Central Pacific Financial Corp.CPFNYSE
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Operator: Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Third 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 would like to turn the call over to Mr. Jayrald Rabago, Senior Strategic Financial Officer. Please go ahead.
Jayrald Rabago: Thank you, Dustin, and thank you all for joining us as we review the financial results of the third 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; Dayna Matsumoto, Executive Vice President and Chief Financial 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. Arnold?
Arnold Martines: Thank you, Jayrald, and aloha to everyone joining us today. I want to begin by expressing our sincere gratitude for your continued interest and support of Central Pacific Financial Corp. We are pleased to report that our bank delivered strong results this quarter. We remain well positioned to pursue our strategic objectives while maintaining flexibility to navigate economic headwinds with a high-quality, well-capitalized balance sheet and strong liquidity. Our foundation is solid, and our focus is on exceptional customer experience, disciplined growth, sustainable profitability and long-term value for our shareholders. While Hawaii's economy is experiencing some softness in tourism due to U.S. trade policies, our market has historically proven resilient. Ongoing construction and military spending continue to provide meaningful support, helping to stabilize the local economy. This quarter, our results were highlighted by deposit and loan growth, margin expansion and the strategic consolidation of our operations center into our main headquarters, which positions us for improved collaboration among employees and future efficiencies. We also announced a strategic partnership with the Kyoto Shinkin Bank, strengthening economic ties between Hawaii and Japan's Kyoto region. This collaboration will create new opportunities for our small and midsized customers, enhancing growth prospects and reinforcing our commitment to supporting business development. At Central Pacific, our vision is to be a bank that people want to invest in, work for and partner with. For our employees, this means fostering a workplace where talent can thrive. For our customers, this means providing exceptional experience with safe, reliable and accessible financial solutions that help them achieve their goals. And for our shareholders, this means delivering consistent attractive returns, distributing income responsibly and building long-term value. Our governing objective is anchored in disciplined capital stewardship. Our strategy is focused on optimizing bottom line returns while maintaining a high level of liquidity and prudent levels of capital. We achieved this through thoughtful capital allocation, measured risk taking and ethical business practices. Operationally, we are building a resilient business model designed for steady returns rather than short-term gains. Our balance sheet strategy is focused on enhancing composition, improving risk-adjusted returns, shortening duration and increasing diversification across products and geographies. In essence, our focus is on 4 priorities: enhancing our products to better serve customers and capture growth opportunities, building the strongest team possible to execute our strategy effectively, strengthening the balance sheet to deliver durable profits and solid returns and growing the business prudently through disciplined programmatic strategies. We are confident that this approach positions Central Pacific for continued long-term success and value creation for our shareholders. With that, I'll turn the call over to David. David?
David Morimoto: Thank you, Arnold. Our balance sheet growth strategy continues to focus on deepening customer relationships and increasing market share within our core Hawaii market. As expected, in the third quarter, we reported solid net growth with loans increasing by $77 million and deposits by $33 million. The Hawaii loan portfolio saw growth in commercial, commercial mortgage and construction loan types, which was offset by runoff in residential mortgage and home equity. The Mainland loan portfolio also saw solid growth in commercial mortgage and construction. While this quarter's growth was led by Mainland activity, we anticipate a more balanced contribution between Mainland and Hawaii markets moving forward. We continue to operate within our historical range of Mainland loans, maintaining 15% to 20% of total loans in that segment. Average yields on total loans increased 5 basis points to 5.01% compared with the prior quarter. Our loan pipeline remains healthy, and we continue to expect full year loan growth in the low single-digit percentage range for 2025. Deposit growth of $33 million brought total deposits to $6.6 billion, reflecting both business development wins and deposit stabilization following recent interest rate volatility. While period-end noninterest-bearing DDA deposits experienced normal fluctuations, we are pleased to see continued growth in average noninterest-bearing deposits. The average rate paid on total deposits remained steady at 1.02% as the Fed rate cut occurred late in the quarter. Overall, these results demonstrate the continued strength and resilience of our balance sheet and our commitment to disciplined growth and long-term value creation for shareholders. With that, I'll turn the call over to Dayna.
