Q4 2023 Central Pacific Financial Corp Earnings Call
Participants
Dayna Matsumoto; Group Senior VP and Director of Finance and Accounting; Central Pacific Financial Corp
Arnold Martines; President and CEO; Central Pacific Financial Corp
David Morimoto; Senior EVP and CFO; Central Pacific Financial Corp
Anna Hu; EVP and Chief Credit Officer; Central Pacific Financial Corp
David Feaster; Analyst; Raymond James Financial, Inc.
Andrew Liesch; Analyst; Piper Sandler Companies
Presentation
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp fourth quarter 2023 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. Dot Bank.
And with that, I'd like to turn the call over to Ms. Dayna Matsumoto, Group Senior Vice President and Director of Finance and Accounting. Please go ahead.
Dayna Matsumoto
Thank you, Greg, and thank you all for joining us as we review the financial results of the fourth quarter of 2023 for Central Pacific Financial Corp. With me this morning are Arnold Martines, 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 website at CPB. typing 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.
Arnold Martines
Thank you, Dayna, and hello, everyone. We appreciate your interest in Central Pacific Financial Corp., and we are pleased to share with you our latest updates and results. We are proud of the recognition we recently received by Newsweek as one of the best regional banks in America for 2024. Also, in a few weeks, we will celebrate our 70th anniversary as an honor to lead this institution and continue our legacy of supporting the communities.
2023 was another strong year for us as we successfully navigated the operating environment challenges while continuing to deliver solid results. We have a strong balance sheet and our balanced growth strategy positions us extremely well for the future.
During the fourth quarter, we completed a few balance sheet repositioning transactions that were good opportunities to gain greater future returns and efficiencies. We will continue to pursue similar opportunities and aligned with our strategy in 2024. The team will provide additional detail and insights on our fourth quarter financial and credit metrics. But let me start first with an update on the Hawaiian market. The Hawaii tourism industry continues to do well with male visitors recovering faster than anticipated in the month of December. Visitor arrivals Tamale were 75% of the previous year, and total statewide arrivals were 90% of pre-pandemic 2019. Statewide visitors from Japan continue to increase up 92% from a year ago, but still lagging pre pandemic levels at only 49% at 2019. Total visitor spending was $1.96 billion in December, down 1% from a year ago and up 12% from December 2019. Total hotel occupancy in December, it was 72%, up 0.7% from a year ago with an average daily rate of $428, down 3% from a year ago.
Hawaii's statewide seasonally adjusted unemployment rate was 2.9% in December and continues to outperform the national unemployment rate of 3.7%. The University of Hawaii Economic Research Organization forecasts the state unemployment rate to remain very low at 2.5% in 2024. Real estate values in Hawaii are consistently strong in December for Oahu. Median single-family home price was $1 million and the median condo sales price was 510,000. Home sale volumes continue to be down year over year but with mortgage rates recently declining slightly, we are starting to see an increase in contract signings and with limited inventory properties continue to move quickly in our markets. Overall, we are optimistic about Hawaii's economic outlook. While the state faces some headwinds and uncertainty, Hawaii's economy is proving to be resilient, and we hope to turn unfortunate events like the Mali wildfires into opportunities to rebuild and to make our island communities stronger in the future.
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 $14.9 million, or $0.55 per diluted share. Return on assets -- return on average assets was 0.79%. Return on average equity was 12.55% and our efficiency ratio was 64.12% at year end. Our balance sheet reflected further strengthening of our liquidity position with higher levels of cash as we continue to be balanced with our loan growth.
Our total loan portfolio decreased by $7 million or 1.3% sequential quarter, primarily due to us continuing to let our mainland loan portfolio runoff and partially offset by growth in our home, our Hawaii commercial real estate and CNI portfolio, our total deposit portfolio decreased by $27 million or 0.4% sequential quarter as we ran off some higher-cost government time deposits. Total core deposits remained relatively flat despite some continued migration from demand deposits to CDs. From an average balance standpoint, the trends indicate the movement out of noninterest-bearing DDA is continuing to slow net interest income for the fourth quarter was $51.1 million and decreased by $0.8 million from the prior quarter, primarily due to higher funding costs. The net interest margin was 2.84 in the fourth quarter, a decline of four basis points sequential quarter. Our total cost of deposits was 1.22% in the fourth quarter and our cycle to date, total deposit repricing beta was 23%, which remains within our expectations for margin compression continues to narrow. And with that positive trend as well as the expected benefit from our pay fix. We see float swap. We expect our NAM to trough in the first half of this year. As Arnaud mentioned, during the fourth quarter, we completed a balance sheet repositioning, where we sold an office real estate building and utilized a $5.1 million pretax gain to improve prospective earnings through an investment portfolio restructuring of approximately $30 million at a loss of $1.9 million in a branch lease termination, where we incurred a one-part one-time charge of $2.3 million. Overall, the three nonrecurring transactions positions our balance sheet for improved future performance, which we estimate to be an increase to annual pretax income of $2 million.
