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DATE
Friday, July 25, 2025 at 6:00 p.m. ET
CALL PARTICIPANTS
Chairman, President, and Chief Executive Officer — Arnold Martinez
Senior Executive Vice President and Chief Financial Officer — David Morimoto
Executive Vice President and Chief Risk Officer — Ralph Mesick
Executive Vice President and Chief Accounting Officer — Dayna Matsumoto
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RISKS
Net Charge-Offs— Net charge-offs rose to $4.7 million, or 35 basis points annualized on average loans, primarily due to a single commercial credit loss after a borrower ceased operations.
Nonperforming Assets— Nonperforming assets increased by five basis points to $14.9 million, or 20 basis points of total assets, with the growth concentrated in the residential mortgage and HELOC portfolio.
Provision Expense— Provision expense was $5 million, reflecting larger construction loan commitments and higher net charge-offs, indicating greater credit cost pressure in the period.
Past Due Loans— Past due loans 90 days plus increased $2.1 million and now represent four basis points of total loans, signaling a rise in late payment occurrences.
TAKEAWAYS
Net Income-- $18.3 million and 67¢ per diluted share, reflecting positive core earnings performance.
Return Metrics-- Return on average assets reached 1%, and return on average equity was 13.04%.
Efficiency Ratio-- Improved to 60.36%, indicating progress on cost control and operating leverage.
Net Interest Income-- Increased 3.6% quarter over quarter to $59.8 million, supported by higher loan yields and lower deposit costs.
Net Interest Margin-- Rose 13 basis points to 3.44% due to a loan portfolio yield of 4.96% and decline in total deposit cost to 1.02%.
Total Deposits-- Ended at $6.54 billion, with a "favorable" shift in mix driven by growth in noninterest-bearing DDA balances.
Total Loans-- Closed at $5.29 billion after a slight sequential decline; growth persisted in construction and consumer loans, while other categories contracted.
Credit Performance-- Criticized loans increased to 180 basis points of total loans, and provision included $3.8 million added to the allowance plus $1.2 million to the reserve for unfunded commitments.
Share Repurchase-- 103,000 shares repurchased for $2.6 million ($25/share), leaving $25.3 million authorized for future buybacks as of June 30, 2025.
Dividend-- Quarterly cash dividend of 27¢ per share, payable September 15 to shareholders of record on August 29.
Capital Position-- Total risk-based capital was 15.8% at the end of Q2 2025, described as able to absorb "prolonged stress."
Expense Guidance-- Near-term core operating expense projected at $43.5 million–$44.5 million per quarter, excluding one-time items.
CD Portfolio-- $430 million maturing in Q3 2025 and $350 million in Q4 2025 at a weighted average roll-off rate of 3.6%, with new promotional CDs offered at 3.4% (excluding government CDs).
New Loan Production Yield-- Weighted average yield for new loans was approximately 7.2%.
Mainland SNC Portfolio-- Outstanding balance of the Mainland SNC portfolio was $403 million, comprised of $152 million in Business & Industry (B&I) credits.
One-Time Charges-- Anticipated $2–$2.5 million pretax write-off from operations center exit by year-end 2025, with about $1 million in annual savings expected thereafter from reduced lease operating and maintenance expenses.
Deposit Beta-- Cycle-to-date beta of 42% on interest-bearing deposits; management expects ability to lower deposit costs in line with any future Fed rate cuts.
Spot Deposit Cost and Margin (June 30)-- Spot deposit cost was 0.98% as of June 30, 2025, and margin for June 2025 reached 3.49%.
SUMMARY
Central Pacific Financial Corp. (CPF 0.32%) delivered improved net interest income and margin through a combination of higher loan yields and lower deposit costs. The company maintained a strong capital position and continued its strategy of returning capital to shareholders through both regular dividend payments and active share repurchases. Management reaffirmed its outlook for low single-digit growth in loans and deposits for 2025 and highlighted a robust loan pipeline with bookings already contributing positively early in the third quarter. Operational expenses are expected to remain within guided ranges, with near-term one-time charges anticipated due to facilities changes but offset by longer-term efficiency gains.
