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

Financial Performance:

• Net income for Q3 2026 was $22.8 million ($0.88 diluted EPS), up 21% YoY and 9.6% sequentially from Q2 2026 ($20.8 million).
• Net interest income (NII) reached $64.5 million, a 5.2% increase YoY and 2.6% increase sequentially.
• Net interest margin (NIM) expanded to 3.62%, rising 13 bps YoY and 5 bps sequentially, driven by higher earning asset yields (average loan yield +5 bps to 5.01%) and stable deposit costs (90 bps).
• Return on average assets (ROAA) was 1.22% and return on average equity (ROAE) was 15.28%.
• Non-interest income was $12.4 million, down from $14.6 million due to a $2.4 billion decline in bank-owned life insurance (BOLI) income from equity market volatility.
• Non-interest expense decreased to $44.8 million from $46.2 million, primarily due to reduced deferred compensation expenses.
• Efficiency ratio improved to 58.3% from 59.6%.
• Full-year expense guidance updated to a 2-2.5% increase.
• Total tax rate expected to normalize to 22-24% going forward; Q3 elevated rate attributed to lower tax-exempt BOLI income.

Guidance and Future Outlook:

• Q4 2026 NIM guidance set in the mid-360 bps range.
• Total other operating income for Q4 expected to be approximately $13 million, driven by wealth management growth but offset by mortgage banking pressures in a higher-rate environment.
• Deposit cost beta estimated at ~24% overall (33% on interest-bearing deposits); management expects deposit costs to rise slightly if loan growth accelerates.
• Q4 CD maturities estimated at $410 million (40% of portfolio) rolling off at 2.7% and repricing at an estimated 3.0%.
• No specific 2027 NIM or growth guidance provided; 2027 margin upside depends on loan growth and rational pricing.
• Loan growth anticipated to be driven by variable-rate commercial mortgage and construction lending replacing lower-yielding fixed-rate residential products.

Business Segments and Product Lines:

• Total loans: $5.31 billion (flat sequentially, down $54 million YoY); average loans stable at $5.3 billion.
• Production totaled $229 million against $204 million runoff; new production weighted average rate 6.26% vs. 5.72% runoff.
• Geographic split: 50% Hawaii, 50% mainland; mainland loans grew $50 million while Hawaii loans declined $45 million.
• Loan pipeline: $224 million across 71 opportunities, with over one-third booked in October.
• Total deposits: $6.66 billion, up 1.3% YoY but down 0.5% sequentially; driven by reduction in higher-cost time deposits offset by growth in interest-bearing demand, savings, and money market accounts.
• Non-interest bearing deposits increased $10.9 million.
• No broker deposits; deposit base remains granular with low reliance on public time deposits.
• Share repurchases: ~294,000 shares ($11.2 million) in Q3 at avg $38/share; $22 million remaining under authorization.
• Dividend increased 3.3% for Q4 to $0.31 per share.

Market and Competitive Landscape:

• Hawaii economy resilient with visitor arrivals up 1.8% and spending up 4.1% YTD; unemployment at 2.8% vs. 4.2% national average.
• Construction sector adding jobs; overall non-farm employment up 1,300 jobs YoY.
• Mortgage production reduced to approx. one-third of historical levels due to rate environment; home equity products viewed as opportunity to replace runoff.
• Mainland lending supplementing Hawaii franchise rather than replacing it; $380 million production in Hawaii vs. $310 million mainland YTD.
• Deposit competition acknowledged, but management cites sticky, relationship-based customers reducing rate sensitivity.

Risks and Challenges:

• Storm-related travel disruptions and elevated storm activity affecting Hawaii's visitor economy.
• Geopolitical conflicts, inflation, and oil price volatility impacting regional economy.
• Asset sensitivity neutral to slightly asset sensitive; management well-positioned but exposed to modest deposit cost increases if rates rise.
• BOLI income volatility impacts non-interest income and effective tax rates.
• Consumer market monitoring heightened due to macroeconomic conditions and higher interest rates.

Management Commentary and Tone:

• Tone is confident and disciplined, emphasizing "sustainable returns," "positive operating leverage," and "high performance."
• Management highlights resilience of the relationship-based banking model and successful balance sheet optimization.
• Explicitly stated focus on pricing, shorter duration, and diversification over pure balance sheet volume growth.
• Management noted that while loan growth has been muted, they remain biased toward business development within disciplined parameters.

Analyst Questions and Answers:

• Demand & Pipeline: Ralph Misik confirmed pipeline health; no major demand shift observed despite higher rates, though mortgage production is naturally depressed.
• Deposit Costs & Beta: Dana Matsumoto projected a 24% overall deposit beta in rising rate environments; expects total deposit costs to rise slightly if loan growth resumes, targeting 80-85% loan-to-deposit ratio.
• Margin Outlook: Dana noted that while asset yields will rise, deposit repricing will offset some benefits, keeping Q4 NIM guidance in the "mid-360s."
• Credit Quality: Anna Hu highlighted improved criticized loan ratio (181 bps vs. 234 bps) and stable allowance (1.13% of loans); monitoring consumer sector closely.
• Tax Rate: Effective tax rate normalization expected to 22-24% excluding volatile BOLI income; potential new tax credits not yet included in guidance.
• Share Repurchases: Expectation to maintain Q3 repurchase pace in Q4, contingent on loan growth opportunities and regulatory capital ratios.

Other Key Points:

• Storm impacts on operations and customers were "isolated" with no material financial impact reported.
• $2.4 billion BOLI income decline was the primary driver for the sequential drop in non-interest income.
• Average deposit cost was 91 bps in September, showing a slight tick up from the quarter average.
• Securities portfolio cash flows of ~$30 million quarterly with 225-250 bps yield pickup on reinvestment; loan runoff of ~$200 million quarterly replaced at 50-60 bps higher yields.