00:11 Good afternoon, ladies and gentlemen, thank you for standing by, and welcome to the Central Pacific Financial Corp Fourth Quarter 2021 Conference Call. During today's presentation, all parties will be in 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. 00:39 I'd like to turn the call over to Mr. David Morimoto, Chief Financial Officer. Please go ahead.

00:48 Thank you, Charlie. And thank you all for joining us as we review the financial results for the fourth quarter of 2021 for Central Pacific Financial Corp. 00:58 With me this morning are Paul Yonamine, Chairman and Chief Executive Officer; Catherine Ngo, Executive Vice Chair; Arnold Martines, President and Chief Operating Officer; and Anna Hu, Executive Vice President and Chief Credit Officer. We have prepared 2 supplemental slide presentations that provide additional details on our earnings release and are available in the Investor Relations section of our website at www.cpb.bank. 01:32 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 presentations. 01:53 And now I'll turn the call over to our Chairman and CEO, Paul Yonamine.

01:59 Good morning, everyone. As always, we appreciate your interest in Central Pacific Financial Corp. We are beginning the 2022 year with much excitement and optimism. Our financial results for 2021 are among our best ever. In fact, this is the best earnings report since before the great recession. Our recently announced executive leadership promotions went into effect starting January 1, and our teams are energized and ready to continue our digital transformation. 02:33 In addition to our earnings release this morning, we announced the launch of our Banking-as-a-Service strategy, and our team is pleased to share more details today. After an in-depth evaluation of the Banking-as-a-Service market we identified an opportunity to enter this fast-growing market in a way that leverages our strength. To maximize our impact as a Banking-as-a-Service provider we will focus on partnering with select fintech companies to create strategic customized programs resulting in new differentiated financial products. There is strong demand for this type of Banking-as-a-Service offering in the market today. We believe this creates a great opportunity for us to expand our reach beyond Hawaii and will drive future revenue generation to increase the value of the CPF franchise. 03:33 Last quarter we announced the launch of our new product Shaka Checking. It is Hawaii’s first and only digital bank account from a local financial institution. Shaka allowed us the test the product development and launch strategies that we will leverage in our future Mainland Banking-as-a-Service programs. The Shaka account demand has far surpassed our initial expectations. We opened over 33,000 Shaka accounts since its launch in early November. It's obvious, Shaka is serving a key need with a younger tech savvy audience in Hawaii. And has a strong value proposition that includes getting your paycheck up to 2 days early, no ATM fees…

06:04 Thank you, Paul. I'll start by giving an update on the Hawaii environment. We were pleased to have a strong visitor holiday travel season with the daily average air arrivals over 25,000 in November through December. Our statewide unemployment rate continue to decline and was at 6% in November 2021. And while we were not immune to the COVID case spike related to the Omicron variant, our state has been able to manage through it, particularly as our vaccination rate is strong at approximately 75%. We have also not seen any significant slowdown in Hawaii business activity or investment due to Omicron. 06:44 The housing market in Hawaii remains very hot with our median single family home price holding at just over $1 million. Overall, the Hawaii economy remains on track for recovery. Our asset quality continues to be very strong with non-performing assets at just 8 basis points of total assets as of December 31. Additionally, total criticized loans were at about 1.5% of total loans. Finally, during the quarter we had net recoveries of $900,000. 07:17 I'd like to now turn the call over to Arnold Martines, our President and Chief Operating Officer. Arnold?

07:25 Thank you, Catherine. In the fourth quarter, our core loan portfolio increased by $183 million or 4% sequential quarter, which was offset by PPP forgiveness paydowns of $127 million. Year-over-year our core loan portfolio increased by 10%. The core loan growth was broad based across almost all loan categories. 07:51 Our residential mortgage production continue to be very strong, with total production in the fourth quarter of $354 million as several large condominium projects in Honolulu were completed during the quarter with CPB leading to take out financing for the homeowners. 08:10 Total net portfolio growth in residential mortgage and home equity was $146 million in the fourth quarter. For all of 2021, we once again had record residential mortgage production totaling 1.2 billion, putting us near the top of all residential mortgage lenders in Hawaii. 08:33 PPP forgiveness continues to progress well with 99% of the loan balances originated in 2020 and 73% of the balances originated in 2021 forgiven and paid down through December 31. During the fourth quarter, we continued consumer unsecured purchases with our established vendors on an ongoing flow basis. The purchases during the quarter all were -- all were within our established credit limits and had a weighted average FICO score of 750. 09:09 As of December 31, total Mainland consumer unsecured and auto purchase loans were approximately 5.7% of total loans. Both, our Mainland and Hawaii consumer portfolios continue to perform well. Our target range for total Mainland loans, including commercial and consumer is around 15% of total loans. With Hawaii's steady economic recovery we have a healthy loan pipeline in all loan product categories and we are expecting our favorable loan growth trends to continue in 2022. 09:50 On the deposit front, we continue to see strong inflow of deposits with total core deposits increasing by $66 million or 1% sequential quarter growth. On a year-over-year basis, total core deposits increased by $1 billion or 20%. Additionally, our average cost of total deposits in the fourth quarter was just 6 basis points. 10:16 Finally, we plan to build upon our early success with our Shaka digital checking product going into 2022. With this differentiated product and a strong market acceptance we expect account growth to continue. We will be expanding our relationships with the new to CPB Shaka account holders, which represented over 50% of the new accounts and explore further complementary product offerings using the Shaka brand. 10:49 I'll now turn the call over to David Morimoto, our Chief Financial Officer. David?

