Central Pacific Financial Corp - Third Quarter 2026 Earnings - CENTRAL PACIFIC FINANCIAL CORP

Financial Performance:

• Net income reached $22.8 million ($0.88 per diluted share), a 21% year-over-year increase and up from $20.8 million in the prior quarter.
• Return on average assets (ROAA) was 1.22%; return on average equity (ROAE) was 15.28%.
• Net interest income (NII) totaled $64.5 million, up 2.6% sequentially and 5.2% year-over-year.
• Net interest margin (NIM) expanded 13 basis points year-over-year and 5 basis points sequentially to 3.62%, driven by a 5 basis point increase in average loan yield to 5.01% while deposit costs remained stable at 90 basis points.
• Efficiency ratio improved to 58.3% from 59.6% in the prior quarter.
• Total other operating income was $12.4 million, down $2.2 million sequentially primarily due to a $2.4 billion reduction in Bank-Owned Life Insurance (BOLI) income.
• Total operating expenses were $44.8 million, down $1.4 million sequentially, driven by lower deferred compensation expenses.
• Non-performing assets declined to $40.0 million (19 basis points of total assets); criticized loan ratio improved to 181 basis points from 234 basis points.
• Allowance for credit losses (ACL) stood at $59.8 million (1.13% of total loans); provision for credit losses was $1.9 million.
• The bank repurchased approximately 294,000 shares ($11.2 million) at an average price of $38, with $22 million remaining in authorization.
• The quarterly dividend was increased by 3.3% to $0.31 per share.

Guidance and Future Outlook:

• Fourth quarter NIM is expected to be in the mid-360 basis points range.
• Management expects total deposit costs to potentially trough in the near term, with slight increases anticipated in Q4 due to CD roll-offs (new blended rates estimated at ~3.0% vs. runoff rates of ~2.7%).
• Total other operating income for Q4 is projected at approximately $13 million.
• Full-year operating expense growth is guided for an increase of 2.0% to 2.5%.
• Management targets a loan-to-deposit ratio range of 80% to 85%; current ratio is approximately 80%.
• Normalized effective tax rate (ETR) is expected to be between 22% and 24%.
• No specific 2027 margin guidance was provided, though upside potential exists if loan growth accelerates and pricing remains rational.
• Q4 share repurchases are expected to continue at a pace similar to Q3.

Business Segments and Product Lines:

• Total loans stood at $5.31 billion, essentially flat sequentially but down $54 million year-over-year; average loans remained steady at $5.3 billion.
• Portfolio mix is shifting toward higher-yielding, variable-rate commercial mortgage and construction lending, replacing lower-yielding fixed-rate residential and home equity loans.
• Loan production for Q3 was $229 million against $204 million runoff, with new production weighted at 6.26% versus 5.72% on runoff.
• Geographic split in Q3 production was 50% Hawaii and 50% mainland; mainland balance increased by ~$50 million while Hawaii balance decreased by ~$45 million.
• Q4 pipeline includes $224 million across 71 opportunities; over one-third of this pipeline was booked in October.
• Total deposits were $6.66 billion, down 0.5% sequentially due to a $49.2 million reduction in higher-cost time deposits, partially offset by growth in interest-bearing demand and savings accounts.
• The deposit franchise remains granular with no broker deposits; focus remains on primary operating accounts and relationship banking.
• BOLI income remains volatile due to equity market fluctuations, causing significant quarterly fluctuations in non-interest income.

Market and Competitive Landscape:

• Hawaii's economy remains resilient with unemployment at 2.8% (vs. 4.2% national); visitor arrivals up 1.8% and spending up 4.1% through August.
• Non-farm employment grew by 1,300 jobs year-over-year, with construction adding 700 jobs.
• Headwinds include storm-related travel disruptions, geopolitical conflicts impacting oil prices, inflation, and elevated storm activity.
• Residential mortgage production is running at approximately one-third of normal levels due to the high-rate environment; refinancing demand remains low due to existing low-rate mortgages.
• Home equity products are being re-evaluated as a potential growth avenue to offset first mortgage runoffs.
• Mainland lending serves to supplement the Hawaii franchise and diversify the portfolio, currently representing 18% of total loan balances.

Risks and Challenges:

• Geopolitical conflicts, inflation, and elevated storm activity pose external risks to the Hawaii economy and the bank's customers.
• The "higher for longer" rate environment continues to pressure residential mortgage production and increases funding costs as loans reprice.
• Equity market volatility remains a risk factor for BOLI income and deferred compensation expenses, contributing to earnings fluctuation.
• Consumer market dynamics are being closely monitored for potential credit deterioration due to macroeconomic conditions.
• Potential for slightly elevated CD costs in Q4 as $410 million in CDs mature and are replaced at higher rates.

Management Commentary and Tone:

• Tone is confident and focused on execution, discipline, and operating leverage despite a muted growth environment.
• Management emphasized a relationship-based banking model that supports resilience against storm impacts and economic headwinds.
• Leadership expressed a bias toward business development and growth while maintaining strict capital allocation discipline.
• Confidence was shown in the bank's ability to manage deposit betas (targeting 24% on total deposits, 33% on interest-bearing) and maintain neutral-to-slightly-asset-sensitive balance sheet positioning.
• Management highlighted that profitability metrics are trending favorably in line with high-performance goals.

Analyst Questions and Answers:

• Growth & Demand: Management confirmed a healthy pipeline but noted residential mortgage runoff is strategic to optimize the loan book toward higher-yielding CRE; mainland lending is supplementing, not replacing, the Hawaii franchise.
• Deposit Pricing: Analysts questioned deposit beta and CD roll-overs; CFO Dana Matsumoto stated total deposit costs were 91 basis points in September, with a target beta of ~24% and CD rollover rates expected to be modestly higher (3.0% new vs. 2.7% runoff).
• Fee Income: BOLI volatility drives non-interest income fluctuations; fee income is expected to be flattish year-over-year, with Q4 non-interest income guidance around $13 million.
• Margin Outlook: Analysts asked why Q4 margin guidance is mid-360s despite asset sensitivity; management explained that rising loan yields are offset by rising deposit costs, though potential exists for margin expansion in 2027 if loan growth accelerates.
• Tax Rate: The higher effective tax rate this quarter was attributed to less tax-exempt BOLI income; normalized ETR is expected to be 22-24%.
• Credit Quality: Management is monitoring the consumer market closely due to macro conditions but noted strong LTVs and diversification in the criticized loan portfolio.
• Capital Management: Share repurchases will continue dynamically based on loan growth opportunities and valuation; dividend remains a key capital allocation tool.

Other Key Points:

• Storm-related travel disruptions in Hawaii were isolated with no material impact on the bank or its customers.
• The bank's balance sheet is well-positioned with neutral-to-slightly asset-sensitive duration, benefiting modestly from Fed rate hikes.
• $400 million+ in CD maturities are scheduled for Q4, representing about 40% of the CD portfolio.
• The bank continues to invest in talent, automation, and data capabilities to drive operating efficiencies and customer experience improvements.
• Management remains committed to optimizing capital to enhance long-term shareholder value while supporting community restoration efforts.