Executive Summary / Key Takeaways

• Robust Financial Performance Amidst Headwinds: Central Pacific Financial Corp. (CPF) delivered strong Q3 2025 results, with net income rising to $18.6 million ($0.69 diluted EPS) and net interest margin expanding to 3.49%. This performance reflects effective balance sheet management and disciplined pricing strategies, even as Hawaii's tourism sector faces softness.
• Strategic Balance Sheet Optimization: CPF is actively enhancing its balance sheet through targeted loan growth in commercial, commercial mortgage, and construction segments, both in Hawaii and on the U.S. Mainland. Concurrently, it is optimizing funding costs through core deposit growth and strategic debt redemptions, including the upcoming $55 million subordinated note redemption.
• Commitment to Capital Stewardship and Shareholder Returns: The company maintains a strong capital position, with all regulatory ratios exceeding "well-capitalized" thresholds. Its capital deployment strategy prioritizes a consistent quarterly dividend (40% payout ratio), accretive loan growth, and opportunistic share repurchases, signaling confidence in future earnings.
• Technological and Operational Efficiency Drive: CPF is investing in technology and consolidating operations to drive efficiencies and enhance customer experience. The recent consolidation of its Operations Center is expected to yield $1 million in annual savings, contributing to a long-term goal of achieving an efficiency ratio in the mid-50s.
• Hawaii-Centric with Diversified Growth Levers: While deeply rooted in Hawaii's economy, CPF strategically diversifies through U.S. Mainland lending and international partnerships, such as the new collaboration with Kyoto Shinkin Bank. This approach mitigates regional risks while capitalizing on local strengths in construction and real estate.

Central Pacific Financial: A Legacy of Local Strength and Strategic Evolution

Central Pacific Financial Corp. (CPF), through its principal subsidiary Central Pacific Bank, has been a cornerstone of Hawaii's financial landscape since its founding in 1954 by World War II veterans. This legacy of serving underserved individuals and small businesses continues to define its mission: to deliver exceptional customer service, provide tailored financial products, support Hawaii's housing needs, and act as a crucial bridge between Hawaii and Japan. Operating as a single reportable segment focused on banking operations, CPF's strategy is deeply intertwined with the economic dynamics of the Hawaiian Islands, while also seeking diversified growth avenues.

The Hawaiian economy, a primary driver for CPF's performance, presents a mixed but resilient picture. While tourism, a key sector, has experienced some softness due to U.S. trade policies, ongoing construction and military spending provide meaningful support. For instance, the total value of construction in 2024 for the first ten months increased an impressive 20.3% compared to 2023, forecasted to exceed $14 billion. Hawaii's labor market remains robust, with a seasonally adjusted unemployment rate of 2.7% in August 2025, outperforming the national rate. However, the University of Hawaii Economic Research Organization (UHERO) forecasts a challenging economic outlook for the remainder of 2025, anticipating a mild recession driven by weakening U.S. and global conditions, declining international tourism, and stalled job growth. Inflation is also expected to rise due to tariff impacts. Despite these headwinds, real personal income is forecast to grow modestly by 1.3% in 2025, and real gross state product by 1.7% in 2025.

CPF's overarching strategy is anchored in disciplined capital stewardship, aiming to optimize bottom-line returns while maintaining high liquidity and prudent capital levels. This involves thoughtful capital allocation, measured risk-taking, and ethical business practices. The company's balance sheet strategy is designed to enhance composition, improve risk-adjusted returns, shorten duration, and increase diversification across products and geographies. Its four core priorities are enhancing products, building a strong team, strengthening the balance sheet, and growing the business prudently through disciplined programmatic strategies.

Technological Edge and Operational Efficiency

Central Pacific Financial is actively investing in technology and process automation to drive efficiencies and enhance its service delivery. While the company does not disclose a single, proprietary "core differentiated technology" in the manner of a specialized manufacturing firm, its technological advancements are focused on improving operational effectiveness and customer experience within its banking operations. These investments include new systems aimed at creating efficiencies and providing better tools for employees to support customers. The company's computer software expenses increased in Q2 2025, driven by a new data center, indicating ongoing infrastructure upgrades. This investment in digital infrastructure is crucial for supporting modern banking services and achieving long-term efficiency goals.

