Central Pacific Financial (NYSE:CPF) held its first-quarter earnings conference call on Wednesday. Below is the complete transcript from the call.
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Summary
Central Pacific Financial reported strong earnings in Q1 2026 with net income of $20.7 million and EPS of $0.78, reflecting a 20% increase from the previous year.
The company maintained healthy credit quality and capital strength, with a return on average equity of 13.90% and a net interest margin of 3.53%.
Loan growth was driven by commercial real estate, while deposits increased by $90 million, with core deposits making up over 90% of total deposits.
Central Pacific Financial was named Hawaii's US Small Business Administration Lender of the Year for 2025, highlighting its commitment to local businesses.
Management expects modest loan and deposit growth for 2026, with net interest income projected to rise by 4-6% over the prior year.
The company plans to continue returning capital to shareholders through dividends and share repurchases, with $44.5 million remaining under the share repurchase program.
The outlook includes maintaining a strong balance sheet and focusing on disciplined and sustainable growth strategies amid a resilient Hawaiian economy.
Full Transcript
OPERATOR
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 www.cpb.bank. i'd now like to turn the call over to Mr. Gerald Rubago, Senior Strategic Financial Officer. Please go ahead.
Gerald Rubago
Thank you Rob and thank you all for joining us today as we review Central Pacific Financial Corp's. Financial results of the first quarter of 2026. Joining me this morning are Arnold Martinez, Chairman, President and Chief Executive Officer David Morimoto, Vice Chairman and Chief Operating Officer Ralph Mesic, Senior Executive Vice President and Chief Risk Officer and Dana 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 [email protected] 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 Martinez. Thank you Gerald and Aloha to everyone joining us today. 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 in 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 US Small Business Administration Lender of the Year for 2025. This marks the 17th 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 increased 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 Lo, 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 Dana.
Arnold Martinez (Chairman, President and Chief Executive Officer)
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 13.90%. 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 were 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 priority. Prior year total other operating expense was $43.7 million and declined by $2.0 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 and at 2.5 to 3.5% from 2025 normalized in the first quarter, we paid a cash dividend of $0.29 per share and repurchased approximately 321,000 shares for a total of $10.5 million. With our strong earnings and capital position, our board declared a second quarter cash dividend of $0.29 per share. We had 44.5 million remaining available under our share repurchase program as of March 31st and we plan to continue to utilize it as part of our capital allocation strategy. I will now turn the call over to David.
Dana Matsumoto (Executive Vice President and Chief Financial Officer)
Thank you, Dana. 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 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 yields. 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 non interest 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'll turn the call over to Ralph.
David Morimoto (Vice Chairman and Chief Operating Officer)
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. Non performing assets were 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 trends. 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 $300,000. We identified no material matters impacting our customers from the recent Kona Flow 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.
Ralph Mesic (Senior Executive Vice President and Chief Risk Officer)
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 continue 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 are now happy to answer your questions.
Arnold Martinez (Chairman, President and Chief Executive Officer)
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press Star one in your telephone keypad. If you would like to withdraw your question, simply press Star one again. Your first question comes from the line of Evan Kwitkowski from Raymond James. Your line is open.
OPERATOR
Hey, good morning guys. I'm on for David Feaster.
Evan Kwitkowski
Good morning. So I just wanted to start on loans. I'm just curious, you know, what you've been hearing from borrowers in your market and maybe how demand has been holding up given a lot of the uncertainty we're seeing in the market today. And then going forward, I think you mentioned seeing more opportunities or maybe focusing more on the commercial side. So I'm just kind of curious, you know, what kind of credits you're targeting there as well. Thanks,
David Morimoto (Vice Chairman and Chief Operating Officer)
Evan. It's David Morimoto. Yeah, I think on what we're seeing and hearing from our customers hasn't changed much from prior quarters. You know, we continue to see opportunities, but as we mentioned, they currently are focused more in the commercial area than in the retail area. And that's industry wide. Right. 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. But right now we're seeing good risk reward loan opportunities. They tend to be primarily focused in commercial mortgage and to a lesser extent in commercial and industrial.
Evan Kwitkowski
And then maybe on that, is that more, Are you seeing more opportunities on the mainland or in Hawaii or is it kind of balanced or just wherever you see the opportunity.