10:56 Thank you, Arnold. Net income for the fourth quarter was $22.3 million or $0.80 per diluted share, an increase of $1.5 million or $0.06 per diluted share from the prior quarter. Return on average assets in the fourth quarter was 1.22% and return on average equity was 16.05%. For the full 2021 year, net income was $79.9 million or $2.83 per diluted share. This compares to $37.3 million or $1.32 per diluted share in 2020. 11:38 Net interest income for the fourth quarter was $53.1 million, which decreased by $3 million from the prior quarter due to less PPP fee income as the forgiveness process wines down. Net interest income include a $4.7 million in PPP net interest income and net loan fees compared to $8.6 million in the prior quarter. At December 31, unearned net PPP fees was $3.5 million. 12:10 The net interest margin decreased to 3.08% in the fourth quarter compared to 3.31% in the prior quarter. The NIM normalized for PPP was 2.87% in the third quarter compared -- I'm sorry, in the fourth quarter compared to 2.96% in the prior quarter. The normalized NIM decrease was driven by lower loan yields due to market pricing competition. While we expect market pricing for loans to remain competitive, our new loan origination yield in the fourth quarter approximated our overall loan portfolio yield and our balance sheet is slightly asset sensitive. 12:54 Fourth quarter other operating income increased to $11.6 million from $10.3 million in the prior quarter. The increase was driven by higher mortgage banking income and higher bank-owned life insurance income. Other operating expense for the fourth quarter was $42.2 million, which included non-recurring expenses of $1.1 million of severance payments, $0.4 million branch consolidation costs and $0.3 million in promotion expenses related to…

15:58 Thanks, David. Central Pacific had a solid fourth quarter and 2021 year. Looking forward, we are very excited about the key items we announced today, which we believe will position us extremely well and enables us to deliver greater shareholder value in the near and long term. 16:18 In summary, we had record 2021 earnings. We increased our quarterly cash dividend by 4%. We will continue share repurchases under our new $30 million board-approved authorization. We launched our banking as a service strategy, which started with our successful Shaka digital checking launch in Hawaii, and upcoming soon we will expand the Mainland with our Swell fintech investment as well as other selected partners. 16:50 Further, we remain committed to providing support to our employees, customers and the community as we continue to progress through the economic recovery. On behalf of our management team and employees, thank you for your continued support and confidence in our organization. 17:07 At this time, we will be happy to address any questions you may have. Back to you, Charlie. Thank you.

17:18 Our first question comes from Andrew Liesch of Piper Sandler. Your line is open. Please go ahead.

17:37 Hi, good morning everyone. Thanks for taking the questions. I got a question on -- some questions on the Banking-as-a-Service initiative. Like the long-term plan this can provide for you. But I'm just curious, what the revenue-sharing agreement that you discussed, is this based on loan growth, deposit growth, a combination of both? How should we be thinking about how this could benefit CPF's bottom line?

18:03 Yeah. Thank you. This is Paul Yonamine. It is both, Andrew. And we have it structured between the 3 organizations, between Swell, Elevate and CPF. And as we iterate with our launch this year and we have further learnings, there could be certain adjustments to that revenue sharing arrangement. And we will be glad to share more details on that as we get further along in the year.

18:37 Certainly. Look forward to hearing that. Then I guess the loss sharing on -- or the credit protection that Elevate is providing us, just explain that a little bit more. They are in the first spot position, how -- and obviously, you need to go into too many details right now. Is it still pretty early stages, but how is that broadly structured?