A past initiative, the "12 FinTech app," developed in 2022, unfortunately resulted in a $1.4 million impairment charge on intangible assets in Q4 2024. This demonstrates the inherent risks and learning curve associated with technological innovation in the financial sector. However, the company's current focus remains on leveraging technology for strategic advantage. Management has explicitly stated that a key objective is to drive the efficiency ratio to the high 50% range and eventually the mid-50s over time, which they plan to achieve through consistent revenue growth, process automation, and greater use of technology. This commitment to technological enhancement, despite past setbacks, underscores its importance to CPF's competitive moat by improving operational agility and potentially lowering long-term operating costs.

Competitive Landscape and Strategic Positioning

Central Pacific Financial operates in a competitive banking environment, primarily in Hawaii, where it contends with both larger regional players and national institutions. Its main direct competitors include First Hawaiian Bank (FHB) and Bank of Hawaii (BOH), both deeply entrenched in the local market, as well as national giants like Wells Fargo (WFC) which have a significant presence.

CPF's competitive advantages stem from its strong local brand and community-centric approach, fostering deep customer loyalty and recurring revenue streams. Its extensive branch network in Hawaii, coupled with diversified service offerings including wealth management and digital banking, allows it to cater effectively to local businesses and individuals. This localized service delivery provides a qualitative edge in customer intimacy, potentially allowing for better pricing power and stable funding sources compared to more standardized national offerings. The recent strategic partnership with Kyoto Shinkin Bank further strengthens its unique "bridge between Hawaii and Japan" proposition, creating new opportunities for small and midsized customers and enhancing growth prospects.

However, CPF faces vulnerabilities due to its regional concentration, which exposes it more directly to local economic downturns compared to nationally diversified banks. While its investments in technology aim to enhance efficiency, larger competitors like Wells Fargo possess significantly greater resources for advanced technology integration and broader market positioning, potentially leading to faster processing and wider accessibility for customers. The deposit pricing market in Hawaii is described as "pretty rational," suggesting a stable competitive environment for funding costs, where CPF's disciplined pricing strategies have proven effective.

Financial Performance and Operational Momentum

Central Pacific Financial reported net income of $18.6 million, or $0.69 per diluted share, for the third quarter of 2025, a notable increase from $13.3 million, or $0.49 per diluted share, in the same period of 2024. For the nine months ended September 30, 2025, net income reached $54.6 million, or $2.01 per diluted share, up from $42.1 million, or $1.55 per diluted share, in the prior year. The company's return on average assets (ROA) stood at 1.01% and return on average shareholders' equity (ROE) at 12.89% for Q3 2025, reflecting disciplined execution.

Net interest income (NII) was a significant driver of performance, rising to $61.3 million in Q3 2025, a 13.9% increase from Q3 2024. The net interest margin (NIM) expanded by 42 basis points year-over-year to 3.49%. This expansion was primarily fueled by higher average yields earned on loans and investment securities, combined with lower average rates paid on interest-bearing deposits. The average yield on total loans increased to 5.01% in Q3 2025, with new loan production yielding approximately 6.9%. The investment portfolio repositioning completed in Q4 2024, which involved selling $106.5 million in lower-yielding securities and reinvesting at approximately 280 basis points higher, is projected to increase prospective annualized NII by $2.7 million and NIM by four basis points.

The loan portfolio totaled $5.37 billion as of September 30, 2025, increasing by $34.4 million (0.6%) from December 31, 2024. Growth was primarily in commercial mortgage, construction, and commercial and industrial loans, particularly on the U.S. Mainland, which saw a $135.1 million increase. The Hawaii loan portfolio experienced growth in these segments but was offset by runoff in residential mortgage and home equity loans. Asset quality remains strong, with nonperforming assets at $14.3 million (0.19% of total assets) and criticized loans at $95.1 million (1.80% of total loans) as of September 30, 2025. Net charge-offs were $2.7 million, or 20 basis points annualized on average loans, in Q3 2025. The allowance for credit losses (ACL) stood at $60.4 million, or 1.13% of total loans.

