Central Pacific Financial Corp. (CPF) Q3 2026 Earnings Report, Transcript and Summary

Good morning, and good afternoon ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp Third Quarter 26 Earnings Call. During today's presentation, 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 would like to turn the call over to mister Jayrald Rabago, senior strategic financial officer. Please go ahead.

Thank you, Erica, and thank you all for joining us today to review Central Pacific Financial Corp's financial results for the third quarter of 26. Joining me this morning are Arnold D. Martines, chairman, president, and chief executive officer. David S. Morimoto, vice chair and chief operating officer Ralph Mesick, vice chair Dana Matsumoto, executive vice president and chief financial officer and Anna Hu, executive vice president 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 2 of our presentation. With that, I will turn the call over to our chairman, president, and CEO, Arnold D. Martines.

Thank you, Jayrald, 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% compared with last year's third quarter results. Which were adjusted to exclude onetime 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 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 8 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% in September compared with 4.2% nationally. Statewide non farm employment increased by 1.3 thousand jobs, year over year. Including 700 jobs added in the construction industry. Which. 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 do not see any material impacts on our business or our customers. With that, I will turn the call over to Dayna.

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 quarter, net income was $22.8 million or $0.88 per diluted share. Compared with $20.8 million or $0.80 per diluted 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 5 basis points from the prior quarter and 13 basis points from 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 5 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 disciplined 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 have 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-3.60% 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 million 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 $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 thousand shares for $11.2 million at an average price of about $38 per share. At quarter end, $22 million remain available under our 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 Mesick.

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 have 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. Funded 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. Quarter end, Mainland loans represented 18% of total balances. Mainland balances increased by approximately $50 million during the quarter, while Hawaii balances declined by approximately $45 million. 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. We have booked more than 1/3 of that production in dollars during the month of October. Finally, we are well aware of the uncertainty and headwinds impacting the local and national economy. But continue to be biased toward business development and growth. We will be intentional and disciplined in this pursuit. Allocating capital to opportunities that strengthen the earnings power of the bank, the resilience of our balance sheet. And with that, I will turn the call over to David S. Morimoto.

Thank you, Ralph Mesick. 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 in interest bearing demand deposits, and $21.6 million in savings and money market balances. On an average balance basis, noninterest bearing deposits increased $10.9 million while savings and money market balances increased $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 brokered 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 will turn the call over to Thank you, David S. Morimoto.

Asset quality remained strong at quarter end. Nonperforming assets declined to $40 million or 19 basis points of total assets, while net charge offs remained flat at $0.7 million or 20 basis points of average loans. Criticized loan ratio improved to 181 basis points of total loans from 34 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 losses totaled $1.9 million for the quarter. Overall, our credit quality remained strong with our lending and credit risk strategy focused on diversification consistent underwriting standards, strong collateral, and on stable state segments and industries that we have solid expertise in. I will now turn the call back to Arnold for closing comments.

Thank you, Anna Hu. 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 customers, 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 1 to raise your hand. To withdraw your question, press 1 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.

I wanted to start on the growth side. It sounds like demand's holding up well. Pipelines are doing alright. And it sounds like you are still pulling things through. I am just curious, how is demand from your perspective? Like, I mean, are. As you talk to your clients about higher rates, have you seen any shift in demand? Are you concerned at all about anything starting to fall out of the pipe And then just touch on the paydown activity. It sounds like that really has been the biggest inhibitor to faster growth. But just wanted to get your sense on that side.

David. This is Ralph Mesick. I would say in terms of the forecast, the best forecast we have right now is what we have in the pipeline. The pipeline looks fairly healthy. As you probably are aware, you know, we do underwrite loans to the higher rate environment. We also look at that relative to our asset monitoring of our portfolio. I would say in terms of activity, mainland lending is really supplementing, not replacing the Hawaii franchise. We generated, I think, about $380 million in production in Hawaii this year, again, about, say, $310 million in the mainland. And then the runoff is greater in Hawaii because it is basically a larger portfolio. Okay. And, you know, when I look at it, it is, you know, it is a lot of the runoff is in kind of the resi mortgage and home equity lines. Could 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 are seeing pricing trending today.

Hey, David. it is David. You know, on the first mortgage side, residential mortgage, obviously, that is a. 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. it is gonna continue to face headwinds. You know, I think it is running at about a third of what it normally would have been running on as far as production. And we expect that to continue. The home equity is a potential opportunity. It is a product that we are taking a harder look at and seeing if there is opportunity to at least diminish the runoff, if not have some net growth in that portfolio. As people have. A lot of people have first mortgages at very low interest rates. They are not looking to refi that. So the way that they can access their equity is through the home equity product.

I would add, David, that we are really trying to improve the economics of our own portfolio, not really just pursuing balance sheet growth. So what you are going to see, I think, and what you have seen our priorities are better pricing, shorter duration, some diversification and then I. I would say continued sort of, I would say, disciplined credit selection.

Okay. Okay. And maybe on the other side of the balance sheet. Right? Touching on funding, it is pretty impressive what y'all are able to do. I mean, 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 in just kind of the competitive landscape for funding, on the islands?

Yeah. David, it is David again. First off, I want to thank the teams. The teams have been doing an exceptional job with continuing to build core deposits, and that is what is led us to be able to keep to manage, you know, deposit costs over time. I think as we look forward, we are expecting strengthening loan growth, net loan growth, And as a result, that likely will cause total deposit costs to. This might be a trough. Going forward. If we start to see loan growth, we will we will 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 are looking to do, and that will be accretive growth So I would think that is how we are looking at the deposit side. We have 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 is gonna 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.

