Earnings call: Central Pacific Financial Corp. reports steady Q1 income

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Earnings call: Central Pacific Financial Corp. reports steady Q1 income
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Central Pacific Financial Corp. (NYSE: CPF ) announced a net income of $12.9 million, or $0.48 per diluted share, for the first quarter of 2024, maintaining a strong credit quality with a minor increase in non-performing assets due to specific mortgage loans.

The company's total loan portfolio saw a slight decrease, and the effective tax rate is expected to stay between 23% to 25%. Despite challenges from the Maui wildfires, CPF remains positive about Hawaii's economic growth and anticipates modest state economic expansion in 2024.

Key Takeaways

  • Central Pacific Financial Corp. reported a first-quarter net income of $12.9 million, or $0.48 per diluted share.
  • The total loan portfolio decreased by 0.7% from the previous quarter.
  • Non-performing assets increased slightly due to isolated residential mortgage issues.
  • The company's effective tax rate stood at 23.5% and is expected to remain stable.
  • CPF is optimistic about Hawaii's economy, despite recent wildfires affecting recovery.
  • The company is focusing on deposit growth and net interest margin expansion strategies.

Company Outlook

  • CPF expects Hawaii's economy to grow modestly through 2024.
  • The company aims for low single-digit total deposit growth for the year.
  • Net interest margin is projected to be in the 2.90% to 3% range.
  • CPF plans to maintain a dividend payout ratio of 40% to 50% and continue share repurchases.

Bearish Highlights

  • Total deposits decreased by $230 million, including a $140 million intentional government CD runoff.
  • The core deposit runoff was $90 million, influenced by seasonal needs and the Lahaina fire.

Bullish Highlights

  • The interest rate swap is expected to add about 6 basis points to the net interest margin quarterly.
  • Positive operating leverage is a target through expense initiatives.
  • Strong credit quality with stabilized charge-offs in the Mainland portfolio and no issues in the commercial real estate book.


  • The company's loan portfolio experienced a slight contraction compared to the previous quarter.

Q&A Highlights

  • CPF is monitoring the consumer side of the business and will resume Mainland lending when conditions are favorable.
  • The company continues to lend in Hawaii and maintains a strong credit quality.
  • Management expressed confidence in the company's future and thanked call participants.

Central Pacific Financial Corp. remains focused on managing growth and the cost of deposits to improve its net interest margin. With a strong credit quality and a strategic approach to capital deployment, CPF is navigating the current economic landscape with cautious optimism. The company's commitment to maintaining strong asset quality and capitalizing on Hawaii's economic prospects underscores its resilience in the face of short-term challenges.

InvestingPro Insights

Central Pacific Financial Corp. (CPF) has demonstrated a commitment to shareholder value, maintaining dividend payments for 12 consecutive years. According to InvestingPro Tips, analysts are optimistic about the company's profitability, having revised their earnings upwards for the upcoming period and predicting the company will be profitable this year. This aligns with CPF's own positive outlook on Hawaii's economic growth.

From a financial standpoint, CPF's market capitalization stands at 540.38M USD, with a Price/Earnings (P/E) ratio of 9.29, which is slightly lower than the adjusted P/E ratio for the last twelve months as of Q4 2023, at 8.93. This could indicate that the company is potentially undervalued relative to its earnings. The Price/Book ratio as of Q4 2023 is 1.07, suggesting that the market price closely reflects the company's book value.

The company's dividend yield is notably high at 5.21%, which may attract income-focused investors, especially considering the large price uptick of 32.58% over the last six months. This price appreciation, coupled with a strong dividend yield, presents a compelling case for investors looking for growth alongside income.

For readers interested in further analysis and additional InvestingPro Tips, there are more tips available on the platform. CPF's profile on InvestingPro offers a comprehensive view of the company's financial health and future prospects. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, and delve into the full spectrum of insights that could inform your investment decisions.

Full transcript - CPB Inc (CPF) Q1 2024:

Operator: Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. First Quarter 2024 Conference Call. During today’s presentation all participants will be in listen mode only. Following the presentation the conference will be open for the 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 Ms. Dayna Matsumoto, Group Senior Vice President and Director of Finance and Accounting. Please go ahead.

Dayna Matsumoto: Thank you, Eli, and thank you all for joining us as we review the financial results of the first quarter of 2024 and 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.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.