Total deposits were $6.58 billion as of September 30, 2025, a 1% decrease from year-end 2024, primarily due to declines in savings, money market, and time deposits, partially offset by increases in noninterest-bearing demand and government time deposits. Core deposits, representing 90.9% of total deposits, decreased by $59 million. The average cost of total deposits decreased to 1.02% in Q3 2025 from 1.32% in Q3 2024. Estimated uninsured deposits were $2.80 billion, or 43% of total deposits.

Other operating income for Q3 2025 increased by $0.8 million to $13.5 million, driven by higher investment services income. Other operating expenses increased by $0.3 million to $47.0 million, primarily due to higher salaries and employee benefits (incentive accruals) and computer software expenses. This was partially offset by a $1.5 million net credit to other operating expense from the consolidation of the Operations Center, which included a $2 million fixed asset write-off partially offset by a lease accounting credit. This consolidation is expected to generate $1 million in annual savings. The efficiency ratio improved to 62.84% in Q3 2025 from 70.12% in Q3 2024.

Outlook and Strategic Trajectory

Central Pacific Financial maintains a cautiously optimistic outlook for 2025 and beyond, underpinned by its strategic initiatives and Hawaii's economic resilience. Management expects full-year loan growth in the low single-digit percentage range for 2025, with a healthy pipeline and anticipated pent-up demand as interest rates moderate. For the fourth quarter of 2025, the company guides for net interest income between $62 million and $63 million, with a net interest margin increase of 5 to 10 basis points. Total other operating income is projected to be $12 million to $13 million, and total other operating expense is guided to be $45 million to $46 million, anticipating similar incentive accruals.

Deposit growth is expected to be relatively flat year-over-year for 2025 due to known outflows in Q4, but management is optimistic for low single-digit growth in 2026, driven by focused initiatives in Hawaii, Japan, and Korea. The effective tax rate is expected to remain in the 22% to 24% range. The company's long-term objective is to drive its efficiency ratio to the high 50% range and eventually the mid-50s through consistent revenue growth, process automation, and greater use of technology.

Capital deployment priorities are clear: first, a consistent quarterly cash dividend with a payout ratio of approximately 40%; second, funding accretive loan growth; and third, opportunistic share repurchases. The recent increase in the dividend to $0.28 per share and a new $30 million share repurchase authorization reflect management's strengthening outlook for earnings and capital. The redemption of $55 million in subordinated notes on November 1, 2025, which would have repriced to SOFR plus 456 basis points, further demonstrates proactive capital management to optimize funding costs.

Risks and Mitigation

While CPF's outlook is positive, several risks warrant investor attention. The Hawaiian economy, despite its resilience, remains sensitive to tourism fluctuations, U.S. trade policies, and global economic conditions. UHERO's forecast of a mild recession and rising inflation due to tariffs highlights potential headwinds. Furthermore, the broader financial services industry is subject to new government policies, legislation, and potential disruptions from government shutdowns.

CPF mitigates these risks through a diversified loan portfolio, robust capital levels, and stringent risk management practices. The loan portfolio is balanced across customer, product, industry, collateral types, and geography, with no outsized exposures in higher-risk segments. The company's strong capital position, with all regulatory ratios exceeding "well-capitalized" thresholds, provides a substantial buffer against prolonged stress. Management's proactive approach to credit risk, including enhanced monitoring of large exposures and a "playbook for stress events," aims to ensure asset quality remains strong.

Conclusion

Central Pacific Financial Corp. stands as a resilient regional banking institution, deeply rooted in Hawaii's unique economic fabric while strategically expanding its reach. Its investment thesis is built upon a foundation of disciplined capital stewardship, a commitment to operational efficiency through technological investment, and a diversified growth strategy that balances local market strength with selective Mainland opportunities and international partnerships. The company's recent financial performance, marked by expanding net interest margins and controlled expenses, underscores its ability to generate solid returns even amidst a dynamic economic environment.

Looking ahead, CPF's clear guidance for loan and deposit growth, coupled with its proactive capital management and a focus on improving its efficiency ratio, paints a picture of a company poised for continued, albeit measured, progress. While vulnerabilities tied to regional economic shifts and the inherent challenges of technological adoption exist, CPF's established competitive advantages in customer relationships and its strategic responses to market changes position it favorably. For discerning investors, CPF offers a compelling opportunity to invest in a well-managed regional bank that is strategically adapting to evolving market conditions, leveraging its heritage, and building for sustainable long-term value.