Nonperforming asset growth occurred primarily in residential mortgages and HELOCs. Management stated that downgraded loans remained "performing and adequately collateralized."
The company reported provision expense changes were largely attributable to one idiosyncratic commercial credit and rising construction loan commitments.
Deposit generation initiatives in Japan and Korea are contributing to favorable shifts in deposit mix and support the bank's overall growth strategy.
Management noted "early success" in core deposit franchise expansion and expects future rate cuts to be passed through to depositors with minimal lag.
Loan runoff in residential mortgage and HELOC portfolios, as well as selective reduction in the Mainland shared national credit book, was framed as a deliberate strategy to reposition lending.
INDUSTRY GLOSSARY
Criticized Loans: Loans categorized by management as exhibiting elevated credit risk but not yet classified as nonperforming, often warranting heightened monitoring.
SNC (Shared National Credit): A large syndicated loan or credit facility shared by multiple lenders and commonly subject to federal examination standards.
BOLI (Bank-Owned Life Insurance): A permanent life insurance policy owned by a bank, with benefits used to offset employee benefit costs; income recognized from equity market gains can impact noninterest income.
DDA (Demand Deposit Account): A noninterest-bearing checking account available on demand for withdrawals or payments.
B&I (Business and Industry Loans): Government-guaranteed commercial loans, often part of U.S. Department of Agriculture (USDA) programs, aimed at supporting business and industry development.
Full Conference Call Transcript
Arnold Martinez: Thank you, Dayna, and aloha, everyone. Before diving into our quarterly results, I'd like to take a moment to proudly share that CPB was named the best bank in Hawaii by Forbes Magazine in 2025. This is the fourth consecutive year the bank has made the Forbes list. Our second quarter financial results demonstrate the continued strength of our core business and ability to execute effectively in a dynamic market environment. The bank's strong asset quality, capital, and liquidity positions will enable us to grow our business by continuing to support the needs of our customers and the markets we serve. I want to thank our dedicated employees, customers, community, and shareholders for your continued support of our bank.
Turning to our Hawaii market update, the state's economy continues to demonstrate resilience across multiple sectors. The construction industry remains solid, with completed construction in the state reaching $14 billion in 2024. Activity in 2025 is expected to show steady growth driven by several major infrastructure and residential developments. Tourism, a key driver of our economy, shows encouraging trends. Through May, year to date, visitor arrivals were up 2.8% from the prior year and down just 3.9% from pre-pandemic 2019. Total visitor spending was up 6.5% from the same prior year period and up 24.3% from the same period in 2019. The majority of the growth is from domestic travelers, while the recovery of Japanese visitors continues to be low.
Hawaii's statewide seasonally unemployment rate remained very low at 2.8% in June and continues to outperform the national unemployment rate of 4.1%. The strong labor market continues to support consumer confidence and spending in our local economy. The Hawaii residential real estate remains steady. Single-family home prices in Hawaii rose 0.4% in June, with a $1,130,000 median sales price. Home sales volumes for June year to date dipped 2.1% for single-family homes and dipped 6% for condos compared to the same prior year period. The housing supply in Hawaii continues to be tight but has picked up in recent periods and now has a positive outlook with a number of large housing projects in development.
Looking ahead, we maintain a cautiously optimistic outlook for Hawaii's economy. While we are mindful of potential headwinds from global and domestic economic conditions, Hawaii's fundamental economic drivers remain sound and have proven to be resilient. Overall, we feel good about our core business environment and the opportunities ahead. With that said, I'll now turn the call over to David, who will talk about our growth strategy and outlook.
