Central Pacific Financial Corp. (CPF) Q2 2026 Earnings Report, Transcript and Summary

Thank you. Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp. Second Quarter 2026 Earnings Call. 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 the speaker, to Mr. Gerald Robago, Senior Strategic Financial Officer.

Thank you, Erica, and thank you all for joining us today as we review Central Pacific Financial Corp.'s financial results for the second quarter of 2026. Joining me this morning are Arnold Martines, Chairman, President, and Chief Executive Officer; David Morimoto, Vice Chair and Chief Operating Officer; Ralph Mesick, Vice Chair; and Dayna 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.cpb.bank. During today's call, management may make forward-looking statements. These statements are based on current expectations and assumptions and are subject to risks 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 2 of our presentation. With that, I will now turn the call over to our Chairman, President, and CEO, Arnold Martines.

Thank you, Gerald, and aloha to everyone joining us today. We are pleased to report on a strong second quarter, maintain solid profitability, and continue to manage our balance sheet with discipline. We grew average earning assets, maintained a stable core 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 continued to build momentum to drive results that position 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 disciplined execution. We were honored to be the highest-ranked company in Hawaii on America's Best Companies 2026 list, published by TIME Magazine, and also recognized by Forbes as the Best-In-State Bank in 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 disciplined expense management and thoughtful allocation of resources across the organization. After all, 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 Dayna.

Thank you, Arnold. 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 remained 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 NIM to remain relatively steady to a slight rise in the second half of the year. Back-book asset repricing remains beneficial but has moderated. 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 NIM 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 BOLI income that is tied to market performance. Excluding that item, our 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 a 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 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, Dayna. 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 in select mainland markets and expect greater fundings 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 remain largely unchanged at $6.7 billion. Core 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 points. 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 disciplined 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, or 22 basis points of total assets, while net charge-offs were 20 basis points of average loans. The loss 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. Provision expense totaled $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, maintain 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 provide a 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 loan and deposit 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.

Your first question comes from the line of David Feaster with Raymond James.

I wanted to start, maybe let's touch on the deposit front. I mean, obviously, if you listen to any of these conference calls, everybody's talking about intensifying deposit competition on the mainland. Curious what you're seeing in the islands. How is the competitive landscape? Obviously, it's relatively insulated and it's historically been more rational. Is that the same case? And just kind of curious where marginal funding costs are locally and just kind of what you're seeing on the funding side.

Hey, David, it's David Morimoto. I think the deposit competition in Hawaii has remained rather consistent. It is somewhat more rational than on the mainland where there's a larger number of competitors. Having said that, we have been pleased with our deposit performance year-to-date. We did have a strong first quarter that was slightly offset by lesser growth in the second quarter, but on a combined basis, total deposit growth was up close to $90 million year-to-date. So we were pleased with that level of growth and we expect it to continue.

Okay, that's helpful. And then maybe just wanted to touch on some of the puts and takes on the margin guidance. Flat to modestly higher. I know there's a lot of embedded expansion just as you reprice lower-yielding assets. Sounds like there might not be a ton of funding cost leverage left. I'm curious, what's holding you back from expanding more and keeps it flattish? And then whether you're considering any other balance sheet optimization opportunities to maybe help expand the margin more?

Yes. Hi, David, this is Dayna. Thanks for the question. On the margin, let me start by saying 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 Hawaii 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, therefore, we expect our NIM to remain relatively stable in the high 3.50s. And I feel like that gives us a good ability to take advantage of opportunities that arise.

Okay. And maybe just digging in a bit into the underlying dynamics in loans on the quarter, it sounds like there was some slippage into the third quarter, just given higher prepays. How are originations this quarter and how's the pipeline shaping up? I want to understand what gives you confidence that growth is going to accelerate. It sounds like you're leaning maybe into the mainland more. Just kind of curious what's giving you confidence there. And does that guidance contemplate continued elevated payoffs?

David, it's David again. Looking forward, we are confident that second-half loan growth will be stronger than what we saw in the first half. We had 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. So we do have a decent amount of commercial construction loan fundings that will 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 lumpier than we would expect, and the timing of closings will be critical with the pipeline. Additionally, we have implemented a couple of initiatives on the Hawaii retail portfolio. These initiatives are designed to not eliminate or grow the portfolio, but slow the amount of runoff in the commercial portfolio. 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.

The next question comes from the line of Matthew Clark with Piper Sandler.

