Central Pacific Financial Corp. (CPF) Q1 2026 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp. First Quarter 2026 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. This call is being recorded and will be available for replay shortly after its completion on the company's website at cpb.bank. I would now like to turn the call over to Jayrald Rabago, Senior Strategic Financial Officer. Please go ahead.

Thank you, and thank you all for joining us today as we review Central Pacific Financial Corp.'s financial results for the first quarter of 2026. Joining me this morning are Arnold D. Martines, Chairman, President, and Chief Executive Officer; David S. Morimoto, Vice Chairman and Chief Operating Officer; Ralph M. Mesick, Senior Executive Vice President and Chief Risk Officer; and Dayna Matsumoto, Executive Vice President and Chief Financial Officer. We have prepared a supplemental slide presentation with additional details on our earnings release. The presentation is available in our Investor Relations section of our 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 two of our presentation. With that, I will now turn the call over to our Chairman, President, and CEO, Arnold D. Martines.

Thank you, and aloha to everyone joining us today. The first quarter represented a strong start to 2026 with solid earnings performance and continued execution across our franchise. We delivered growth in both loans and core deposits, maintained strong credit quality, and continued to operate from a position of capital strength. This momentum reflects the strength of our relationship-focused banking model and our continued commitment to serving the people, businesses, and communities of Hawaii. Our results also demonstrate the durability and organic earnings power of the franchise. With return on equity above 13% and robust capital levels, we remain focused on disciplined, sustainable growth and thoughtful capital allocation. From a shareholder perspective, we 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. We were also pleased that CPB was named the Hawaii U.S. Small Business Administration Lender of the Year for 2025. This marks the seventeenth time CPB has received this recognition and reflects our long-standing commitment to Hawaii's small business community. Turning to the broader environment, Hawaii's economy remained resilient during the first quarter. Visitor arrivals and spending increased, and the state's unemployment rate remained exceptionally low at 2.3%. While oil prices have decreased due to the conflict in the Middle East, the direct impact on Hawaii's economy has been limited to date, and we continue to monitor conditions closely. At the same time, Hawaii continues to benefit from ongoing construction activity, military spending, and a resilient local economy. Recent storm activity and flooding, including impacts from the Kona Low, caused isolated but significant damage in parts of the state. We remain committed to supporting affected customers and communities as they recover and rebuild. Against this backdrop, our strategy remains consistent: support local businesses through prudent lending, grow and deepen core deposit relationships, invest thoughtfully in our franchise, and manage risk with discipline through the cycle. With that, I will turn the call over to Dayna.

Thanks, Arnold. For the first quarter, net income was $20.7 million and earnings per diluted share was $0.78. Return on average assets was 1.12%, and return on average equity was 13.9%. Compared to the year-ago quarter, our EPS increased by 20%, reflecting revenue growth and expense discipline as we continue to successfully execute on our strategy. Net interest income totaled $61.4 million and net interest margin remained healthy at 3.53%. Compared to the prior quarter, results reflected typical seasonal factors and balance sheet timing, including lower day count and lower average loan balances. The decline in our loan yields was partially offset by the improvement in our deposit costs. For the second quarter, we are projecting NIM of 3.50% to 3.55%. Our guidance for full-year net interest income remains at a 4% to 6% increase over the prior year. Across a range of potential rate environments, our balance sheet positioning and funding mix continue to provide meaningful resilience. Total other operating income was $11.6 million and declined from the prior quarter by $2.6 million. In the prior quarter, we had one-time BOLI death benefit income of $1.4 million. Current quarter BOLI income was further impacted by equity market volatility. Additionally, Q1 seasonality typically results in lower levels of fee income in the mortgage banking and wealth areas. We continue to expect our full-year other operating income to increase modestly over normalized prior year. Total other operating expense was $43.7 million and declined by $2 million from the prior quarter. The decline was primarily driven by higher incentive accruals in the prior quarter and lower deferred compensation expense this quarter. We expect our expenses to increase over the year, but our full-year expense growth is still expected to be modest at 2.5% to 3.5% from 2025 normalized. In the first quarter, we paid a cash dividend of 29¢ per share and repurchased approximately 321 thousand shares for a total of $10.5 million. With our strong earnings and capital position, our board declared a second quarter cash dividend of 29¢ per share. We had $44.5 million remaining available under our share repurchase program as of March 31, and we plan to continue to utilize it as part of our capital allocation strategy. I will now turn the call over to David.