David Morimoto: Thank you, Arnold. Our loan and deposit growth strategy continues to focus on deepening customer relationships and growing market share in Hawaii, in select Mainland markets, and in Asia. While growth was muted in the first half of 2025, as anticipated, the outlook for the second half of the year looks favorable. We continue to target low single-digit full-year growth for both loans and deposits in 2025. In the second quarter, our loan portfolio declined slightly and ended at $5.29 billion. By segment, growth was achieved in construction and consumer loans, while declines occurred in all other categories.
Average yields earned on loans during the second quarter increased to 4.96% from 4.88% in the prior quarter as we continue to add new loans at current market rates. Our loan pipeline remains healthy, including several CRE and construction loans that we are booking early in the third quarter, which will provide revenue lift for the second half of the year. On the deposit front, we ended the second quarter with total deposits of $6.54 billion, which also declined slightly from the prior quarter. The deposit mix continued to shift favorably with an increase in noninterest-bearing DDA deposits. Our teams remain focused on growing core deposits while managing the cost of funds in this competitive environment.
Additionally, our deposit generation initiatives related to Japan and Korea are gaining traction and play a role in our overall growth strategy. I'll now turn the call over to Dayna, who will provide an update on our financials.
Dayna Matsumoto: Thanks, David. Our financial results continue to trend positively for the second quarter of 2025. Starting with our core earnings metric, we reported net income of $18.3 million or 67¢ per diluted share. Return on average assets was 1%, and return on average equity was 13.04%. We achieved an improved efficiency ratio of 60.36% as the focus continues to be on driving positive operating leverage through revenue expansion, internal efficiencies, and expense management. Net interest income showed strong performance, increasing 3.6% quarter over quarter to $59.8 million. Our net interest margin expanded by 13 basis points to 3.44%, driven by the loan portfolio yield increasing by eight basis points combined with total deposit cost declining by six basis points.
Our total cost of deposits was just 1.02% in the second quarter. We are pleased with our NIM expansion and continue to manage our balance sheet in the current rate environment while maintaining a disciplined approach to pricing. Total other operating income was $13 million in the second quarter. There was a $1.9 million increase quarter over quarter primarily due to higher BOLI income resulting from equity market gains. Total other operating expense was $43.9 million in the second quarter, which was an increase of $1.9 million quarter over quarter due to higher deferred compensation expense also related to equity market gains, as well as higher computer software expense.
The computer software increase was driven by our new data center, which had offsets in several other expense line items and was slightly elevated this quarter due to overlap of services during conversion. The exit of our operations center building discussed on our prior quarter call is expected to happen by year-end and will result in a one-time pretax write-off of $2 to $2.5 million. Going forward, we expect to realize total annual savings from reduced lease operating and maintenance expenses of approximately $1 million. Our effective tax rate was 23.5% in the second quarter and is expected to remain in the range of 22 to 24%.
During the second quarter of 2025, we repurchased approximately 103,000 shares of common stock at a total cost of $2.6 million or $25 per share. As of June 30, $25.3 million in share repurchase authorization remains available. Finally, our board of directors declared a quarterly cash dividend of 27¢ per share, which will be payable on September 15 to shareholders of record on August 29. I'll now turn the call over to Ralph.
Ralph Mesick: Thank you, Dayna. Strong credit performance and asset quality continued in the second quarter. Credit costs were up within our expected operating range, and the level of NPAs, past dues, and criticized assets remain low. Net charge-offs were $4.7 million or 35 basis points annualized on average loans. The increase in net charge-offs this quarter was related to the write-off of a single commercial loan after the borrower lost a legal dispute and effectively ceased operations. Losses in the consumer book were relatively flat to the prior quarter and down year over year. Nonperforming assets were $14.9 million, or 20 basis points of total assets, at quarter-end, an increase of five basis points from the prior quarter.
The increase came in the residential mortgage and HELOC portfolio. Residential mortgages comprise the bulk of our NPAs. Past due loans ninety days plus increased $2.1 million and represent four basis points of total loans. Criticized loans increased to 180 basis points of total loans but remained at low levels. As part of the enhanced monitoring effort we implemented at the start of the tariff declaration, we downgraded two large loans this quarter: a hotel participation and an owner-occupied CRE loan. Both loans are performing and adequately collateralized. The provision expense was $5 million. In the quarter, we added $3.8 million to the allowance and an additional $1.2 million to the reserve for unfunded commitment.