Just on those last comments, David, I think you mentioned that you expect loan growth to be stronger than the first quarter, or do you mean the first half in the second half?

In the second half. Yes. First half, Matthew.

First half, okay, got it. And then on that $70 million in new commitments on the construction side, could you give us the weighted average rate on that? Just trying to get a sense for it.

You know, Matthew, they were primarily multi-family construction on the mainland, and I would say that the spreads, they're floating so far in the low 200s.

Okay. Got it. Sounds good. And then maybe for Dayna, my typical question on deposit costs, the spot rate at the end of June?

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

Okay, great. And then maybe just on the uptick in non-accruals and the increase in classified, just more about what caused them to migrate and the outlook there.

Sure, Matthew, this is Ralph. I think maybe first I'll kind of put it into some context in terms of how we risk-rate credits. So our risk rating system is driven by a probability of default, not expected loss. This quarter, we identified several credits that had potential or defined weaknesses that could have an impact with regard to default probabilities. So that was the nature of the downgrade. The largest credit was a $20 million real estate loan. The ownership group 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, Hawaii-based. The debt service coverage of the loan is about 1.27x. 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 a default risk than an expectation of loss.

Great, thanks. And then last one for me, just on expenses, maybe for Dayna. Other operating expenses, you're tracking, call it $180 million for the year, if you just annualize, well, a little bit higher than that for the full year, which doesn't get you to 2.5% to 3.5% increase. I guess maybe, wanted to confirm the baseline you're using for 2025 in terms of non-interest expense. And then where the increase might be coming from after we reset for the BOLI this quarter?

Yes. Hey, Matthew. I will say, as far as our guidance range of 2.5% to 3.5%, our latest forecast is probably on the lower end of that range, 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. Beyond that, it's just going to be probably a function of timing of certain expenses.

Okay. And the baseline you're using for last year, if you had it offhand?

Yes, I do. It's about, so there was a little bit of non-recurring last year. So the baseline I'm using is about $177 million.

Yep, that's what I thought. Okay, thank you.

The next question comes from the line of Andrew Liesch with StoneX Group.

Just the pace on the share repurchases, should we expect a similar pace going forward here?

Hey, Andrew, it's Dayna. 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 repurchases. As always, the amount that we buy back each quarter is dynamic and considers a number of factors, including loan growth, the environment and risks, as well as our valuation. But generally speaking, I'd expect it to be a similar amount.

Got it. Very helpful. All my other questions have been asked and answered. I'll step back. Thanks.

The next question comes from Kelly Motta with KBW.

Maybe on the deposits, you have a lot of room on your balance sheet. You have some nice cash flows coming off the securities portfolio still. With the 79% loan-to-deposit ratio and your expectation for kind of a pickup in growth here for the back half of the year, how are you thinking about funding? Would you expect, based on your pipelines, a commensurate amount of deposits? Are we still thinking some kind of grow into your loan-to-deposit ratio and commentary on where you'd like to bring that? Thank you.

Hi, Kelly, it's Dayna. Yes, 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 loan growth and our continued focus on optimizing, and there may be some mix shift in there as well.

Got it. That's really helpful. And then I'm sorry to circle back on this, but I just want to understand your expense commentary correctly. I appreciate the jumping-off point. Can you clarify whether or not that includes the equity gains that impacted incentive comp this quarter for 2026? I just want to make sure I'm modeling appropriately ahead.

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.

Great. And as you noted, investing in some of these technology and systems is something that you ultimately hope is helping to drive greater efficiencies ahead. Can you share any, so far, any latest use cases or what you're seeing based on the changes made so far and what you're most excited for or looking to do as we look ahead here? Thank you.

Yes, Kelly, if you're talking about AI, I think right now we're really taking a measured approach. So we don't really intend to overstate what we can deliver, but we're aiming not to be a laggard or trying to lead on that. Today, right now, really, we're kind of focused on building up the data infrastructure and some of the guardrails. Because the technology is evolving, we want to make smaller investments. We want near-term paybacks. And most of the applications are around workflows, whether it be assembling credit information, drafting routine documentation, supporting the AML reviews, or automating certain types of risk reporting. We really want to retain employee judgment and approval of authority over this. We want to be very clear on what kind of data we're looking at. And then we're really trying to work with, I'd say, more established providers than trying to develop our own tools right now.

Yep, got it. Thank you so much. Appreciate all the color. I'll step back.

There are no further questions at this time. 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 Corp. We look forward to updating you again next quarter. Thank you.

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