David Morimoto (Vice Chairman and Chief Operating Officer)
Yeah, Evan, currently it's relatively balanced. I will say that quarter to quarter, there's always a lot of variability, right. In deals, right when things ultimately end up closing. You might think it's going to close in the second quarter and it slips to a subsequent quarter. But currently what we're seeing in the pipeline is it's relatively balanced and we're always targeting rough to grow both Hawaii and the mainland every quarter. But as we saw, like in this quarter, it varies based on a lot of different factors.
Evan Kwitkowski
That's really helpful. And then maybe pivoting to the margin, you were able to achieve further funding cost leverage during the quarter, which is no easy feat seeing as you know, deposit costs are at 90bps. Do you think you've kind of hit a floor on the funding cost side from here? And if so, what do you think the main drivers for the margin are going forward with the Fed seemingly on hold?
Dana Matsumoto (Executive Vice President and Chief Financial Officer)
Hi Evan, it's Dana. Thank you for the question. Yeah, with the Fed on hold, we expect our deposit costs will level out somewhat. We do have some downward repricing opportunity on our CD portfolio. We have about $480 million, or that's slightly less than 50% of our CD portfolio maturing in the second quarter, and that has a weighted average rate of 2.8% coming off, while our new CD rates on a blended basis are approximately 2.5%. And then just thinking about the NIM going forward, some of the dynamics there, we will improve our earning asset mix as we do 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. And as I mentioned on the funding side, we do expect some modest continued decline in our CD costs. But 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. But bottom line is 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.
Evan Kwitkowski
That's really helpful. And then maybe if I can ask one more, I saw that you were active on the buyback this quarter and you still maintain a good amount of excess capital. I just wanted to get a sense of how you're thinking about capital priorities today. If you see any opportunities for balance Sheet optimization with that excess capital.
Dana Matsumoto (Executive Vice President and Chief Financial Officer)
Sure. Our capital priorities, Evan, they remain the same. We continue to deploy our capital in a very thoughtful and deliberate manner. And as we've said before, our top priority is going to be to use capital for loan growth and to support our clients. We do plan to continue our quarterly cash dividend and then any excess capital beyond what we can use to organically grow the business. We will consider that for share repurchases. So what you'll likely see is that we'll return a similar amount of capital as we did this past quarter through both dividends and share repurchases.
Evan Kwitkowski
Awesome. Thank you for taking my question, guys. I'll step back.
OPERATOR
Your next question comes from the line of Matthew Clark from Piper Sandler. Your line is open.
Matthew Clark
Hey, good morning, everyone. Just a couple more questions around the margin. Dana, if you had the spot rate on deposits deposit costs at the end of March.
Dana Matsumoto (Executive Vice President and Chief Financial Officer)
Sir Matthews, for the March month to date deposit cost, it was 90 basis points. And then the spot rate at the end of March was about in the same area.
Matthew Clark
Okay. And then on the asset side, can you remind us on average, how much you have in fixed loan repricing per quarter? And same on the security side in terms of cash flows?
Dana Matsumoto (Executive Vice President and Chief Financial Officer)
Yes. We typically have around 200 to 250 million dollars of loan runoff each quarter. And our weighted average new loan yield in the first quarter was 6.0%. And you can compare that to our average loan portfolio yield in the quarter of 4.9%. So we continue to see positive repricing there. On the securities portfolio, the cash flows, it's 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.
Matthew Clark
Okay, great. So I guess I'm wondering why the margin guide is 350 to 355. When you put these dynamics together, you know, a couple of basis points on CD repricing, you know, a few basis points, you know, three to four on loans and securities. I haven't done the math yet, but I assume it's modestly helpful. I mean, it puts you closer to 360, I guess. What's. What's keeping you at. You know, I'm just curious. Why the. Why the 350 or the lower end of the range there? What's. What's driving that?
Dana Matsumoto (Executive Vice President and Chief Financial Officer)
Yeah, Matthew, I mean, there's a lot of factors and variables that go into the nim. As you know, I think one other thing in addition to the moderation of the back book repricing that I mentioned on the competitive front, we do see some pressure on spreads and new loan yields just due to the competitive nature of the market. So that's some of the factors we're considering. But our NIM path will just largely depend on loan growth, the market dynamics and the shape of the yield curve going forward.