Arnold Martines: Thank you, Dayna, and hello, everyone. We appreciate your interest in Central Pacific Financial Corp. and we are pleased to share our latest updates and results with you. We had a special start to 2024. First, with the celebration of our 70th anniversary in mid-February, where we took time to honor our founding. As many of you know, our bank was started by World War II Nisei veterans to help the underserved in Hawaii. We celebrated this special occasion with our many long-standing loyal customers and employees. Consistent with our founders’ mission in March, we were recognized for the 15 time as SBA Lender of the Year Hawaii District. We are all very proud to continue the legacy. Our financial results in the first quarter reflect our positioning to optimize performance in the coming quarters. We believe we are well positioned with strong liquidity, asset quality and capital and a healthy pipeline. The team will provide additional detail and insights on our first quarter financial performance. But as usual, let me start with an update on the Hawaii market. The Hawaii economy continues proved to be resilient despite headwinds that have impacted recovery. In the month of February, total statewide visitor arrivals measured by the average daily census due to the leap day was about 3% down from the prior year and about 95% of pre-pandemic 2019. Visitors from Japan continues to increase, up 77% from a year ago yet remained about 48% of the same month in 2019. As it relates to Maui, total visitors in February were about 78% in the prior year as recovery following the wildfires continues. Total statewide hotel occupancy in March was 75%, down 1.9% from a year ago with an average daily rate of $384, down 0.9% from a year ago. Hawaii's statewide seasonally adjusted unemployment rate was 3.1% in March and continues to outperform the national unemployment rate of 3.9%. The University of Hawaii Economic Research Organization forecast, the state and unemployment rate to remain very low at 2.7% in 2024. In the area of Hawaii real estate values, the Oahu median single-family home price increased back up to $1.1 million, and the median condo sales price was $500,000 in March. Home sales volumes in the first quarter were up 6.1% for single-family homes, but down 7.1% for condos compared to the prior year. With the demand for housing remaining strong, it is welcoming to see inventory levels increasing with a 7.4% increase in active inventory for single-family homes in March. Overall, we remain optimistic about Hawaii's economic outlook. Although the impacts from the Maui wildfires have slowed our recovery in the near-term, we are getting closer before recovery. In addition, government and military contracts in Hawaii are at all-time highs with $5 billion in total contracts awarded in 2023. With all of that said, the latest forecast is for the total state economy to continue to grow modestly in 2024. 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 first quarter was $12.9 million or $0.48 per diluted share. Return on average assets was 0.70%. Return on average equity was 10.33% and our efficiency ratio was 66%. In the first quarter, our total loan portfolio decreased by $37.6 million or 0.7% sequential quarter, primarily due to planned runoff in the Mainland consumer loan portfolio and partially offset by growth in our Hawaii received float swap on $115 million of municipal securities started on March 31 and at current rates adds approximately $1 million in pretax income quarterly. We believe our NIM has bottomed and will expand modestly in the coming quarters. First quarter other operating income was $11.2 million, which normalized following the non-recurring gain on office sale and investment portfolio restructuring loss in the fourth quarter. Other operating expenses totaled $40.6 million in the first quarter, also normalizing after we took the charge on the early branch lease termination in the fourth quarter of last year. Our effective tax rate was 23.5% and we believe will continue to be in the 23% to 25% range going forward. During the first quarter, we repurchased 49,960 shares at a total cost of $900,000. Our Board of Directors declared a quarterly cash dividend of $0.26 per share, which will be payable on June 17 to shareholders of record on May 31. I'll now turn the call over to Anna Hu, our Chief Credit Officer. Anna?

Anna Hu: Thank you, David. Our asset quality remained strong in the first quarter with favorable trends in criticized loans and net charge-offs. Non-performing assets increased slightly due to one-off residential mortgage loan situation. However, we are well collateralized and are not anticipating any losses. Our lending and credit risk strategy continues to be based on diversification, consistent underwriting standards, supported by strong collateral and a focus on stable segments and industries that we have solid expertise in. Nearly 80% of the loan portfolio is real estate secured with a weighted average loan-to-value of 63%. Our commercial real estate portfolio represents 26% of total loans and is diversified across all asset types with 7% of outstanding balances in this portfolio maturing in the remainder of 2024. Our commercial real estate office and retail exposure remains low at 3.4% and 5.4% of total loans, respectively. The office portfolio has a weighted average loan-to-value of 56% and 71 weighted average months to maturity. The retail portfolio has a weighted average loan-to-value of 65% and 59 weighted average months to maturity. Our Maui related loan deferrals have nearly all returned to regular payment status with just two loans remaining on deferral with a total principal balance of $1.3 million. The U.S. Mainland consumer loan portfolio continued to run off to $274 million or 5.1% of total loans as of March 31 and compared to $429 million a year ago. Non-performing assets were $10.1 million or 0.14% of total assets, an increase of $3.1 million from the prior quarter, primarily due to residential mortgage loans that moved into non-accrual status. A majority of these loans are well seasoned with strong loan-to-value. Criticized loans decreased to $30.4 million or 0.56% of total loans a decrease of 36 basis points from the previous quarter and continues a downward trend over the last three quarters. Net charge-offs were $4.5 million for the first quarter or 0.34% of average loans on an annualized basis. This reflects a 7 basis point decrease from the previous quarter. Our allowance for credit losses was $63.5 million or 1.18% of outstanding loans. In the first quarter, we recorded a $4.1 million provision for credit losses on loans primarily due to net charge-offs. Additionally, we recorded a $0.2 million credit to the provision for unfunded commitments for a total provision for credit losses of $3.9 million during the quarter. Overall, our credit quality remains strong and we continue to monitor the economic environment closely. Now I'll turn the call back to Arnold. Arnold?

