Central Pacific Financial Corp. Stock

Good morning and good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Third Quarter 2026 Earnings Call. [Operator Instructions]. 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 like to turn the call over to Mr. Jayrald Rabago, Senior Strategic Financial Officer. Please go ahead.

Thank you, Erica, and thank you all for joining us today to review Central Pacific Financial Corp.'s financial results for the third quarter of 2026. Joining me this morning are Arnold Martines, Chairman, President and Chief Executive Officer; David Morimoto, Vice Chair and Chief Operating Officer; Ralph Mesick, Vice Chair; Dayna Matsumoto, Executive Vice President and Chief Financial Officer; and Anna Hu, Executive Vice President and Chief Credit Officer.

Before we begin, I would like to remind everyone that our earnings release and supplemental slides are available on our Investor Relations website at ir.cbb.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, please refer to Slide 2 of our presentation.

With that, I will turn the call over to our Chairman, President and CEO, Arnold Martines.

Thank you, Jayrald, and hello to everyone joining us today. We delivered solid third quarter results driven by higher net interest income, disciplined expense management and continued balance sheet strength.

Our net interest margin expanded, supported by higher earning asset yields and stable deposit costs. Diluted earnings per share rose 21% compared with last year's third quarter results, which were adjusted to exclude onetime expenses.

Our performance reflects the resilience of our relationship-focused banking model and provides a sound foundation as we move into the fourth quarter. Our strategy remains focused on delivering sustainable returns as a high-performing bank while supporting our customers, communities and shareholders.

We continue to invest in talent, automation and data capabilities to support future operating efficiencies. At the same time, continued productivity gains and thoughtful resource allocation are helping us generate positive operating leverage.

Turning to the broader environment. Hawaii's economy remains resilient despite slower growth in the recent months due to storm-related travel disruptions. Through the first 8 months of 2026, visitor arrivals increased 1.8% and spending rose 4.1% compared with the prior year. Hawaii's unemployment rate remained low at 2.8% in September compared with 4.2% nationally.

Statewide nonfarm employment increased by 1,300 jobs year-over-year, including 700 jobs added in the construction industry, which continues to be a bright spot in the Hawaii economy. We continue to monitor external risks, including the geopolitical conflict and effects on oil prices, inflation and visitors to our state as well as impacts from the elevated storm activity Hawaii is experiencing this year.

We are committed to supporting our community as restoration and cleanup efforts continue. Overall, impacts were fortunately isolated, and we don't see any material impacts on our business or our customers.

With that, I will turn the call over to Dayna.

Thank you, Arnold. We are pleased to report another solid quarter of earnings, reflecting the continued execution and diligence of our teams. For the third quarter, net income was $22.8 million or $0.88 per diluted share compared with $20.8 million or $0.80 per diluted share in the prior quarter.

Return on average assets was 1.22% and return on average equity was 15.28%. Our profitability metrics continue to trend favorably in line with our focus on high performance. Net interest income totaled $64.5 million for the quarter, up $1.6 million or 2.6% from the prior quarter and up $3.2 million or 5.2% from the year ago quarter.

Net interest margin increased 5 basis points from the prior quarter and 13 basis points from the year ago quarter to 3.62%. The sequential quarter increase in net interest income and margin was primarily driven by higher yields on loans and investment securities. Average loan yield increased 5 basis points to 5.01%, while the average rate paid on total deposits remained stable at 90 basis points. We continue to benefit from earning asset repricing and disciplined funding management.

Our balance sheet sensitivity position is neutral to slightly asset sensitive. Therefore, we are well positioned in the current rate environment. Fed rate hikes are modestly favorable as we've reduced our fixed rate asset exposures and we expect deposit pricing and betas to remain manageable.

For the fourth quarter, we expect NIM to be in the mid 3.60% range. Total other operating income was $12.4 million for the quarter compared with $14.6 million in the prior quarter. The sequential decrease was primarily due to a $2.4 million decline in our bank-owned life insurance income related to continued equity market volatility.

Total other operating expense was $44.8 million for the quarter compared with $46.2 million in the prior quarter. The sequential quarter decrease was primarily attributable to a $1.2 million reduction in salaries and employee benefits and a $1.0 million reduction in other expenses, both related to lower deferred compensation expenses driven by market volatility and offset by lower BOLI income.

The efficiency ratio improved to 58.3% from 59.6% in the prior quarter and continues to drive towards high performance with our ongoing focus on positive operating leverage. During the quarter, we repurchased approximately 294,000 shares for $11.2 million at an average price of about $38 per share.

At quarter end, $22 million remained available under our share repurchase authorization. Given our strong earnings, the Board increased the fourth quarter cash dividend by 3.3% to $0.31 per share. We continue to maintain a healthy capital position and remain committed to optimizing capital to enhance long-term shareholder value.

I will now turn the call over to Ralph.

Thank you, Dayna. We continue to focus our lending activities on strengthening the earnings profile of the bank while maintaining pricing and credit discipline. We target good quality credit and emphasize sponsorship, structure and returns over volume.

Total loans ended the quarter at $5.31 billion, up approximately $5 million from the prior quarter and down approximately $54 million from a year ago. Average loans were essentially unchanged at $5.3 billion. While overall balances were relatively stable, portfolio mix continued to evolve, improving our interest rate position of our balance sheet.

As we've seen in previous quarters, growth in variable rate commercial mortgage and construction lending is replacing lower-yielding fixed rate residential mortgage, consumer and home equity loans. Funded production, excluding revolving activity, totaled approximately $229 million against $204 million of runoff. New production carried a weighted average rate of 6.26% compared with 5.72% on runoff balances, resulting in positive spread replacement.

From a geographic perspective, third quarter production was about 50% from Hawaii and 50% from the Mainland. At quarter end, Mainland loans represented 18% of total balances. Mainland balances increased by approximately $50 million during the quarter, while Hawaii balances declined by approximately $45 million.

In Hawaii, our emphasis remains on relationship-based lending that supports building deeper customer relationships. These types of relationships generate operating accounts and treasury management services as well as personal banking opportunities.

On the Mainland, we continue to selectively deploy excess funding, which will enhance portfolio diversification and increase risk-adjusted returns. Looking ahead, we are encouraged by pipeline activity. We have approximately $224 million in loan volume across 71 opportunities in the processing stages scheduled for fourth quarter closings.

I would emphasize that this represents scheduled pipeline activity rather than a forecast. The actual pull-through and timing of closings may differ, but we booked more than 1/3 of that production in dollars during the month of October.

Finally, we're well aware of the uncertainty and headwinds impacting the local and national economy, but continue to be biased towards business development and growth. We'll be intentional and disciplined in this pursuit, allocating capital to opportunities that strengthen the earnings power of the bank and the resilience of our balance sheet.

And with that, I'll turn the call over to David.

Thank you, Ralph. Total deposits ended the quarter at $6.66 billion, down $31.9 million or 0.5% from the prior quarter and up $86.2 million or 1.3% from the prior year.

The quarterly decline was due to a $49.2 million reduction in higher cost time deposits. This was partially offset by growth of $15.7 million in interest-bearing demand deposits and $21.6 million in savings and money market balances.

On an average balance basis, noninterest-bearing deposits increased $10.9 million, while savings and money market balances increased $39.2 million, reflecting our continued focus on primary operating accounts and deeper customer relationships.

Our deposit franchise continues to reflect the strength of our consumer, business and international relationships. Deposits remain well diversified and granular, supported by long-tenured customers, low reliance on public time deposits and no broker deposits. We also continue to invest in the customer experience and operating efficiency across our digital, branch, data and operations platforms.

Recent work on our customer relationship management and data platform initiatives are strengthening service, insight and scalability. Our focus remains on new customer acquisition, increasing primary relationships and connecting our full range of capabilities to serve customers more fully.

With that, I'll turn the call over to Anna.

Thank you, David. Asset quality remained strong at quarter end. Nonperforming assets declined to $14 million or 19 basis points of total assets, while net charge-offs remained flat at $2.7 million or 20 basis points of average loans.

Criticized loan ratio improved to 181 basis points of total loans from 234 basis points in the prior quarter. 91% of criticized loans are real estate secured with strong loan-to-value ratios. The allowance for credit losses was $59.8 million or 1.13% of total loans, relatively stable from 1.14% in the prior quarter. The provision for credit losses totaled $1.9 million for the quarter.

Overall, our credit quality remains strong with our lending and credit risk strategy focused on diversification, consistent underwriting standards, strong collateral and on stable segments and industries that we have solid expertise in.

I will now turn the call back to Arnold for closing comments.

Thank you, Anna. To summarize, we are pleased with our third quarter earnings performance, which continued to trend favorably and reflect the strong execution of our team. These results position us to serve our customers well, support prudent growth and navigate the ongoing market uncertainties with discipline.

I want to thank our employees for their continued commitment to our customers and our communities. Thank you also to our customers, shareholders and our broader community for your ongoing support. We are now happy to answer your questions.

[Operator Instructions]. Your first question comes from the line of David Feaster with Raymond James.

