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. Fourth Quarter 2025 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. As a reminder, 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, and thank you all for joining us as we review the financial results of the 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 ir.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 two 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 start by sharing that Central Pacific Bank was recently named to Newsweek's list of America's Best Regional Banks for 2026. This recognition reflects the strength of our franchise and the trust our customers place in us every day. It's also a testament to our team's commitment to deliver exceptional service and build lasting relationships across the communities we serve, which is foundational to delivering long-term value to our shareholders. Central Pacific closed the year with strong momentum in the fourth quarter and solid overall performance in 2025. The Q4 results were driven by disciplined execution across our core franchise. Our profitability strengthened as we grew revenue and expanded our margin while proactively managing expenses. As we enter 2026, Central Pacific Bank is ultra-focused on our core business, which includes a disciplined approach to organic growth, thoughtful diversification, and operational excellence. We are well-positioned to achieve consistent earnings growth, enhance shareholder returns, and strengthen our competitive advantage. Over the past three years, our total shareholder return was 77%, reflecting both solid share price appreciation and dividends. Additionally, our core earnings per share increased 24% from the prior year, underscoring the strong operating momentum across our franchise. Hawaii's economy continues to be resilient despite macroeconomic uncertainty leading to lower visitor counts and softer job growth. Offsetting such factors, Hawaii's key strength continues to come from strong construction activity at both the public and private levels, as well as the military sector. Total core deposits grew by $78 million during the quarter, with meaningful gains in interest-bearing demand, savings, and money market balances. At the same time, the average rate paid on total deposits declined to 94 basis points from 102 basis points. Noninterest-bearing demand deposits remained healthy, continuing to represent a sizable 29% of total deposits. In the fourth quarter, our total loan portfolio declined by $78 million from the prior quarter. During the quarter, we experienced several large construction and commercial mortgage loan payoffs, combined with a delay of certain new loan fundings. For the full 2025 year, total loans declined by $44 million. The full-year decline was driven by an aggregate $190 million decrease in residential mortgage, home equity, and consumer portfolios, which was partially offset by strong growth in commercial mortgage and construction. Average loan yields in the fourth quarter remained relatively stable at 4.99% as the impact from Fed rate cuts was mitigated by back book loan repricing. As we enter 2026, our revenue growth strategy will be further enhanced with sales management technology tools and consistent discipline to drive results. We continue to build our loan pipeline with a focus on our core Hawaii market, supplemented by select Mainland markets for diversification. Our deposit growth will be driven by a focus on deepening relationships in Hawaii and strategic partnerships in Japan and Korea. For 2026, we are conservatively guiding to full-year net loan and deposit growth in the low single-digit percentage range. With that, I'll turn the call over to Dayna. Thanks, David.
Dayna Matsumoto: For the fourth quarter, we reported net income of $22.9 million or 85¢ per diluted share, compared to $18.6 million or 69¢ per diluted share in the prior quarter. Our return on average assets was 1.25%, and return on average equity was 15.41%, underscoring continued profitability improvement in a dynamic environment. For the full 2025 year, net income was $77.5 million or $2.86 per diluted share. Excluding $1.5 million in one-time pretax office consolidation costs in the prior quarter, adjusted non-GAAP net income was $78.6 million, representing a meaningful 24% increase over 2024 non-GAAP net income of $63.4 million, which excludes non-core items. Fourth-quarter net interest income rose by 1.3% from the prior quarter to $62.1 million, and net interest margin expanded seven basis points to 3.56%. We were successful in lowering our deposit cost by eight basis points to 0.94%, while our total loan yields declined by only two basis points to 4.99%. There was approximately $250 million in loan runoff in the fourth quarter. Our weighted average new loan yield this quarter was 6.8%, as compared to our weighted average portfolio yield of 4.99%. For the full year 2026, we are guiding to approximately a 4 to 6% increase in net interest income. We expect the NIM to expand, albeit at a slower pace than what we experienced in 2025. Our expectation for first-quarter NIM is an expansion of approximately two to five basis points. Total other operating income was $14.2 million, up $700,000 from last quarter, primarily driven by a $900,000 increase in bank-owned life insurance income. During the quarter, we recognized BOLI death benefit income of $1.4 million. Going forward, we anticipate total other operating income to grow by 1 to 2% in 2026 over 2025 normalized. Total other operating expenses were $45.7 million, down $1.3 million from the previous quarter, which included a one-time expense related to the consolidation of our operations center. We repurchased 788,000 shares at a total cost of $23.3 million. The board declared a first-quarter cash dividend of 29¢ per share, an increase of 3.6% from the prior quarter. Additionally, our board approved a new share repurchase authorization for up to $55 million in 2026. The increase in the dividend and share repurchase authorization reflects our strong earnings, capital, and liquidity position and outlook. Our current target capital ratios and priorities remain the same. We plan to continue to use capital for organic loan growth, dividends, and share repurchases to move towards our CET1 target of 11 to 12% to optimize our position. We enter 2026 with a strong balance sheet, improved profitability metrics, and a clear focus on delivering sustainable value for our shareholders. I'll now turn the call over to Ralph.
