Loan Growth Slows, Margin Expands as Fed Cuts Loom

Date of Call: Jan 30, 2026

Financials Results

• Revenue: Not explicitly provided; net interest income was $170.3M, up $1M sequentially.
• EPS: Not explicitly provided; return on average tangible equity was 15.8% in Q4 and 16.3% for full year.
• Gross Margin: Not applicable for a bank; NIM was 3.21%, up 2 basis points sequentially.
• Operating Margin: Not explicitly provided; NIM expansion driven by lower deposit costs and full quarter benefit of maturing borrowings.

Guidance:

• Full year 2026 loan growth expected in the 3%-4% range, driven by CRE and C&I loans.
• Full year 2026 NIM expected in the 3.16%-3.18% range.
• Non-interest income expected to be stable at about $220 million for the year.
• Expenses expected to be about $520 million in 2026.

Business Commentary:

Loan Growth and Composition:

• Total loans grew by $183 million in the quarter, or 5.2% on an annualized basis.
• Growth was primarily driven by Commercial & Industrial (C&I) loans, with contributions from draws on existing lines and new customer additions like an auto dealer.
• The increase was supported by strong demand in Hawaii and mainland opportunities, despite some payoffs in the CRE portfolio.

Net Interest Margin and Funding Costs:

• The Net Interest Margin (NIM) in the fourth quarter was 3.21%, up 2 basis points from the prior quarter.
• This improvement was driven by lower deposit costs and the full-quarter benefit of a borrowing that matured in September, partially offset by lower loan yields.
• The effective tax rate was 24.8% due to the reversal of a previously accrued tax benefit, expected to normalize to 23.2% going forward.

Deposits and Cost of Funds:

• Retail and commercial deposits increased by $233 million, while public deposits declined by $447 million, leading to a net increase of $214 million in deposits.
• The total cost of deposits fell by 9 basis points to 1.29%, supported by a strong non-interest-bearing deposit ratio of 32%.
• The deposit beta is expected to be between 30-35% following anticipated Fed rate cuts.

Credit Quality and Provisioning:

• Classified assets decreased by 7 basis points, while special mention assets increased by 16 basis points.
• The bank recorded a $7.7 million provision, with the allowance for credit losses increasing to 118 basis points of total loans and leases.
• Credit risk remains low, with no broad signs of weakness observed in either consumer or commercial books.

Outlook and Guidance:

• For full-year 2026, the company expects loan growth of 3%-4%, driven by CRE and C&I loans, with a projected NIM of 3.16%-3.18%.
• Non-interest income is anticipated to be stable at about $220 million, while expenses are expected to be around $520 million.
• Growth expectations consider current economic conditions, including the impact of potential Fed rate cuts and deposit beta trends.

Sentiment Analysis:

Overall Tone: Positive

• Management described 'another strong quarter' with NIM expansion, contained expenses, and strong credit quality. They noted 'good growth' in C&I loans and deposits, and expressed confidence in the pipeline with 'multifamily is still there' and 'we’re very, very busy'.

Q&A:

• Question from David Feaster (Raymond James): Could you provide color on C&I loan growth trends, pipeline, and mainland vs. Hawaii activity?
  Response: Growth was broad-based with draws on existing lines and a new dealer relationship; pipeline is busy, especially for multifamily, with more normalization expected in CRE on the mainland in the second half.

• Question from David Feaster (Raymond James): What led to payoffs coming sooner than expected, and does the loan growth outlook contemplate continued payoffs?
  Response: Permanent lenders are active earlier than normal; paydowns from past deals should burn through in the first half, with second half seeing better growth.

• Question from David Feaster (Raymond James): On NIM expansion, is the tailwind primarily from funding costs, and have you seen attrition from reducing deposit costs?
  Response: Margin guide assumes continued Fed cuts lowering deposit rates (beta 30-35%) and fixed asset repricing ($400M/quarter with 150 bps repricing accretion), with costs managed well.

• Question from Andrew Terrell (Stephens): Could you bifurcate spread competition for new assets and the marginal pickup from securities cash flow vs. loan repricing?
  Response: There is spread competition; securities portfolio offers ~200 bps pickup, loans offer ~80-100 bps pickup.

• Question from Andrew Terrell (Stephens): Is loan growth expected to be low in first half and pick up in second half?
  Response: Yes, lower in first half due to fewer new multifamily loans funding, with a pickup in second half.

• Question from Janet Lee (TD Cowen): Clarify deposit beta expectations after Fed cuts and expense guide rationale.
  Response: Interest-bearing deposit beta expected to step down to 30-35% post-cuts; expense growth of ~4-5% is a normalization after cost containment via technology investments.

• Question from Janet Lee (TD Cowen): How should we think about expense trajectory and potential for beating $520M?
  Response: Expense growth has been held low by technology savings; 2026 reflects more normalized growth, with potential for slight beat but aligned with the guide.

• Question from Kelly Motta (KBW): What is the appetite for the new $250M buyback authorization versus M&A?
  Response: Appetite to continue buybacks at similar pace, but organic growth is primary; M&A remains an option with a focus on targets west of Rockies, $2B-$15B in size, and strong management.

• Question from Matthew Clark (Piper Sandler): What was the spot deposit rate at year-end, and how does expense seasonality work?
  Response: Deposit rate was 124 in December; expenses are generally flat with a slight pickup in Q1.

• Question from Matthew Clark (Piper Sandler): Updated thoughts on mainland M&A and ideal target profile?
  Response: Focus remains on core growth, but M&A is considered; ideal target has strong management, disciplined lending, good deposits, is well-managed, and located west of Rockies, size $2B-$15B.

