Overview

Central Pacific Financial Corp. (CPF) is a bank holding company that owns Central Pacific Bank, a full-service community bank in Hawaii. The bank was founded by World War II veterans to serve the needs of individuals and small businesses that did not have access to financial services in Hawaii at the time.

Today, Central Pacific Bank operates 27 branches and 55 ATMs throughout the state of Hawaii. The bank provides a range of products and services including loans, deposits, wealth management, and services catered to the Japanese market due to the company’s historical connections.

Financial Summary

In the first quarter of 2025, Central Pacific Financial Corp. reported net income of $17.8 million, or $0.65 per diluted share, compared to $12.9 million, or $0.48 per diluted share, in the same period a year earlier.

The company recorded a provision for credit losses of $4.2 million in Q1 2025, up from $3.9 million in Q1 2024, primarily due to changes in the economic forecast used in its credit loss model.

Pre-provision net revenue (PPNR), a non-GAAP metric that excludes the provision for credit losses and income taxes, was $26.7 million in Q1 2025 compared to $20.9 million in Q1 2024. The increase was driven by higher net interest income.

The company’s efficiency ratio, another non-GAAP metric, improved to 61.16% in Q1 2025 from 66.05% in the year-ago quarter, reflecting higher revenues and controlled expenses.

Trends and Outlook

Central Pacific’s performance is heavily influenced by economic conditions in Hawaii, including the strength of the real estate market, tourism industry, and overall business environment.

Hawaii’s economy showed mixed signals in early 2025. Visitor arrivals were up slightly from the prior year but still below pre-pandemic levels, particularly for visitors from Japan. The state’s unemployment rate remained low at 2.9% in March 2025. Real personal income and gross state product are projected to grow modestly in 2025.

The company’s lending activities are focused on commercial and real estate loans in Hawaii as well as selective mainland markets. The Hawaii housing market saw some softening in the first quarter, with single-family home sales down 4% and condominium sales up 0.4% year-over-year.

Changes in monetary policy, including interest rate hikes by the Federal Reserve, could impact the company’s net interest income, loan originations, and asset values. The Fed raised rates aggressively in 2022 and 2023 to combat inflation, but has since lowered them slightly as inflation has moderated.

Results of Operations

Net interest income, which is the difference between interest earned on loans and investments versus interest paid on deposits and borrowings, was the primary driver of Central Pacific’s improved profitability. Net interest income rose 14.9% to $57.9 million in Q1 2025 compared to the year-ago quarter.

The increase was due to higher average yields on interest-earning assets, particularly loans and investments, as well as lower average rates paid on interest-bearing deposits. The company’s net interest margin expanded by 48 basis points to 3.31% year-over-year.

Noninterest income, which includes fees and other revenue sources outside of lending and investing activities, was relatively flat at $11.1 million in Q1 2025 compared to $11.2 million a year earlier. Declines in income from bank-owned life insurance were offset by higher service charges and fiduciary fees.

Noninterest expense increased 3.7% to $42.1 million in the first quarter, driven by higher personnel costs, legal/professional fees, and computer software expenses, partially offset by lower deferred compensation plan costs.

The company’s effective tax rate declined to 21.25% in Q1 2025 from 23.49% a year earlier, primarily due to increased low-income housing tax credits.

Asset Quality and Capital

Nonperforming assets, which include nonaccrual loans and other real estate owned, were $11.1 million as of March 31, 2025, up slightly from $11.0 million at the end of 2024. The ratio of nonperforming assets to total assets remained stable at 0.15%.

The allowance for credit losses (ACL) on loans totaled $60.5 million at the end of Q1 2025, up from $59.2 million at year-end 2024. The ACL to total loans ratio was 1.13%, compared to 1.11% at the end of 2024.

Central Pacific’s capital ratios remained well above regulatory minimums for a “well-capitalized” institution. The company’s total risk-based capital ratio was 15.6% as of March 31, 2025, compared to the 8.0% minimum. Its common equity tier 1 (CET1) ratio was 12.4%.

The holding company had $21.1 million in available cash as of March 31, 2025 to meet its obligations, while the bank subsidiary had $207.8 million in retained earnings available for dividends to the parent.

Liquidity and Funding

Central Pacific maintains a diversified funding base, primarily composed of core deposits including demand, savings, and time deposits under $250,000. Core deposits totaled $5.98 billion, or 90.6% of total deposits, as of March 31, 2025.

The company also has access to other short-term and long-term funding sources such as the Federal Home Loan Bank, secured repurchase agreements, and the Federal Reserve discount window. As of the end of Q1 2025, the company had $276.9 million in cash and $2.54 billion in additional liquidity sources.

Interest Rate Risk Management

As a financial institution, Central Pacific is exposed to interest rate risk - the risk that changes in interest rates could adversely impact its net interest income and the economic value of its assets and liabilities.

The company uses an asset-liability management process to monitor and manage this risk. It utilizes earnings simulation models and economic value of equity (EVE) analysis to measure the sensitivity of net interest income and capital to changes in interest rates under various scenarios.

The results of these analyses show that Central Pacific’s balance sheet is relatively well-matched against movements in interest rates and within the company’s risk limits approved by the Board of Directors.

Conclusion

Central Pacific Financial Corp. reported strong financial results in the first quarter of 2025, driven by growth in net interest income amid a rising rate environment. The company’s diversified business model, prudent risk management, and solid capital and liquidity positions position it well to navigate the current economic landscape in Hawaii and selectively expand in mainland markets.

However, the company remains exposed to risks from changes in monetary policy, the strength of the local economy, and competitive pressures in its lending and deposit-gathering activities. Ongoing monitoring and management of these risks will be crucial to sustaining the company’s performance going forward.