The higher provision was primarily driven by increases in the construction loan commitment combined with higher net charge-offs incurred this quarter. We continue to maintain a strong level of capital as additional support. Total risk-based capital was 15.8% at the end of the second quarter. At these levels, the bank can readily absorb the financial impacts that may result from a period of prolonged stress. Looking ahead, we will continue to rely on a well-tested management approach that considers risk through a cycle, anticipates a range of outcomes, and builds a margin of safety to deal with adverse conditions. With that, let me now turn the call back to Arnold for closing remarks.
Arnold Martinez: Thank you, Ralph. As we conclude, I want to emphasize the solid performance we've delivered. It demonstrates our ability to optimize performance in a dynamic market environment. I want to express my gratitude to our employees, whose voyaging spirit navigates us through these uncertain times. For our customers, thank you for your continued trust and loyalty. And to our shareholders, thank you for your ongoing support and confidence in our strategy and execution. At this time, we will be happy to address any questions you may have.
Operator: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment, and your first question comes from the line of David Feaster with Raymond James.
David Feaster: Hey. Good morning, everybody.
Arnold Martinez: Morning, David.
David Feaster: I wanted to start on the growth side. I mean, it sounds like there's some pretty encouraging trends here heading in the back half of the year. The pipeline's healthy. Was just kinda curious maybe what you saw in the quarter. I mean, how's, you know, the pulse of your client? How's demand trending? Or is this more of a function of payoffs and paydowns offsetting otherwise solid originations? So just kinda curious on that. Just, again, the pulse of the competitive landscape from your perspective.
Arnold Martinez: Yeah. David, this is Arnold. Let me just start, and I'll turn it over to David Morimoto for more color. Yeah. You know, the loan growth for the first half was fairly muted, but that's expected given the, you know, the operating environment. The team has done a really good job in working together and engaging, you know, the marketplace and our customers and prospects, and we feel, you know, we feel good about the second half of the year. We are still looking at low single-digit percent range growth for the full year. David can talk a little bit about what he's seeing and what we expect in the next quarter or two.
David Morimoto: Hey, David. Yeah. In the second quarter, you know, there was a continued runoff of the expected continued runoff of the residential mortgage and HELOC portfolios, and that likely will continue. We did see a few payoffs in the mainland shared national credit portfolio. But that was, you know, that was by design. We had a couple of deals where the deals were recut, and we just chose not to continue participating because we have other growth opportunities, growth levers. On the positive side, we have a robust pipeline, and we had a handful of deals that were expected to close late second quarter that slipped into the third quarter.
And as we mentioned in our prepared remarks, we did close a handful of loans in the first three weeks of July. And we have strong net loan growth already in July that will help revenue growth for the full year, the back half of the year.
David Feaster: Okay. Okay. That's helpful. And then, again, how's just competition? I mean, are you seeing much competition increase? And then, again, you know, kind of along the same line, to some degree, I mean, there's been a lot of disruption on the islands recently. I'm just curious how you think about your positioning to capitalize on that and maybe gain share in this ocate maybe some talent and clients?
David Morimoto: Yeah, David. It's David again. On the competition front, you know, there always is good competition in the local Hawaii banking market. I wouldn't say it's any, you know, stronger or weaker. I think it's been pretty average. And then on the second part of the question about the recent changes in the Hawaii banking market, I haven't noticed any change with regard to territorial or American. You know, they remain, you know, solid competitors, but no real change in strategy that I've noticed.
David Feaster: Okay. Maybe shifting gears to the other side of the balance sheet. Your non-interest-bearing deposit growth was extremely impressive. I'm curious maybe where you're finding that you're having more success driving that? And then, you know, as we think about your margin trajectory over the next couple of quarters, how much deposit cost leverage do you have to support that? Or is it primarily going to be loan growth and back book repricing driven as you think about the margin side?
