don't see it -- this is a near-term dynamic that us and every other bank has to manage through. I don't see this as a longer-term issue. I think we're going to get that as beds start to ease rates in the future, we'll get back to kind of where we were pre pandemic, but it's going to be a little bit of a journey, and we're just going to manage that effectively in the near term. I'm not sure if David wants to add anything.

Just maybe one additional point, Andrew. On DDA, there's obviously a lot of interest in DDA. DDA as a percent of total deposits at the end of 2019. So pre-pandemic, was 28% of total deposits. At the end of last year, it was 31%. So there's 3% differential to pre-pandemic. That's about $200 million, roughly $200 million in deposits. We think our baseline DDA ratio should be higher than pre-pandemic due to our outperformance on PPP lending. So we're thinking maybe we have $50 million or $100 million more normalization of DDA balances. And obviously, we're doing everything we can to keep that to the lower end of that range.

Got you. That's really helpful color. And then I guess related to that, your margin guide, is that for the quarter or for the next several quarters or for the year, just curious for that $310 million to $320 million range is good for.

Yes. Generally, for the next couple of quarters, that's what we're looking at. Obviously, the operating environment is very volatile and a lot of things can change, but that's what we're guiding for, for the next couple of quarters, Andrew.

Certainly, that makes sense. And then good to see the new buyback, I guess, how active do you intend to be? You've been pretty active in the last couple of quarters. Is a similar pace of repurchases reasonable? Or I guess, kind of how you're looking at that?

Yes. I would say similar. We've been repurchasing about 200 to 250 -- 200 to 250,000 shares per quarter, spending roughly about $5 million on repurchases combined with $7 million in quarterly cash dividends. So that's roughly the 60% return of net income that we've been targeting.

(Operator Instructions) The next question is from Laurie Hunsicker with Compass Point.

Just maybe circling back to what David was asking on Swell. Can you quantify a little bit more where your Swell balances are as of December 31. It sounds like there are not a lot there. But when you talk about ramping it up in 2023, what does that look like? And then, I guess, off of that, I thought you were ceasing Mainland unsecured consumer. So is this pilot testing then just in Hawaii? Or help us think about that?

So Laurie, this is Arnold. I'll start on the Mainland unsecured consumer, and then I'll turn it over to David, and he can speak to Swell. But yes, we -- as I mentioned earlier in my comments, we are suspending Mainland consumer unsecured purchases until such time that we believe the outlook, the national outlook, economic outlook is improving. So near term, pretty much full suspension of the Mainland consumer unsecured, okay? So -- but -- as far as Hawaii, we're continuing to be very active there on consumer and in our home market. And also, we're still looking at auto loans as an area where we believe it's acceptable risk, given the -- what we saw in the past, in the last recession, it actually performed pretty well as far as the data points that we're looking at. So generally speaking, we're open to auto. But in any event, on Mainland unsecured consumer, we're just basically suspending for now until the national outlook improves. And I'll turn it over to David to talk a little bit about Swell.

Yes. And just a clarification. When Arnold's talking about suspending Mainland unsecured debt, that's on the purchase side, Laurie. So we're not suspending well, but we're continuing the very deliberate and gradual rollout of Swell. So at year-end, to give you an idea, we have about less than 100 customers on the platform. The deposit balances are probably less in the aggregate are less than 20,000. The loan balances are less than 5,000. And so it's very nominal balances at this point. We are planning to do some test marketing in the first half of 2023. But we don't anticipate the balances to be meaningful at all. And so that's where we are. We're not spending Swell. Any -- do you have any follow-up questions on Swell, Laurie?

Yes. So in other words, I guess, as we think looking out to 2023 and you said you would ramp it up, that you're obviously not going to stay at 5,000 in loans. I guess the question is, what are you taking out to? Are you taking it to $5 million? Are you taking it to $25 million? How are you thinking about that?

Laurie?

Yes, are you there?

Sorry. Laurie?

Yes, I am right here. Can you hear me?

Okay. Sorry, we had a technical glitch on our end, but we thought we lost you. I would say that Swell balances are not going to exceed $10 million in any time soon.

Perfect. Perfect. That's what I was looking for. Okay. That's helpful. And then just on the unsecured Mainland consumer book, I had that at $310 million at September -- what is that as of December 31? And then can you help us think about -- I mean, your credit is pristine outside of consumer. The consumer piece, it looks like you had $1.07 million of charge-offs, $1.03 million of it came from consumer. Can you help us think about -- of that $1.03 million, how much came from the Mainland piece.

So just what is your Mainland unsecured consumer at December 31 and then in the quarter, how much of the Mainland charge-offs were in total.

I'll ask Anna to respond to that question.

So for our consumer unsecured book at the end of fourth quarter, it was just about $316 million. So we did increase slightly from the $310 million we talked about at the end of the third quarter, and that was because we had a couple of orders in place that we did need to fulfill. But we did go ahead and really suspend any additional purchases for the rest of the quarter.

With regards to the charge-offs, about $900,000 is from the Mainland consumer book. The breakdown was about $200 in auto, about $280 in our home improvement and about $450 in our unsecured consumer. And that's all related to mainland consumer.

Perfect. That's great. And then just going back to margin, David, do you have a spot margin for December?

Yes. So December spot NIM was [317]which is flat to the full quarter. And then just to give you a little more color, spot interest-bearing deposit costs in December was 73 basis points, which increased 10 basis points month-over-month while December loan yields was were 420, which increased 12 basis points month-over-month. So I think that -- all of that data is supportive of the flattish NIM guide that we provided.

There are no additional questions waiting at this time. So I will turn the call over to Arnold Martines for any further remarks.

Thanks a lot. Thank you very much for participating in our earnings call for the fourth quarter of 2022. We look forward to future opportunities to update you on our progress.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.