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

Explicit Guidance:

• Net Interest Income (NII) & Margins: Expect NII and Net Interest Margin (NIM) to increase in 2027 and 2028 relative to 2026 projections, based on a static portfolio model using September 30th yield curves where rates were higher; the company anticipates "additional opportunity" for margin and NII gains.
• Balance Sheet Composition: Projects a "mixed shift" on the consumer side, replacing higher-yielding direct lending (with higher credit loss content) with lower-yielding residential first mortgages and growing HELOCs; commercial loan growth is expected to continue at a mid-single-digit annualized rate (approx. 4% linked quarter annualized).
• Loan Repricing & Yields: Anticipates $700 million in fixed-rate loans rolling off in Q4 2026 and $2.2 billion in 2027, all repricing at roughly 6%; expects to reinvest these proceeds at yields approximately 100 basis points higher than the exiting book.
• Deposit Costs: Expects deposit cost beta in the "mid to low 20s" range even in rising rate environments; anticipates Q4 deposit seasonality driven by Missouri state tax payments (due December), with costs remaining "flattish" on an average Q3-to-Q4 basis but rising on a spot basis.
• Share Repurchases: Retains $96 million of remaining buyback authority (out of $100 million total); intends to remain "opportunistic" and "tepid" regarding aggressive repurchases until an M&A deal occurs to increase float; currently sees value at $34–$35/share but believes benefits of higher rates and capital are not yet fully reflected.
• Non-Recurring Gains: Expects to record a pre-tax gain of approximately $27 million in Q4 2026 from the termination of the frozen pension plan.
• Loan Growth: Expects organic loan portfolio growth to average mid-single digits over the long term; 2026 linked quarter annualized growth is tracking at ~3% overall, or ~4% excluding declining direct lending consumer segments.

Business-Segment Outlook:

• Payments: Deep commitment to growth; volumes are up year-over-year; expansion driven by organic retail base growth (debit card portfolio) and active investment in the commercial payments segment within the existing base.
• Deposit Strategy: Focus remains on acquiring checking account customers rather than purchasing high-yield savings; non-interest-bearing deposits are expected to grow in the "mid-single digits range" year-in and year-out, with consumer deposits comprising >50% of the base.
• Credit Quality: Maintains optimism regarding commercial loan pipelines (both gross and net) remaining as strong as the previous quarter; anticipates "moderation" in borrower activity in certain markets but expects strong activity in others, resulting in stable net pipeline levels.
• Pension: Completed the determination of payments for the terminated pension plan; the transition is expected to be a one-time event with no recurring impact on operating costs.

Market and Competitive Outlook:

• Rate Environment: Characterizes the current environment as "crazy" and uncertain, noting the shift from expected rate cuts (late 2025) to rate hikes (late 2025/early 2026); views the "higher for longer" rate regime as beneficial to the business model (asset sensitivity).
• Liquidity Management: Acknowledges asset sensitivity and has begun implementing strategies to moderate exposure, including a cash flow hedge placed at the end of the quarter and repricing opportunities within the securities portfolio.
• Pricing Power: Competes on service rather than price to manage deposit costs; expects to maintain margin expansion despite competitive and "irrational" market conditions in the short term.
• Public Deposits: Identifies Missouri state tax payment seasonality as a key driver for deposit cost fluctuations, with the first quarter historically being the highest cost quarter due to state agency spending.

Macro / Industry Outlook:

• Economic Growth: Anticipates a moderate economic environment where "moderation in certain markets" balances with "strong activity" in others; does not expect a thematic shift in credit risk or borrower defaults despite rate hikes.
• Regulatory/Tax Seasonality: Specific macro driver identified is the Missouri state tax calendar (property taxes due December), which drives seasonal liquidity and cost shifts in public fund deposits.

Strategic Initiatives:

• Leadership Changes: Promoted Matt Adams to CEO of Oklahoma region and created a new "Head of Consumer and Small Business Lending" role for Brandy Bryant to strategically focus on consumer/small business growth.
• Hedging Strategy: Initiated a cash flow hedge at quarter-end to reduce asset sensitivity; plans to continue monitoring and utilizing the securities portfolio to hedge rate volatility.
• M&A: Continues to prosecute a known M&A strategy but has "no updates" or active changes at this time; capital deployment from the pension gain has not been decided upon, and the company remains "less focused" on retooling the book with pension proceeds in favor of future success initiatives.
• Capital Allocation: Maintains $2 billion in excess capital ($8.28/share); plans to balance buybacks against M&A opportunities and liquidity needs, avoiding aggressive repurchases that could negatively impact stock float.

Risks and Headwinds to Outlook:

• Rate Uncertainty: Significant uncertainty regarding the forward path of interest rates (potential for another hike in December 2026 and early 2027) creates volatility in deposit costs and asset yields.
• Deposit Cost Beta: Potential for deposit costs to rise faster than expected if the "unusual turbulence" in the rate environment impacts the bank's ability to manage pricing.
• Asset Sensitivity: While currently asset-sensitive, the company acknowledges the risk of "rate volatility" and the potential need to further moderate this sensitivity if the rate cycle shifts significantly.
• Loan Mix Shift: The strategic shift away from higher-yielding direct lending toward residential mortgages may initially compress yields until reinvestment opportunities materialize.

Management Tone on the Future:

• Confidence: "Optimistic" regarding loan pipeline strength and the ability to grow from current levels; "convicted" in the credit portfolio positioning despite minor fluctuations in non-performing assets.
• Caution: "Tepid" and "reluctant" regarding aggressive share buybacks until an M&A transaction increases share float; cautious on deposit cost beta in the current volatile environment.
• Strategic Patience: Indicates a willingness to let time tell regarding deposit pricing dynamics and is taking a "prudent" approach to capital deployment (e.g., pension proceeds, hedge timing).

Miscellaneous:

• Mortgage Business: Acknowledged decline in mortgage revenues this quarter but confirms originations remain profitable on a direct cost basis.
• Credit Losses: Net charge-offs remained benign at 12 basis points; commercial delinquencies are described as "law of small numbers" with no thematic shifts in risk.
• Public Sector: Identified as a specific portfolio with higher costs than consumer/commercial books, driving some volatility in total deposit costs.