19:00 Sure. This is Paul again. So first, before I get into that I really want to commend Anna Hu, our Chief Credit Officer. CPF has a history of keeping a very pristine loan portfolio. I think we know how to really take a hard look at credit. And in some of those best practices that gets baked in to this Banking-as-a-Service strategy. Again, among the 3 organizations we have a very solid credit management structure. And for CPF as the bank sponsor to this fintech operation, we will be in a position to dictate the credit guidelines and we'll be monitoring that very closely, definitely weekly, if not, even daily. 19:53 Be rest assured that the way we have it structured in terms of managing risk, I believe we have 3 lines of defense. We have what we do here at CPF already, but also with Elevate, that is a proven fintech lender with over 20 years of experience. And also Swell, which is led by our former Chief Strategy Officer and Chief Marketing Officer, Kevin Dahlstrom. 20:23 I might just add that one of the -- one of the core strengths that we have on this particular bank sponsorship is the relationships that we have with the other 2 organizations. Again, Kevin leading, being the CEO of Swell and also at Elevate where the Chief Strategy Officer of Elevate is a Board of Directors for CPF, and our former Chairman, my predecessor John Dean also serves on the Board of Elevate. So relationships at the end of the day is what it's going to harvest the real benefit of even a pure digital play.

21:08 That's great. Thank you for all that detail. I was not aware of that. And just one question for you, David. Just you mentioned the balance sheet being slightly asset sensitive. Could you go into a little bit more details on that? You guys have such a low cost key deposit base that I would think going to be a little bit more than slightly asset sensitive. So what are the different factors that play there?

21:33 Yeah. Hey, Andrew. Yeah, they are slightly asset sensitive. As you're aware, Hawaii banks tend to have a larger concentration in residential mortgage or loans under balance sheet and say Mainland banks, and that's just a function of the markets. It’s pretty commonplace in Hawaii and those loans tend to have fixed rates. So, similar to the other local banks we have 50% to 60% of our loan portfolio is fixed rate. But it is funded by a very strong, large and stable core deposit base. 22:09 So our modeling -- our current modeling in, say, plus 100 rate environment has net interest income increasing about 5%. That modeling currently contemplates 3 tightenings in 2022 with the first occurring in March. And our core deposit rate betas on average are about 15% and that's based on historical experience.

22:41 Got it. That's very helpful. Thanks for taking all the questions today. I really appreciate it.

22:48 Thanks, Andrew.

22:52 Our next question comes from David Feaster of Raymond James. Your line is open. Please go ahead.

22:59 Hey, good morning everybody. I just wanted to -- maybe just following up on that margin question. Appreciate that sensitivity. Just kind of reading maybe between the lines on your prepared remarks, it kind of feels like we are about at the trough? Do you think we have dropped or do you think that the first quarter is going to be the low point and then we can start expanding it, hopefully we start getting rising rates and an improving earning asset mix. Just some of the growth -- given the growth initiatives that you've talked about?

23:33 Yeah, David. The margin guidance for the next couple of quarters is probably 285 to 295 on a core basis. So it is where we believe that net interest margin on a core basis has troughed. As mentioned in the prepared remarks, the new volume loan yields approximate the portfolio yield, likewise, on the investment portfolio side. So that’s the expectation on net interest margin.

24:08 Okay. And then it's great to see the early success that you guys have had from the Shaka digital checking account initiative. Could you just maybe give us some insights into how much deposit growth you've generated from those 33,000 clients so far that you on-boarded? And just how you think about growth going forward? And maybe where you're seeing some early success on the cross selling front?

24:33 Yeah. David, this is Arnold. Yes, so we're pretty pleased with the success of the Shaka product and the launch. As you know, we just launched that in November of last year. So it's probably a little early for us to talk about the growth, the actual balance growth. We probably will talk about that in future quarters as the account start to mature. But I can tell you that, we are focused on cross-sell and engaging and activating these new customers. 25:10 As I mentioned in my opening remarks, more than 50% of the accounts opened our new customers to CPB. So we're pretty excited and more to come on -- reporting on our success here in future quarters.

25:28 So it sounds like that the $123 million of deposit growth you saw, we're only starting to see limited impact of that growth thus far, we should expect kind of deposit growth to remain relatively strong through ’22?

