Central Pacific Financial Corp. (CPF) Earnings Call Transcript

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. [Operator Instructions]. 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. Jayrald Robago, 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 2026. Joining me this morning are Arnold Martines, Chairman, President and Chief Executive Officer; David Morimoto, Vice Chair and Chief Operating Officer; Ralph Mesick, Vice Chair; Dayna 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.cbr.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 Martines.

Thank you, Jayrald, and hello 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 solid 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 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 nonfarm 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, the impacts were fortunately isolated, and we don't 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% and 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'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-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 $1.0 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 for $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, Dayna. 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 continue 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. Funded production, excluding revolving activity totaled approximately $229 million against $204 million of runoff. New production carried a weighted average rate of 6.26% and compared with 5.72% on runoff balances, resulting in a positive spread replacement. From a geographic perspective, third quarter production was about 50% from Hawaii and 50% from the Mainland. At 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 increased 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 1/3 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 towards business development and growth. We'll be intentional and disciplined in this pursuit, allocating capital to opportunities that strengthen the earnings power of the bank and the resilience of our balance sheet. And 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 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 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 Anna.

Thank you, David. Asset quality remained strong at quarter end. Nonperforming assets declined to $4 million or 19 basis points of total assets, while net charge-offs remained 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. The 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 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 customers, shareholders and our broader community for your ongoing support. We are now happy to answer your questions.

[Operator Instructions]. Your first question comes from the line of David Feaster with Raymond James.

I wanted to start on the growth side. It sounds like demand is holding up well pipelines are doing all right. And it sounds like you're still pulling things through. I'm just curious, how is demand from your perspective? Like, I mean, 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 pipeline? And then just touch on the paydown activity. It sounds like that's really been the biggest inhibitor to faster growth. But just I wanted to get your sense on that side.

Yes, David, this is Ralph. I would say in terms of 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, 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 against about, say, 310 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, it's -- a lot of the runoff is 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?

David, it's David. 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 1/3 of what it normally would have been running on as far as production, and we expect that to continue. The home equity -- it 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're not looking to refi that. So the way that they can access the equip -- their equity is through a full equity product.

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

Okay. And maybe on the other side of the balance sheet, right? I mean, touching on funding, it's pretty impressive what you're all able to do. I mean reducing CDs, able to replace that with some core deposits, keep deposit costs flat. Could you just touch on how you think about core deposit growth as we look forward? How pricing is trending and just kind of the competitive landscape for funding on the islands.

Yes, David, it's 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's what's led us to be able to keep -- to manage 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'll look to start growing our deposits and that may result in slight increases in total deposit costs. As we said all of that, that is what we're looking to do, and that will be accretive growth, so I would think that's how we're looking at the deposit side. We've been very deliberate about our managing of our deposit base because of the lack -- not that, but the minimal amount of loan growth. But going forward, we think that's going to change.

The next question comes from the line of Matthew Clark with Piper Sandler.

Just along those lines, maybe Dayna, if you had the spot rate on deposits at the end of September? And just thinking through the beta assuming we get maybe a rate hike in December and March. I think on the way down, you're about 35% for interest-bearing. Do you think you can kind of -- you think you do something similar? Or do you think you can do a little better than that on the way up?

Sure. 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'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 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 quarter, 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 cost going forward, but we can manage through that.

Got it. Okay. That's helpful. And then on the fee and expense run rate. I don't 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 kind of distill the bully noise?