Central Pacific Financial - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 GAAP EPS was $0.42 (net income $11.3M), impacted by a $9.9M pre-tax loss from an investment portfolio repositioning; non-GAAP adjusted EPS was $0.70 with NIM expanding 10 bps to 3.17% and core deposits +$74.2M QoQ.
• The securities repositioning is expected to add ~$2.7M to annual NII and ~4 bps to NIM with an estimated earn-back of ~3.5 years, setting up further margin improvement; December MTD NIM was 3.29% with deposit costs down to 1.14%.
• Balance sheet trends were constructive: core deposits rose to $6.04B, total deposits +$61M QoQ, and total loans decline narrowed (down 0.2% QoQ); credit stayed solid with NPAs at 0.15% of assets and ACL/loans at 1.11%.
• Capital return stepped up: dividend raised 3.8% to $0.27 and a new $30M buyback authorized for 2025; CPB also became a Federal Reserve member bank (effective Jan 24, 2025).
• Wall Street (S&P Global) quarterly consensus for EPS and revenue was unavailable at the time of analysis (API limit), so we cannot quantify a beat/miss this quarter; qualitatively, margin and core funding trends were better than feared and are key stock catalysts into 2025 [Values retrieved from S&P Global unavailable due to access limits].

What Went Well and What Went Wrong

What Went Well

• NIM and funding costs: NIM rose to 3.17% (+10 bps QoQ) as average deposit costs fell 11 bps to 1.21%; December MTD NIM was 3.29% and deposit cost 1.14%.
• Core deposit growth and mix: Core deposits increased $74.2M QoQ to $6.04B; total deposits +$61M QoQ with favorable DDA growth (seasonal DDA +~$40M) and lower reliance on government time deposits.
• Strategic repositioning for future earnings: Sold $106.5M of lower-yield AFS securities (2.1% yield) and reinvested at ~4.9%, expected to add ~$2.7M annual NII and ~4 bps NIM (earn-back ~3.5 years).

What Went Wrong

• GAAP earnings optics: The $9.9M pre-tax securities loss suppressed GAAP EPS ($0.42 vs $0.70 non-GAAP), and the efficiency ratio rose to 75.65% (64.65% adjusted).
• Modest loan contraction and asset quality normalization: Loans fell 0.2% QoQ (now $5.33B) and NPAs rose YoY to $11.0M (0.15% of assets), with NCOs at 29 bps annualized (two idiosyncratic C&I credits contributed ~$0.6M).
• Lower noninterest income: Other operating income fell to $2.6M, driven by the securities loss; adjusted OOI would have been $12.6M without the repositioning.

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp Fourth Quarter 2024 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 would now like to turn the call over to Ms. Dayna Matsumoto, Group SVP, Director, Finance and Accounting. Please go ahead.

Dayna Matsumoto (Group SVP and Director of 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 Martinez.

Arnold Martines (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 loan 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 Hawaii 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 L.A. 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 boost to the economy over time, and the state remains committed to supporting Maui and building a stronger island for the future.

Hawaii's statewide 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 (EVP and CFO)

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 pre-tax 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 4 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 a 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, an increase 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 cost 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 a 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 Swell FinTech app 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%-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 17 to shareholders of record on February 28. 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 (EVP and Chief Risk Officer)

Thank you, David. And good morning, everyone. Our bank continues 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-offs trend lower this quarter. Non-performing 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, were just one basis point of total loans, and the level of criticized loans remained 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 was 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 type, and geography, with no outsized exposures in higher-risk segments. I should note that 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 (President and CEO)

Thank you, Ralph. In summary, we had a solid core fourth quarter in a 2024 year. We are excited for the outlook in 2025 and are focused on supporting our clients and the community in 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 (participant)

Thank you. As a reminder, if you'd like to ask a question, please press star and the number one on your telephone keypad. And our first question comes from the line of David Feaster from Raymond James. The line's up.

David Feaster (Analyst)

Hi. Good morning, everybody.

David Morimoto (EVP and CFO)

Hi. Good morning.

Ralph Mesick (EVP and Chief Risk Officer)

Hey, David. Good morning, David.

David Feaster (Analyst)

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 in just being proactive versus increased demand? And just hoping you could touch on sentiment, where you're seeing the most opportunity, and just how you think about organic growth this year.

Arnold Martines (President and CEO)

Yeah. Thanks, David. This is Arnold. Yeah, you're right. We are optimistic about loan growth. We saw a pickup in loan growth in the fourth quarter, and we believe that momentum is going to continue through 2025. Our pipeline for Q1 is very healthy. I think our team has been very proactive in being out there in the market. We've also recently added additional lending team members from within the market that we believe will augment the overall growth plans for this year. So yeah, so David, we're pretty 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 (President and CEO)

We'll 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 NII growth at that pace is definitely an exception to the rule. Where are you seeing opportunity to drive that growth? And then just touching on the competitive landscape for deposits, client reception to reduce deposit costs, just kind of curious what you're seeing on that side.

