Central Pacific Financial's Q3 2025: Contradictions Emerge on Hawaii Loan Growth, Deposit Cost Reduction, and Pipeline Opportunities

Date of Call: October 29, 2025

Financials Results

• Revenue: Net interest income $61.3M, up 2.5% sequentially
• EPS: $0.69 per diluted share (net income $18.6M); adjusted $0.73 excluding $1.5M onetime costs

Guidance:

• Q4 net interest income expected $62M–$63M and NIM to widen 5–10 bps
• Normalized Q4 other operating income $12M–$13M
• Q4 total other operating expense guided $45M–$46M; annualized savings from consolidation ~ $1M
• Full-year 2025 loan growth expected low single-digit; Q4 deposits likely flattish with 2026 deposit target low single-digit
• Redeem $55M subordinated notes on Nov 1; CET1 target 11%–12%, TCE target 7.5%–8.5%
• Continue quarterly dividend (~40% payout) and opportunistic share repurchases ( ~$23M authorization remaining)

Business Commentary:

* Strong Financial Performance: - Central Pacific Financial Corp. reported net income of $18.6 million or $0.69 per diluted share in Q3 2025. - Adjusted net income was $19.7 million or $0.73 per diluted share, excluding $1.5 million in onetime pretax office consolidation costs. - The growth was driven by deposit and loan growth, margin expansion, and strategic consolidation of operations.

• Deposit and Loan Growth:
• Loans increased by $77 million and deposits by $33 million, with average yields on total loans increasing by 5 basis points to 5.01%.
• Hawaii loan growth was led by commercial, commercial mortgage, and construction loans, while Mainland growth was driven by commercial mortgage and construction.

• This growth was supported by increasing market share within the core Hawaii market and diversification through Mainland lending opportunities.

• Capital Management and Shareholder Returns:

• Central Pacific redeemed $55 million in subordinated notes at par and declared a quarterly cash dividend with a 40% payout ratio.
• The company repurchased 78,000 shares in Q3 and an additional 127,000 shares through October 27, using $23 million remaining in the repurchase authorization.

• This capital management strategy is focused on optimizing long-term value for shareholders and maintaining prudent capitalization levels.

• Credit Quality and Risk Management:

• Net charge-offs were $2.7 million or 20 basis points annualized on average loans, with nonperforming assets totaling $14.3 million or 19 basis points of total assets.
• The decrease in provision expense was primarily driven by lower net charge-offs, reflecting strong credit performance and asset quality.
• The risk management strategy focuses on maintaining a high level of solvency while delivering acceptable risk-adjusted returns, ensuring accretive growth, and maintaining balance and diversification.

Sentiment Analysis:

Overall Tone: Positive

• Management: "we are pleased to report that our bank delivered strong results this quarter"; reported net income $18.6M ($0.69/sh), NII up 2.5% sequentially to $61.3M, NIM expanded 5 bps to 3.49%, strong credit metrics (NPAs $14.3M, 19 bps), and capital above targets (total risk-based capital 15.7%).

Q&A:

• Question from David Feaster (Raymond James & Associates, Inc., Research Division): I wanted to start on the growth side. I appreciate some of your commentary, but I did want to get a sense of what drove the declines in loans in Hawaii? And what gives you confidence that growth on the islands accelerates? And then maybe just touching on -- in that conversation, some of the impacts of the government shutdown in the islands as well as opportunities to capitalize on some of the disruption as well across your footprint, too.
  Response: Hawaii loan declines were driven by runoff in residential mortgage and HELOC; construction, C&I and commercial mortgage grew — management expects runoff to moderate as rates ease and a healthy pipeline should support more balanced Hawaii/Mainland growth.

• Question from David Feaster (Raymond James & Associates, Inc., Research Division): And then maybe touching on the expense side. I appreciate the color that you gave in the guidance. It's a bit higher than what we've been expecting. It sounds like there's some cost saves with that op center consolidation. I know a decent amount of its incentive accruals. But just kind of curious, as you think about the expenses, where are you investing today? I mean, are you seeing opportunities for new hires? Are there some other key investments that you guys are making? And just how do you think about your ability to drive positive operating leverage going forward?
  Response: Investing in technology and people to drive efficiencies; one-time consolidation costs increased Q3 expenses and incentive accruals rose, but goal remains improving efficiency ratio toward high-50%/mid-50s through revenue growth and automation.

