Central Pacific Financial Corp. (CPF) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to Central Pacific Financial Corp First Quarter 2025 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 Ms. Dayna Matsumoto, EVP, Chief Financial Officer. Please go ahead.

Thank you, Kate, and thank you all for joining us as we review the financial results of the first quarter of 2025 for Central Pacific Financial Corp. With me this morning are Arnold Martines, Chairman, President and Chief Executive Officer; David Morimoto, Vice Chairman and Chief Operating 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 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. Before I provide a market update for the State of Hawaii, and we dive into our results, let me start with sharing our recent leadership appointments that went into effect on March 1. David Morimoto has been appointed as Vice Chairman and Chief Operating Officer. David has been with us for over 30 years and has broad extensive experience in the banking industry. In his new role, David will oversee all frontline revenue areas. With that change, Dayna Matsumoto has been appointed Executive Vice President and Chief Financial Officer, taking David's previous role. Dayna has been with us for nearly 20 years with prior leadership in our treasury and controller areas. These planned transitions recognize the valuable contributions David and Dayna have made while aligning our executive team to the bank's future strategic, financial and business objectives. Our financial Q1 results were solid across the board and continue to trend favorably. We achieved meaningful NIM and net interest income expansion. We maintained strong capital, liquidity and asset quality, which positions us well for any economic challenges that may occur in the future. All of these results reflect our focus on optimizing our balance sheet and executing on our strategies. We know we are in a time of market and economic uncertainty, we are confident that we will be able to effectively navigate through the changes that impact our industry and our customers and remain focused on delivering strong results regardless of external factors. The Hawaii construction industry continues to grow and is being led by residential and government construction. The total value of construction in 2024 for the first 10 months of the year increased an impressive 20.3% compared to the same period in 2023 and is forecasted to exceed $14 billion, a substantial increase from the prior year's high of $11.8 billion. On the tourism front, through February, average daily census statewide visitor arrivals dropped 1.9% from the prior year and down 4.3% from 2019. Total visitor spending per day was up 6.3% from the same period the prior year and up 20.5% from 2019. The recovery of visitors from Japan remains slow and has continued to be offset by the strength of domestic travel. Travel to Maui showed signs of improvement year-over-year with an increase of 13.3% for average daily census visitor arrivals, but is still recovering from the 2023 Maui wildfires. While statewide seasonally adjusted unemployment rate remained very low at 9% and continued to outperform unemployment rate of 4.2%. In the area of Hawaii real estate, the market remained strong overall in the first quarter despite some mixed trends. Single-family home prices on Oahu reached a new record high in February and remained at similar levels in March at $1.16 million median sales price. Home sales for the month of March dipped 10.4% for single-family homes, but went up 7.3% for condos compared to the same month of the prior year. Active inventory of housing listings is starting to build, which bodes well for the industry and state. The state's economy has proven to be resilient in the past and was forecasted earlier this year to grow modestly. However, we continue to monitor the potential impacts from the policies of the current administration and are prepared to dedicate any uncertainties in the operating environment. I'll now turn the call over to David.

Thank you, Arnaud. Starting off the year, I'm excited to share CPB once again was honored by the Small Business Administration as the SBA Lender of the Year Category 2, marking our 16th year receiving this award. CPB was founded on the principle of helping all of Hawaiian people achieve their financial aspirations, and we continue to honor our [ beginning ] with a focus on small businesses. I am proud of our employees who are committed to helping our customers succeed each and every day. Driving revenue growth is a key focus for us, and we remain cautiously optimistic for the remainder of 2025. We will continue to focus on growing our CPB market share in Hawaii and supplementing that with targeted lending opportunities in Mainland markets. We have a strong team of relationship bankers and continue to successfully add talent that will help us drive revenue growth in Hawaii and the Mainland. In the first quarter, our loan portfolio increased by $1.7 million sequential quarter which was the first quarterly increase in 2 years. First quarter growth was led by Mainland and Hawaii commercial mortgage and Hawaii construction lending. Our team continues to concentrate on building a healthy loan pipeline and serving our clients' needs as they continue to navigate the current market environment. We are optimistic that net loan growth will continue to pick up this year. However, we remain nimble as we learn how the macro environment impacts national and local economies. Our total deposits at the end of the first quarter declined by $48 million from the prior quarter. On an average balance basis, total deposits increased by [ $14 ] million with an increase in average non-time deposits of $78 million quarter-over-quarter. Despite some volatility impacting period ends, overall, we continue to grow our deposit relationship and average balances. I'll now turn the call over to Dayna, who will provide an update on our financials. Dayna?