Dayna Matsumoto: Thanks, David. In the third quarter, we reported net income of $18.6 million or $0.69 per diluted share. Excluding $1.5 million in onetime pretax office consolidation costs, adjusted net income was $19.7 million or $0.73 per diluted share. ROA was 1.01% and ROE was 12.89%, underscoring disciplined execution in the current environment. Net interest income rose 2.5% from the prior quarter to $61.3 million, and net interest margin expanded 5 basis points to 3.49%, primarily driven by higher average yields on loans. There was approximately $230 million in loan portfolio runoff in the third quarter. Our weighted average new loan yield this quarter was 6.9% as compared to our portfolio yield of 5.0%. The investment portfolio also has runoff of about $30 million per quarter, which we are currently reallocating to fund loan growth. We are not planning at this time to do any further material investment securities or loan portfolio restructuring as we believe our profitability is strong and will be further enhanced over time through ongoing repricing. For the fourth quarter, we are guiding to $62 million to $63 million in net interest income and a net interest margin increase of 5 to 10 basis points. Total other operating income was $13.5 million, up $0.5 million from last quarter, primarily driven by higher investment services income from the Wealth Management Group. There is some seasonality in the revenue from Wealth with the third quarter usually being strong. Additionally, BOLI income benefited again this quarter from favorable market movements. Our normalized fourth quarter guidance for total other operating income is $12 million to $13 million. Total other operating expenses were $47.0 million, up $3.1 million from the previous quarter. During the quarter, we recorded a net $1.5 million onetime expense related to the consolidation of our operations center, which included a $2 million write-off of fixed assets, partially offset by a lease accounting credit. Going forward, we expect to realize total annual savings from reduced lease operating and maintenance expenses of approximately $1 million. Additionally, salaries and employee benefits increased by $2.1 million due to higher incentive accruals and commissions tied to stronger production. Our guidance for total other operating expense is $45 million to $46 million, which anticipates similar levels of incentive accruals in the fourth quarter. During the third quarter, we repurchased approximately 78,000 shares at a total cost of $2.3 million, and we have $23 million remaining repurchase authorization as of September 30. Additionally, fourth quarter to date through October 27, we have repurchased about 127,000 shares at a cost of $3.7 million. The Board increased the fourth quarter dividend by 3.7% to $0.28 per share. The dividend is payable on December 15 to shareholders of record as of November 28. Finally, on October 1, we notified holders of our subordinated debt notes that we will redeem the full $55 million outstanding at par on the upcoming call date of November 1. The subordinated notes, which were fixed for the first 5 years at 4.75% would have repriced to floating rate at SOFR plus 456 basis points on November 1. Our current target CET1 ratio is in the range of 11% to 12% and our TCE ratio in the range of 7.5% to 8.5%. We plan to deploy our capital first by continuing our quarterly cash dividend with about a 40% payout ratio. Then our priority is to fund accretive loan growth and opportunistically continue share repurchases. Overall, we have a healthy capital position and are optimizing our capital structure to provide sustainable long-term value for our shareholders while continuing to maintain prudent capitalization levels to protect against downside macroeconomic scenarios. I'll now turn the call over to Ralph.
Ralph Mesick: Thank you, Dayna. Our risk appetite is informed by our strategic goal of delivering acceptable risk-adjusted returns while maintaining a high level of solvency. We seek accretive growth, balance and diversification. Credit risk is measured and evaluated against expected results and established guidelines and limits. In the third quarter, we continued to maintain strong credit performance and asset quality. Credit costs stayed within an expected range and the level of NPAs, past due loans and criticized assets remained low. Net charge-offs were $2.7 million or 20 basis points annualized on average loans with consumer book losses continuing to trend downward. Nonperforming assets totaled $14.3 million or 19 basis points of total assets, down 1 basis point from the last quarter. Past due loans over 90 days decreased to $1.5 million, representing just 3 basis points of total loans. Criticized loans declined to 177 basis points of total loans, maintaining low levels. Provision expense for the quarter was $4.2 million. including $3.4 million added to the allowance and $0.8 million to the reserve for unfunded commitments. The decrease in provision expense was primarily driven by lower net charge-offs this quarter. We maintain a strong capital position to support the bank through the credit cycle and against additional impacts that could arise from periods of prolonged stress. At quarter end, our total risk-based capital was 15.7%. Looking ahead, we will continue to take a prudent approach to building our loan portfolio, one that considers a range of outcomes and builds margins of safety to protect against adverse conditions. Let me now turn the call back over to Arnold.