Arnold Martines: Thank you, Anna. In summary, we believe that with our exceptional team, combined with our strong liquidity, capital and credit positions, we are well positioned for success. 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. Thank you.

Operator: [Operator Instructions] Our first question comes from David Feaster from Raymond (NS: RYMD ) James.

David Feaster: Maybe just touching on the loan side. You talked about a healthy pipeline. I'm curious maybe, the complexion of the pipeline, where are you seeing opportunities today? And if you could touch on some of the competitive dynamics, what you're hearing from your borrowers and maybe how you think about loan growth just given the continued runoff in the consumer portfolio?

Arnold Martines: This is Arnold. I'll just start by saying that we believe we'll see more normalization in the environment as 2024 progresses. And I mentioned this at the last quarter's earnings call, Q1 was a transitional quarter for us and we are expecting a ramp-up in activity as we move deeper into 2024. We're seeing strength in the commercial real estate segment as well as our core small business loans area. So we do have a healthy pipeline, albeit that it is based on a lower demand in the marketplace. As far as the landscape, given the fact that volume is down overall in the market, it does continue to be competitive. So we're making wise decisions on risk reward as we move forward.

David Feaster: And then maybe touch on the other side, touching on deposits. Curious some of the underlying trends that you're seeing whether you've seen inflows or impacts from the wildfires and maybe how the Japanese initiative is trending? And then just how do you think about driving core deposit growth and funding growth going forward and other ways that you're looking to optimize your funding base?

Arnold Martines: David, let me just start and then I'll turn it over then to David Morimoto. But I'll just say that the team has done a good job to manage growth and cost of deposits. It's a balancing act. It is economic environment. And so we've been very cognizant of balancing those decisions so that we can improve our position for NIM expansion in the future. But I'll turn it over to David for more color on deposit inflows and outflows.

David Morimoto: The first quarter total deposits were down $230 million sequential quarter. But as we noted in our release, $140 million was intentional government -- higher-cost government CD runoff. So when you look at the core or normalized deposit runoff, the $90 million, it works out to roughly $0.015 sequential quarter or 6% linked quarter annualized. That was a little bit more runoff than we've been experiencing, but that was -- it was primarily due to seasonal cash needs by customers, so some of it was related to the Lahaina fire, but also it was businesses needing to use some cash. So we do think that the first quarter was a transitional quarter. We think we'll gain traction going forward. Again, we're highly focused on core deposit growth in the small business sector. We have a couple of promotions coming out on what we call our business exceptional account. It's our flagship small business checking account. And then -- so we are still targeting full year '24 total deposit growth in the low single-digit range. So we do expect to make up the first quarter.

David Feaster: Could you maybe elaborate a bit on like the trends within the first quarter? How much of the outflows were in January and kind of the progression throughout the quarter on the core deposit trends?

David Morimoto: Yes, David. I think it was pretty much throughout the quarter. Yes. I don't think it was heavily weighted one way or the other.

David Feaster: Okay. And then maybe just as it relates to the margin, kind of putting it all together, you talked about the swaps kicking in and that we're very confident that the margin is troughed. Curious, how do you think about the margin trajectory over the course of the year? And other opportunities that you're considering to maybe manage rate sensitivity and protecting against Fed cuts?

David Morimoto: Yes. Sure, David. Again, the balance sheet is relatively well matched from an interest rate risk standpoint. The interest rate swap started on March 31 of this year. It will add roughly 6 basis points to the NIM on a quarterly basis, $1 million to quarterly net interest income. So we'll get the full effect of that this quarter. So our forward guide on the net interest margin is in the 2.90% to 3% range, which is a nice uptick from the 2.83% in the first quarter.