I wanted to start on the growth side. It sounds like demand is holding up well. Pipelines are doing all right, and it sounds like you're still pulling things through. I'm just curious, how is demand from your perspective? Like I mean, as you talk to your clients about higher rates, have you seen any shift in demand? Are you concerned at all about anything starting to fall out of the pipeline?

And then just touch on the paydown activity. It sounds like that's really been the biggest inhibitor to faster growth, but just wanted to get your sense on that side.

Yes, David, this is Ralph. I would say in terms of the forecast, the best forecast we have right now is what we have in the pipeline and the pipeline looks fairly healthy. As you probably are aware, we do underwrite loans to the higher rate environment.

We also look at that relative to our asset monitoring of our portfolio. I would say in terms of activity, Mainland lending is really supplementing not replacing the Hawaii franchise. We generated, I think, about $380 million in production in Hawaii this year against about, say, $310 million in the Mainland. And then the runoff is greater in Hawaii because it's basically a larger portfolio.

Okay. And when I look at it, it's -- a lot of the runoff is in kind of the resi mortgage and home equity lines. Could you touch on the mortgage market and the housing market from your perspective? How much of that is intentional and strategic, just kind of optimizing the loan book and rotating towards more CRE and commercial? And just again, kind of how you're seeing pricing trending today?

David, it's David. On the first mortgage side, residential mortgage, obviously, that faces a lot of headwinds just because of the rate environment. So no different than the rest of the industry. And with the recent rise in longer-term rates, it's going to continue to face headwinds.

I think it's running at about 1/3 of what it normally would have been running on as far as production and we expect that to continue. The home equity is a potential opportunity. It is a product that we are taking a harder look at and seeing if there's opportunity to at least diminish the runoff, if not have some net growth in that portfolio.

As people have -- a lot of people have first mortgages at very low interest rates, they're not looking to refi that. So the way that they can access their equity is through the home equity product.

I would add, David, that we're really trying to improve the economics of our loan portfolio, not really just pursuing balance sheet growth. So what you're going to see, I think, and what you've seen our priorities are better pricing, shorter duration, some diversification. And then I'd say continued sort of, I'd say, disciplined credit selection.

Okay. Okay. And maybe on the other side of the balance sheet, right? I mean, touching on funding, it's pretty impressive what you are able to do. I mean, reducing CDs, able to replace that with some core deposits, keep deposit costs flat. Could you just touch on how do you think about core deposit growth as we look forward? How pricing is trending and just kind of the competitive landscape for funding on the islands?

David, it's David again. First off, I want to thank the teams. The teams have been doing an exceptional job with continuing to build core deposits, and that's what's led us to be able to keep -- to manage deposit costs over time. I think as we look forward, we are expecting strengthening loan growth, net loan growth and as a result, that likely will cause total deposit costs to -- this might be a trough going forward.

If we start to see loan growth, we'll look to start growing our deposits and that may result in slight increases in total deposit costs. Having said all of that, that is what we're looking to do, and that will be accretive growth. So I would think that's how we're looking at the deposit side. We've been very deliberate about our managing of our deposit base because of the lack -- not lack, but the minimal amount of loan growth. But going forward, we think that's going to change.

The next question comes from the line of Matthew Clark with Piper Sandler.

Just along those lines, maybe, Dayna, if you had the spot rate on deposits at the end of September. And just thinking through the beta, assuming we get maybe a rate hike in December and March. I think on the way down, you were about 35% for interest-bearing. Do you think you can kind of -- do you think you do something similar? Or do you think you can do a little better than that on the way up?

Sure. Matthew, thanks for the question. On the spot rate for the month of September, our total deposit cost was 91 basis points, so starting to tick up slightly there. As far as the betas, we believe we can manage the deposit repricing beta in a favorable range, similar to what we've experienced in the last couple of cycles. So I'm expecting a total deposit beta of around 24% or about 33% on total interest-bearing deposits. Our depositors are relationship-based, sticky and generally less rate sensitive overall. So I feel good that we can manage the beta in a reasonable range.

Great. And then just on the CD side, down this quarter. It sounded like some of it was higher cost. Can you just update us on the amount of CDs you have maturing here in the fourth quarter and the roll-off and roll-on rates that you anticipate?

Sure. In the fourth quarter, we have about $410 million of CD maturity. That's about 40% of our portfolio. That's running off at a weighted average rate of about 2.7%. And I believe our new CD rates on a blended basis, I estimate it to be approximately 3.0%. So a nominal rise in our CD costs going forward, but we can manage through that.

Got it. Okay. That's helpful. And then on the fee and expense run rate, I apologize if I missed it in your prepared comments if you spoke to kind of a run rate going forward, but just trying to think of a normalized fee income and noninterest expense run rate for the fourth quarter when you kind of distill the BOLI noise.

Sure, Matthew. On the fee income side, when we carve out that BOLI noise, like you said, our noninterest income continues to do well on the wealth side. Our teams have been successful there growing the business. Mortgage banking, though, will be under pressure in this current higher for longer rate environment.

So considering these factors, I'm expecting that our total other operating income to be generally flattish year-over-year, but it will depend on further market volatility impacting our BOLI. And then just for the fourth quarter, if you're looking at that specifically, probably in about the $13 million range.

And then on expenses, Matthew, our -- we continue to manage our expense base well. And like I said, our objective is to consistently deliver positive operating leverage. The guidance for the full year, I updated it to expect an increase of about 2% to 2.5% this year, which is on the low end of the range that I had previously guided to.

In the fourth quarter, we do typically see some seasonal step-up in expenses related to incentives and some other year-end activities. And then as you know, our deferred compensation expense continues to be volatile, but we assume that it will normalize in the fourth quarter.

Our next question comes from the line of Andrew Liesch with StoneX Financial.

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

It was a nice clean quarter. I feel like most of mine have been taken at this point. I guess as you look ahead, it seems like growth has been a little bit more muted with more coming from the Mainland. I'm wondering if you can supplement kind of what you're seeing in natural Hawaii for maybe more Mainland growth coming on. I'm just wondering how you guys are viewing that portion of the business.

Kelly, I think I got your question. You were a little soft, but I think right now, we're running about 50-50 between Hawaii and the Mainland. And I think just through this first month of the quarter, that's kind of the mix right now. So again, if we continue to run off some of the fixed rate long-duration assets, we're probably going to see fairly muted growth.

Got it. That's helpful. And maybe just a housekeeping item for Dayna. Dayna, do you have your expected tax rate? It came in a little higher than where it was for the quarter?

Sure, Kelly. On the tax rate, so the increase this quarter was due to less tax-exempt BOLI income as well as higher pretax book income. Going forward, I would expect our normalized ETR to be around 22% to 24%. The BOLI income has been volatile, so that could impact it. And then I'll lastly note that we are evaluating some potential additional tax credits, which would be favorable to our tax rate. But right now, I'm not building it into the guidance.

Your next question comes from the line of Andrew Liesch with StoneX Financial.

Okay. No, my question is really just on the margin guide. I mean I see the repricing engine that's still flowing through, hear the asset sensitivity or the modest asset sensitivity. So why wouldn't the guide be closer to the high 3.60s rather than the mid-3.60s?

Andrew, it's Dayna. So on the go-forward margin, you're correct about the factors that are -- will be favorable to the margin going forward. We will continue to have the positive asset back book cash flow repricing benefits on both the loans and the securities.

And then our balance sheet sensitivity, as I noted earlier, is neutral to slightly asset sensitive. So there could be a slight net positive for us there. But I will note loan yields are going up. But on the deposit side, those rates will also be going up, offsetting some of those benefits.

So those are the factors that are kind of influencing our margin outlook. Yes, as we head into next year, I think there is more potential upside on the margin to the extent we are able to drive more loan growth and assuming that pricing remains rational, but we're not providing guidance for 2027 at this point.

Your next question comes from the line of Liam Coohill with Hovde Group.

So to touch on deposits one more time, great to see the replacement of some higher cost funding in the quarter for some lower cost core deposits. But I was wondering, is there a loan-to-deposit ratio you're targeting as we're thinking about potential loan growth in the future and funding that with deposits?

Liam, this is Dayna. On the loan-to-deposit ratio, we're currently at about 80%. Our target range, I would say, is about 80% to 85%. So we're on the lower end of that. I think that gives us a lot of flexibility to grow the balance sheet, and we plan to do that in a profitable way.

That's very helpful. Let's jump to credit quickly. Are there any verticals where you're watching dynamics more closely? I mean it looks like credit improved pretty nicely in the quarter, but just curious if you have any thoughts there.

I think -- Liam, this is Anna. Where we're primarily focused on is just paying attention a little bit more to the consumer market, just given the macroeconomic market conditions, the higher interest rates for longer. Yes, it's mostly the consumer side.

That makes sense. And final question for me, just more of a housekeeping item. Moving forward, do you expect share repurchases likely continue in your current levels?

