Kelly Motta

Kelly Motta inquired about the bank's appetite for continuing its share buyback pace, given the new $250 million authorization without a specific timeframe. She also asked how this buyback strategy is weighed against other capital allocation considerations, such as M&A, and referenced the bank's CET1 target.

Answer

James Moses, Vice Chair and CFO, First Hawaiian Bank, stated a good appetite to continue the previous year's buyback pace, with opportunism baked into the program, but no firm internal commitments on exact timing. He emphasized that organic growth is the primary focus, with buybacks returning capital. Robert Harrison, Chairman, President, and CEO, First Hawaiian Bank, added that the larger buyback capacity acknowledges the bank being well above its 12% CET1 target (currently +13%), providing flexibility to bring it closer to the target.

Kelly Motta inquired about First Hawaiian Bank's appetite for continuing its share buyback program at a similar pace to 2025, given the new $250 million authorization without a specific timeframe. She also asked how the bank is weighing this capital return strategy against potential M&A opportunities and its stated CET1 target.

Answer

Vice Chair and CFO James Moses indicated a good appetite to continue the buyback pace from the previous year, noting that the program allows for opportunism but no firm internal commitments on exact pace and timing. He emphasized that organic growth remains the primary focus, with buybacks serving to return capital. Chairman, President, and CEO Robert Harrison added that the larger buyback capacity acknowledges the bank's CET1 ratio being well above its 12% target, providing flexibility to bring it closer to that goal.

Kelly Motta of Keefe, Bruyette & Woods inquired about the updated effective tax rate outlook following a California tax law change, expectations for deposit betas in a rate-cutting cycle, and the longer-term drivers for loan growth.

Answer

CFO James Moses provided an updated full-year effective tax rate outlook of 23.2% and projected that deposit betas on rate-sensitive accounts would be around 90% for the next one or two rate cuts. CEO Robert Harrison addressed loan growth, noting that while recent construction loan payoffs are a headwind, the stabilization of the indirect auto loan portfolio removes a previous drag on growth. He also noted that institutional buyers, not other banks, were refinancing the completed construction projects.

Kelly Motta asked about the expected seasonal trends for deposits in the upcoming quarter and whether the overall balance sheet size would grow in line with deposits or if loan growth would be funded by securities cash flows.

Answer

CFO James Moses explained that deposit growth is typically stronger in the second half of the year, though strong Q1 retail growth makes forecasting less certain. He confirmed that the balance sheet size should grow along with deposits, potentially becoming more efficient, which would be a positive for net interest income. CEO Bob Harrison added that average deposits were up quarter-over-quarter, indicating normal end-of-period fluctuations.

Kelly Motta from KBW requested details on the expected balance sheet size, clarification on the pace of NIM expansion, any shifts in Hawaii's competitive dynamics, and the outlook for asset quality.

Answer

CFO Jamie Moses explained that balance sheet size will be determined by core deposit growth, with the investment portfolio likely to shrink due to cash flows funding loan growth. He confirmed the guidance implies about 3 basis points of NIM expansion per quarter in 2025. CEO Bob Harrison stated it's too early to see competitive changes. Both Harrison and Chief Risk Officer Lea Nakamura affirmed the strong and stable credit quality, highlighting the positive performance of the Maui portfolio.

Kelly Motta asked about the expected natural growth rate of expenses post-investment and the outlook for positive operating leverage in a falling rate environment. She also sought quantification of the deposit portfolio subject to discretionary repricing and clarification on the drivers of strong fee income.

Answer

CFO Jamie Moses and CEO Bob Harrison indicated future expense growth will be much lower, though achieving positive operating leverage is challenging with falling rates and potential NII compression. Moses quantified the repricable deposit portfolio at approximately $4.5 billion. He also attributed strong fee income to growth in the card portfolio and market-driven BOLI gains, with no one-time death benefits, guiding Q4 fee income to the $50-51 million range.

Kelly Motta asked about Verdant's continued growth pace and the impact of Axos's balance sheet flexibility and potential synergies on its performance.

Answer

Gregory Garrabrants, CEO of Axos Financial, affirmed Verdant's strong performance, noting that Axos's balance sheet flexibility has enabled Verdant to better serve larger clients. He also highlighted Verdant's seasonality, enthusiastic deposit-selling efforts, and emerging synergies with the floor plan business.