Thanks, David. Turning to our earnings results, we are pleased to share that our performance metrics continue to trend positively and towards our financial targets. Net income for the first quarter was $17.8 million or $0.65 per diluted share. Return on average assets was 0.96% and return on average equity was 13.04%. Our efficiency ratio was 61.2%, which is the best we posted since the fourth quarter of 2022. Net interest income for the first quarter was $57.7 million, which increased by $1.9 million or 3.5% from the prior quarter. Net interest margin was 3.31% in the first quarter, up 14 basis points on a sequential quarter basis. Our NIM has expanded every quarter for the last 4 quarters, which reflects our continued disciplined approach to pricing and balance sheet management. The net interest income and NIM expansions were primarily driven by a reduction in our funding cost from deposits combined with a higher average yield earned on investment securities. Total cost of deposits decreased by 13 basis points from the prior quarter to 1.08% in the first quarter. The higher average yield on investment securities can be attributed to our investment portfolio repositioning completed last quarter. Total other operating income was $11.1 million, and total other operating expense was $42.1 million in the first quarter. Due to market volatility, our BOLI income and our deferred compensation expenses decreased during the quarter. To the extent market volatility continues, we'll continue to have some variability in lease line items. Additionally, as we continue our focus on efficiencies, we are in the process of consolidating our office space into our main headquarters in downtown Honolulu. With this move, we anticipate that we will exit our current operation center building and recognize a onetime pretax write-off of $2 million to $2.5 million in the second or third quarter. Going forward, we expect to realize total annual savings from reduced lease operating and maintenance expenses of approximately $1 million. Our effective tax rate was 21.2% in the first quarter, which is in the range that we communicated on our last call and consistent with historical trends. During the first quarter, we repurchased about 77,000 shares of common stock at a total cost of $2.1 million or $27.09 per share. Additionally, in the second quarter to date through April 16, we have repurchased approximately 86,000 shares at an average price of $24.70 per share. Finally, our Board of Directors declared a quarterly cash dividend of $0.27 per share, which will be payable on June 16 to shareholders of record on May 30. I'll now turn the call over to Ralph.

Thank you, Dayna. Our asset quality remained healthy in the first quarter. Net charge-offs were $2.6 million or 20 basis points annualized on average loans. This represents a 9 basis point decrease from the prior quarter. The decrease came from lower charge-offs on the consumer and C&I loans. Nonperforming assets were $11.1 million or 15 basis points of total assets at quarter end, flat from the prior quarter. Criticized loans also remain near cyclical low levels at 82 basis points of total loans, up 20 basis points quarter-on-quarter. Past due loans 90-plus days were flat compared to the prior quarter, just 1 basis point of total loans. Our allowance for credit loss was $60.5 million or 1.13% of outstanding loans, up 2 basis points. The provision expense was $4.2 million. In the quarter, we added $3.9 million to the allowance and an additional $300,000 to the reserve for unfunded commitments. The higher allowance was primarily driven by a more conservative macroeconomic outlook. Supporting this allowance, we also maintain a strong level of capital. Total risk-based capital was 15.6% at the end of the first quarter. At these levels, the bank can readily absorb the financial impacts resulting from a period of prolonged stress. Looking ahead, we'll continue to rely on a well-tested management approach that considers risks through a cycle anticipates a range of outcomes and build a margin of safety to deal with adverse conditions. With that, let me turn the call back to Arnold.

Thank you, Ralph. In summary, we had a solid first quarter to kick off 2025. We are focused on supporting our clients and the community in driving value to our shareholders. We are prepared to navigate through these uncertain times, and we thank all of 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] Your first question comes from the line of David Feaster with Raymond James.

Obviously, there's a lot of volatility and uncertainty in the market today. I wanted to just start on the loan growth side. I mean, obviously, again, there's a lot of chaos out there. Curious how your clients are responding to that. How is the pipeline trending? And just -- it sounds like you're optimistic about growth. Just maybe where do you see most opportunities to drive growth?

David, do you want to take that call? I mean that question?

Yes, sure. David, yes, obviously, there is a lot of uncertainty. We're in touch with all of our large borrowers and potential borrowers in our pipeline. And while there remains a lot of volatility, certain transactions are likely to get postponed. We remain cautiously optimistic on future. And we are reiterating our full year loan guidance of low to mid-single-digit loan growth for the full year. That growth, David -- I'm sorry, David, that growth is likely to be focused in the commercial area. So it's going to be C&I and commercial mortgage and also construction. Those are probably the growth areas for the next several quarters.

Okay. That's terrific. And then I know this is a hard question to answer. But look, I'm just curious how you think about potential impacts on your clients from these -- the trade wars, the tariffs in those -- as you dig into the book, what segments are you expecting to be most impacted? And just kind of how are you approaching this at this point? I mean it's -- maybe it's kind of a wait-and-see approach, but I'm just kind of curious your thoughts.

Ralph, you want to take that question?