Arnold Martines (President and CEO)

I'm going to turn the call over to David. David can respond to your question on deposits.

David Morimoto (EVP and CFO)

Hey, David. Good morning. Yeah. We likewise were very pleased with the team's performance on deposits. Being able to grow core deposits while also reducing overall total deposit costs was a great outcome. One thing to note on the fourth quarter, especially in the DDA growth area, we did benefit from some seasonal DDA deposits in the fourth quarter, totaling roughly $40 million. But other than that, it's been a lot of blocking and tackling. The teams have been doing a great job utilizing our market position, and we've been able to move some new relationships to CPB. Bottom line, we're very pleased with the increase in core deposits and the 11 basis points 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 a pretty decent visibility in 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 (EVP and CFO)

Yeah. Yeah. 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 the 42.5-43.5 range. And I think if you run that through for the year, I think it's a slight increase to normalize 2025. But we will grow revenues faster than expenses.

David Feaster (Analyst)

Terrific. Thanks, everybody.

David Morimoto (EVP and CFO)

Thanks, David.

Arnold Martines (President and CEO)

Thank you, David.

Operator (participant)

Thank you. And again, if you'd like to ask a question, please press star and the number one on your telephone keypad. And our next question comes from the line of Andrew Liesch from Piper Sandler. The line's open.

Andrew Liesch (Analyst)

Hey, everyone. Thanks. Hey, everyone. Good morning.

David Morimoto (EVP and CFO)

Hi, Andrew.

Andrew Liesch (Analyst)

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 280 and 330. But with the expansion you just saw and the benefit from the securities repositioning, I mean, do you think you get above 330 here later on this year?

David Morimoto (EVP and CFO)

Yeah, Andrew. It's David. Yeah. We're consciously optimistic that that range will be proven conservative. Yeah. 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. The jumping-off point for the first quarter is quite positive. The December month-to-date NIM was actually 329, loan yield was 495, and total deposit cost was down to 114. Everything's 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 that this is more positive than I've heard elsewhere on loan repricing. Maybe you can talk about what sort of repricing characteristics you have coming up.

David Morimoto (EVP and CFO)

Yeah. Yeah. 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, right? So the fourth quarter new volume yield on the loan portfolio was averaged out to 740.

Andrew Liesch (Analyst)

Got it. Sorry.

David Morimoto (EVP and CFO)

Yeah. Portfolio is down in the 4% range, right, or high 4s. It's accretive.

Andrew Liesch (Analyst)

Got it. Yeah. 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 improvement?

David Morimoto (EVP and CFO)

Yeah. I think while we had two great quarters on net interest income and net interest margin, they were accomplished quite differently, right? The third quarter was largely on the asset side of the balance sheet. The fourth quarter was largely on the liability side of the balance sheet. I think going forward, we'll continue to see net interest margin expansion, but it's likely to be a little more balanced. So we do think we're going to see continued opportunities on the funding side, but we think there's going to be opportunities on the asset side also. And again, the total deposit cost was down to 114 in the month of December.

Andrew Liesch (Analyst)

Yeah. Awesome. Great to hear that. All right. You've covered all my other questions. I'll step back. Thanks.

Arnold Martines (President and CEO)

Thanks, Andrew.

David Morimoto (EVP and CFO)

Thanks, Andrew.

Operator (participant)

Thank you. Our next question comes back to the line of David Feaster from Raymond James. So the line's open.

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. I was 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's continued to run down. Do you think we're through the worst of it? Just kind of curious what you're seeing there too.

Ralph Mesick (EVP and Chief Risk Officer)

David, this is Ralph. The couple of situations that we talked about, 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 some more of the loss that we saw in 2025, but actually, we've come down from that. The peak loss has probably occurred in the fourth quarter of 2023, and even the past due trends are improving, and then when you kind of look at the NPAs, 90% of that is secured by one to four single-family residences.

So, I think they're well margined to ensure eventual principal repayment. And then, I think if we kind of look forward and we look at kind of 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 kind of 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 restructuring securities. You kind of did a little bit of everything, right? And organic growth's coming. I'm just curious your plans as we look forward. What's most interesting to you and plans for deploying capital?

David Morimoto (EVP and CFO)

Hey, 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 our capital priorities, 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 repositioning, and/or M&A. Obviously, we like our current capital flexibility, and we evaluate it on an ongoing basis. So kind of long-winded way of not really addressing your questions directly. But I think you understand that it is somewhat of an ongoing analysis, right, based on the operating environment and the equity market.

David Feaster (Analyst)

For sure. Terrific. Thanks, everybody.

David Morimoto (EVP and CFO)

Thanks, David.

Arnold Martines (President and CEO)

Thank you, David.

Operator (participant)

Thank you. Seeing if there are no more questions in the queue, that concludes our question and answer session. I would now like to turn the call back over to Ms. Dayna Matsumoto for closing remarks.

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.