• Question from David Feaster (Raymond James & Associates, Inc., Research Division): Okay. That's helpful. And then hoping you could maybe touch on the deposit side of the equation and what you guys are seeing there from a competitive landscape, some of the core deposit growth initiatives that you've got in place? And just how do you think about your ability to -- we just got another Fed cut, right? How do you -- just given the competitive landscape, how do you think about the ability to pass through some of these and reduce deposit costs with Fed cuts?
  Response: Q4 likely flattish due to known outflows; management expects low-single-digit deposit growth in 2026 driven by core banking execution and Asia initiatives (Japan/Korea) while working to pass along rate moves to lower deposit costs.

• Question from Matthew Clark (Piper Sandler & Co., Research Division): Just on the -- starting on the margin, interest-bearing deposit costs up a couple of bps, but the NIM guide implies -- you're calling for NIM expansion. So my sense is those costs have rolled over. Do you have the spot rate at the end of September on interest-bearing deposits?
  Response: Spot rate on total deposits was 100 bps at 9/30; September month-to-date margin was 3.51%.

• Question from Matthew Clark (Piper Sandler & Co., Research Division): Okay. Great. And then you're going to get a 2-month benefit from redeeming the sub debt. When you strip out the sub debt, it implies the rest of your long-term debt costs are about $623. Can you remind us of the duration of that long-term debt that's left? And I just want to try to forecast the rate.
  Response: Only one remaining long-term advance: a $25M FHLB advance maturing February 2028.

• Question from Matthew Clark (Piper Sandler & Co., Research Division): And then just on the -- do you happen to have the -- or just on the loan growth this quarter, the Mainland piece, the CRE and construction. Maybe if you could just provide some color on what you originated this quarter. I assume it's all participations and just an update on the size of the SNC portfolio.
  Response: Mainland growth this quarter was concentrated in industrial and multifamily within CRE and construction; Mainland lending provides diversification and volume will vary quarter-to-quarter based on opportunity.

• Question from Matthew Clark (Piper Sandler & Co., Research Division): Great. And then just maybe on the SNC exposure at the end of the quarter.
  Response: Total SNC exposure ~ $526M: Mainland CRE ~ $190M and mainland broadly syndicated loans ~ $144M; syndicated exposure has been declining over the past year.

• Question from Matthew Clark (Piper Sandler & Co., Research Division): Okay. That's helpful. And then the last one for me, just on the special mention and substandard balances, where those stood at the end of September.
  Response: Special mention $34.3M and classified $62.1M; largely two large secured, performing credits that are expected to continue performing with no expected loss if they default.

• Question from Kelly Motta (Keefe, Bruyette, & Woods, Inc., Research Division): I was hoping to circle back to the expense side to David's question on compensation. You had mentioned some of that increase was related to step-up in bonus accruals. I'm just wondering how much of that, call it, $2 million was related to that. I appreciate the guidance about Q4, but just trying to get a good run rate as we kind of start the year next year.
  Response: $1.5M of the $2.1M increase in salaries and employee benefits was related to incentive accruals.

• Question from Kelly Motta (Keefe, Bruyette, & Woods, Inc., Research Division): Okay. That's super helpful. And then I appreciate the new color on capital targets. It looks like you're currently within the range on TCE and above on CET1. Kind of wondering how you guys are thinking about this level here. Does that imply potentially some more capital return? And given your outlook for balance sheet growth, it would seem that absent maybe more aggressive buybacks that would build. So wondering how you guys are kind of thinking about managing that and kind of the intermediate-term trajectory of capital levels.
  Response: Target ranges consider rating agency expectations and downside protection; capital priorities are: continue quarterly dividend (~40% payout), fund accretive loan growth, and opportunistic buybacks — repurchases depend on loan growth and market conditions.

• Question from Kelly Motta (Keefe, Bruyette, & Woods, Inc., Research Division): Okay. That's helpful. I guess kind of given this low single-digit outlook, like what would -- as we look to next year, make you more confident with the loan growth stepping up to kind of deploy more of that CET1 into that range?
  Response: Management expects rate declines to release pent-up demand—particularly in Hawaii—and if rates fall, loan demand should increase and capital will be deployed into accretive lending.