Fourth quarter other operating income was $15.2 million, which includes the aforementioned gain on office sale and investment portfolio restructuring loss. Additionally, we had higher moly income in the fourth quarter, which was driven by the equity market rally and offset by higher deferred compensation expense. Other operating expenses totaled $42.5 million in the fourth quarter. It included the charge on the early branch lease terminations. Our effective tax rate declined to 22.3% in the fourth quarter, primarily due to higher tax-exempt only income. Going forward, we expect our normalized effective tax rate to be 24% to 25%. During the fourth quarter, we did not repurchase any shares.
Finally, our Board of Directors declared a quarterly cash dividend of $0.26 per share, payable on March 15 to shareholders of record on February 29. Our Board of Directors also authorized a new share repurchase plan to repurchase up to 20 million of our common stock in 2024.
I'll now turn the call over to Anna Hu, our Chief Credit Officer.
Anna Hu
Anna and keeping and asset quality remained strong in the fourth quarter with nonperforming assets at nine basis points of total assets and criticized loans decreasing to 0.92% of total loans. Our loan portfolio continues to be well diversified by loan type and industry sector. Over 75% of the loan portfolio is real estate secured with a weighted average loan-to-value of 62%. Our commercial real estate portfolio represents 25% of total loans and is diversified across all asset types, with 8% of outstanding balances in this portfolio maturing in 2024. Our commercial real estate office and retail exposure remains low at 3.5% and 4.8% of total loans, respectively.
The 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 64% and 61 weighted average months to maturity by loan exposure to them. The Highland Valley area was $111 million or 2% of total loans before the August wildfires. Since then, balances have paid down slightly to $103 million or 1.9% of total loans as of December 31. We estimate that $90 million or 87% of the total behind male loans outstanding were not directly impacted by the wildfire and $11 million or 11% that were directly impacted have sufficient insurance and land value coverage.
We are monitoring the remaining $2 million of the higher loan, which includes primarily consumer, unsecured and small business loans. The US mainland loan portfolio continued to decline during the fourth quarter due to the continued runoff in the mainland consumer portfolio for $308 million or 5.7% of total loans as of December 31 compared to $452 million a year ago.
Net charge-offs were $5.5 million for the fourth quarter, which equates to 41 basis points annualized as a percent of average loans increase in net charge-offs were primarily from our mainland consumer portfolio. This portfolio continues to run-off as new purchases remain on hold as a prudent measure. With that said, we believe that our losses in this portfolio have peaked and will improve going forward.
Overall, our loan portfolio remains solid. Our allowance for credit losses was $63.9 million or 1.18% of outstanding loans in the fourth quarter, we recorded a $5 million provision for credit losses on loans primarily due to net charge-off. Additionally, we recorded a $0.3 million credit to the provision for unfunded commitments, a total provision for credit losses of $4.7 million during the quarter. Overall, our strong risk management culture and conservative underwriting policies continue to serve us well. Our loan portfolio. Credit quality remains strong and we continue to monitor the economic environment closely.
Now I'll turn the call back to Arnold.
Arnold Martines
Thank you, Anna. In summary, we are pleased with our progress and results for 2023. We believe with our strong liquidity, capital and credit, we are well positioned to continue to deliver results with a focus on our mission of serving our customers and the broader community as we celebrate our 70 years of serving Hawaii this year.
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.
Question and Answer Session
Operator
(Operator Instructions) David Feaster, Raymond James.
David Feaster
Good morning, everybody. Maybe just high level. I'd like to start on on how you think about and potential impacts of Fed cuts. Obviously, that's that would benefit on the credit side. But is your sense there that maybe there's a decent amount of pent-up loan demand and we can see loan growth accelerate, especially on the mortgage front. Maybe just how do you think about your ability to reprice deposits lower if we do get fed cuts.