Arnold Martines: Thank you, Ralph. In closing, our third quarter results reflect disciplined execution, strong profitability and prudent risk management in a dynamic market environment. I'm grateful to our employees for their dedication and innovation, which continue to drive our success. To our customers and shareholders, thank you for your trust and support as we execute our strategy and deliver long-term value. We are now happy to take your questions.
Operator: [Operator Instructions] And our first question comes from the line of David Feaster from Raymond James.
David Feaster: I wanted to start on the growth side. I appreciate some of your commentary, but I did want to get a sense of what drove the declines in loans in Hawaii? And what gives you confidence that growth on the islands accelerates? And then maybe just touching on -- in that conversation, some of the impacts of the government shutdown in the islands as well as opportunities to capitalize on some of the disruption as well across your footprint, too.
Arnold Martines: Yes. Thanks, David. David Morimoto will take that question.
David Morimoto: David, yes, again, we did see net growth in the Hawaii market in the areas that we expected. So that would be in construction, C&I and commercial mortgage. The net growth in those sectors were overcome by runoff in the residential, primarily the residential mortgage and the HELOC portfolios, which are 2 portfolios that have been under a little pressure as a result of the interest rate environment. With interest rates hopefully continuing to moderate, we are hopeful that we can see some reduction in the runoff in those 2 portfolios, and that would bode well for future Hawaii loan growth. In addition to that, we do have a healthy Hawaii loan pipeline. There are a number of deals in the pipeline right now. It's just a function of timing. There's a number of loans that are between the fourth -- closing in the fourth quarter and the first quarter. So we'll need to see how that plays out. But we're cautiously optimistic that forward loan growth will be more balanced between the Hawaii and Mainland markets.
David Feaster: Okay. That's helpful. And then maybe touching on the expense side. I appreciate the color that you gave in the guidance. It's a bit higher than what we've been expecting. It sounds like there's some cost saves with that op center consolidation. I know a decent amount of its incentive accruals. But just kind of curious, as you think about the expenses, where are you investing today? I mean, are you seeing opportunities for new hires? Are there some other key investments that you guys are making? And just how do you think about your ability to drive positive operating leverage going forward?
Arnold Martines: David, this is Arnold. Let me just maybe start, and then I'll turn it over to Dayna. Obviously, as you know, we have been investing in technology, harvesting some of the investments that we've made in the past to be able to drive efficiencies. So that continues to be an area where we focus in on. We have a few systems that we're putting in place today. That's going to create a lot of efficiencies for us and just creates better tools for our employees to be able to support our customers and drive our effectiveness. And then I think just generally speaking, we are very focused in the development of our people and looking at areas where we have gaps and building skill levels in order to execute on our strategies as we move forward. So there will be some investment in people for sure. And I appreciate that you brought that up because that's -- the people is going to help us execute on the strategies. So with that, kind of overall, I'll turn it over to Dayna for additional further comments.
Dayna Matsumoto: Sure, sure. David, what I'll add is that managing expenses and our efficiency ratio continues to be a key focus of ours. This quarter, we were impacted by the onetime expense from our office consolidation, and this will create significant efficiencies going forward. Additionally, this quarter, as we had greater revenue, we needed to increase our incentive and commission accruals. This is a good thing. Our objective continues to be driving our efficiency ratio to the high 50% range and mid-50s over time, and we plan to achieve this through consistent revenue growth while we continue process automation and greater use of technology.