• Question from Kelly Motta (Keefe, Bruyette, & Woods, Inc., Research Division): Got it. That's helpful. Last question for me. It looks like you have a new Japanese bank partner. Just if you could remind us about the potential opportunities that you see leveraging now your third relationship that you have with the bank over there.
  Response: The Kyoto Shinkin partnership expands CPF's Japan footprint into the Kansai region (Kyoto/Osaka/Kobe) to facilitate cross-border opportunities for Japanese corporates with Hawaii operations and support customer collaboration between regions.

Contradiction Point 1

Loan Growth Expectations in Hawaii

It reflects differing perspectives on the expected trajectory of loan growth in Hawaii, which is a key market for the bank and critical for investor expectations.

What caused the loan decline in Hawaii, and what gives you confidence in future growth there? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q3: Runoff in residential mortgage and HELOC portfolios was overcome by growth in construction, C&I, and commercial mortgage sectors in Hawaii. Moderating interest rates may reduce runoff, boosting future growth. - [Arnold Martines](CEO)

Can you elaborate on the loan growth opportunities in Hawaii, including the balance between proactive initiatives and demand-driven factors, and the areas with the most potential? - David Feaster (Raymond James)

2024Q4: Central Pacific is optimistic about loan growth in 2025. The bank is experiencing increased loan demand, supported by team proactivity and new lending team members. Growth will primarily come from commercial and commercial real estate segments. - [Arnold Martines](CEO)

Contradiction Point 2

Deposit Cost Reduction Strategy

It highlights different approaches to reducing deposit costs, which are crucial for the bank's profitability and market positioning.

What are your deposit growth strategies, and how will you pass through Fed rate cuts to lower deposit costs? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q3: Strategies include the blocking and tackling of banking, with success in Hawaii and optimism for Asian initiatives. Expecting more balanced growth in loans between Hawaii and Mainland markets, with future deposit growth anticipated in 2026. - [David Morimoto](COO)

Where are opportunities to drive deposit growth and how is the competitive landscape shaping up for deposits, particularly in reducing costs? - David Feaster (Raymond James)

2024Q4: Central Pacific is pleased with its deposit growth while reducing total deposit costs. Growth has been due to seasonal DDA deposits and strategic relationship building. The bank has successfully expanded core deposits and reduced costs, demonstrating its market position advantage. - [David Morimoto](CFO)

Contradiction Point 3

Loan Growth and Pipeline Opportunities

It highlights differing perspectives on the growth opportunities and loan pipeline, which are crucial for banking institutions' future performance.

What caused the loan decline in Hawaii, and what gives you confidence in its growth acceleration? Also, how will you leverage government shutdown disruption? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q3: Runoff in residential mortgage and HELOC portfolios was overcome by growth in construction, C&I, and commercial mortgage sectors in Hawaii. Moderating interest rates may reduce runoff, boosting future growth. The bank is optimistic about future growth given a healthy pipeline and potential opportunities arising from disruptions, like the government shutdown. - [Arnold Martines](CEO)

How are clients responding to market volatility and uncertainty? How is the sales pipeline trending? What are the most promising growth opportunities? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q1: We remain cautiously optimistic for the rest of the year. Loan growth opportunities are focused in commercial areas, including C&I, commercial mortgage, and construction. - [Arnold Martines](CEO)

Contradiction Point 4

Deposit Growth and Cost Management

It involves differing strategies and expectations for deposit growth and cost management, which are critical for a bank's financial sustainability.

What are your deposit growth strategies, and how do you plan to pass through Federal Reserve rate cuts to reduce deposit costs? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q3: Strategies include the blocking and tackling of banking, with success in Hawaii and optimism for Asian initiatives. Expecting more balanced growth in loans between Hawaii and Mainland markets, with future deposit growth anticipated in 2026. - [David Morimoto](COO)

Can you discuss the competitive funding environment on the islands and your strategy for core deposit growth? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q1: We're very pleased with our deposit performance, with average balances up and a favorable mix shift. Our teams are focused on growing core deposits, and we expect funding costs to continue trending down. - [Dayna Matsumoto](CFO)