Arnold Martines
Yes. Thanks, Dave. This is Arno. I'll start and then I'll turn it over to David for a present for you. The second part of your question with regard to the loan growth side of it, and we do feel good about about that this year. We think that the operating environment is going to normalize a bit of capacity better than last year for sure. So we're building a strong loan pipeline as we move into the first half of 2024. We see most of the activity in the CRE and C&I loan categories. But we do expect the residential and home equity and small business to also support the growth in 2024. As you know, we continue to lap the mainland consumer loan portfolio runoff until we have better visibility on what happens in the US continent from an economic perspective.
So with all that said, we anticipate our full year 2020 for loan growth to be in the low single digit percentage range.
I'll just add that we see Q1 as a transitional quarter for loan growth given that some folks are waiting to see what happens with the interest rates to your to your point earlier. But all in all, we anticipate an improving operating environment supported by Hawaii's resilient economy. And I have to tell you our bankers are excited and engaged for what we hope to be a good year to help our customers achieve their broader investment goals.
So let me maybe have David cover some of the repricing, a part of your question.
David Morimoto
Yeah. On on the potential for rate cuts and what our plans are on the deposit pricing side. You know, as we saw last year on, we implemented a product segmentation strategy, we created some higher yield options for our customers that we're seeking on higher yields. And then those those accounts obviously have high betas and on. So we would anticipate that those high beta accounts would react pretty much, 100%, 100% beta with the move in market rate.
So on an overall basis in our expectations is that rate cut would be somewhat beneficial to CPF and R&M. But having said that, as we've consistently said, we do view the balance sheet as relatively well matched. So so you know, both in the rising rate environment and a falling rate environment, we don't see really large swings in our net interest margin and net interest margin tends to stay in a pretty pretty well defined range. Hopefully, that helps, Dave.
David Feaster
Yes, that's terrific. And since we were just talking about deposits was once they've they're ours. I was hoping you could touch on maybe some of the deposit trends you're seeing in some of the drivers of the NIB. outflows, whether you started to see that reverse course at all? And just how do you think about deposit growth as we look forward some of the initiatives you've put in place. Have you started to see any benefits from your Japanese partnership for any inflows from insurance proceeds and the wildfires? Or just kind of curious, again, some of the drivers of the flows in the quarter and then kind of the outlook going forward and some of your initiatives.
David Morimoto
Yes, I can start, David, David again on the again, core deposits as a whole were relatively flat sequential quarter, which is which is positive. There was some continued migration within core deposits out of DDA into interest-bearing on. However, Dayna Matsumoto did a good analysis. And if you've been tracking the third quarter, the average balances of DDA and early in 2023, the sequential quarter declines were about $80 million to $90 million a quarter out of DDA and then in the third quarter declined to $55 million and in the fourth quarter declined to $30 million. And these are our quarterly average balances so far, the trend is moving in the right direction. Our DDA represents about 28% of total deposits, which is where it was in late 2019 pre pandemic. So all indicators are pointing to the outflow of the migration of non-interest bearing are continuing to slow then, yes, we will need to turn the tide and it can grow growing again, and the teams are really focused on that.
David Feaster
Got it. That's helpful. And then maybe a last one for me. Just touching on the capital priorities. You talked about a pause last quarter on the buyback, you've made several balance sheet moves, but those are capital neutral. I'm just curious maybe your appetite for additional securities restructurings or share repurchases we put in the new program this quarter. Just curious your thoughts on capital priorities given given the strength of your capital base.
David Morimoto
Yes, David, the capital on capital management is remains consistent. So we'll continue to do pay the quarterly cash dividend at similar similar payout payout levels. And then beyond that, we are we are open to all alternatives right now. We do have the other Board provide us another authorization on the share repurchase plan. And then like you said, there are still opportunities to do further balance sheet restructurings, and we'll be evaluating those options against each other and on with the buyback where the ultimate Insider. So we'll we'll we'll make the decisions that we book, we believe are prudent beyond the cash dividend.
David Feaster
Okay, terrific. And just confirming that it sounds like the margin guidance you're talking about for a trough in the first half that does incorporate rate cuts.