Arnold Martinez: Let me, David, let me just start. This is Arnold, and then I'll turn it back over to David. But I just wanted to comment that, you know, I think our team has done a really good job in keeping close to our customers, ensuring that we're meeting the needs of our customers, as well as focusing on prospecting. And we're doing that in collaboration internally to really manage, you know, manage, you know, the balance between deposit growth and margin, and it shows in our core operating results. So I'm really pleased with that.
But David can comment on, you know, kind of what we're looking at and the outlook and kind of what we're seeing that's kind of translating to, you know, our results.
David Morimoto: Yeah. Thanks, Arnold. Yeah, David. We have a good plan to grow core deposits, low-cost core deposits. And as you know, to grow core deposits, it's really, you know, moving relationships. And so it's really blocking and tackling prospecting, and we're ramping up our efforts on that front, and we're seeing early success. And I think that's what you saw in the second quarter with the positive mix shift in our deposits.
David Feaster: Okay. On the expense side, Dayna, you touched on it a bit. There's some puts and takes there, you know, with the BOLI stuff, the lease savings. Could you help us think through maybe what's a good core expense run rate as we look forward? And maybe what are some of the areas that you're investing in?
Dayna Matsumoto: Sure, David. Thanks for the question. So on the expense side, yes, we are pretty pleased with our progress on the efficiency ratio and driving positive operating leverage. As we had noted previously, we do continue to invest in the business, including in technology, facilities, as well as people, you know, where it makes sense strategically. And those investments are to create efficiency savings and ultimately drive greater revenue. So with all of that said, you know, pulling it together, our near-term guidance for total other operating expense is going to be in the range of $43.5 to $44.5 million per quarter. And that would be excluding any one-time impacts.
David Feaster: Okay. That's helpful. And then maybe just last one for me, Ralph. You know, circling back to you to get hit the whole team. You know, just your I appreciate your commentary on the credit side. Just curious maybe high level. You know, we had, you know, had one larger loss quarter. It sounds kind of idiosyncratic. And it seems like the consumer side's kind of stabilized. I'm just high level, is there anything that you're seeing that's making you a bit nervous or cautious on or just kind of your thoughts on the credit side more broadly?
Ralph Mesick: Yeah. David, you know, the uptick in the AQ metrics is really a function of being at a low starting point. I think if you consider the endpoint, we're well within our risk appetite. And then I would not extrapolate the charge-off or the two downgrades to be related to anything systemic. The circumstances around the three credits that we highlighted were specific to each name. I think that perspective is kind of reflected in the reserve actions we took this quarter. The level of expected loss we see in the portfolio is relatively unchanged.
And then I think if you think about those losses, based on the composition of our loan book, we expect credit losses between 25 and 50 basis points. And if you look at our incurred losses over the last few years, they run between 10 and 40 basis points. We were at maybe the higher part of that range this quarter annualized. But if you back out that one credit, which was unexpected, the incurred losses would have been at the lower end of that range. You know, we're continuing to call on our customers regularly. We are looking at large exposures very frequently. I think the cadence has become more rigorous because of where we're at in the cycle.
And I think when you look at those two credits that were downgraded, you know, that is really a function of the outlook we have today. We've identified some weakness that warrants closer attention. But we've evaluated those loans for impairment, and they're well collateralized. We don't anticipate any losses, and it's important to point out that both credits are performing.
David Feaster: That's helpful. Thanks, everybody.
Arnold Martinez: Thank you, David.
Operator: Your next question comes from the line of Matthew Clark with Piper Sandler.
Matthew Clark: Hey. Good morning, everyone.
Arnold Martinez: Hi, Matthew.
Matthew Clark: Maybe just starting on the margin. Nice lift there this quarter again. Deposit cost down. Just want to get a sense for, you know, exiting the quarter where the spot rate was on deposit cost. If you had it at the June, and then if you also had the average margin in the month of June, that'll be helpful.
