Central Pacific Financial (CPF) Q2 2026 earnings call transcript

I'd like to turn the call over to Mr. Gerald Robago, Senior Strategic Financial Officer. Please go ahead. Thank you, Erica, and thank you all for joining us today as we review Central Pacific Financial Corp's financial results of the second quarter of 2026. Joining me this morning are Arnold Martinez, Chairman, President, and Chief Executive Officer, David Morimoto, Vice Chair, and Chief Operating Officer, Ralph Misic, Vice Chair, and Dana Matsumoto, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to remind everyone that a copy of our earnings release and supplemental slides are available on our investor relations website at ir. cpp. bank.

During today's call, management may make forward-looking statements. These statements are based on current expectations and assumptions and are subject to risk and uncertainties that could cause actual results to differ materially. For a complete discussion of these risks related to our forward-looking statements, please refer to slide two of our presentation.

With that, I will now turn the call over to our Chairman, President, and CEO, Arnold Martinez.

Thank you, Gerald, and Aloha to everyone joining us today. We are pleased to report on a strong second quarter. We maintain solid profitability and continue to manage our balance sheet with discipline. We grew average earning assets, maintained a stable car-funding base, and expanded our net interest margin. Our strategic focus remains on being a high-performing bank that delivers sustainable growing returns.

In the first half of the year, we continue to build momentum to drive results that positions us well for the future. Our success reflects the strength of our relationship-focused banking model. We continue to serve Hawaii's people, small businesses, and local communities with a focus on long-term relationships, exceptional customer experiences, and discipline execution. We were honored to be the highest-ranked company in Hawaii on America's Best Company's 2026 list, published by Time magazine, and also recognized by Forbes as the best banking Hawaii for the third consecutive year.

These recognitions reflect the trust of our customers and the commitment of our employees. It is meaningful because it ties directly to our founding mission and the relationships we work to earn every day.

We continue to invest in our business in the areas of talent and technology, including automation and data, that supports future operating efficiencies. At the same time, we are also executing on discipline expense management and thoughtful allocation of resources across the organization.

Overall, we remain focused on continuing to generate positive operating leverage. Turning to the broader environment, Hawaii's economy remains resilient. The visitor industry continues to be steady, and we have recently seen promising increases in visitors from the U. S. East and Japan markets. Unemployment remains low at just 2.5%. Construction employment has increased, and government contract awards continue to rise supported by public projects and military spending.

We continue to monitor external risks, including the geopolitical conflict and its impact on oil prices and inflation. Our customers are resilient, and we have not seen any significant impacts. But we will remain vigilant and committed to supporting our customers and community.

With that, I will turn the call over to Dana.

Thank you, Arnott. For the second quarter, net income was $20.8 million, or $0.80 per diluted share, which is a meaningful 19% increase from the year ago period on a diluted share basis. Return on average assets was 1.12%, and return on average equity was 13.94%. Net interest income totaled $62.8 million, and net interest margin increased by 4 basis points to 3.57%. We were successful in growing average loan and securities balances, while also increasing earning asset yields.

At the same time, funding costs remain stable. Our strong net interest margin provides us with flexibility as we continue to execute on our strategies and navigate market dynamics. With that said, we generally expect our NIMM to remain relatively steady to a slight rise in the second half of the year. Backbook asset re-pricing remains beneficial, but has moderated, and we expect our deposit costs to remain fairly steady, assuming the Fed is on hold.

Our guidance for full-year net interest income remains at a 4 to 6% increase over the prior year. Our balance sheet sensitivity is relatively neutral to slightly asset-sensitive, therefore our NII and NIMM is well positioned for a potential Fed rate hike, although we do not expect it to have a significant impact this year. Total other operating income was $14.6 million, up $3 million from the prior quarter.

The increase was primarily driven by boldy income that is tied to market performance. Excluding that item or core fee income lines are relatively stable, quarter over quarter. Total other operating expense was $46.2 million, up $2.5 million. The increase was primarily driven by higher salaries and employee benefits due to higher deferred compensation expense, also related to the strong market performance.

For the full year, we expect our other operating expense to grow by 2.5 to 3.5%, no change from what we've shared previously. We paid a second quarter dividend of $0.29 per share, and with our continued strong earnings, our board declared a third quarter dividend of $0.30 per share, an increase of 3.4%. We repurchased approximately 322,000 shares for a total of $11.3 million.