25:46 That's correct. In fact, on the subject of deposit growth, I'll just mention that, we are looking as far as full-year guidance for you at the mid-single digit for growth in deposits. And we feel pretty good about that. We think there'll be some outflows as the economies continue to take traction and recover. We'll have -- our customers have confidence in being able to span again. But with that said, with the things that we're doing, Shaka launch, but even the rebrand last year and just the vibe that we created, we feel pretty confident that we'll start grow, we'll continue to see nice deposit growth this year.

26:33 Okay. And then, could you just maybe talk a bit about your outlook for expenses as we go into ’22? We hear a lot about inflationary pressures just weighing on expenses for the industry, you got several tech initiatives, obviously, ongoing. But it seems like maybe a lot of the expenses are already in the run rate, just given what we did last year. And I'm just curious, how you think about expenses as we head into ’22? What good core run rate inflationary rate might be? Just cognizant of a seasonally higher first quarter as well.

27:05 Yeah. Hey, David. It's David. Yeah. I think your commentary was right on point. As we've stated previously, we started the investments in our initiatives last year. Actually, it was the prior year, but it did ramp up last year. And that was designed, because we knew we had the tailwinds of PPP income and credit provisioning. So, because we had those tailwinds we started investing last year. So the outlook for expenses now is roughly flat. I would say it's probably $40 million to $42 million per quarter is the guide. So it's like a 0% to plus 2% year-over-year increase is what we're looking at for 2022.

28:03 Okay. That's helpful. Thanks everybody.

28:07 Thanks, David.

28:10 Our next question comes from Laurie Hunsicker of Compass Point. Your line is open. Please go ahead.

28:25 Hi. Thanks. Good morning. Just sticking with where David was on expenses. And so obviously netting out your one-time items. I can see how you're at that $40 million to $42 million expense run rate. Can you just help us in terms of timing on when you're 3 branches are planning to close in 2022?

28:51 Sure. Hey, Laurie. It's David. So under the current plan, and obviously things can change, but under the current plan we're looking at 2 consolidations in the second quarter. Though those branches tend to be smaller branches, so the one-time expense there is roughly $300,000 pre-tax and prospective annual savings is about $500,000. And then the third consolidation is currently planned in the third quarter. There we have one-time expense of $200,000, prospective annual savings of $400,000. So we're looking at total annual savings about $900,000 from the 2022 consolidations on an annual run rate basis.

29:43 Okay. And how should we be thinking about core expense growth for 2023?

29:54 Yeah. Laurie, I would say we're in that 160, 165 on an annual basis in 2022. And then 2023 is a little ways out, but I would say we're targeting, like in the 2% to 3% range. Annual growth, which is really inflation, but there is so much uncertainty right now with regard to COVID, market interest rates, excess balance sheet liquidity and our Banking-as-a-Service strategy. So there is a lot of moving parts to the expense line. 30:32 So I think the bottom line message on expenses is, we plan to be nimble as we've been throughout this -- the last several years and we're going to adjust our expenses based on revenue opportunities. So if there is revenue -- if there is great revenue opportunities, Banking-as-a-Service strategy gain traction. We will take advantage of it and we will increase our expenses to take advantage of that of it has commensurate revenue opportunities.

31:06 Okay. That makes sense. That's a great numbers. Thanks for the color on that. Arnold, I just wanted to go back to something you said. You said consumer loans you were targeting 15% of your buck, when is your thought on when consumer loan get to that level? You're currently at 12%, how should we be thinking about that?

31:27 Hi. Good morning, Laurie. Actually when I said 15% it includes both commercial and consumer. So it's consumer and commercial 15% as a percentage of our total loan portfolio. So right now, on the consumer side for the Mainland, we were at about 5.7% and we will probably be in that 6% range I would say. I mean, I don't see us growing more than that in the near term.

32:03 Got it. Okay. And then, I guess -- I just -- and this is for all of you. I guess if you can help us think a little bit about the Swell Elevates fintech. Can you help us think how much you plan to add in loans over the duration of 2022 as you're obviously just ramping up and more importantly, 2023? And what the coupons are looking like on those? And anything around FICO?

32:30 Thanks, Laurie. I'm going to start on that. This is Paul. And so, as you mentioned as well, in 2022 we will be ramping things up, we will be -- there'll be an iteration process this year as we review customer acquisition cost, yields, default rates. We will be figuring out how deeply to step on the gas pedal on this. And that's one of the real benefits of the relationship with Swell and Elevate is that, we have that degree of flexibility as we look at risk going forward. 33:13 I can tell you that Swell will become a good part of our future growth. Naturally, we continue to see great opportunities here locally. And hopefully when Japan opens up we'll see many opportunities with Japanese investors coming into Hawaii again. But in terms of this digital play, working with Elevate, again, a very proven fintech lender with over 20 years of experience and also with Swell, led by an individual who had much to do with our digital strategy here in Hawaii and our ad marketing campaign that I think this is a good group that will be driving future potential for us. 34:03 But you know, Laurie. At this time, it's really difficult for me to provide you with any specifics on number of loan originations and things during 2023. But once again, I do believe that our initiative with Swell will become a key part of our future growth.