Ralph Mesick: Thank you, Dayna. Our credit risk appetite continues to be informed by our strategic goals, emphasizing portfolio design, underwriting discipline, and risk-based pricing to achieve optimal returns, balance, and diversification. In the fourth quarter, we maintained strong credit performance. Asset quality indicators were stable, as credit costs stayed within an expected range, and the level of NPAs, past due loans, and criticized assets remain near cycle low. Net charge-offs were $2.5 million or 18 basis points annualized on average loans, with consumer book losses continuing to stabilize. Nonperforming assets were $14.4 million or 19 basis points of total assets. Past due loans over ninety days totaled $1.6 million, representing just three basis points of total loans. Criticized loans declined to 135 basis points of total loans, maintaining low levels. Provision expense for the quarter was $2.4 million, including $1.7 million added to the allowance, and $700,000 to the reserve for unfunded commitments. The decrease in provision expense was primarily driven by a decline in loan balances as well as improvements in our asset quality and macroeconomic forecast. We hold a strong capital position to support the bank through the credit cycle and against unexpected outcomes. At quarter-end, our total risk-based capital was 14.8%. Looking ahead, we'll continue to take a prudent approach to growing our loan portfolio to build durable earnings. Let me now turn the call back to Arnold. Thank you, Ralph.
Arnold Martines: In closing, our fourth-quarter results reflect strategic execution and prudent risk management. We delivered improved operating efficiency, margin expansion, and execution of strategic initiatives that position Central Pacific for sustainable growth. As we look ahead, we remain focused on creating an exceptional experience for our customers and long-term value for our shareholders. I'm very proud of our team's accomplishments in 2025 and look forward to continuing the momentum in 2026. We are now happy to take your questions.
Operator: Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your questions, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, pick up your handset and ensure that your phone is not on mute when asking your question. We will pause for a moment to compile the Q&A roster. Our first question comes from the line of Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark: Morning, Matthew. I just want to start on the delay in new loan fundings this quarter. Somewhat expected. And it sounded like they're gonna fund here in the first half. And I believe a couple of them are construction projects that require higher reserves. I'm just trying to get the timing down. And what that means for your provisioning in the first half.
David Morimoto: Hey, Matt. It's David. And, yeah, you're right. We did have some delayed closings that pushed into the first half of this year. I would say that the closings are probably a little more weighted to the second quarter versus the first quarter. And you are correct that some of it is funded deals. Some of it is construction. So it's gonna be a combination of the two. But probably a little more weighted to the second quarter versus the first quarter.
Matthew Clark: Okay. Great. And then, Dayna, did you have the spot rate at the end of the year on deposits? Costs?
Dayna Matsumoto: Sure, Matthew. Yes. Our deposit spot rate at December 31 was 89 basis points.
Matthew Clark: Okay. And then you had a 30% deposit beta this quarter. Seems like that's what you're trying to manage to. Is that fair or has there been any change in deposit competition that might put that at risk?