Liam, I can take that one. This is Dayna. So we do have the repurchase program with some authorization left, as I noted. This does give us flexibility, which we like. It's a low-risk source of value. But as I've said in prior quarters, the level of repurchases in any given quarter, it will continue to be dynamic and informed by several factors, including loan growth opportunities, the operating environment, other risk considerations, our valuation as well as we are watching our AOCI and TCE ratio. But with all of that said, as of now, I generally expect we will continue share repurchases at a roughly similar pace in the fourth quarter as we did in the third quarter.

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

Since we're digging into the margin a little bit more there in the Q&A, Dayna, can you just remind us of the securities cash flows that are coming off the portfolio roll off and expected roll-on rates?

And then same thing on the loan side. I think the payoffs and new production, roughly, I think, a 50 basis point pickup there, but just also want to think through the back book repricing on the loan side.

Sure, Matthew. On the securities portfolio, the cash flows on a quarterly basis is about $30 million a quarter. And we've been getting about, I'd say, 225 to 250 basis points yield pickup on our new securities purchases. On the loan portfolio, it's about $200 million in total quarterly runoff. And as you mentioned, it is being replaced at weighted average yields that are around 50 to 60 basis points higher.

[Operator Instructions]. There are no further questions at this time. I will now turn the call back to Mr. Jayrald Rabago.

Thank you, everyone, for joining us today and for your continued interest in Central Pacific Financial Corp. We look forward to speaking with you again next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp. Second Quarter 2026 Earnings Call. [Operator Instructions] This call is being recorded and will be available for replay shortly after its completion on the company's website at www.cpbbank.bank (sic) [ www.cpb.bank ].

I'd like to turn the call over to the speaker, to Mr. Jayrald Rabago, Senior Strategic Financial Officer.

Thank you, Erica, and thank you all for joining us today as we review Central Pacific Financial Corp.'s financial results of the second quarter of 2026. Joining me this morning are Arnold Martines, Chairman, President, and Chief Executive Officer; David Morimoto, Vice Chair and Chief Operating Officer; Ralph Mesick, Vice Chair; and Dayna Matsumoto, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to remind everyone that a copy of our earnings release and supplemental slides are available on our Investor Relations 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 2 of our presentation.

With that, I will now turn the call over to our Chairman, President, and CEO, Arnold Martines.

Thank you, Jayrald, and aloha to everyone joining us today. We are pleased to report on a strong second quarter. We maintained solid profitability and continue to manage our balance sheet with discipline. We grew average earning assets, maintained a stable core funding base, and expanded our net interest margin. Our strategic focus remains on being a high-performing bank that delivers sustainable, growing returns.

In the first half of the year, we continued to build momentum to drive results that position us well for the future. Our success reflects the strength of our relationship-focused banking model. We continue to serve Hawaii's people, small businesses, and local communities with a focus on long-term relationships, exceptional customer experiences, and disciplined execution.

We were honored to be the highest-ranked company in Hawaii on America's Best Companies 2026 list, published by TIME Magazine, and also recognized by Forbes as the Best Bank (sic) [ Best-In-State Banks ] in Hawaii for the third consecutive year. These recognitions reflect the trust of our customers and the commitment of our employees. It is meaningful because it ties directly to our founding mission and the relationships we work to earn every day.

We continue to invest in our business in the areas of talent and technology, including automation and data that supports future operating efficiencies. At the same time, we are also executing on disciplined expense management and thoughtful allocation of resources across the organization. Overall, we remain focused on continuing to generate positive operating leverage.

Turning to the broader environment, Hawaii's economy remains resilient. The visitor industry continues to be steady, and we have recently seen promising increases in visitors from the U.S. East and Japan markets. Unemployment remains low at just 2.5%. Construction employment has increased, and government contract awards continue to rise, supported by public projects and military spending.

We continue to monitor external risks, including the geopolitical conflict and its impact on oil prices and inflation. Our customers are resilient, and we have not seen any significant impacts, but we will remain vigilant and committed to supporting our customers and community.

With that, I will turn the call over to Dayna.

Thank you, Arnold. For the second quarter, net income was $20.8 million, or $0.80 per diluted share, which is a meaningful 19% increase from the year-ago period on a diluted share basis. Return on average assets was 1.12%, and return on average equity was 13.94%. Net interest income totaled $62.8 million, and net interest margin increased by 4 basis points to 3.57%.

We were successful in growing average loan and securities balances while also increasing earning asset yields. At the same time, funding costs remained stable. Our strong net interest margin provides us with flexibility as we continue to execute on our strategies and navigate market dynamics. With that said, we generally expect our NIM to remain relatively steady to a slight rise in the second half of the year.

Back-book asset repricing remains beneficial but has moderated, and we expect our deposit costs to remain fairly steady, assuming the Fed is on hold. Our guidance for full-year net interest income remains at a 4% to 6% increase over the prior year. Our balance sheet sensitivity is relatively neutral to slightly asset-sensitive. Therefore, our NII and NIM is well-positioned for a potential Fed rate hike, although we do not expect it to have a significant impact this year.

Total other operating income was $14.6 million, up $3 million from the prior quarter. The increase was primarily driven by BOLI income that is tied to market performance. Excluding that item, our core fee income lines are relatively stable quarter-over-quarter. Total other operating expense was $46.2 million, up $2.5 million.

The increase was primarily driven by higher salaries and employee benefits due to higher deferred compensation expense, also related to the strong market performance. For the full year, we expect our other operating expense to grow by 2.5% to 3.5%, no change from what we've shared previously.

We paid a second-quarter dividend of $0.29 per share. And with our continued strong earnings, our Board declared a third-quarter dividend of $0.30 per share, an increase of 3.4%. We repurchased approximately 322,000 shares for a total of $11.3 million. We have $33.2 million remaining available under our share repurchase program as of quarter end.

We continue to have a very healthy capital position and 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.

I will now turn the call over to David.

Thank you, Dayna. Total loans ended the quarter relatively flat at $5.3 billion, with average loan balances increasing quarter-over-quarter by $33 million. Second-quarter loan growth was impacted due to several loan closings moving to the third quarter, coupled with expected CRE loan payoffs.

Second-quarter loan production by type was well diversified among commercial and retail lending, and the majority of the production came from Hawaii. Looking forward, we continue to see opportunities in select mainland markets and expect greater fundings in the second half of the year. Average loan portfolio yield in the second quarter was 4.96% compared to 4.93% in the prior quarter. The increase in yield was primarily due to higher new production loan yields versus runoff yields.

Total deposits remain largely unchanged at $6.7 billion. Core deposits represent over 90% of total deposits with continued growth in non-interest-bearing and relationship-based accounts. Total deposit costs remain unchanged quarter-over-quarter at an attractive 90 basis points.

Looking ahead, we continue to expect loan and deposit growth in the low-single-digit range for the full year. As we move into the second half of 2026, we are prioritizing disciplined growth and balance sheet management, along with a consistent sales focus on new customer acquisition and increasing primary relationships.

With that, I'll turn the call over to Ralph.

Thank you, David. Asset quality was strong at quarter end. Non-performing assets were $16.5 million, or 22 basis points of total assets, while net charge-offs were 20 basis points of average loans. Past due trends are stable, and we are not seeing evidence of broad-based weakness across the portfolio.

Criticized loans increased to 234 basis points of total loans, driven primarily by a small number of Hawaii-based credits. These loans are well-collateralized and actively managed. Our focus remains on disciplined underwriting, risk-adjusted pricing, and maintaining portfolio diversification.

Provision expense totaled $4.4 million, including $3.3 million added to the allowance and $1.1 million added to the reserve for unfunded commitments. The increase was driven primarily by more conservative economic assumptions and commitment growth rather than deterioration in the loan portfolio.

As a result, the allowance increased slightly to $60.6 million, or 1.14% of loans compared to 1.13% in the first quarter. The strength of the balance sheet, combined with strong credit performance and reserve levels, continues to support a robust capital position.

We entered the quarter with a 12.7% CET1 ratio and a 14.8% total risk-based capital ratio, providing flexibility to support growth, maintain strong reserves, invest prudently across the balance sheet, and continue returning capital to shareholders. Overall, we remain constructive as our balance sheet is well-positioned, loss reserves are appropriate, and capital levels provide a cushion to absorb any uncertainty in the environment.

I'll turn things over to Arnold now for some closing comments.

Thank you, Ralph. To summarize, the second quarter was a strong quarter. We delivered solid earnings, maintained credit quality, thoughtfully managed loan and deposit growth, and continued to operate from a position of capital strength.

I want to thank our employees across the state for their continued commitment to our customers and our communities. It is that commitment that makes results like this possible. We are happy to answer your questions at this time.

[Operator Instructions] Your first question comes from the line of David Feaster with Raymond James.

I wanted to start -- maybe let's touch on the deposit front. I mean, obviously, there's -- if you've listened to any of these conference calls, everybody is talking about intensifying deposit competition on the mainland. Curious what you're seeing in the islands. How is the competitive landscape? Obviously, it's relatively insulated and it's historically been more rational. Is that the same case? And just kind of curious where marginal funding costs are locally and just kind of what you're seeing on the funding side?