34:25 Okay. And so Elevate is subprime, are you intending to do subprime unsecured . A - Paul Yonamine 34:35 No, we're not I'm sorry.

34:39 So what is the line in the sand of how low you're going to go on FICO? Can you help us understand that?

34:47 Right. So, our focus right now, Laurie, is to look at what we call near prime. And -- but mind you that, Elevate being in the subprime space for roughly 20 years, they have considerable experience and IP in terms of assessing. They have automated the process of assessing the credit worthiness of potential prospects. And so, we will be leveraging a lot on Elevate's current lending management system. It's already built. There is nothing that we need to rebuild. And actually, that's another great feature of this current alliance that we have. And why we're not showing great deal of more expense on our books today, because it really is the coming together of existing technologies and business processes.

35:49 And if so how -- sorry, what is your definition of near prime? How do you think about that on the FICO?

35:56 David, what was the FICO score?

35:58 Yeah. Laurie, it's in that 650 area. But what I will say, Laurie, and we will be happy to share more details as we get closer to launch and as we get to launch of Swell. But there is a desire to keep some of this behind the curtain for now. But what I will say with regard to near prime is, we're not going with necessarily just a FICO definition of near prime. As you're well aware, a lot of the online digital lenders today have multiple and sometimes hundreds of different inputs into their credit models and FICO being one of the 100 inputs. 36:52 And so, while it is an input, it is not the only input that we'll rely on. And we're going to be focused on more of the digital lending experience of Elevate.

37:06 Okay. Great. And then just last question

37:08 Paul again, Laurie. If I could just add, again, the near prime segment in the Continental US is probably the most underserved segment in terms of credit today. So we've done a fair amount of analysis. And so as David has covered, it doesn't just boil down the FICO scores. And this is really what we're counting on with Elevate with their 20 years of experience in how to identify and segment that near prime group.

37:43 Okay. Sorry, just 2 more questions. What is your target launch date then for Swell? When do we start to see these add to your balance sheet? What’s your best guess?

37:53 Laurie, as we've disclosed, we're targeting mid-2022. So I'd say 6:30.

38:03 Okay. Great. And then lastly, can you just share with us a little bit about Kevin. I'm just -- I'm not familiar with Kevin Dahlstrom. Just any high-level thoughts that you can share with us will be good. Thank you.

38:14 All right. Thanks, Laurie. So Kevin was with Central Pacific Financial Corp for 2 years. We are very fortunate to bring them on board after a great stent with Mr. Cooper in the Continental US, one of the largest online digital mortgage lenders. And prior to that -- and at Mr. Cooper he was the Chief Marketing Officer there, very involved in the rebranding a lot of the social influencer strategy and basically driving their digital marketing initiative. Prior to that actually Kevin worked for Elevate as well, where he was also the Chief Marketing Officer. And again, this goes back to this strength that we have on relationships. We all know each other, which I find extremely important as becoming a bank sponsor. I think it's a matter of fact, it's a critical success factor as banks sponsor fintech’s that they have that type of relationship that's built -- that's been built up over the years. 39:27 Central Pacific Financial Corp, if you -- and many thanks to all of the people who follow us, but we have had a good history of hitting our targets this past 3 years, especially in the digital arena. Kevin was very involved in the final implementation of our new mobile and online platform, which is now rated 4.8 on Apple and Android. And I believe could be the highest rated platform now in the state of Hawaii. And we're quite proud about that. It took a lot of work, but we executed and we got it done. 40:07 And so it's a lot of that discipline that Kevin brings to the Swell organization along with his marketing capabilities. And we're very -- we're looking very positively to the future as a result of that.

40:24 Great. Thanks. I'll leave it there.

40:29 There are no further questions at this time. So I'll turn the call back over to Paul Yonamine, Chairman and CEO for closing remarks.

40:39 Great. Thank you very much for participating in our earnings call for the fourth quarter of 2021. We look forward to future opportunities to update you on our progress. Thank you.

40:55 This concludes today's call. Thank you for joining. You may now disconnect your lines.