David Morimoto
Yes, that are our baseline forecasts. Our internal baseline forecast has 325 basis point cuts in 2024 on, but nothing in the first quarter. Again, I think that the important thing to note on the net interest margin is the arm interest rate swaps are forward-starting interest rate swap that we put in in early 2020. So on it goes live in on April one, April one of 2024. And again, we were paying six to 10 and were receiving Fed funds flowing. So at the current time with three 42 and 40 basis points in the money on $115 million on. So by our our forecast, if there if there are the three, 25 basis points cuts cuts in 2020 for the swap will add $1.8 million in net interest income, two basis points to NIM. $0.05 to EPS.
David Feaster
Terrific. That's helpful. Thanks, everybody.
Operator
(Operator Instructions) Andrew Liesch, Piper Sandler.
Andrew Liesch
Thanks for joining everyone on. So just to touch base on the kind of the repositioning of the securities and the the $2 million and then the offices as well, $2 million, how much of that it's going to flow to the bottom line versus redeployed and reinvested back into the franchise.
Arnold Martines
Andrew, that's a good question for David.
David Morimoto
Yet again, like like all banks, we continue to invest in the franchise. We as you know, Andrew, we've had multiple on technology initiatives on first, we started with customer facing technology enhancements. More recently, we've been focused on the back-office on with some software new software implementations so on. I think the way to answer your question is it is likely won't all flow to the bottom line. But what I would probably guide you to is on our quarterly run rate guidance on OE. ON. So we're still guiding to 40 to $41 million per quarter for full year 2024 guidance in the one $160 million and $164 million range. And then if you normalize 2023 for the nonrecurring, it ends up being like a low single digit annualized growth rate, which we believe is reasonable considering the other inflationary pressures that we're all dealing with. So on what I would say is we we we are finding some offsets. We will find some offsets for the to offset the full inflationary impact such that the annualized growth rate and expenses, it is in the low single digit range.
Andrew Liesch
Got it. That's helpful from a good way to think about it. The I've noticed that the reserve ratio has been grinding higher the last few quarters. I guess what are some of the drivers of the CECL model that's causing that to happen because outside of the some of the losses in the mainland consumer book, the credit performance has been excellent. So I'm just curious like what's driving in the CECL model that the reserve ratio a bit higher?.
David Morimoto
Yes, Andrew, the so like like our CECL models, there is out there is a baseline economic forecast. We use the Moody's. So we subscribe to Moody's for our economic forecast. And on then Then there's the qualitative factor is the qualitative overlay on top of that on. I think I think the grinding higher unit increased one basis point on. And yes, I think it was primarily related to on the mainland consumer charge-offs. So mainly consumer has been in the one area that we've seen a little bit of a credit deterioration, although I would say that the deterioration is from a have normally pristine period of time where all consumers were buoyed by the fiscal stimulus. So it feels like it's rising a lot, but it's really only normalizing back to probably it's our normal expectation.
I'm not sure that does that address your question, Andrew, as And absolutely, Bob.
Andrew Liesch
And then you alluded to it earlier that the high level of cash balances at quarter end or year end. What are you thinking about those?
Those will be redeployed somewhere there's some more deposit declines in certain areas that content that can be used to fund. Just how should we think about the cash going forward?
David Morimoto
Yes, there was there was additional cash build on during the fourth quarter, and I forgot to mention. So we had four basis points of sequential quarter net deterioration in the fourth quarter, two basis points of that was a result of the increase in on-balance sheet liquidity. And so going forward, the plan is to not increase on-balance sheet liquidity further, I think I think we've done enough there that the fortress balance sheet is good for trust and offer so on, we probably won't grow it any further. And we are looking at options to reduce on-balance sheet liquidity somewhat.
Andrew Liesch
Got it. So right now, maybe just hold it in Fed funds and earn that and before under their option for?
David Morimoto
Obviously, Fed funds yield of five 50 or close to five 15. That's not a not a bad yield in currently. The challenge is it's not going to stay there, right? So that's where we're redeploying some of the on-balance sheet, liquidity could make sense.
Andrew Liesch
Got it. And that covers all my questions. Thanks off the bat.
Arnold Martines
Thanks, Andrew.
David Morimoto
Thank you, Andrew.
Operator
(Operator Instructions) And it looks like we have no further questions. So at this time, I will turn the call back over to Arnaud Martinez for closing remarks. Arnaud, the floor is yours.
Arnold Martines
Thank you, Greg, and thank you very much for participating in our earnings call for the fourth quarter of 2023. We look forward to future opportunities to update you on our progress. Thanks very much.
Operator
Thank you, Arnold. And ladies and gentlemen, that does conclude today's call. Thank you all for joining and you may now disconnect.
