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

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. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. 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. J. Rold Robago, Senior Strategic Financial Officer. Please go ahead. Thank you, Erica, and thank you all for joining us today to review Central Pacific Financial Corps' financial results for the third quarter of 2026. Joining me this morning are Arnold Martinez, Chairman, President, and Chief Executive Officer. David Morimoto, Vice Chair and Chief Operating Officer. Ralph Misik, Vice Chairman. Dana Matsumoto, Executive Vice President and Chief Financial Officer. And Anna Hu, Executive VP 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.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, please refer to slide two of our presentation. With that, I will turn the call over to our chairman, president, and CEO, Arnold Martinez. thank you gerald and aloha 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 percent compared with last year's third quarter results which were adjusted to exclude one-time 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 eight 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 percent in September compared with 4.2% nationally. Statewide non-farm 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 IMPACT ON OUR BUSINESS OR OUR CUSTOMERS. WITH THAT, I WILL TURN THE CALL OVER TO DANA. 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 QUARтер, NET INCOME was $22.8 million or $0.88 per diluted share, compared with $20.8 million or 80 cents per dilute 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 five basis points from the prior quarter and 13 basis points for the year ago quarter to 3.62%. A sequential quarter increase in net interest income and margin was primarily driven by higher yields on loans and investment securities. Average loan yield increased five 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 discipline 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-360% 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 billion 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 $0.1 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 or $11.2 million at an average price of about $38 per share. At quarter end, $22 million remain 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, Dana. 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. 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. Net quarter and mainland loans represented 18% of total balances. Mainland balance has increased by approximately $50 million during the quarter, while Hawaii balance has declined by approximately 45 million dollars. 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've booked more than a third 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 toward business development and growth. We'll be intentional and disciplined in this pursuit, allocating capital to opportunities that strengthen the earnings part of the bank and the resilience of our balance sheet. 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 dollars in interest-bearing demand deposits and 21.6 million dollars and savings and money market balances on an average balance basis non-interest bearing deposits increase 10.9 million dollars while savings and market balances increase 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 adam thank you david asset quality remains strong at quarter end non-performing assets declined to 40 million dollars or 19 basis points of total assets, while net chart drops remain 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. 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 loses 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 consumers, shareholders, and our broader community for your ongoing support. We are now happy to answer your questions. We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. your first question comes from the line of david feaster with raymond james your line is open please go ahead hey good morning everybody hi david um i wanted to start on the growth side it sounds like demand's holding up well pipelines are doing all right um and you know it sounds like you're still pulling things through. I'm just curious, how's demand from your perspective? Like, I mean, as you talk to your clients about higher rates, have you seen any shifted demand? Are you concerned at all about anything starting to fall out of the pipeline? And then just touch on the pay down activity. It sounds like that's really been the biggest, you know, inhibitor to faster growth, but just wanted to get your sense on that side. Yeah, David, this is Ralph. I would say in terms of, you know, the forecast, the best forecast we have right now is what we have in the pipeline. I think the pipeline looks fairly healthy. As you probably are aware, you know, we do underwrite loans to, you know, to the higher rate environment. We also look at that relative to our, you know, asset monitoring of our portfolio. I would say in terms of activity, you know, mainland lending is really supplementing, not replacing the Hoyt 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, a lot of the runoffs as 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. Hey, David. It's David. You know, 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 a third of what it normally would have been running on as far as production, and we expect that to continue. um the home equity is a potential opportunity it is it is a product that we are um taking a harder look at and seeing if there's opportunity to to um at least diminish the runoff if not have some net growth in in that portfolio you know as as people have a lot of people have first mortgages at very low interest rates um they're not looking to refi that so the way that that they can access their equity is through the home equity product. I would add, David, you know that we're really trying to improve the economics of our own portfolio, not really just pursuing balance sheet growth. So what you're gonna 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 take discipline credit selection. okay okay and maybe maybe on the other side of the balance sheet right i mean touching on funding it's it's pretty impressive what y'all are able to do i mean um you know 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 um on the islands yeah david it's uh david again um first off i i i want to thank um you know the teams the teams have been doing an exceptional job um with um you Know continuing to build core deposits and that's what's led us to be able to keep uh to manage um you know deposit costs over time i i think as we look forward we are