Thank you, Dayna. During the first quarter, our total loan portfolio grew by $31 million, bringing total loans to $5.3 billion at quarter end. The majority of the loan growth came near the end of the first quarter; therefore, we will see the benefit in our net interest income in subsequent quarters. Loan growth this quarter was driven by commercial real estate, where we continue to see good risk-reward opportunities both in Hawaii and the Mainland. We had a roughly equal amount of loan production volume in Hawaii and the Mainland this quarter, while loan runoff was greater in the Hawaii portfolio, as it represents over 80% of overall balances. Average loan portfolio yield in the first quarter was 4.93%, compared to 4.99% in the prior quarter. The yield decline was primarily due to the impact of the fourth quarter Fed rate cut on repricing and new loan yield. Total deposits increased $90 million during the quarter, ending at $6.7 billion. Core deposits represent over 90% of total deposits, with continued growth in noninterest-bearing and relationship-based accounts. At the same time, total deposit costs decreased by 4 basis points quarter over quarter to 0.90%. Looking ahead, our loan pipeline remains solid across Hawaii and select Mainland CRE markets, and currently we see stronger opportunities in commercial loans relative to retail lending. We will continue to execute our deposit strategy, focusing on new customer acquisition and deepening existing relationships. As a result, we are maintaining our full-year 2026 guidance of loan and deposit growth in the low single-digit percentage range. With that, I will turn the call over to Ralph.

Thank you, David. We continue to operate within risk appetite, and the credit profile of the bank is unchanged at quarter end. We maintain an approach of seeking to achieve optimal returns, balance, and diversification, emphasizing underwriting discipline, relationship lending, and risk-based pricing. Our credit metrics stayed near cycle lows during the first quarter. Nonperforming assets totaled $14.5 million, or 19 basis points of total assets. Net charge-offs were 18 basis points. Past due trends were stable. Criticized loans were less than 200 basis points of total loans and within an expected range. Changes in criticized loans reflect relationship-specific dynamics rather than any broad-based credit trend. Provision expense for the quarter was $2.4 million. We added $2.7 million to the allowance, while the reserve for unfunded commitments declined by $300 thousand. We identified no material matters impacting our customers from the recent Kona Low flooding. At quarter end, our total risk-based capital ratio was 14.7%. At this level, we retain ample flexibility to manage through adverse conditions. With that, let me turn the call back over to Arnold.

Thank you, Ralph. To summarize, the first quarter was a strong start to the year. We delivered solid earnings, maintained strong credit quality, grew both loans and core deposits, and continued to operate from a position of capital strength. I want to thank our employees for their continued commitment, care, and dedication to our customers and communities. We will now open the call for questions.

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star then one on your telephone keypad. If you would like to withdraw your question, simply press star then one again. Your first question comes from the line of Evan Krotowski from Raymond James. Your line is open.

Good morning. I am on for David Pipkin Feaster. I just wanted to start on loans. What have you been hearing from borrowers in your market, and how has demand been holding up given the uncertainty we are seeing in the market today? And then going forward, I think you mentioned seeing more opportunity or maybe focusing more on the commercial side. What kinds of credits are you targeting there as well?

Hey, Evan. It is David Morimoto. What we are seeing and hearing from our customers has not changed much from prior quarters. We continue to see opportunities, but as we mentioned, they are currently more focused in the commercial area than in the retail area, and that is industry-wide. A lot of the retail loan categories are subdued right now as a result of the interest rate environment, but hopefully that will change going forward. Right now, we are seeing good risk-reward loan opportunities. They tend to be primarily focused in commercial mortgage and, to a lesser extent, in commercial and industrial.

Is that more on the Mainland or in Hawaii, or is it balanced wherever you see the opportunity?

Currently, it is relatively balanced. I will say that quarter to quarter, there is always a lot of variability in deals—when things ultimately end up closing. You might think it is going to close in the second quarter and it slips to the subsequent quarter. But currently, what we are seeing in the pipeline is relatively balanced. We are always targeting to grow both Hawaii and the Mainland every quarter, but as we saw this quarter, it varies based on a lot of different factors.

That is helpful. Pivoting to the margin, you were able to achieve further funding cost leverage during the quarter, which is no easy feat seeing as deposit costs are at 90 bps. Do you think you have hit a floor on funding costs from here? If so, what are the main drivers for the margin going forward with the Fed seemingly on hold?

Hi, Evan. With the Fed on hold, we expect our deposit cost will level out somewhat. We do have some downward repricing opportunity on our CD portfolio. We have about $480 million, or slightly less than 50% of our CD portfolio, maturing in the second quarter with a weighted average rate of 2.8% coming off, while our new CD rates on a blended basis are approximately 2.5%. Thinking about the NIM going forward, we will improve our earning asset mix as we plan to optimize our excess liquidity by growing loans and some securities. We also expect to continue to get a positive lift from back book repricing, although that lift has moderated somewhat. On the funding side, we do expect some modest continued decline in our CD cost. All in all, our NIM is expected to remain relatively close to where it is today. With the Fed on hold and our position being fairly neutral to slightly asset sensitive, we think it could be modestly positive to us, but not a big overall impact. Bottom line, we feel really good about our strong NIM being in the mid-3% range, and that gives us some flexibility to be more competitive in the market to drive growth and revenue.