David, it's David Morimoto. I think the deposit competition in Hawaii has remained rather consistent. It is somewhat more rational than on the mainland where there's a larger number of competitors. Having said that, we have been pleased with our deposit performance year-to-date. We did have a strong first quarter that was slightly offset by lesser growth in the second quarter, but on a combined basis, total deposit growth was up close to $90 million year-to-date. So we were pleased with that level of growth and we expect it to continue.

Okay, that's helpful. And then -- maybe just wanted to -- let's touch on some of the puts and takes on the margin guidance. Flat to modestly higher. I know there's a lot of embedded expansion just as you reprice lower-yielding assets. Sounds like there might not be a ton of funding cost leverage left. I'm curious, what's holding you back from expanding more and keeps it flattish? And then whether you're considering any other balance sheet optimization opportunities to maybe help expand the margin more?

David, this is Dayna. Thanks for the question. On the margin, let me start by saying we are very focused on maintaining a strong margin. At the same time, though, we do balance growth and margin. As far as pricing competition, loan pricing continues to be fairly competitive in the Hawaii market. We have seen some spreads compress. On the deposit side, pricing continues to be pretty rational, and we're not expecting a ton of pressure there. And so, therefore, we expect our NIM to remain relatively stable in the high 3.50s. And I feel like that gives us a good ability to take advantage of opportunities that arise.

Okay. And maybe just digging in a bit into the underlying dynamics in loans in the quarter. It sounds like there was some slippage into the third quarter, just given higher -- as well as some higher prepays. How are originations this quarter? And how is the pipeline shaping up? Just kind of -- I want to understand what gives you confidence that growth is going to accelerate. It sounds like you're leaning maybe into the mainland more. Just kind of curious what's giving you confidence there? And does that guidance contemplate continued elevated payoffs?

David, it's David again. Looking forward, we are confident that second half loan growth will be stronger than what we saw in the first quarter. One thing to start off with is during the second quarter, we did originate almost $70 million in new construction loans that obviously didn't really benefit us in the second quarter, but they will benefit us going forward. So we do have a decent amount of commercial construction loan fundings that will help in -- help drive loan growth in the back half of the year.

Additionally, we do have a solid commercial pipeline that we've built. It's a little lumpier than we would expect, and that's what the timing of closings will be critical with the pipeline. Additionally, we have implemented a couple of initiatives on the Hawaii retail portfolio. These initiatives are designed to not eliminate or grow the portfolio, but slow the amount of runoff in the commercial portfolio. So I think when you put all of that together, that's why we have confidence for stronger growth in the second half of the year.

The next question comes from the line of Matthew Clark with Piper Sandler.

Just on that last -- those last comments, David, I think you mentioned that you expect loan growth to be stronger than the first quarter? Or do you mean the first half in the second half?

Yes. Yes. First half, Matthew.

First half. Okay. Got it. And then on that $70 million of -- sorry, on that $70 million of new commitments on the construction side, could you give us the weighted average rate on that? Just trying to get a sense for...

Matthew, they were primarily multi-family construction on the mainland. And I would say that the spreads, they're floating at SOFR in the low 200s.

Okay. Got it. Sounds good. And then on the -- maybe for Dayna, my typical question on deposit costs, the spot rate at the end of June?

Yes. Matthew, the spot rate on total deposits was 90 basis points. So pretty stable there.

Okay. Great. Okay. And then maybe just on the uptick in non-performers. I know it's tiny, but I guess any incremental increases makes a minor difference. So just curious on getting some more color on the uptick in non-accruals and the increase in classified, just more about what caused them to migrate and the outlook there.

Sure, Matthew. This is Ralph. I think maybe first, I kind of put it into some context in terms of how we risk rate credits. So our risk rating system is driven by a probability of default, not expected loss. This quarter, we identified several credits that had potential or defined weaknesses that could have an impact with regard to default probabilities. So that was the nature of the downgrade.

The largest credit was a $20 million real estate loan. The ownership group is having a dispute and the principal guarantor has some financial difficulties, and that was the primary reason why it was downgraded. It's a real estate loan, Hawaii-based. The debt service coverage on the loan is about 1.27x, third-party leases, pretty diversified, and the loan-to-value is 57%. So we don't see any kind of loss content there. And the downgrades, as I said, really reflect more kind of a default risk than an expectation of loss.

Great. And then last one for me, just on expenses, maybe for Dayna -- or operating expenses. You're tracking, call it, 180 -- I'm sorry, $180 million for the year if you just annualize -- well, a little bit higher than that for the full year, which doesn't get you to 2.5% to 3.5% increase. I guess maybe wanted to confirm the baseline you're using for 2025 in terms of non-interest expense. And then where the increase might be coming from after we reset for the BOLI this quarter?

Yes. Matthew, I will say, as far as our guidance range of 2.5% to 3.5%, our latest forecast is probably on the lower end of that range, just to give you an idea there. And in the second half of the year, we do expect some expenses to rise due to certain projects going live. We have a CRM system as well as a new branch system and some data platforms. Those are related to ongoing investments in our business. And beyond that, it's just going to be probably a function of timing of certain expenses.

Okay. And the baseline you're using for last year, if you had it off hand?

Yes, I do. It's about -- so there was a little bit of non-recurring last year. So the baseline I'm using is about 177 -- $177 million.

The next question comes from the line of Andrew Liesch with StoneX Group.

Just the pace on the share repurchases, should we expect a similar pace going forward here?

Andrew, it's Dayna. I would say that we do generally plan to return capital at a similar pace as we did this past quarter through dividends and share repurchases. But as always, the amount that we buy back each quarter, it is dynamic and considers a number of factors, including loan growth, the environment and risks as well as our valuation. But generally speaking, I'd expect it to be a similar amount.

The next question comes from Kelly Motta with KBW.

Maybe on the deposits, you have a lot of room on your balance sheet. You have some nice cash flows coming off the securities portfolio still. With the 79% loan-to-deposit ratio and your expectation for kind of a pickup in growth here for the back half of the year, how are you thinking about funding? Would you expect based on your pipelines, a commensurate amount of deposits? Are you still thinking kind of grow into your loan-to-deposit ratio and commentary on where you'd like to bring that?

Kelly, it's Dayna. Yes, starting with the loan-to-deposit ratio. At June 30, I think it was about 79%. I'd say that's on the lower end of our target. We typically target about 80% to 85% on the loan-to-deposit ratio. So I think there's some room there. And we're always looking to optimize the balance sheet. And our average earning asset growth, it really will depend on loan growth and our continued focus on optimizing and there may be some mix shift in there as well.

Got it. That's really helpful. And then I'm sorry to circle back on this, but I just want to understand your expense commentary correctly. I appreciate the jumping off point. Can you clarify whether or not that includes the equity gains that impacted incentive comp this quarter for 2026? I just want to make sure I'm modeling appropriately ahead.

Yes, Kelly, that does include the higher deferred compensation expense this quarter. But I am assuming for the back half of the year that we'll see some normalization there.

Great. And as you noted, investing in some of these technology and systems is something that you ultimately hope is helping to drive greater efficiencies ahead. Could you share any -- so far, any latest use cases or what you're seeing based on the changes made so far and what you're most excited for or looking to do as we look ahead here?

Yes, Kelly, if you're talking about AI, I think right now, we're really taking a measured approach. So we don't really kind of intend to overstate what we can deliver, but we're aiming not to be a laggard or trying to lead on that. Today, right now, really, we're kind of focused on building out the data infrastructure and some of the guardrails. Because the technology is evolving, we want to make smaller investments. We want kind of near-term paybacks.

And most of the applications are around sort of workflows, whether it be assembling credit information, drafting routine documentation, supporting the AML reviews or automating certain types of risk reporting. We really want to retain kind of employee judgment and approval authority over this. We want to be very clear on what kind of data we're looking at. And then we're really trying to work with, I'd say, more established providers than trying to develop our own tools right now.

[Operator Instructions] There are no further questions at this time. I will now hand the call back to Mr. 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. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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. Jayrald Rabago, Senior Strategic Financial Officer. Please go ahead.

Thank you, Rob, and thank you all for joining us today as we review Central Pacific Financial Corp.'s results of the first quarter of 2026. Joining me this morning are Arnold Martines, Chairman, President and Chief Executive Officer; David Morimoto, Vice Chairman and Chief Operating Officer; Ralph 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 2 of our presentation.

With that, I will now turn the call over to our Chairman President and CEO, Arnold Martines.

Thank you, Jayrald, and hello 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 continue 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 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 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 recruited 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 13.90%. 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 environment, 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 onetime 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 $2.0 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 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 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 cuts 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 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'll 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 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 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 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're now happy to answer your questions.

[Operator Instructions] Your first question comes from the line of Evan Kwiatkowski from Raymond James.

I'm on for David Feaster. So I just wanted to start on loans. I'm just curious 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 what kind of credits you're targeting there as well.