David Feaster: And do you have -- does that include rate cuts? And how much of that is -- comes in this next quarter with the swaps taken in?

David Morimoto: Yes. We don't anticipate any rate cuts in this quarter. I think where we are now is probably one to two cuts in the second half of the year. But for the next couple of quarters, we think the 2.90% to 3% NIM guide is good, David.

Operator: Question comes from Andrew Liesch from Piper Sandler.

Andrew Liesch: David, I just wanted to just kind of drill down on to the expense base here. It looks like it came in a little bit lower than I was forecasting. But still, I mean, still pretty good expense control. I guess, how should we be looking at expenses going forward? I think you referenced in the press release or in the presentation on some ongoing efficiency initiatives. So curious what those might be and how might that affect expenses going forward?

David Morimoto: Yes, Andrew, it's David. Yes, as we've been stating now probably for the better part of the year. We've been focused on a lot of expense initiatives. It tends to be more back office oriented. So leveraging technology, as we talked about previously, we implemented ServiceNow (NYSE: NOW ) workflow automation. We've connected ServiceNow to our core through a middleware called MuleSoft. So we've been spending the last year a lot of on the foundation building of those technologies. And now we're starting to -- we're really at the beginning of leveraging that to see expensive efficiencies. And the way it'll show up is not likely a reduction of expenses but what we hope to do is be able to grow revenue, obviously, faster than our expenses. So keep the expense base relatively flat, maybe growing at low single-digit pace but have stronger revenue growth. So positive operating leverage is obviously the goal.

Andrew Liesch: And then, I guess, shifting back to the margin, it looks like maybe you'll be operating off a smaller earning asset base here this quarter with that excess liquidity used to pay off the higher cost funding. But then you also have the $1 million of interest income from the swap. So do you think -- if you just look at where the balance sheet is shaken out that net interest income should grow from here? Or do you think it's going to stay pretty steady?

David Morimoto: Yes. The net interest income guide, so again, the net interest margin guide is 2.90% to 3%, net interest income guide is probably $50 million to $52 million a quarter, Andrew, which is an uptick from the first quarter.

Operator: [Operator Instructions] Our next question comes from David Feaster from Raymond James.

David Feaster: Just kind of curious about capital priorities. Obviously, growth is relatively muted at this point. You guys were bought back a little bit of stock. Curious how you think about capital deployment at this point?

David Morimoto: Yes, the capital plan hasn't changed. So dividend payout ratio in the 40% to 50% range. We do have the share repurchase plan and we'll continue to use that judiciously. As you know, the banking industry has been a little volatile. And so there are days where the overall banking sector is under some downward pressure and we see those as great buying opportunities for the company as the ultimate insider and we'll continue to leverage that opportunity.

David Feaster: And then maybe just, broadly touching on credit. First on the consumer side. Curious where you think we are working through that book with realizing those losses? And then maybe more broadly, obviously, you've got a conservative credit culture. I'm curious, how you think about credit? What you watch closely? Obviously, there's a hyper focus on CRE. Just kind of curious your thoughts on credit broadly outside of the consumer book as well and how you're approaching credit management going forward?

Anna Hu: David, this is Anna. So with regard to the consumer side, particularly with the mainland book, we are continuing the runoff mode, but we are looking and watching closely at the economy and the market conditions as to when we would get back into the Mainland consumer lending. We continue to do Mainland -- Hawaii consumer lending here in Hawaii and we have not stopped on that front. But the opportunities, I think in the current quarter and the forward-looking couple of quarters is really in the commercial real estate and the small business loans as Arnold mentioned.

David Feaster: Maybe touch on credit quality side though. Like I'm curious, what are some of the trends do you think we've worked through all the issues in the consumer portfolio? And then as you look at your -- maybe stress the CRE book, is there anything that you're seeing there? Or anything that you're watching more closely just from the credit standpoint?

Anna Hu: Yes. From the credit quality standpoint, on the Mainland book, we're optimistic as we believe that the charge-offs have stabilized in the Mainland portfolio and we're optimistic that those numbers will start coming down. With respect to the commercial real estate book, we really are not seeing any issues there. Our office and retail remain low as a percentage of our total loan book and really not seeing any issues in there. Overall, credit quality continues to remain very strong in our loan book.

Operator: As of right now, we don't have any questions. I'd like to hand back over to the management for their final remarks.

Arnold Martines: Thank you, Eli, and thank you to all of you for participating in our earnings call for the first quarter of 2024. We look forward to future opportunities to update you on our progress. Thanks very much.

Operator: Thank you, everyone, for attending today's conference call. We hope you have a wonderful day. You may now all disconnect. Have a wonderful day.

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