expecting strengthening loan loan growth net loan growth and as a result that that likely will cause um 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 you know that is what we're looking to do and that that will be a creative growth so I would think that's how we're working at the deposit side we've been very deliberate about our managing of our deposit base because of the you know, the lack, not lack, but the minimal amount of loan growth. But going forward, we think that's going to change. Okay. Terrific. Thanks, everybody. The next question comes from the line of Matthew Clark with Piper Sandler. Your line is open. Please go ahead. Good morning, everyone. Morning, Matthew. Just along those lines, maybe Dana, if you had the spot rate on deposits at the end of September and just thinking through the beta, you know, assuming we get maybe a rate hike in December, in March. I think on the way down, you were about 35% for interest bearing. do you think you can kind of you think you can do something similar or do you think you do a little better than that on the way up sure hi Matthew thanks for the question on the spot rate first 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 corner, we have about $410 million of CD maturities. 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. Thank you. And then on the fee and expense run rates, 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 non-interest expense run rate for the fourth quarter when you kind of distill the bully noise? Sure, Matthew. On the fee income side, you know, when we carve out that bully noise, like you said, our non-interest income continues to do well on the wealth side. Our teams have been successful. They're 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 bully and then just for the for the fourth quarter if you're looking at that specifically probably in about the 13 million dollar range and then on expenses matthew um our you know we continue to manage our expense space 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 two to two and a half percent 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. Okay. Okay. That's great. Thank you very much. Thanks, Matthew. Your next question comes from the line of Andrew Leash with Stone X Financial. Your line is open. Please go ahead. hello andrew your line is open please go ahead your next question comes from the line of kelly mota with kbw your line is open please go ahead hey good morning thanks for the question um most of mine it was a it was an ice cream quarter i feel like most of them have been taken at this point um i guess as you look ahead um it seems like you know 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. Thanks. Hi, Kelly. I think I got your question. You're a little soft, but, you know, I think, you Know, right now we're running about 50-50 between, you know, Hawaii and the mainland. And I think just through the through this first month of the quarter, that that's kind of the mix right now. So again, you know, if, if we continue to run off some of the, you Know, fixed rate long duration assets, you're probably going to see fairly muted growth. Got it. That's helpful. And maybe just a housekeeping item for Dina. Dina, do you have your expected tax rate. It came in a little higher than where I 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 pre-tax book income. Going forward, I would expect our normalized ETR to be around 22 to 24 percent the bully 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 got it that's helpful that's all for me i'll step back thank you kelly your next question comes from the line of andrew leash with stone x financial your line is open please go ahead hi sorry i hope i'm coming through now my phone wasn't muted i don't know what was up there um uh can you hear me at all yeah you're good andrew okay sorry about that um no my question's really just on the margin guide i mean i hear the i see the repricing engine that's still flowing through uh here the asset sensitivity or the modest as a sensitivity so why wouldn't the guide be closer to the high 360s rather than the mid 360s hi andrew it's dana so on the go forward margin uh you're correct about the you know the factors that are will be favorable to the margin going forward we will continue to have the positive asset back book, you know, 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 yeah, I will note, you know what 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. Yeah, 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. Got it. All right. Thanks for taking the question. Thank you, Andrew. Your next question comes from the line of Liam Kuhil with Havdi Group. Your line is open. Please go ahead. Hey, good morning, everyone. Thanks for taking my questions. Welcome, Liam. Thank you. 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 you know potential loan growth in the future and funding that with deposits hi liam it's dana on the loan to deposit ratio we're currently at about 80 percent our target range i would say is about 80 to 85 percent 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 Thank you. 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, hi Leon, 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, higher interest rates for longer um yeah it's mostly the consumer side that makes sense thank you um and final question for me just more of a housekeeping item moving forward do you expect their repurchases likely continue in your current levels hi liam i can take that one this is dana 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 you know as i said in prior quarters the level of repurchases in any given quarter it will continue to be dynamic and informed by several factors including you know 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 you know 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. Great. Well, thank you for taking my questions. I'll step back. Your next question comes from the line of Matthew Clark with Piper Sandler. Your line is open. Please go ahead. Hey, thank you. Sorry. Since we're digging to the margin a little bit more there in the Q&A, Dana, 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, you know, pick up there, but just also want to think through the back book repricing on the long side. Sure, Matthew. On the securities portfolio, the cash flows on a quarterly basis, it's 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. Perfect. Thank you. Sure. as a reminder if you would like to ask a question please press star one on your telephone keypad there are no further questions at this time i will now turn the call back to mr gerald rubago for closing remarks 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.