Kelly Motta sought clarification on Axos Financial's low-to-mid teens loan growth guidance, asking if it implies a slowdown from the strong Q2 performance and if it includes Verdant. She also inquired about Verdant's continued growth pace and whether Axos's balance sheet flexibility has enabled increased activity for the acquired entity.

Answer

Gregory Garrabrants, CEO of Axos Financial, clarified that the loan growth guidance includes Verdant and implies a more normalized growth rate of approximately $600-$800 million per quarter, which aligns with Axos's organic capabilities and capital/liquidity management. He confirmed that Axos's balance sheet has enabled Verdant to serve larger clients more effectively, noting Verdant's immediate profitability post-acquisition due to debt refinancing. Mr. Garrabrants also highlighted Verdant's enthusiastic deposit-selling efforts and the introduction of floor plan transactions, creating new synergistic opportunities.

Kelly Motta of Keefe, Bruyette & Woods (KBW) asked for an update on Axos's strategy regarding Stablecoin and digital assets in light of a more conducive regulatory environment. She also inquired about the drivers of non-interest-bearing deposit growth and the current state of asset quality, including any specific areas being monitored closely.

Answer

President & CEO Gregory Garrabrants stated that while the company allows crypto ETF trading in its self-directed business, it is still actively thinking through a broader Stablecoin strategy and had no further public comments at this time. He attributed strong core deposit growth to success in the commercial specialty, tech, and middle-market banking teams, as well as cross-selling efforts. On credit, Mr. Garrabrants expressed high confidence in the commercial real estate portfolio and stated that while the C&I book may have minor issues, he does not anticipate any material losses.

Kelly Motta inquired about Axos's capital strategy, specifically the outlook for share buybacks, potential M&A targets, and the company's exposure to construction risk from rising input costs and tariffs.

Answer

CEO Gregory Garrabrants confirmed that the current stock price presents a good opportunity for buybacks and that the company has sufficient capital for both growth and repurchases. For M&A, he cited interest in wealth/custody and specialty finance but stressed price discipline. Regarding construction risk, he stated it is minimal due to deal structures that require a high proportion of trades to be bought out, strong sponsors, and Subguard insurance, which mitigates budget overrun risks.

Kelly Motta asked about the outlook for fee income growth, particularly from Axos Advisory Services, and the company's current thinking on share buybacks.

Answer

President and CEO Greg Garrabrants identified the securities business as the best opportunity for fee income growth, citing strong net new asset growth in the custody business. He cautioned that the business is rate-sensitive, but if rates stabilize, the core business growth should be beneficial. Regarding capital, Garrabrants reiterated that organic growth is the primary priority, followed by share repurchases and opportunistic M&A. He stated that while he is optimistic about loan growth returning, the company will not let excess capital build forever and will evaluate buybacks based on opportunities and capital levels.

Kelly Motta of KBW asked for more detail on the core margin performance, wondering if any one-time fees contributed to its strength. She also questioned if an apparent increase in commercial real estate (CRE) exposure impacts the bank's appetite for CRE growth and asked for context on the size of the shared national credit (SNC) portfolio.

Answer

CFO Derrick Walsh confirmed there were no one-time items boosting the core margin. President and CEO Greg Garrabrants clarified that Axos is not constrained by CRE concentration limits and remains interested in growing that book, which is performing well. Regarding the non-performing loan, he specified it was a large syndicated SNC, not a smaller club deal, and that the total cash flow-based SNC portfolio is approximately $1 billion, with the vast majority performing strongly.

Kelly Motta inquired about the expected expense run rate for Q1 2026, considering the noisy Q4 2025, and the overall cadence of expenses throughout the year. She also asked if the loan outlook for 2026, which is lower than expected, contemplates additional payoffs, potentially leading to further downside.

Answer

CFO David Della Camera advised that expense seasonality is expected to be relatively flat in 2026, with a quarterly run rate around $159-$160 million, offsetting normal increases with tax timing. He confirmed that the loan guidance for 2026 does assume additional larger payoffs, with expectations for lower loans in Q1 and modest growth in the back half of the year.