Dayna Matsumoto: Hi, Matthew. It's Dayna. So, yeah, I can start with the spot rates. So the spot deposit cost on June 30 was 0.98%. And then for the month of June, our margin was 3.49%.
Matthew Clark: Okay. Great. And then can you remind us what you have coming due on the CD repricing side? You know, how much you have over the next couple of quarters that are maturing and, you know, the rates that they're maturing at and where you're offering new CDs?
Dayna Matsumoto: Sure. So on the CD portfolio, we have about $430 million maturing in the third quarter. And then another about $350 million maturing in the fourth quarter. This excludes our government CDs. As far as the roll-off rates on a weighted average basis, it's about 3.6%. And our current CD promotional rate that we're offering is at 3.4%. So we continue to have some opportunity to lower our CD costs as those roll over.
Matthew Clark: Okay. And then assuming we get a couple of rate cuts in this back half of this year. Any thoughts around the beta that you might realize with those cuts? I mean, your cycle-to-date beta on interest-bearing, I think, is about 42%, which is better than it's more than on the way up, I should say. But, yeah, just curious how much of the Fed rate cuts you might be able to pass through on the deposit side.
Dayna Matsumoto: Sure. So when the Fed cuts rates, we believe we can continue to successfully lower our deposit cost with a pretty minimal timing lag. The deposit pricing market here continues to be pretty rational. As far as the betas, you're correct. So far, it's been about 42% on the total interest-bearing deposits. When you look specifically at our more rate-sensitive deposits, the money markets and the CDs, the beta has been close to 100%. So with the upcoming Fed rate cuts, we expect it to be similar on the betas. And we think we'll continue to be successful with our pricing strategies and continued discipline.
Matthew Clark: Great. Okay. Thank you. And then on the loan yields up nicely here. Up six basis points, I believe. At least by our calculation. Can you give us a sense for the new loan production? What kind of rates you're getting maybe on a weighted average basis? Just trying to get a sense for the lift on loan growth.
David Morimoto: Hey. Hey, Matthew. It's David Morimoto. In the second quarter, the weighted average new loan yield was roughly 7.2%, which obviously compares favorably to the portfolio yield that you mentioned is just about 5%.
Matthew Clark: Okay. Great. And then on the net charge-offs, I think you mentioned kind of without this one C&I credit, it would have been toward the lower end of the range in terms of net charge-offs. But can you quantify? I'd have to go back. I can go back to the transcript. But if you could just quantify the amount of net charge-offs associated with that one credit, dollar terms?
Ralph Mesick: Yeah. It was about 21 basis points of the amount. So if you back that up, it would have been at about 14 basis points.
Matthew Clark: Okay. Perfect. And then just the increase in criticized, you called out those two credits. I think one was the hotel participation. The other one, I can't recall. But you just give us some more color on, you know, what's happening with those two credits and kind of plan for resolution and timing?
Ralph Mesick: Yeah. You know, I want to be as transparent as possible, but I need to be sensitive to the information we disclose on these calls. So I can't really say more than that. And I think it would be inappropriate for me to say, you know, provide more details. But as I said, we do not expect any losses on these two credits. And we do believe that there will be some resolution in the coming couple of quarters.
Matthew Clark: Okay. Thank you. And then last one for me. Just on the Mainland SNC portfolio, can you remind us how large that portfolio is?
Ralph Mesick: Let's say it's about $403 million, and that breaks out, yeah, roughly $152 million of that is B&I.
Matthew Clark: Okay. Perfect. Thank you.
Arnold Martinez: Thank you, Matthew.
Operator: And at this time, there are no further questions. I will now turn the call back over to Dayna Matsumoto for closing remarks.
Dayna Matsumoto: Thank you very much for participating in our earnings call for the second quarter of 2025. We look forward to sharing our progress with you next quarter. Thank you.
Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.