We have $33.2 million of remaining available under our share repurchase program as of quarter end. We continue to have a very healthy capital position and remain committed to deploying capital in ways that enhance long-term value. This includes supporting organic growth, maintaining a strong balance sheet, returning capital through dividends and share repurchases, and preserving flexibility to respond to market opportunities. I will now turn the call over to David.

Thank you, Dana. Total loans ended the quarter relatively flat at $5.3 billion, with average loan balances increasing quarter over quarter by $33 million.

Second quarter loan growth was impacted due to several loan closings moving to the third quarter, coupled with expected CRE loan payoffs.

Second quarter loan production by type was well diversified among commercial and retail lending, and the majority of the production came from Hawaii.

Looking forward, we continue to see opportunities and select mail-in markets and expect greater funding in the second half of the year.

Average loan portfolio yield in the second quarter was 4.96% compared to 4.93% in the prior quarter. The increase in yield was primarily due to higher new production loan yields versus runoff yields.

Total deposits remained largely unchanged at $6.7 billion. Quarter deposits represent over 90% of total deposits with continued growth in non-interest bearing and relationship based accounts.

Total deposit costs remain unchanged quarter over quarter at an attractive 90 basis point. Looking ahead, we continue to expect loan and deposit growth in the low single digit range for the full year. As we move into the second half of 2026, we are prioritizing discipline growth and balance sheet management along with a consistent sales focus on new customer acquisition and increasing primary relationships.

With that, I'll turn the call over to Ralph.

Thank you, David. Asset quality was strong at quarter end. Non-performing assets were $16.5 million for 22 basis points of total assets, while net chargeoffs were 20 basis points of average loans. Past due trends are stable, and we are not seeing evidence of broad-based weakness across the portfolio. Criticized loans increased to 234 basis points of total loans, driven primarily by a small number of Hawaii-based credits.

These loans are well-collateralized and actively managed. Our focus remains on disciplined underwriting, risk-adjusted pricing, and maintaining portfolio diversification. Revision expense total $4.4 million, including $3.3 million added to the allowance and $1.1 million added to the reserve for unfunded commitments. The increase was driven primarily by more conservative economic assumptions and commitment growth rather than deterioration in the loan portfolio. As a result, the allowance increased slightly to $60.6 million, or 1.14% of loans compared to 1.13% in the first quarter.

The strength of the balance sheet combined with strong credit performance and reserve levels continues to support a robust capital position. We entered the quarter with a 12.7% CET1 ratio and a 14.8% total risk-based capital ratio, providing flexibility to support growth. Maintained strong reserves invest prudently across the balance sheet and continue returning capital to shareholders.

Overall, we remain constructive as our balance sheet is well-positioned, loss reserves are appropriate, and capital levels providing cushion to absorb any uncertainty in the environment.

I'll turn things over to Arnold now for some closing comments.

Thank you, Ralph. To summarize, the second quarter was a strong quarter. We delivered solid earnings, maintained credit quality, thoughtfully managed loans and deposits growth, and continued to operate from a position of capital strength.

I want to thank our employees across the state for their continued commitment to our customers and our communities. It is that commitment that makes results like this possible.

We are happy to answer your questions at this time.

Good morning, David.

Thank you, David.

But on a combined basis, total deposit growth was up close to 90 million year to date. We're pleased with that level of growth and we expect it to continue.

And then whether you're considering any other balance sheet optimization opportunities to maybe help expand the margin more. Yeah. Hi, David. This is Dana. Thanks for the question. On the margin, let me start by saying, you know, we are very focused on maintaining a strong margin. At the same time, though, we do balance growth and margin. As far as pricing competition, loan pricing continues to be fairly competitive in the way market. We have seen some spreads compress.

On the deposit side, pricing continues to be pretty rational and we're not expecting a ton of pressure there. And so we therefore, we expect our NIMM to remain relatively stable in the high 350s. And I feel like that gives us a good ability to take advantage of opportunities that arise.

And does that guidance contemplate continued elevated payoffs? David, again, you know, looking forward where we are confident that second half loan growth will be stronger. Then what we saw in the first quarter, one thing to start off with is during the second quarter, we did originate almost 70 million in new construction loans. That obviously didn't really benefit us in the second quarter, but they will benefit us going forward.

