Central Bancompany Third Quarter 2026 Earnings Conference Call - CENTRAL BANCOMPANY INC

Explicit Guidance:

• Net Interest Income (NII): Internal static curve models project growth in NII and Net Interest Margin (NIM) for FY2027 and FY2028 relative to 2026 levels, assuming a static balance sheet with September 30th rate assumptions.
• Loan Repricing: $700 million in fixed-rate loans expected to roll off in the fourth quarter of 2026 at approximately a 6% rate; $2.2 billion rolling off in FY2027 at similar rates, with reinvestment expected to improve yields by ~100 basis points.
• Deposit Costs: Management expects a deposit cost beta in the mid-to-low 20s over the long term; specifically, a 0–10 basis point reduction from the prior year for cost of deposits is noted for the current cycle context.
• Share Repurchases: $96 million of buyback authority remains outstanding within a $100 million total authorization; future buybacks remain opportunistic rather than aggressive until M&A deals increase float or stock valuation becomes more compelling.
• One-Time Gain: Expectation of a non-recurring pre-tax gain of approximately $27 million from pension plan termination to be recorded in the fourth quarter of 2026.
• Loan Growth: Target annualized loan growth in the mid-single digits for the long term; current linked-quarter annualized growth (excluding consumer decline) is running at ~4%.

Business-Segment Outlook:

• Payments & Deposits: Payments volumes are growing YoY driven by debit card portfolio expansion aligned with retail base growth; non-interest-bearing deposits projected to grow in the mid-single digits annually long-term, with specific focus on checking accounts rather than high-yield savings.
• Consumer Lending: Shift ongoing in the consumer portfolio; declining direct lending (higher yield, higher loss content) is being replaced by residential first mortgages and growth in HELOCs; originations remain profitable on a direct cost basis despite revenue declines.
• Commercial Lending: Pipeline remains strong (both gross and net) despite some moderation in borrower activity due to rate uncertainty; loan growth expected to continue from current levels.
• Credit Quality: Net charge-offs expected to remain benign (12 bps in Q3); non-performing assets (NPA) increases viewed as situational with no thematic shift in the portfolio; loan growth expected to drive a small increase in allowance coverage.
• Deposit Seasonality: Public fund deposits (Missouri state) typically trough in September, rise in Q4 due to tax payments, and peak in Q1; this seasonality impacts deposit cost trends.

Market and Competitive Outlook:

• Pricing & Competition: Strategy remains focused on competing on service, not price; deposit cost management has historically achieved a mid-to-low 20s beta even in rising rate environments.
• Asset Sensitivity: Bank is currently slightly asset sensitive; benefit expected from a "higher for longer" rate environment, though the bank is actively monitoring volatility.
• Market Dynamics: Anticipated moderation in commercial borrower activity/appetite in certain markets due to high rates, offset by strong activity in other regions; overall pipeline strength suggests resilience.
• Securities Portfolio: Significant repricing opportunity identified within the securities book following a shift in the rate outlook (from cuts to hikes), adding to NII growth potential.

Macro / Industry Outlook:

• Interest Rates: Management views the current environment as volatile ("crazy"), with a shift from expected rate cuts to hikes; anticipates potential rate hikes in December 2026 and early 2027; notes uncertainty in the forward look on rates.
• Economic Impact: Higher rates present opportunities for NII growth and margin expansion via loan reinvestment at higher yields; potential headwinds include "demand destruction" at some point, though current pipelines remain robust.
• FX/Regulation: No specific mentions of FX, tariffs, or regulatory changes impacting the outlook.

Strategic Initiatives:

• Capital Hedging: Implemented a cash flow hedge at the end of Q3 2026 to moderate asset sensitivity; will continue to explore prudent measures to reduce exposure to rate volatility via the securities portfolio.
• Pension Termination: Pension plan termination process locked in; $27 million gain to be recognized in Q4 2026; proceeds allocation decisions pending.
• Leadership Changes: Creation of new role Head of Consumer and Small Business Lending (promoted Brandy Bryant); elevation of Matt Adams to CEO of the Oklahoma region.
• M&A: No specific updates or immediate announcements; strategy continues to be prosecuted with no immediate plans for deal execution; M&A opportunity set balances against potential buyback activity.
• Capex/Opex: Expenses remain well-controlled; termination of pension plan represents a non-recurring adjustment.

Risks and Headwinds to Outlook:

• Deposit Cost Beta: Uncertainty regarding the exact deposit cost beta in the current turbulent rate environment ("time will tell").
• Rate Volatility: "Crazy" rate environment with potential shifts between cuts and hikes creating uncertainty for the forward rate look.
• Demand Destruction: Concern that higher rates may eventually lead to demand destruction, though currently offset by strong pipelines.
• Liquidity Management: Caution against aggressive buybacks to avoid killing stock liquidity before an M&A deal increases float; limited buyback authorization ($100M) constrains capital return agility.
• Consumer Loan Mix: Transition from higher-yielding direct lending to residential/HELOCs may alter yield profiles and credit loss content dynamics.

Management Tone on the Future:

• Confidence: Optimistic and confident in the franchise's ability to grow loans and expand margins in the current rate environment; describes the bank as "well positioned for higher interest rates."
• Hedges: Cautious regarding deposit beta certainty and rate direction; explicitly states they will "pick their spots" for buybacks rather than being aggressive.
• Stance: Believes $34–$35 stock price does not fully reflect value from excess capital ($8.28/share) and asset sensitivity benefits; maintains a "tepid" approach to capital returns until M&A increases float.

Miscellaneous:

• Share Count: $8.28 excess capital per share; minimal share repurchases in Q3.
• Operational Specifics: Terminated small gift card areas due to high expenses; focused on acquiring checking account customers rather than buying deposits.
• Credit Metrics: Non-performing asset increases noted as "law of small numbers" with delinquencies trending down.