Evan, it's David Morimoto. Yes, I think on what we're seeing and hearing from our customers hasn't changed much from prior quarters. They continue -- 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.

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?

Yes, 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 the subsequent quarter. But currently, what we're seeing in the pipeline is it's relatively balanced. And we're always targeting enough room 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.

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 deposit costs are at 90 bps. 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?

Evan, it's Dayna. Thank you for the question. Yes, 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 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 are -- 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 then 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.

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, and if you see any opportunities for balance sheet optimization with that excess capital.

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.

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

Just a couple more questions around the margin. Dayna, do you have the spot rate on deposits, deposit costs at the end of March?

Sure, Matthew. For the March month-to-date deposit costs, it was 90 basis points. And then the spot rate at the end of March was about in the same area.

Okay. And then on the asset side, can you remind us on average, how much you have in fixed loan repricing per quarter or -- and same on the securities side in terms of cash flows?

Yes. We typically have around $200 million to $250 million 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.

Okay. Great. So I guess I'm wondering why the margin guide is 3.50% to 3.55%, when you put these dynamics together, a couple of basis points on CD repricing, a few basis points, 3 to 4 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 3.60%. I guess what's keeping you at -- I'm just curious why the 3.50% or the lower end of the range there? What's driving that?

Yes, 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.

Yes. And maybe, Matthew, I'll add, this is Arnold. I think we do have a pretty healthy level of healthy NIM level. And I think we want to be thoughtful about balancing improvement in profit, which we have done in the last few years with being selective on competitiveness in the local market. So that's kind of what is happening there. But we continue to be very committed to maintaining a very healthy NIM overall.

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?

Yes. 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 paydown on the construction side, but it will largely be offset by takeout mortgages on the residential mortgage side for the homeowners.

Okay. Great. And then last one, just on the uptick in criticized in the slide deck, what drove that? And what's the plan there for resolution?

Yes. Matthew, this is Ralph. 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 a fairly strong balance sheet. They had experienced some operating losses that resulted in some drawdown in liquidity. I think the plan there really is to retain and support this customer. We don't see any loss content in that credit.

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

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 the blended rate of new originations is now relative to maybe a quarter ago?

Sure. Kelly, it's Dayna. 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.

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 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?

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 to our capital ratios, particularly from the residential mortgage risk weighting changes. And our 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.

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 BOLI death benefit. Dayna, is this kind of 23% tax rate a good go-forward rate? Or any considerations as we think through the full year because that did come in a bit higher?

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 benefit. 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.

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. Dayna, can you remind us what -- how you guys manage your liquidity levels as I'm assuming some of that gets redeployed back into the growth you're seeing?

Yes, that's right, Kelly. At 3/31, 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 million to $150 million that could be deployed to opportunities 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.

[Operator Instructions] 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.

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Fourth Quarter 2025 Conference Call. [Operator Instructions]

As a reminder, 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 would like to turn the call over to Mr. Jayrald Rabago, Senior Strategic Financial Officer. Please go ahead.

Thank you, John, and thank you all for joining us as we review the financial results of the fourth quarter of 2025 for Central Pacific Financial Corp. With me this morning are Arnold Martines, Chairman, President and Chief Executive Officer; David Morimoto, Vice Chairman and Chief Operating Officer; Ralph Mesick, Senior Executive Vice President and Chief Risk Officer. Dayna Matsumoto, Executive Vice President and Chief Financial Officer; and Anna Hu, Executive Vice President and Chief Credit Officer.

We have prepared a supplemental slide presentation that provides additional details on our earnings release and is available in the Investor Relations section of our website at ir.cpb.bank. During the course of today's call, management may make forward-looking statements. While we believe these statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to our forward-looking statements, please refer to Slide 2 of our presentation.

And now I'll turn the call over to our Chairman, President and CEO, Arnold Martines. Arnold?

Thank you, Jayrald, and hello to everyone joining us today. I want to start by sharing that Central Pacific Bank was recently named us Week's list of America's best regional banks for 2026. This recognition reflects the strength of our franchise and the trust our customers place in us every day. It's also a testament to our team's commitment to delivering exceptional service and building lasting relationships across the communities we serve, which is foundational to delivering long-term value to our shareholders. Central Pacific closed the year with strong momentum in the fourth quarter and solid overall performance in 2025.

The Q4 results were driven by disciplined execution across our core franchise. Our profitability strengthened as we grew revenue and expanded our margins while proactively managing expenses. As we enter 2026, Central Pacific Bank is ultra focused on our core business, which includes a disciplined approach to organic growth, thoughtful diversification and operational excellence. We are well positioned to achieve consistent earnings growth, and hence shareholder returns and strengthen our competitive advantage. Over the past 3 years, our total shareholder return was 77%, reflecting both solid share price appreciation and dividends.

Additionally, our core earnings per share increased 24% from the prior year, underscoring the strong operating momentum across our franchise. A wise economy continues to be resilient despite macroeconomic uncertainty leading to lower visitor counts and softer job growth. Offsetting such factors, Hawaii's key strength continues to come from strong construction activity at both the public and private level as well as the military sector.

Finally, in the fourth quarter, we continued to expand our international strategy through the signing of a strategic partnership with Korea Investment & Securities, one of South Korea's leading financial institutions. This collaboration expands our international reach and creates new deposit opportunities as we offer our banking services to Korean customers seeking investment in business opportunities in Hawaii.

With that said, I'll turn the call over to David.

Thank you, Arnold. In the fourth quarter, our teams were successful in growing core deposits through consistent calling efforts and relationship building. Total core deposits grew by $78 million during the quarter with meaningful gains in interest-bearing demand, savings and money market balances. At the same time, average rate paid on total deposits declined to 94 basis points from 102 basis points. Noninterest-bearing demand deposits remained healthy, continuing to represent a sizable 29% of total deposits.

In the fourth quarter, our total loan portfolio declined by $78 million from the prior quarter. During the quarter, we experienced several large construction and commercial mortgage loan payoffs combined with a delay of certain new loan fundings to the first half of 2026. For the '25 full year total loans declined by $44 million. The full year decline was driven by an aggregate $190 million decrease in residential mortgage, home equity and consumer portfolios, which was partially offset by strong growth in commercial mortgage and construction. Average loan yields in the fourth quarter remained relatively stable at 4.99% and as the impact from Fed rate cuts was mitigated by back book loan repricing.

As we enter 2026, our revenue growth strategy will be further enhanced with sales management, technology tools and consistent discipline to drive results. We continue to build our loan pipeline with a focus on our core Hawaii market supplemented by select mainland markets for diversification. Our deposit growth will be driven by a focus on deepening relationships in Hawaii and strategic partnerships in Japan and Korea. For 2026, we are conservatively guiding to full year net loan and deposit growth in the low single-digit percentage range.

With that, I'll turn the call over to Dayna.

Thanks, David. For the fourth quarter, we reported net income of $22.9 million or $0.85 per diluted share compared to $18.6 million or $0.69 per diluted share in the prior quarter. Our return on average assets was 1.25%, and return on average equity was 15.41% underscoring continued profitability improvement in a dynamic environment. For the full 2025 year, net income was $77.5 million or $2.86 per diluted share. Excluding $1.5 million in onetime pretax office consolidation costs in the prior quarter, adjusted non-GAAP net income was $78.6 million representing a meaningful 24% increase over 2024 non-GAAP net income of $63.4 million, which excludes noncore items.

Fourth quarter net interest income rose by 1.3% from the prior quarter to $62.1 million, and net interest margin expanded 7 basis points to 3.56%. We were successful in lowering our deposit cost by 8 basis points to 0.94%, while our total loan yields declined by only 2 basis points to 4.99%. There was approximately $250 million in loan portfolio runoff in the fourth quarter. Our weighted average new loan yield this quarter was 6.8% as compared to our weighted average portfolio yield of 4.99%. For the full year 2026, we are guiding to approximately 4% to 6% increase in net interest income. We expect the NIM to expand, albeit at a slower pace than what we experienced in 2025. Our expectation for first quarter NIM is an expansion of approximately 2 to 5 basis points.

Total other operating income was $14.2 million, up $0.7 million from last quarter, primarily driven by a $0.9 million increase in bank-owned life insurance income. During the quarter, we recognized BOLI death benefit income of $1.4 million. Going forward, we anticipate total other operating income to grow by 1% to 2% in 2026 over 2025 normalized. Total other operating expenses were $45.7 million, down $1.3 million from the previous quarter which included onetime expense related to the consolidation of our operations center. Our guidance for total other operating expense in 2026 is an increase of 2.5% to 3.5% from 2025 normalize. Our effective tax rate was 18.9% in the fourth quarter and benefited from greater tax exempt income as well as additional tax credits. Our normalized effective tax rate is in the 21% to 22% range.