Arnold Martinez (Chairman, President and Chief Executive Officer)
Yeah, and maybe Matthew, I'll add, this is Arnold. You know, I think we do have a pretty healthy level of, you know, healthy NIM level. And I think, you know, we want to, we want to be thoughtful about, you know, balancing, you know, improvement in property, which we have done the last few years with, you know, being selective on competitiveness, you know, in the local market. So that's kind of what, you know, is happening there. But you know, we continue to be very committed to maintaining a very healthy NIM overall.
Matthew Clark
Got it. And then do you still anticipate a few construction projects funding this quarter or where does that stand as we think about the related reserves you put against it?
David Morimoto (Vice Chairman and Chief Operating Officer)
Yeah. Hey Matthew, it's David. There is one large residential condominium project that is expected to close in the second quarter. So that will be a pay down on the construction side, but it will largely be offset by takeout mortgages on the residential mortgage side for the homeowners.
Matthew Clark
Okay, great. And then last one just on the uptick and criticized in the slide deck which drove that. And what's the plan there for resolution? Yeah, Matthew, this is our Ralph. You know, the increase in criticized loans really was related to one, primarily one commercial relationship. So there's no systemic deterioration there. This is a long time customer. It's a viable business. I think fairly strong balance sheet. They had experienced some operating losses that resulted in some drawdown in liquidity. So I think the plan there really is to retain and support this customer. We don't see any loss coming content in that credit. Okay, perfect. Thank you.
Ralph Mesic (Senior Executive Vice President and Chief Risk Officer)
Your next question comes from the line of Kelly Mata from kbw. Your line is open.
OPERATOR
Hi, good morning. Thanks for the question. Maybe if I could circle back to the margin. I apologize if I missed it. I did catch your commentary around some greater competition on the loan pricing side. Can you remind us where a blended rate of new originations is now relative to maybe a quarter ago?
Kelly Mata
Sure. Hi Kelly, it's Dana. In the first quarter, our weighted average new loan yield was 6.0%. And then if you compare that in the fourth quarter, I believe it was 6.8%. So we do see a little bit of Moderation there.
Dana Matsumoto (Executive Vice President and Chief Financial Officer)
Got it, got it. That's helpful. And then I appreciate the commentary around capital return. It seems very consistent with the commentary you've had so far. I know it's really early, but just, you know, given residential mortgage is a decent part of the portfolio, I wonder if fair to say the proposed capital rules would be beneficial to you guys. And have you guys done any preliminary sensitivity around the impact to your regulatory capital ratios?
Kelly Mata
That's correct, Kelly. It will definitely be beneficial to us, I'd say on the proposal we're still evaluating it, but it's positive it will have a favorable impact for our capital ratios, particularly from the residential mortgage risk weighting changes. And an early estimate is we're expecting around 50 to 100 basis point improvement in our CET1 ratio. But we'll continue to monitor the developments on the proposal and we don't really expect it to change our capital strategy in any way.
Dana Matsumoto (Executive Vice President and Chief Financial Officer)
Got it. Maybe two last just nitpicky modeling questions if I may. Just on the tax rate, it jumped up a bit from Q4, but you did have the bully death benefit. Dana, is this kind of 23% tax rate a good go forward rate or any considerations as we think through the full year? That did come in a bit higher. Thank you.
Kelly Mata
The increase in our effective tax rate this quarter was due to less tax exempt boli income. As you noted. Also in the prior quarter in Q4, we had some tax credit benefits. Going forward, kind of on a normalized rate, 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, but we feel pretty good about that range for now.
Dana Matsumoto (Executive Vice President and Chief Financial Officer)
Got it, got it. That's helpful. And then last question for me. You noted part of the maybe greater pressure than we may have expected on Q1 margin was liquidity was higher. Dana, can you remind us what how you, how you guys manage your liquidity levels? As I'm assuming some of that gets redeployed back into the growth you're seeing.
Kelly Mata
Yeah, that's right, Kelly. At 331, our cash and liquidity position was very healthy. We did have some inflows of deposits. We do have some excess cash maybe in the range of about 100 to 150 million that could be deployed to opportunities as it as those present itself. So I think our average earning asset growth may not be too significant as we shift some of that excess cash to loans or securities. But going forward it's always going to be a function of good loan risk, reward opportunities and also our continued focus on growing core deposits.
Dana Matsumoto (Executive Vice President and Chief Financial Officer)
Understood. Thank you so much.
Kelly Mata
Thanks for your question Kelly.
OPERATOR
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 JROL Rebago for closing remarks.
JROL Rebago
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.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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