Help drive loan growth in the back half of the year. Additionally, we do have a solid commercial pipeline that we've built. It's a little it's a little lumpier than we would expect. And that that's what, you know, the timing of closings will be critical with the pipeline. Additionally, we have implemented a couple initiatives on the Hawaii retail portfolio.

These initiatives are designed to not not eliminate or grow the portfolio, but slow the amount of runoff in the commercial portfolio. So I think when you put all of that together, that's why we have confidence for stronger growth in the second half of the year.

Morning Matthew.

Yeah, yeah.

First half.

Matthew, it's they were primarily multifamily construction on the mainland. And I would say that the spreads, you know, they're they're floating at so far in the low 200s.

Hey Matthew, the spot rate on total deposits was 90 basis points. So pretty stable there.

Matthew, this is Ralph. I think maybe first I kind of put it into some context in terms of how we risk rate credits. So our risk rating systems driven by a probability of default, not expected loss. This quarter, we identified several credits that had potential or defined weaknesses that could, you know, have any impact with regard to, you know, default probabilities.

So that was the nature of the downgrade. The largest credit was a 20 million dollar real estate loan. The ownership group is in this is having a dispute and the principal guarantor has some financial difficulties. And that was the primary reason why it was downgraded. It's a real estate loan, a way based. The debt service coverage alone is about 1.27 times third party leases pretty diversified and the loan to value is 57%. So we don't see any kind of loss content there.

And the downgrades, as I said, really reflect more kind of the default risk and expectation of loss.

And then the last one for me, just on expenses, maybe for Dana. Or operating expenses. You're tracking, call it, you know, 180, I'm sorry, 180 million for a year. Well, a little bit higher than that for the full year, which doesn't get you to two and a half to three and a half percent increase. I guess maybe wanted to confirm the baseline you're using for 2025 in terms of non-interest expense. And then, you know, where the increase might be coming from after we've reset for the bully this quarter.

Yeah. Hey, Matthew. I will say, you know, as far as our guidance range of two and a half to three and a half percent, our latest forecast is probably on the lower end of that range. And just to give you an idea there. And in the second half of the year, we do expect some expenses to rise due to certain projects going live.

We have a CRM system as well as a new branch system and some data platforms. Those are related to ongoing investments in our business.

And beyond that, it's just going to be probably a function of timing of certain expenses.

Yeah, I do. It's about. There was a little bit of nonrecurring last year. So the baseline I'm using is about 177, 177 million.

Hey, Andrew, if it's Dana. I would say that we do generally plan to return capital at a similar pace as we did this past quarter through dividends and share. But as always, the amount that we buy back each order, it is dynamic and considers the number of factors, including loan growth, the environment and risks as well as our evaluation.

But generally speaking, I'd expect it to be a similar amount.

It's Dana. Yeah, starting with the loan to deposit ratio. At June 30, I think it was about 79%. I'd say that's on the lower end of our target. We typically target about 80 to 85% on the loan to deposit ratio. So I think there's some room there and we're always looking to optimize the balance sheet and our average earning asset growth. It really will depend on on loan girls and our continued focus on optimizing and there may be some mix shift in there as well.

Yes, Kelly. That does include the higher deferred compensation expense this quarter, but I am assuming for the back half of the year that we'll see some normalization there.

Yeah, Kelly, you know, if you're talking about AI, I think right now we're really taking a measured approach. So, you know, we're not, we don't really kind of intend to overstate what we can deliver, but we're aiming not to be, you know, a laggard or trying to lead on that. Today, right now really we're kind of focused on building out the data infrastructure and some of the guardrails.

You know, because the technology is evolving, we want to make smaller investments. We want kind of near term paybacks. And most of the applications are around sort of workflows, whether it be assembly credit information, you know, drafting routine documentation, supporting the AML, you know, reviews or automating certain types of risk reporting. We really want to retain kind of employee judgment and approval authority over this. We want to be very clear of what, you know, what kind of data we're looking at. And then we're really trying to work with, I take more established providers than trying to develop our own tools right now.

I will now hand the call back to Mr. Gerald Robago for closing remarks. Thank you everyone for joining us today and for your continued interest in central Pacific financial core. We look forward to updating you again next quarter. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.