During the fourth quarter, we repurchased approximately 530,000 shares at a total cost of $16.3 million. For the full 2025 year, we repurchased 788,000 shares at a total cost of $23.3 million. The Board declared a first quarter cash dividend of $0.29 per share, an increase of 3.6% from the prior quarter. Additionally, our Board approved a new share repurchase authorization for up to $55 million in 2026. The increase in the dividend and share repurchase authorization reflects our strong earnings, capital and liquidity position and outlook. Our current target capital ratios and priorities remain the same. We plan to continue to use capital for organic loan growth, dividends and share repurchases to move towards our CET1 target of 11% to 12% to optimize our position. We enter 2026 with a strong balance sheet, improved profitability metrics and a clear focus on delivering sustainable value for our shareholders.

I'll now turn the call over to Ralph.

Thank you, Dayna. Our credit risk appetite continues to be informed by our strategic goals, emphasizing portfolio design, underwriting discipline and risk-based pricing to achieve optimal returns, balance and diversification. In the fourth quarter, we maintained strong credit performance. Asset quality indicators were stable as credit costs stayed within an expected range and the level of NPAs, past due loans and criticized assets remain near cycle low. Net charge-offs were $2.5 million or 18 basis points annualized on average loans with consumer book losses continuing to stabilize. Nonperforming assets were $14.4 million or 19 basis points of total assets. Past due loans over 90 days totaled $1.6 million, representing just 3 basis points of total loans.

Criticized loans declined to 135 basis points of total loans maintaining low levels. Provision expense for the quarter was $2.4 million, including $1.7 million added to the allowance and $0.7 million to the reserve for unfunded commitments. The decrease in provision expense was primarily driven by a decline in loan balances as well as improvements in our asset quality and macroeconomic forecasts. We hold a strong capital position to support the bank through the credit cycle and against unexpected outcomes. At quarter end, our total risk-based capital was 14.8%. Looking ahead, we'll continue to take a prudent approach to growing our loan portfolio to build durable earnings.

Let me now turn the call back to Arnold.

Thank you, Ralph. In closing, our fourth quarter results reflect strategic execution and prudent risk management. We delivered improved operating efficiency, margin expansion and execution of strategic initiatives that position Central Pacific for sustainable growth. As we look ahead, we remain focused on creating an exceptional experience for our customers and long-term value for our shareholders. I'm very proud of our team's accomplishments in 2025 and look forward to continuing the momentum in 2026. We are now happy to take your questions.

[Operator Instructions] Our first question comes from the line of Matthew Clark with Piper Sandler.

I just want to start on the delay in new loan fundings this quarter somewhat expected. And it sounded like they're going to fund here in the first half. And I believe a couple of them are construction projects that require higher reserves. I'm just trying to get the timing down and what that means for your provisioning in the first half.

Matt, it's David. And yes, you're right. We did have some delayed closings that pushed into the first half of this year. I would say that the closings are probably a little more weighted to the second quarter versus the first quarter. And you are correct that some of it is funded deals, some of it is construction. So it's going to be a combination of the two, but probably a little more weighted to the second quarter versus the first quarter.

Okay. Great. And then, Dayna, did you have the spot rate at the end of the year on deposit costs?

Sure, Matthew. Yes, our deposit spot rate at 12/31, it was 89 basis points.

Okay. And then you had a 30% deposit beta this quarter. It seems like that's what you're trying to manage to. Is that fair? Or has there been any change in deposit competition that might put that at risk?

Yes. Matthew, that's correct. The current cycle thus far, our interest-bearing deposit beta is about 30%. And with the outlook for 2 rate cuts this year, we anticipate that our cycle-to-date beta to remain roughly in the 25% to 30% range. We do still have some room to lower our deposit costs to offset our floating rate assets.

Okay. Great. And then last 1 for me, just on the buyback. I know it's for 2026, but I just want to confirm the plan is to complete that buyback this year?

Yes, Matthew. On the capital side, I want to start with just sharing that our strong earnings have built up our capital to a really solid level. And given this, our Board approved a larger share repurchase authorization for this year, that gives us flexibility you can expect that we will be active on the buyback as we return capital that can't be used to organically grow our business. But the amount that we buy back each quarter, it's really going to be dynamic.

Our next question comes from the line of Kelly Motta with KBW.

Maybe kicking it off with the loan growth. I know you hear revised the Hawaiian report test up in the last release. So wondering, incrementally, as you look to the year ahead, how you feel about the outlook for growth, specifically in Hawaii and that low single-digit loan growth, the mix of that from the islands versus the Mainland?

Kelly, it's David. Yes, you're right. UHERO did upgrade their forecast, but it was an upgrade from a deeper downturn to a lighter downturn. So it's moving in the right direction. But it's -- as far as Hawaii growth opportunities, we do have a nice pipeline of some growth opportunities. They're primarily focused in the commercial area. So it's C&I, commercial mortgage and construction and as we stated before, the growth between the Hawaii and Mainland will -- it will fluctuate from quarter-to-quarter, but we are expecting 2026 to be a stronger growth year than 2025.

And the balance between the Hawaii and Mainland will be a function of risk return opportunities as they arise. I did want to just point out one thing on 2025 loan growth. While growth was muted in 2025 for the full year, I did want to point out that we did see strong growth in the areas that we were targeting, specifically construction and commercial mortgage. In the aggregate, those 2 portfolios grew by 10% year-over-year. And then the overall decline in loan growth was a result in drawdowns on the -- in the residential mortgage, home equity and consumer portfolios. So that was by design. We did -- we are trying to shift our portfolio mix more to commercial from consumer and then the other thing to note is on the consumer drawdowns, that's somewhat within management's control. We portfolioed only about 1/3 of our resi mortgage production last year. And so that's a management decision that's within our control. But I think the loan growth in 2026, the reason we're more cautiously optimistic on 2026 is that we're expecting stronger growth in the commercial portfolios and less drawdown on the consumer portfolios.

Got it. That's helpful. And then putting together the pieces of your guide, it seems to suggest some positive operating leverage as we head into 2026. I know expenses has been a focus for you guys. You've done a nice job managing them. As you look ahead, if growth comes in weaker, there's more challenging margin expansion, is there additional room or conversely, if growth picks up, -- are there areas that you might be able to look to add to as you kind of think about the overall platform.

Kelly, it's Dayna. Yes, definitely, we continue to be very focused on managing our expenses and maintaining strong expense discipline while continuing to invest for growth. So we have some flexibility. If revenue is more or less we can adjust. But overall, this year, we plan to continue to invest in technology to drive returns and efficiency. We do have a couple of projects planned for sales management systems and tools as well as some data platform enhancements. But those investments will have some offset with savings coming from our continued automation and process improvement as well as optimizing our resources.

Our next question comes from the line of David Feaster with Raymond James.

Maybe just following up kind of on the loan growth side. Just with the focus on optimizing your loan portfolio towards more commercial and some of the commentary on a delay in some fundings, would you maybe expect growth, like, again, this low single-digit growth, maybe a bit slower in the first part of the year? And would you expect continued declines maybe the back half of the year accelerate as you work through that optimization. Just kind of curious how you think about the trajectory?

David, yes, I think what you described is the base case, right? I think the first quarter is a seasonally slower quarter for loan growth. And I think that's what we're expecting. We're hoping we can still get some net loan growth in the first quarter, but it probably will be -- it will probably start off slower and then growth will accelerate as we roll through the year.

Okay. And then maybe just touching on -- I'm just kind of curious how originations are trending and kind of how the pipeline is looking at this point and if you could give any -- a bit more color on what's driving the elevated payoffs and pay downs. Whether it's asset sales or again, you talked about some strategic versus competition. Just kind of curious, again, the origination side and then how some of the drivers behind payoffs and paydowns.

Yes David. The pipeline is -- the loan pipeline remains consistent with past levels and originations. Fourth quarter originations were in the $300 million range. And that's where we likely need to be to keep the portfolio relatively flat to slightly down. So we need to get originations higher than that to see net loan growth and again, we're forecasting cautiously optimistic that we'll see low single-digit growth, and hopefully, we can outperform that. And then the second part of your question, David, was?

Just the drivers behind the payoffs and paydowns.

Yes, I'm sorry. Yes. I think I would chalk that up to just the construction portfolio has been on the smaller side. And when you have a small construction portfolio and you do encounter payoffs, it really impacts loan growth. What we're trying to do now is we're obviously focused on building the construction portfolio, getting a little more critical mass. And then when you do that, the paydowns are somewhat offset by new construction draws. And so we got to get to that critical mass on the construction portfolio side. And we are working towards it. Last year, we did have a good year for construction originations that we'll be funding in the quarters ahead.

Okay. Okay. And then maybe just touching on -- switching gears to the deposit side. Just kind of curious how the competitive landscape is from your perspective on the islands. You guys have done a great job reducing deposit costs. But just kind of curious a, the competitive landscape? And then the core deposit growth that you saw was great to see Curious how much of that is new clients versus gaining share with existing clients. So just kind of curious what you're seeing on the deposit side.

David, it's been a little bit of a combination of both. Core deposit growth is -- it's basic banking, right, blocking and tackling. It's calling on new customer prospects and it's deepening our relationships, what we refer to as primacy, customer primacy, improving primacy with our existing customers. So it's been a combination of both. And I think we're optimistic on core deposit growth for 2026 as some of the initiatives that we put in place with calling efforts, being more disciplined on calling efforts, sales culture and a focus on customer primacy. We think all of those will lead to stronger core deposit growth in 2026.