Dayna Matsumoto: Yeah. Matthew, that's correct. You know, the current cycle thus far, our interest-bearing deposit beta is about 30%. And with the outlook for two rate cuts this year, we anticipate that our cycle-to-date beta to remain roughly in the 25 to 30% range. We do still have some room to lower our deposit cost to offset our floating rate assets.
Matthew Clark: Okay. Great. And then last one for me. Just on the buyback, I know it's for 2026, but just want to confirm the plan is to complete that buyback this year.
Dayna Matsumoto: Yeah. Matthew, on the capital side, I want to start with, you know, just sharing that our strong earnings have built up our capital to a really solid level. And given this, our board approved a larger share repurchase authorization for this year. You know, that gives us flexibility. You can expect that we will be active on the buyback as we return capital that can't be used to organically grow our business. But the amount that we buy back each quarter, it's really gonna be dynamic.
Matthew Clark: Yep. Understood. Thank you. Our next question comes from the line Kelly Motta with KBW. Please go ahead.
Kelly Motta: Maybe kicking it off with the loan growth. I know you here over by the Hawaiian report test up in the last release. So wondering, incrementally, as you look to the year ahead, how you feel about the outlook for growth specifically in Hawaii and with that low single-digit loan growth, the mix of that from the islands the mainland? Thank you.
David Morimoto: Hey. Hey, Kelly. It's David. Yeah. You're right. Uhiro did upgrade their forecast but it was an upgrade from a deeper downturn to a lighter downturn. So it's moving in the right direction. But it's you know, as far as Hawaii growth opportunities, we do have a nice pipeline of some growth opportunities there primarily focused in the commercial area. So it's C&I, commercial mortgage, and construction. And as we stated before, the growth between the Hawaii and Mainland will it'll fluctuate from quarter to quarter. But we are expecting 2026 to be a stronger growth year than 2025. And the balance between the Hawaii and Mainland will be a function of you know, risk-return opportunities as they arise. I did want to just point out one thing on 2025. Loan growth. You know, while growth was muted in 2025 for the full year, I did want to point out that we did see strong growth in the areas that we were targeting specifically construction and commercial mortgage. In the aggregate, those two portfolios grew by 10% year over year. And then the overall decline in loan growth was a result in drawdowns on the in the residential mortgage, home equity, and consumer portfolios. So that was sort of that was by design. You know, we did we are trying to shift our portfolio mix more to commercial. From consumer. And then another thing to note is on the consumer drawdowns, that somewhat within management's control. You know? We portfolioed only about a third of our resi mortgage production last year. And so that's a management decision that's within our control. So I think the loan growth in 2026, the reason we're more cautiously optimistic on 2026 is that we're expecting stronger growth in the commercial portfolios and less drawdown on the consumer portfolios.
Kelly Motta: Got it. That's helpful. And then putting together the pieces of your guide, it seems to suggest some positive operating leverage as we head into 2026. I know expenses have been a focus for you guys. You've done a nice job managing them. As you look ahead, you know, if growth comes in weaker or there's more challenging margin expansion, is there additional room? Or conversely, if growth picks up, are there areas that you might be able to look to add to as you think about the overall platform? Thank you.
Dayna Matsumoto: Hi, Kelly. Yeah. Definitely. You know, we continue to be very focused on managing our expenses and maintaining strong expense discipline while continuing to invest for growth. We have some flexibility. You know, if revenue is more or less, we can adjust. But overall, this year, we plan to continue to invest in technology to drive returns and efficiency. We do have a couple of projects planned for sales management systems and tools as well as some data platform enhancements. But those investments will have some offsets with savings coming from our continued automation and process improvements as well as optimizing our resources.
Kelly Motta: Great. Thanks so much for the color. I'll step back.
David Morimoto: Thanks, Kelly.
Operator: Our next question comes from the line of David Pfister with Raymond James. Please go ahead.
David Pfister: Hey. Good morning, everybody.
David Morimoto: Hi, David.