I am just along those lines. Maybe, Dana, if you had this 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 and March. I think on the way down, you were about 35% for interest bearing. Do you think you can kind of do something similar, do you think you can do a little better than that? On the way up?

Sure. Hi, Matthew. Thanks for the question. On the spot rate, first 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 have experienced in the last couple of cycles. So I am 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. 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 quarter, we have about a $410 million of CD maturities. that is about 40% of our portfolio. that is 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 is helpful. Thank you. And then on the fee and expense run rates, I guess. 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 noninterest expense run rate for the fourth quarter when you just kind of distill the bully noise?

Sure, Matthew. On the fee income side, you know, when we carve out that BOLI noise, as you said, our noninterest income continues to do well on the wealth side. Our teams have been successful. They are growing the business. Mortgage banking, though, will be under pressure in this current higher for longer rate environment. So considering these factors, I am expecting that our total other operating income to be generally flattish year over year. But it will depend on further market volatility impacting our BOLI. And then just for the for the fourth quarter, if you are looking at that specifically, probably in about the $13 million range. And then on expenses, Matthew, our. You know, we continue to manage our expense base 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 2% to 2.5% this year, which is on the low end of the range 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 is great.

Thank you very much.

Thanks, Matthew.

Your next question comes from the line of Andrew Liesch with Stonex Financial. Your line is open. Please go ahead. Andrew, Your line is open. Please go ahead. Your next question comes from the line of Kelly Motta. With KBW. Your line is open. Please go ahead.

Hey. Good morning. Thanks for the question.

Hi, Kelly.

Most of my-- it was a nice clean quarter. I feel like most of mine have been taken at this point. I guess as you look ahead, it seems like you growth has been a little bit more muted with more coming from the Mainland. I am wondering if you can supplement kind of what you are seeing in Hawaii for maybe more Mainland growth coming on? I am just wondering how you guys are viewing that, that portion of the business. Thanks.

Hi, Kelly. I think I got your question. You are a little soft, but I think right now, we are running about 50-50, you know, Hawaii and the Mainland, and I think just through the. Through this first month of the quarter, that is kind of the mix right now. So, again, you know, if we continue to run off some of the, you fixed rate, long duration assets, we are probably going to see fairly muted growth. Got it.

that is helpful. And maybe just house keeping item for Dana. Dana, 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 pretax book income. Going forward, I would expect our normalized ETR to be around 22% to 24%. The BOLI income has been volatile, so that could impact it. And then I will lastly note that we are evaluating some potential additional tax credits, which would be favorable to our tax rate. But right now, I am not building it into the guidance.

Got it. that is helpful. that is all for me. I will step back.

Thank you, Kelly.

Your next question comes from the line of Andrew Liesch with Stonex Financial. Your line is open. Please go ahead.

Hi. Sorry, I hope I am coming through now. My phone was not muted. I do not know what was up there. Can you hear me at all?

Yeah. Yeah. We are good, Andrew.

Okay. Sorry about that. My question's really just on the margin guide. I mean, I hear the I see the repricing engine that still flowing through. Here, the asset sensitivity or the modest asset sensitivity. So why would not the guide be closer to the high 3 sixties rather than the mid 3 sixties?

Hi, Andrew. it is Dana. So on the go forward margin, you are correct about the, you know, the factors that 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 I will note, loan yields are going up, but on the deposit side, those rates will also be going up, offsetting some of those benefits. Those are the factors that are 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 are not providing guidance for 2027 at this point.

Got it. Alright. Thanks for taking my question.

Thank you, Andrew.

Your next question comes from the line of Liam Cohee with Hovde Group. Your line is open. Please go ahead.

Hey, good morning, everyone. Thanks for taking my questions.

Welcome, Liam Cohee.

Thank you. So to touch on deposits 1 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 are targeting as we are thinking about you know, potential loan growth in the future and funding that with deposits?

Hi, Liam Cohee. it is Dana. On the loan to deposit ratio, we are currently at about 80%. Our target range, I would say, is about 80% to 85%. So we are 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 is very helpful. Just to jump to your credit quickly. Are there any verticals where you are watching Dynamics more closely? I mean, looks like credit improved pretty nicely in the quarter, but just curious if you have any thoughts there. Yeah. I think. Hi, Liam Cohee. This is Anna. Where we are primarily focused on is just paying a little bit more to the consumer market just given the macroeconomic market conditions, the higher interest rates for longer. Yeah. it is mostly the consumer side. That makes sense. Thank you. And final question for me, just as a housekeeping item. Moving forward, do you expect share repurchases likely to continue at your current levels? Hi, Liam Cohee. I can take that 1. 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 is a low risk source of value. But, you know, as I have said in prior quarters, the level of repurchases in any given quarter, it will continue to be dynamic and informed by several factors, including loan growth opportunities, the operating environment, other risk considerations, our valuation. as well as watching our watching our AOCI and TCE ratio. But with all of that said, 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 will 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 are digging to the margin a little bit more there in the Q and A, Dana, can you just remind us of the securities cash flows coming off the portfolio. Roll off and unexpected 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 pickup there, but just also want to think through the back book repricing on the loan side.

Sure, Matthew. On the securities portfolio, the cash flows on a quarterly basis, it is about $30 million a quarter. And we have been getting about I would say, 2 hundred 25 to 250 basis points yield pickup on our new securities purchases. On the loan portfolio, it is 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 1 on your telephone keypad. There are no further questions at this time. I will now turn the call back to mister Jayrald Rabago for closing remarks.

Thank you everyone for joining us today and for your continued interest in Central Pacific Financial Corp. Look forward to speaking with you again next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.