CPF Q3 2026 earnings call transcript, October 28, 2026

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. Gerald 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 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 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% 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% 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 impacts 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 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. The 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'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 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, 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. $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. Funded production, excluding revolving activity, totaled approximately $229 million, against $204 million. New production carried a weighted average rate of 6.26 percent, compared with 5.72 percent on runoff balances, resulting in positive spread replacement. From a geographic perspective, third quarter production was about 50 percent from Hawaii and 50 percent from the mainland. At quarter-end, mainland loans represented 18 percent of total balances. Mainland balances increased by approximately $50 million during the quarter, while Hawaii is... the balance has 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

and... 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 in... in 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 spiral 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 in interest-bearing demand deposits and $21.6 million in savings and money market balances. On an average balance sheet. On an average balance basis, non-interest-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'll turn the call over to Adam. Thank you, David. Asset quality remains strong at quarter end. Non-performing assets declined to $40 million or 19 basis points of total assets while net charge

off. 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. 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.

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 press star one to raise your hand if you are muted locally.

Hey, David. It's David. You know, on the first mortgage side, residential mortgage, obviously that's 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's going to continue to face headwinds. You know, 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. The home equity is a potential opportunity. It is a product that we are that we are. Um... Taking a harder look at and seeing if there's opportunity to at least diminish the runoff, if not have some net growth in that portfolio. You know, 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 their equity is through the home equity product. And I, I would add, um, David, you know, that we're really trying to improve the economics of our own portfolio. Um, not really just pursuing balance sheet growth. So what, what you're going to see, I think, and what you've seen, our priorities are better pricing, shorter duration, some diversification. And then I say continued sort of, I'd say 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. David, it's David again. Um, first off, I, I, I want to thank, um, you know, the, 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 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, we'll. look to start growing our deposits and, um, 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. Um, so, um, 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, um, you know, that's what we're looking at. The, the, the lack, not, not that, but the minimal amount of loan growth. Um, 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. Um, I'm just along those.

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, 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.

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 this first month of the quarter, that's kind of the mix right now. So again, you know, if we continue to run off some of the, you know, fixed rate, long duration assets, you know, we're probably going to see, you know, fairly muted growth. Got it. That's how And maybe just a housekeeping 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 bully income, as well as higher pre tax book income. Going forward, I would expect our normalized ETR to be around 22 to 24%. And. 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 shut back. Thank you, Kelly.

Your next question comes from the line of Andrew Leish with Stone X Financial.

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.

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 Court. We look forward to speaking with you again next quarter.