David Pfister: Maybe just following up kind of you know, on the loan growth side, you know, just with the focus on optimizing your loan portfolio towards more commercial, you know, and some of the commentary on a delay in some fundings, would you maybe expect growth like, again, this low single-digit growth, maybe a bit slower in the first part of the year? And would you expect continued declines maybe the back half of the year you know, accelerate as you work through that optimization? Just kind of curious how you think about the trajectory.
David Morimoto: Hey, David. Yeah. I think what you described is the base case. Right? I think the first quarter is you know, a seasonally slower quarter for loan growth, and I think that's what we're expecting. You know, we're hoping we can still get some net loan growth in the first quarter, but it probably will be it'll probably start off slower, and then growth will, like, accelerate as we roll through the year.
David Pfister: Okay. Okay. And then maybe just touching on you know, I'm just kind of curious how originations are trending and kind of how the pipeline's looking at this point. And if you could give any a bit more color on what's driving the elevated payoffs and paydowns, you know, whether it's, you know, asset sales or again, you talked about some strategic. You know, versus competition. Just kind of curious, you know, again, the origination side and then how some of the drivers behind payoffs and paydowns.
David Morimoto: Yeah. David, the loan pipeline remains consistent with past levels and originations. Fourth-quarter originations were in the $300 million range. And, you know, that's where we likely need to be to keep the portfolio relatively flat to slightly down. So we need to get originations higher than that to see net loan growth. And again, we're forecasting cautiously optimistic that we'll see low single-digit growth and, we can outperform that. And then the second part of your question, David, was the drivers behind it, the payoffs and paydowns. Oh, I'm, yeah, I'm sorry. Yeah. I think I would chalk that up to just the construction portfolio has been on the smaller side. And, you know, when you have a small construction portfolio, and you do encounter payoff, you know, it really impacts loan growth. What we're trying to do now is we're obviously focused on building the construction portfolio, getting it a little more critical mass. And then when you do that, you know, the paydowns are somewhat offset by new construction draws. And so we got to get to that critical mass on the construction portfolio side. And we are working towards it. Last year, we did have a good year for construction originations that we'll be funding in the quarters ahead.
David Pfister: Okay. Okay. And then maybe just touching on the switching gears to the deposit side. Just kind of curious how you know, the competitive landscape is from your perspective on the island. You guys have done a great job, you know, reducing deposit costs. But just kind of curious, you know, the competitive landscape, and then the core deposit growth that you saw, you know, was great to see. Curious how much of that is new clients versus gaining share with, you know, existing clients. So just kind of curious what you're seeing on the deposit side.
David Morimoto: David, it's been a little bit of a combination of both. You know? Core deposit growth is you know, it's basic banking. Right? Blocking and tackling. It's calling on new customer prospects, and it's deepening our relationships, what we refer to as primacy, customer primacy, you know, improving primacy with our existing customers. So it's been a combination of both and I think we're optimistic on core deposit growth for 2026 as some of the initiatives that we put in place, you know, with calling efforts, being more disciplined on calling efforts, sales culture, and a focus on customer we think all of those will lead to stronger core deposit growth in 2026.
David Pfister: Okay. Is that also kind of what's driving your confidence in accelerating originations due to that kind of cultural shift?
David Morimoto: Yes. Yes. Exactly. It's just a stronger focus on deepening relationships with the existing customers, which we believe there's good opportunity there. But it's also customer prospecting. Right? You know, we have about 13% of the banking market, and there's a lot of opportunity to grow that.
David Pfister: That's great. Thanks, everybody.
David Morimoto: Thanks, David.
Operator: Once again, if you would like to ask a question, please press star followed by the number one on your telephone keypad. At this time, we have no further questions. I will now turn the call back over to Jayrald Rabago for closing remarks.
Jayrald Rabago: Thank you for joining our fourth-quarter 2025 earnings call. We appreciate your continued engagement and look forward to updating you on our progress next quarter.
Operator: This concludes today's conference call. You may now disconnect your lines. Have a pleasant day.