Okay. Is that also kind of what's driving your confidence in accelerating originations to that kind of cultural shift?

Yes. Yes, exactly. It's -- yes, it's just a stronger focus on deepening relationships with the existing customers, which we believe there's good opportunity there. But it's also customer prospecting, right? We're -- we have about 13% of the banking market, and there's a lot of opportunity to grow that.

[Operator Instructions] At this time, we have no further questions. I will now turn the call back over to Jayrald Rabago for closing remarks.

Thank you for joining our fourth quarter 2025 earnings call. We appreciate your continued engagement and look forward to updating you on our progress next quarter.

This concludes today's conference call. You may now disconnect your lines. Have a pleasant day.

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Third Quarter 2025 Conference Call. [Operator Instructions] 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 would like to turn the call over to Mr. Jayrald Rabago, Senior Strategic Financial Officer. Please go ahead.

Thank you, Dustin, and thank you all for joining us as we review the financial results of the third quarter of 2025 for Central Pacific Financial Corp. With me this morning are Arnold Martines, Chairman, President and Chief Executive Officer; David Morimoto, Vice Chairman and Chief Operating Officer; Ralph Mesick, Senior Executive Vice President and Chief Risk Officer; Dayna Matsumoto, Executive Vice President and Chief Financial Officer; and Anna Hu, Executive Vice President and Chief Credit Officer.

We have prepared a supplemental slide presentation that provides additional details on our earnings release and is available in the Investor Relations section of our website at cpb.bank. During the course of today's call, management may make forward-looking statements. While we believe these statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to our forward-looking statements, please refer to Slide 2 of our presentation.

And now I'll turn the call over to our Chairman, President and CEO, Arnold Martines. Arnold?

Thank you, Jayrald, and aloha to everyone joining us today. I want to begin by expressing our sincere gratitude for your continued interest and support of Central Pacific Financial Corp. We are pleased to report that our bank delivered strong results this quarter. We remain well positioned to pursue our strategic objectives while maintaining flexibility to navigate economic headwinds with a high-quality, well-capitalized balance sheet and strong liquidity. Our foundation is solid, and our focus is on exceptional customer experience, disciplined growth, sustainable profitability and long-term value for our shareholders.

While Hawaii's economy is experiencing some softness in tourism due to U.S. trade policies, our market has historically proven resilient. Ongoing construction and military spending continue to provide meaningful support, helping to stabilize the local economy. This quarter, our results were highlighted by deposit and loan growth, margin expansion and the strategic consolidation of our operations center into our main headquarters, which positions us for improved collaboration among employees and future efficiencies. We also announced a strategic partnership with the Kyoto Shinkin Bank, strengthening economic ties between Hawaii and Japan's Kyoto region. This collaboration will create new opportunities for our small and midsized customers, enhancing growth prospects and reinforcing our commitment to supporting business development.

At Central Pacific, our vision is to be a bank that people want to invest in, work for and partner with. For our employees, this means fostering a workplace where talent can thrive. For our customers, this means providing exceptional experience with safe, reliable and accessible financial solutions that help them achieve their goals. And for our shareholders, this means delivering consistent attractive returns, distributing income responsibly and building long-term value. Our governing objective is anchored in disciplined capital stewardship. Our strategy is focused on optimizing bottom line returns while maintaining a high level of liquidity and prudent levels of capital. We achieved this through thoughtful capital allocation, measured risk taking and ethical business practices.

Operationally, we are building a resilient business model designed for steady returns rather than short-term gains. Our balance sheet strategy is focused on enhancing composition, improving risk-adjusted returns, shortening duration and increasing diversification across products and geographies. In essence, our focus is on 4 priorities: enhancing our products to better serve customers and capture growth opportunities, building the strongest team possible to execute our strategy effectively, strengthening the balance sheet to deliver durable profits and solid returns and growing the business prudently through disciplined programmatic strategies. We are confident that this approach positions Central Pacific for continued long-term success and value creation for our shareholders.

With that, I'll turn the call over to David. David?

Thank you, Arnold. Our balance sheet growth strategy continues to focus on deepening customer relationships and increasing market share within our core Hawaii market. As expected, in the third quarter, we reported solid net growth with loans increasing by $77 million and deposits by $33 million. The Hawaii loan portfolio saw growth in commercial, commercial mortgage and construction loan types, which was offset by runoff in residential mortgage and home equity. The Mainland loan portfolio also saw solid growth in commercial mortgage and construction. While this quarter's growth was led by Mainland activity, we anticipate a more balanced contribution between Mainland and Hawaii markets moving forward. We continue to operate within our historical range of Mainland loans, maintaining 15% to 20% of total loans in that segment.

Average yields on total loans increased 5 basis points to 5.01% compared with the prior quarter. Our loan pipeline remains healthy, and we continue to expect full year loan growth in the low single-digit percentage range for 2025. Deposit growth of $33 million brought total deposits to $6.6 billion, reflecting both business development wins and deposit stabilization following recent interest rate volatility. While period-end noninterest-bearing DDA deposits experienced normal fluctuations, we are pleased to see continued growth in average noninterest-bearing deposits. The average rate paid on total deposits remained steady at 1.02% as the Fed rate cut occurred late in the quarter. Overall, these results demonstrate the continued strength and resilience of our balance sheet and our commitment to disciplined growth and long-term value creation for shareholders.

With that, I'll turn the call over to Dayna.

Thanks, David. In the third quarter, we reported net income of $18.6 million or $0.69 per diluted share. Excluding $1.5 million in onetime pretax office consolidation costs, adjusted net income was $19.7 million or $0.73 per diluted share. ROA was 1.01% and ROE was 12.89%, underscoring disciplined execution in the current environment. Net interest income rose 2.5% from the prior quarter to $61.3 million, and net interest margin expanded 5 basis points to 3.49%, primarily driven by higher average yields on loans. There was approximately $230 million in loan portfolio runoff in the third quarter. Our weighted average new loan yield this quarter was 6.9% as compared to our portfolio yield of 5.0%. The investment portfolio also has runoff of about $30 million per quarter, which we are currently reallocating to fund loan growth.

We are not planning at this time to do any further material investment securities or loan portfolio restructuring as we believe our profitability is strong and will be further enhanced over time through ongoing repricing. For the fourth quarter, we are guiding to $62 million to $63 million in net interest income and a net interest margin increase of 5 to 10 basis points. Total other operating income was $13.5 million, up $0.5 million from last quarter, primarily driven by higher investment services income from the Wealth Management Group. There is some seasonality in the revenue from Wealth with the third quarter usually being strong.

Additionally, BOLI income benefited again this quarter from favorable market movements. Our normalized fourth quarter guidance for total other operating income is $12 million to $13 million. Total other operating expenses were $47.0 million, up $3.1 million from the previous quarter. During the quarter, we recorded a net $1.5 million onetime expense related to the consolidation of our operations center, which included a $2 million write-off of fixed assets, partially offset by a lease accounting credit. Going forward, we expect to realize total annual savings from reduced lease operating and maintenance expenses of approximately $1 million. Additionally, salaries and employee benefits increased by $2.1 million due to higher incentive accruals and commissions tied to stronger production.

Our guidance for total other operating expense is $45 million to $46 million, which anticipates similar levels of incentive accruals in the fourth quarter. During the third quarter, we repurchased approximately 78,000 shares at a total cost of $2.3 million, and we have $23 million remaining repurchase authorization as of September 30. Additionally, fourth quarter to date through October 27, we have repurchased about 127,000 shares at a cost of $3.7 million. The Board increased the fourth quarter dividend by 3.7% to $0.28 per share. The dividend is payable on December 15 to shareholders of record as of November 28.

Finally, on October 1, we notified holders of our subordinated debt notes that we will redeem the full $55 million outstanding at par on the upcoming call date of November 1. The subordinated notes, which were fixed for the first 5 years at 4.75% would have repriced to floating rate at SOFR plus 456 basis points on November 1. Our current target CET1 ratio is in the range of 11% to 12% and our TCE ratio in the range of 7.5% to 8.5%. We plan to deploy our capital first by continuing our quarterly cash dividend with about a 40% payout ratio. Then our priority is to fund accretive loan growth and opportunistically continue share repurchases. Overall, we have a healthy capital position and are optimizing our capital structure to provide sustainable long-term value for our shareholders while continuing to maintain prudent capitalization levels to protect against downside macroeconomic scenarios.

I'll now turn the call over to Ralph.

Thank you, Dayna. Our risk appetite is informed by our strategic goal of delivering acceptable risk-adjusted returns while maintaining a high level of solvency. We seek accretive growth, balance and diversification. Credit risk is measured and evaluated against expected results and established guidelines and limits. In the third quarter, we continued to maintain strong credit performance and asset quality. Credit costs stayed within an expected range and the level of NPAs, past due loans and criticized assets remained low. Net charge-offs were $2.7 million or 20 basis points annualized on average loans with consumer book losses continuing to trend downward. Nonperforming assets totaled $14.3 million or 19 basis points of total assets, down 1 basis point from the last quarter.