• Question from Anthony Elian (J.P. Morgan): How are you thinking about deposit balances in Q1 and seasonality?
  Response: Expect seasonal decline in Q1 for public deposits, but commercial/retail deposits should grow low single digits for the year.

• Question from Anthony Elian (J.P. Morgan): Is the full year NIM guide of 3.16%-3.18% for each quarter, and what is 1Q NIM outlook?
  Response: Range depends on rate cut timing; Q1 NIM expected to come down a few basis points from the December level of 3.21%.

• Question from Timur Braziler (Wells Fargo): Can you frame the opportunity set from multifamily production booked 12-24 months ago?
  Response: Management did not provide a specific number but acknowledged the opportunity and can look into it.

• Question from Timur Braziler (Wells Fargo): Is converting construction deals to CRE normal, and why did C&I yields hold up well?
  Response: Conversion is normal for some customers within the footprint; C&I yields held due to draws under existing lines with lower pricing structures from pandemic-era backup lines.

Contradiction Point 1

Deposit Rate Beta Expectations

The expected sensitivity of deposit costs to interest rate cuts has significantly decreased, impacting the company's cost management outlook.

Does the 30-35% deposit beta expectation after two rate cuts represent a decrease from the ~47% beta in Q4? - Janet Lee (TD Cowen)

2025Q4: The bank sees a low deposit cost floor and expects deposit costs to be stable. The interest-bearing deposit beta is expected to step down from the Q4 level to 30-35% over time following rate cuts. - [Jamie Moses](CFO)

What is your analysis of deposit rate betas in response to the Fed's rate cuts? - Charles Driscoll (Keefe, Bruyette, & Woods)

2025Q3: They have a high rate-sensitive deposit portfolio (~$4.5B) with betas around 90% for the next Fed cuts, decreasing with each subsequent cut. - [James Moses](CFO)

Contradiction Point 2

Loan Growth Outlook and Pipeline

The tone and confidence level regarding near-term loan growth have shifted from cautious optimism to acknowledging headwinds and a more normalized cycle.

Could you share insights on C&I loan growth trends, pipeline, and the balance between utilization and new client acquisition, including mainland versus Hawaii? - David Feaster (Raymond James)

2025Q4: Growth was broad-based... The pipeline for multifamily is strong. The 'belly' of the industry's paydown curve is being worked through in the first half of 2026, with normalization expected in the second half. - [Bob Harrison](CEO)

Could you discuss growth outlook, pipeline, demand dynamics, and opportunities to accelerate organic growth, including appetite for full purchases or C&I expansion? - David Feaster (Raymond James)

2025Q3: They remain bullish, seeing strong production in the pipeline for Q4, expecting to end the year about flat year-over-year. - [Robert Harrison](CEO)

Contradiction Point 3

Capital Priorities and Share Buyback Appetite

The stated appetite and capacity for share buybacks have expanded significantly, reflecting a change in capital return strategy.

With the new $250M share repurchase program, what is the preference for buybacks over other capital allocation methods like M&A? - Kelly Motta (KBW)

2025Q4: The bank has a good appetite to continue buybacks at a similar pace... The larger authorization acknowledges the bank's strong capital position (CET1 >13% vs. a 12% target) and provides flexibility to return capital to reach target levels. - [Jamie Moses](CFO) and [Bob Harrison](CEO)

Could you discuss growth outlook, pipeline, demand, and organic growth acceleration opportunities, including appetite for full purchases or C&I? - David Feaster (Raymond James)

2025Q3: Capital priorities remain consistent: focus on loans fitting the credit box, share buybacks (have $26M remaining under the 2025 plan), and the dividend is not expected to increase. - [Robert Harrison](CEO)

Contradiction Point 4

Net Interest Margin (NIM) Outlook

NIM guidance shifts from specific quarterly decline to broad annual range, indicating a change in the expected timing and magnitude of margin compression.

Can you provide color on C&I loan growth trends, pipeline, and the balance between utilization and new relationships (including mainland vs. Hawaii); why payoffs/paydowns occurred earlier than expected and if the 2026 loan growth outlook accounts for continued payoffs; and how deposit cost reductions are being managed amid low deposit costs, including any attrition or pushback concerns? - David Feaster (Raymond James)

2025Q4: The 2026 NIM outlook of 3.16%-3.18% incorporates the ability to cut deposit rates following Fed cuts... - [Jamie Moses](CFO)

How did noninterest-bearing deposit outflows trend during the quarter, and is the pace slowing? Is the net interest margin (NIM) nearing its bottom, with potential stability post-Q3? Why is the loan growth outlook low-to-mid single-digit despite recent strong growth? Where do dealer balances stand relative to historical levels? - Steven Alexopoulos (JPMorgan)

2023Q2: On NIM, the guidance of a 15-20 bps decline in Q3 is seen as 'probably about where it bottoms out,' with the bottom likely reached by Q4. - [Jamie Moses](CFO)

Contradiction Point 5

Capital Priorities & M&A Appetite

M&A shifts from being "not adverse" but not active to being "secondary to organic growth," signaling a strategic refocusing on organic opportunities.

What are your current views on mainland M&A and the ideal target profile? - Matthew Clark (Piper Sandler)

2025Q4: Mainland M&A is still an option but secondary to organic growth. - [Bob Harrison](CEO)

How do the strong capital position and lower loan growth outlook influence your M&A strategy at this time? - Andrew Terrell (Stephens)

2025Q2: The bank is not adverse to considering M&A opportunities but is not currently looking at any specific targets. - [Robert Harrison](CEO)