If I can ask one more: you were active on the buyback this quarter and still maintain a good amount of excess capital. How are you thinking about capital priorities today, and do you see any opportunities for balance sheet optimization with that excess capital?

Our capital priorities remain the same. We continue to deploy our capital in a very thoughtful and deliberate manner. As we have said before, our top priority is to use capital for loan growth and to support our clients. We plan to continue our quarterly cash dividend, and any excess capital beyond what we can use to organically grow the business we will consider for share repurchases. You will likely see that we return a similar amount of capital as we did this past quarter through both dividends and share repurchases.

Your next question comes from the line of Matthew Clark from Piper Sandler. Your line is open.

Good morning, everyone. A couple more questions around the margin. Dayna, do you have the spot rate on deposit costs for March?

For March month-to-date, deposit cost was 90 basis points, and the spot rate at the end of March was about the same.

And on the asset side, on average how much do you have in fixed loan repricing or runoff per quarter, and the same on the securities side in terms of cash flows?

We typically have around $200 million to $250 million of loan runoff each quarter. Our weighted average new loan yield in the first quarter was 6%, compared to our average loan portfolio yield in the quarter of 4.9%, so we continue to see positive repricing there. On the securities portfolio, cash flows are about $30 million per quarter at a weighted average rate of about 2.8%, and our new security purchase yields have been around 5%, so we continue to get a very nice lift there.

Given those dynamics—some basis points on CD repricing and a few basis points on loans and securities—why guide the margin to 3.50% to 3.55% instead of closer to, say, 3.60%?

There are a lot of factors and variables that go into the NIM. In addition to the moderation of the back book repricing I mentioned, on the competitive front we do see some pressure on spreads and new loan yields due to the competitive nature of the market. Those are some of the factors we are considering. Our NIM path will largely depend on loan growth, market dynamics, and the shape of the yield curve going forward.

I will add that we have a healthy NIM level, and we want to be thoughtful about balancing further improvement with being selective and competitive in the local market. We remain very committed to maintaining a very healthy NIM overall.

Do you still anticipate a few construction projects funding this quarter, and how should we think about the related reserves you put against them?

There is one large residential condominium project that is expected to close in the second quarter. That will be a paydown on the construction side, but it will largely be offset by takeout mortgages on the residential mortgage side for the homeowners.

On the uptick in criticized loans in the slide deck, what drove that and what is the plan for resolution?

The increase in criticized loans was related primarily to one commercial relationship. There is no systemic deterioration. This is a longtime customer with a viable business and a fairly strong balance sheet. They experienced some operating losses that resulted in a drawdown in liquidity. The plan is to retain and support this customer. We do not see any loss content in that credit.

Your next question comes from the line of Kelly Motta from KBW. Your line is open.

Good morning, and thanks for taking my questions. Circling back to the margin, you mentioned greater competition on loan pricing. Where is the blended rate of new originations now relative to a quarter ago?

In the first quarter, our weighted average new loan yield was 6%. In the fourth quarter, it was 6.8%, so we do see a little bit of moderation there.

Appreciate the color on capital return. I know it is early, but given residential mortgage is a decent part of the portfolio, is it fair to say the proposed capital rules would be beneficial to you, and have you done any preliminary sensitivity around the impact to your regulatory capital ratios?

That is correct. It will be beneficial to us. We are still evaluating the proposal, but it is positive and will have a favorable impact on our capital ratios, particularly from the residential mortgage risk-weighting changes. Our early estimate is an improvement of around 50 to 100 basis points in our CET1 ratio. We will continue to monitor developments on the proposal, and we do not expect it to change our capital strategy.

Two modeling items: on the tax rate, it jumped from Q4, but you had the BOLI death benefit then. Is 22% to 23% a good go-forward effective tax rate?

The increase in our effective tax rate this quarter was due to less tax-exempt BOLI income, and in Q4 we had some tax credit benefits. On a normalized basis, we expect the ETR to be in the range of about 22% to 23%. It could trend lower to the extent that we bring on additional tax credits or have more tax-exempt income.

Lastly, you noted liquidity was higher in Q1. How do you manage liquidity levels, and should we expect some of that to be redeployed into the growth you are seeing?

At 03/31, our cash and liquidity position was very healthy. We had some inflows of deposits and have some excess cash, maybe in the range of about $100 million to $150 million, that could be deployed as opportunities present themselves. Our average earning asset growth may not be too significant as we shift some of that excess cash to loans or securities. Going forward, it will be a function of good loan risk-reward opportunities and our continued focus on growing core deposits.

Thanks for your questions, Kelly.

Again, if you would like to ask a question or have additional follow-up questions, press star then the number one on your telephone keypad now. We will pause for just a few seconds. As there are no further questions, I will now turn the call back over to Jayrald Rabago 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.

This concludes today's conference call. Thank you for your participation. You may now disconnect.