Past due loans over 90 days decreased to $1.5 million, representing just 3 basis points of total loans. Criticized loans declined to 177 basis points of total loans, maintaining low levels. Provision expense for the quarter was $4.2 million. including $3.4 million added to the allowance and $0.8 million to the reserve for unfunded commitments. The decrease in provision expense was primarily driven by lower net charge-offs this quarter. We maintain a strong capital position to support the bank through the credit cycle and against additional impacts that could arise from periods of prolonged stress. At quarter end, our total risk-based capital was 15.7%. Looking ahead, we will continue to take a prudent approach to building our loan portfolio, one that considers a range of outcomes and builds margins of safety to protect against adverse conditions.

Let me now turn the call back over to Arnold.

Thank you, Ralph. In closing, our third quarter results reflect disciplined execution, strong profitability and prudent risk management in a dynamic market environment. I'm grateful to our employees for their dedication and innovation, which continue to drive our success. To our customers and shareholders, thank you for your trust and support as we execute our strategy and deliver long-term value. We are now happy to take your questions.

[Operator Instructions] And our first question comes from the line of David Feaster from Raymond James.

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.

Yes. Thanks, David. David Morimoto will take that question.

David, yes, again, we did see net growth in the Hawaii market in the areas that we expected. So that would be in construction, C&I and commercial mortgage. The net growth in those sectors were overcome by runoff in the residential, primarily the residential mortgage and the HELOC portfolios, which are 2 portfolios that have been under a little pressure as a result of the interest rate environment. With interest rates hopefully continuing to moderate, we are hopeful that we can see some reduction in the runoff in those 2 portfolios, and that would bode well for future Hawaii loan growth. In addition to that, we do have a healthy Hawaii loan pipeline. There are a number of deals in the pipeline right now. It's just a function of timing. There's a number of loans that are between the fourth -- closing in the fourth quarter and the first quarter. So we'll need to see how that plays out. But we're cautiously optimistic that forward loan growth will be more balanced between the Hawaii and Mainland markets.

Okay. That's helpful. 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?

David, this is Arnold. Let me just maybe start, and then I'll turn it over to Dayna. Obviously, as you know, we have been investing in technology, harvesting some of the investments that we've made in the past to be able to drive efficiencies. So that continues to be an area where we focus in on. We have a few systems that we're putting in place today. That's going to create a lot of efficiencies for us and just creates better tools for our employees to be able to support our customers and drive our effectiveness. And then I think just generally speaking, we are very focused in the development of our people and looking at areas where we have gaps and building skill levels in order to execute on our strategies as we move forward. So there will be some investment in people for sure. And I appreciate that you brought that up because that's -- the people is going to help us execute on the strategies. So with that, kind of overall, I'll turn it over to Dayna for additional further comments.

Sure, sure. David, what I'll add is that managing expenses and our efficiency ratio continues to be a key focus of ours. This quarter, we were impacted by the onetime expense from our office consolidation, and this will create significant efficiencies going forward. Additionally, this quarter, as we had greater revenue, we needed to increase our incentive and commission accruals. This is a good thing. Our objective continues to be driving our efficiency ratio to the high 50% range and mid-50s over time, and we plan to achieve this through consistent revenue growth while we continue process automation and greater use of technology.

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?

David, it's David again. Yes, on the deposit growth, again, we're cautiously optimistic. The fourth quarter is going to be a little more challenging of a quarter because we do have some known outflows. So I think we're striving to probably keep deposit growth relatively flat year-over-year. So on a full year basis, whereas we were guiding to low single digit, I think right now, it's probably more flattish as a result of what we know at this point in time on the fourth quarter. Having said that, we are optimistic on 2026. We do think we can drive towards low single-digit deposit growth in 2026. And the strategies there are -- it's the same strategies that we have been deploying probably with just a little more rigor going forward. So it is the blocking and tackling of banking. And we are seeing success in the Hawaii market with those efforts. And then we also are optimistic on Asia. We continue to have initiatives in Japan and Korea, and we're hopeful that those strategies will continue to gain traction in 2026.

Our next question comes from the line of Matthew Clark from Piper Sandler.

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?

Matthew, it's Dayna. The spot rate on -- I have it on total deposits at 9/30, it was 100 basis points. And if you're also looking for the September month-to-date margin, that was 3.51%. So we continue to feel like it's moving in the right direction.

Got it. 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.

Sure. Matthew, we just have one $25 million FHLB advance outstanding, and it matures in February of 2028.

Okay. Got it. Maybe there's some repos in that number. Okay. 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.

Matthew, it's David. I'll start off on the Mainland part of the question, and then I'll turn it to Dayna for -- Dayna or Ralph on the SNC details. But what we saw in the third quarter is growth in the industrial and multifamily sectors. That's for both the multifamily -- I'm sorry, the commercial real estate and the construction portfolios. So they were in the industrial and multifamily sector. And then maybe just to take a step back on the Mainland lending strategy. What I will say is that Hawaii will always be our core banking market. Having said that, CPF has always had some loan exposure on the Mainland, and that's really due to some structural factors with the Hawaii banking market. the Hawaii banking market has always been characterized as having more deposit balances relative to good lending opportunities.

And a lot of that has to do with Hawaii being largely a service-based economy without large manufacturing. And due to those structural factors, that's why we always have had a portfolio on the Mainland. Mainland lending provides CPF with geographic diversification, shorter duration assets and attractive risk-adjusted returns. But having said all of that, the third quarter was -- the growth was largely -- net growth was largely driven by the Mainland. What we'll see going forward is very much based on opportunities. It will fluctuate between Hawaii dominant growth versus Mainland dominant growth based on opportunities in that particular quarter.

Great. And then just maybe on the SNC exposure at the end of the quarter.

Yes. This is Ralph. The total SNC exposure for the bank is around $526 million. And how that breaks out is Mainland CRE is about $190 million. And then Mainland corporate lending, which is really sort of the large syndicated -- broadly syndicated loans, that's around $144 million. And that's been coming down over the past year.

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.

Yes. From a balance perspective, let's see. Special mention was $34.3 million. Classified was $62.1 million. So relatively flat from the prior quarter. And in general, I think we had mentioned on the last call, we have a couple of large credits that probably represent about a little over half of that. Both of those loans are secured. They're performing loans. We've done individual sort of assessments. We would expect no loss in the event that they did default, but they are performing and our expectation is that they'll continue to perform. The sponsors have, I think, meaningful equity invested in these projects. And I think they're very committed to working through the situations that they're facing today.

Our next question comes from the line of Kelly Motta from KBW.

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.

Kelly, it's Dayna. Of that $2.1 million, about $1.5 million was related to the incentive accruals.

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.

Kelly, let me start off by saying that our target range, it considers a number of factors. First is our debt rating agency expectations. We also further maintain a level to protect against potential downside macroeconomic scenarios. And really, at this point in the cycle, we believe this is prudent. We also regularly perform capital stress tests, and those results are considered in our decisions. So with that said, we are currently slightly above our target range for CET1, and we are taking a more proactive but still prudent approach to capital return. So as I mentioned in the remarks, the priority is first for loan growth, and we are well positioned to support loan growth. We do plan to also continue share repurchases. The level and extent of those share repurchases will be a function of where the loan growth is and where the market is.

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?

Kelly, this is Arnold. I think we -- all of us are expecting that rates are going to decline, and we believe that there's pent-up demand, particularly in Hawaii, the Hawaii market. People are on the sidelines waiting for rates to decline. And so we're pretty confident from the standpoint that assuming rates decline, we are going to see more demand for loans. And so therefore, we believe that if that happens, that's going to be where we're going to focus capital on. That's the most accretive for the company, for our shareholders. But we'll adjust as we move forward and we see how the market opens up and what the opportunities are.

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.

Yes. Thanks, Kelly. This is Arnold. Yes, we're really excited about it. It's something that we've been working on for a little bit. We have a couple of other relationships in Japan, but we didn't have any one in the Kansai area, the Kyoto region, but also includes neighboring areas like Osaka and Kobe. And as you know, we have -- given our history and the ties that we have with Japan, starting with Sumitomo Limited, when we first started -- when the bank was first founded, those relationships are important. And we have a lot of business of Japanese corporations that have operations in Hawaii. So we believe the Kyoto region was an area where we didn't have a relationship with, and we're excited that we can now kind of move forward and hopefully facilitate our customers working together to create economic opportunities maybe in Hawaii, but also maybe in the Kyoto region.

There are no further questions. I will now turn the call back over to Jayrald Rabago for closing remarks.

Thank you, Dustin, and thank you all for joining our third quarter 2025 earnings call. We appreciate your continued engagement and look forward to updating you on our progress next quarter.

The meeting has now concluded. Thank you all for joining. You may now disconnect.