David Feaster: Okay. That's helpful. And then hoping you could maybe touch on the deposit side of the equation and what you guys are seeing there from a competitive landscape, some of the core deposit growth initiatives that you've got in place? And just how do you think about your ability to -- we just got another Fed cut, right? How do you -- just given the competitive landscape, how do you think about the ability to pass through some of these and reduce deposit costs with Fed cuts?
David Morimoto: David, it's David again. Yes, on the deposit growth, again, we're cautiously optimistic. The fourth quarter is going to be a little more challenging of a quarter because we do have some known outflows. So I think we're striving to probably keep deposit growth relatively flat year-over-year. So on a full year basis, whereas we were guiding to low single digit, I think right now, it's probably more flattish as a result of what we know at this point in time on the fourth quarter. Having said that, we are optimistic on 2026. We do think we can drive towards low single-digit deposit growth in 2026. And the strategies there are -- it's the same strategies that we have been deploying probably with just a little more rigor going forward. So it is the blocking and tackling of banking. And we are seeing success in the Hawaii market with those efforts. And then we also are optimistic on Asia. We continue to have initiatives in Japan and Korea, and we're hopeful that those strategies will continue to gain traction in 2026.
Operator: Our next question comes from the line of Matthew Clark from Piper Sandler.
Matthew Clark: Just on the -- starting on the margin, interest-bearing deposit costs up a couple of bps, but the NIM guide implies -- you're calling for NIM expansion. So my sense is those costs have rolled over. Do you have the spot rate at the end of September on interest-bearing deposits?
Dayna Matsumoto: Matthew, it's Dayna. The spot rate on -- I have it on total deposits at 9/30, it was 100 basis points. And if you're also looking for the September month-to-date margin, that was 3.51%. So we continue to feel like it's moving in the right direction.
Matthew Clark: Got it. Okay. Great. And then you're going to get a 2-month benefit from redeeming the sub debt. When you strip out the sub debt, it implies the rest of your long-term debt costs are about $623. Can you remind us of the duration of that long-term debt that's left? And I just want to try to forecast the rate.
Dayna Matsumoto: Sure. Matthew, we just have one $25 million FHLB advance outstanding, and it matures in February of 2028.
Matthew Clark: Okay. Got it. Maybe there's some repos in that number. Okay. And then just on the -- do you happen to have the -- or just on the loan growth this quarter, the Mainland piece, the CRE and construction. Maybe if you could just provide some color on what you originated this quarter. I assume it's all participations and just an update on the size of the SNC portfolio.
David Morimoto: Matthew, it's David. I'll start off on the Mainland part of the question, and then I'll turn it to Dayna for -- Dayna or Ralph on the SNC details. But what we saw in the third quarter is growth in the industrial and multifamily sectors. That's for both the multifamily -- I'm sorry, the commercial real estate and the construction portfolios. So they were in the industrial and multifamily sector. And then maybe just to take a step back on the Mainland lending strategy. What I will say is that Hawaii will always be our core banking market. Having said that, CPF has always had some loan exposure on the Mainland, and that's really due to some structural factors with the Hawaii banking market. the Hawaii banking market has always been characterized as having more deposit balances relative to good lending opportunities. And a lot of that has to do with Hawaii being largely a service-based economy without large manufacturing. And due to those structural factors, that's why we always have had a portfolio on the Mainland. Mainland lending provides CPF with geographic diversification, shorter duration assets and attractive risk-adjusted returns. But having said all of that, the third quarter was -- the growth was largely -- net growth was largely driven by the Mainland. What we'll see going forward is very much based on opportunities. It will fluctuate between Hawaii dominant growth versus Mainland dominant growth based on opportunities in that particular quarter.
Matthew Clark: Great. And then just maybe on the SNC exposure at the end of the quarter.
Ralph Mesick: Yes. This is Ralph. The total SNC exposure for the bank is around $526 million. And how that breaks out is Mainland CRE is about $190 million. And then Mainland corporate lending, which is really sort of the large syndicated -- broadly syndicated loans, that's around $144 million. And that's been coming down over the past year.
Matthew Clark: Okay. That's helpful. And then the last one for me, just on the special mention and substandard balances, where those stood at the end of September.