Sure. David, I think the outlook really has shifted this quarter. But when we look at our portfolio, talking with -- and first off, looking at industries that probably are more impacted, they probably represent about 10% of our total loan book. And we're talking about accommodation, restaurant, wholesale and these retail trades. And I think from our perspective today, we believe that our customers are going to be able to deal with some level of short-term turbulence in the marketplace. We know the policy actions. These are discretionary actions, and we do believe that they're not intended to damage the economy. So we think that there's going to be some turbulence in the short term. But we believe that our customers are going to be able to sort of deal with that. And I think over the longer term, we do have a playbook for stress events, and we've kind of pulled out that playbook. We've looked at the portfolio. We're pretty confident we can deal with a large level of stress. And we are having these conversations with clients, and we will calibrate to events as they develop.

Okay. That's helpful. And then last one for me. Deposit performance, you guys have done a great job on the deposit side. Could you touch on maybe the competitive landscape for funding on the islands? Your ability to drive core deposit growth going forward? And I mean, look, you're sitting here at just barely over 100 basis points of deposit costs. I mean, is there much deposit cost leverage to drive that margin expansion? Or is it primarily going to be loan growth and repricing there that's going to be driving it?

Dayna can answer that question.

David, thanks for the question. On the deposit side, I'd say we're very pleased with our performance. Our average balances were up for the quarter with a favorable mix shift as we grew average core deposits, including demand deposits, while we had some CDs runoff. Our teams have been doing a really good job and remain very focused on growing core deposits. As far as the costs, we're also pleased with the deposit cost trend down. And my expectation is that our funding costs should continue to trend down, but more gradually if the Fed is on hold. The market for pricing, deposit pricing, [ care ] continues to be very rational. Our deposit pricing betas have been generally as expected. And I'd say that our pricing strategies and continued discipline have worked very well.

Your next question comes from the line of Andrew Liesch with Piper Sandler.

Just sticking on the margin here. I'm curious if you had what the margin was in the month of March.

Dayna?

Andrew, yes, for the month of March, our margin was 3.37%.

Okay. So I mean you're starting off here in the second quarter, 6 basis points higher. Is that a good jumping off point? Or are there some other puts and takes that may make that not generate that much expansion.

Yes. Andrew, I'd say, overall, we're quite pleased with our continued NIM extension, which was driven by our lowering our funding costs, the investment securities repositioning as well as overall favorable mix shifts and positive fixed asset repricing. Going forward, our NIM, I would expect it to continue to expand. Our guidance is for an increase of approximately 4 to 7 basis points next quarter. This assumes that the Fed is on hold in May, and we continue to have a relatively flat yield curve. To the extent we get additional Fed cuts later this year, those will benefit our NIM further as our deposits still have some downward repricing ability. And then as always, a steeper yield curve will be helpful as well.

Certainly. Do you have handy what the average yield on new loan production was during the quarter?

Yes, I do. It was about 7.2% is the new loan yield in the first quarter.

Got it. Very helpful. And then obviously, you have like a couple of onetime items, the market adjustments that a BOLI and compensation costs. But would you expect that those line items kind of rightsize themselves to be in line with your prior guidance ahead of -- on the expense side, the cost saves from the rationalization of the real estate?

Yes, Andrew. So that's correct. We had some volatility this quarter with the BOLI and our deferred compensation expense -- and -- but on the expense side, overall, our objective continues to be driving positive operating leverage, and we believe we'll be successful at that this year. So our guidance remains the same for the near term. So our quarterly other operating expense guide continues to be $42.5 million to $43.5 million per quarter.

Got it. And the cost saves from that real estate rationalization. Are those going to be reinvested into the franchise somewhere? Or should that result in a slightly lower run rate?

We are continuing to make some investments in our people and our technology. And those things will create efficiencies throughout our processes. So with that said, we may see some expenses rise slightly in the short term, and that would be offsetting the savings from the office consolidation.

[Operator Instructions] Your next question comes from the line of David Feaster with Raymond James.

I just wanted to follow up maybe on the capital side. I mean, we bought some stock back in the first quarter. Obviously, you've been active here in the second quarter, you guys kind of bottomed it, you guys have done a great job. Curious just how you think about capital priorities today? I mean, obviously, the stock is still attractive, potential securities restructurings. Just kind of curious, how do you think about the opportunities that lie ahead.

David, Overall, our capital position continues to be strong and healthy, and we have flexibility. As we noted previously, we are on the higher end of our target ranges for our capital ratios. So we are evaluating how we can best optimize capital and deploy capital, while continuing to monitor the economic outlook and adjusting as appropriate. So our capital priorities include continuing to pay our quarterly cash dividend with about a 40% payout ratio. After that, we plan to use capital for organic balance sheet growth and share repurchases also continue to make sense. As we noted, we have resumed share repurchases. And with the overall market being down, we view it as an opportunity. But with that said, we'll continue to evaluate the operating environment, especially with the recent heightened uncertainty and volatility, and we will make our capital decisions based on the outlook.

I will turn the call back over to Dayna Matsumoto for closing remarks.

Thank you very much for participating in our earnings call for the first quarter of 2025. We look forward to sharing our progress with you next quarter. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.