Ralph Mesick: Yes. From a balance perspective, let's see. Special mention was $34.3 million. Classified was $62.1 million. So relatively flat from the prior quarter. And in general, I think we had mentioned on the last call, we have a couple of large credits that probably represent about a little over half of that. Both of those loans are secured. They're performing loans. We've done individual sort of assessments. We would expect no loss in the event that they did default, but they are performing and our expectation is that they'll continue to perform. The sponsors have, I think, meaningful equity invested in these projects. And I think they're very committed to working through the situations that they're facing today.
Operator: Our next question comes from the line of Kelly Motta from KBW.
Kelly Motta: I was hoping to circle back to the expense side to David's question on compensation. You had mentioned some of that increase was related to step-up in bonus accruals. I'm just wondering how much of that, call it, $2 million was related to that. I appreciate the guidance about Q4, but just trying to get a good run rate as we kind of start the year next year.
Dayna Matsumoto: Kelly, it's Dayna. Of that $2.1 million, about $1.5 million was related to the incentive accruals.
Kelly Motta: Okay. That's super helpful. And then I appreciate the new color on capital targets. It looks like you're currently within the range on TCE and above on CET1. Kind of wondering how you guys are thinking about this level here. Does that imply potentially some more capital return? And given your outlook for balance sheet growth, it would seem that absent maybe more aggressive buybacks that would build. So wondering how you guys are kind of thinking about managing that and kind of the intermediate-term trajectory of capital levels.
Dayna Matsumoto: Kelly, let me start off by saying that our target range, it considers a number of factors. First is our debt rating agency expectations. We also further maintain a level to protect against potential downside macroeconomic scenarios. And really, at this point in the cycle, we believe this is prudent. We also regularly perform capital stress tests, and those results are considered in our decisions. So with that said, we are currently slightly above our target range for CET1, and we are taking a more proactive but still prudent approach to capital return. So as I mentioned in the remarks, the priority is first for loan growth, and we are well positioned to support loan growth. We do plan to also continue share repurchases. The level and extent of those share repurchases will be a function of where the loan growth is and where the market is.
Kelly Motta: Okay. That's helpful. I guess kind of given this low single-digit outlook, like what would -- as we look to next year, make you more confident with the loan growth stepping up to kind of deploy more of that CET1 into that range?
Arnold Martines: Kelly, this is Arnold. I think we -- all of us are expecting that rates are going to decline, and we believe that there's pent-up demand, particularly in Hawaii, the Hawaii market. People are on the sidelines waiting for rates to decline. And so we're pretty confident from the standpoint that assuming rates decline, we are going to see more demand for loans. And so therefore, we believe that if that happens, that's going to be where we're going to focus capital on. That's the most accretive for the company, for our shareholders. But we'll adjust as we move forward and we see how the market opens up and what the opportunities are.
Kelly Motta: Got it. That's helpful. Last question for me. It looks like you have a new Japanese bank partner. Just if you could remind us about the potential opportunities that you see leveraging now your third relationship that you have with the bank over there.
Arnold Martines: Yes. Thanks, Kelly. This is Arnold. Yes, we're really excited about it. It's something that we've been working on for a little bit. We have a couple of other relationships in Japan, but we didn't have any one in the Kansai area, the Kyoto region, but also includes neighboring areas like Osaka and Kobe. And as you know, we have -- given our history and the ties that we have with Japan, starting with Sumitomo Limited, when we first started -- when the bank was first founded, those relationships are important. And we have a lot of business of Japanese corporations that have operations in Hawaii. So we believe the Kyoto region was an area where we didn't have a relationship with, and we're excited that we can now kind of move forward and hopefully facilitate our customers working together to create economic opportunities maybe in Hawaii, but also maybe in the Kyoto region.
Operator: There are no further questions. I will now turn the call back over to Jayrald Rabago for closing remarks.
Jayrald Rabago: Thank you, Dustin, and thank you all for joining our third quarter 2025 earnings call. We appreciate your continued engagement and look forward to updating you on our progress next quarter.
Operator: The meeting has now concluded. Thank you all for joining. You may now disconnect.