Kelly Motta of Keefe, Bruyette & Woods (KBW) questioned how the company is thinking about reinvesting expense savings versus letting them flow to the bottom line, particularly regarding hiring frontline talent to drive growth. She also asked for the yields on new securities and loans, and for color on the decline in commercial loans.

Answer

President & CEO James Reuter affirmed that while the company is focused on expense discipline, it will not sacrifice investing in the talent required to grow the bank. EVP & CFO David Della Camera detailed that new securities purchases would be shorter-duration, low-risk assets with yields around the 5-year Treasury plus 80-90 basis points, while new loan production is yielding around 7%. He attributed the commercial loan decline to lower line utilization, a large strategic payoff, and the reclassification of some loans to held for sale.

Kelly Motta questioned the strong net interest margin performance in Q4, asking if loan fees contributed and if it represents a sustainable run rate, while also seeking clarity on future dynamics including the reinvestment from the held-for-sale portfolio. She also inquired about the Q4 expense increase, specifically if it included year-end true-ups, and the outlook for future expense run rates and hiring.

Answer

CFO Jim Reske expressed satisfaction with the margin, noting that an expected dip from variable rate loans due to rate cuts was offset by payoffs and paydowns of non-accrual loans. He forecasted a Q1 dip due to unreflected Fed rate cuts, followed by gradual improvement to around 4% in 2026, driven by fixed-rate loan repricing and macro swaps. Regarding expenses, Reske confirmed Q4 increases were due to salaries/benefits from filling positions, contract terminations, and other one-offs not expected to recur, with a goal to limit operating cost increases to approximately 3% year-over-year. President and CEO Mike Price emphasized maintaining operating leverage and the expected payoff from investments in commercial banking and equipment finance.

Kelly Motta from KBW questioned First Commonwealth Financial Corporation about the strong Net Interest Margin (NIM) performance in Q4, asking if it was a sustainable run rate and how future dynamics, including the impact of the held-for-sale portfolio, would affect it. She also inquired about the increase in Q4 expenses and the outlook for operating costs in 2026.

Answer

CFO Jim Reske explained that Q4 NIM benefited from previously non-accrual loans recognizing interest and other factors offsetting variable rate loan impacts. He forecasted a near-term dip in Q1 2026 due to Fed rate cuts, followed by gradual improvement to around 4% by year-end, driven by fixed-rate loan repricing and macro swaps rolling off. Regarding expenses, Jim Reske noted Q4 increases were due to filling open positions and some one-off true-ups, with expectations to limit 2026 operating cost increases to approximately 3% year-over-year.

Kelly Motta asked about potential future opportunistic hiring, the reasons for the decline in SBA gain-on-sale income, and the outlook for that business. She also sought confirmation that the expense guidance fully incorporates the CenterBank acquisition's run-rate costs.

Answer

President and CEO Thomas Michael Price stated that the bank is largely satisfied with current staffing levels after bolstering its equipment finance and commercial teams, and will now focus on process efficiency. Bank President Jane Grebenc explained the SBA slowdown was due to the timing of construction deal closures, not margin compression, and expects activity to be 'frothier' later in the year. CFO James Reske confirmed the expense guidance includes the full impact of the CenterBank acquisition.

Kelly Motta asked about the company's M&A appetite for more small deals following the Center Bank announcement and requested an update on credit quality, both within the acquired Centric portfolio and the legacy originated book.

Answer

President and CEO Thomas Michael Price expressed strong enthusiasm for small, strategic acquisitions, noting they are powerful for growth and that the bank is well-positioned for more deals. On credit, Chief Credit Officer Brian Sohocki detailed positive asset migration trends, with significant reductions in watch-rated and criticized assets within the Centric portfolio. Price and Sohocki added that the originated portfolio is holding up well, with delinquency trends improving, though they continue to monitor the SBA and consumer segments closely given the rate environment.

Kelly Motta questioned the drivers of noninterest-bearing deposit growth, the outlook for deposit betas in a rate-cutting cycle, the normalized level of balance sheet cash, and the current M&A environment.

Answer

President and CEO Mike Price attributed strong deposit growth to a significant $170 million inflow from a single client. CFO Jim Reske added that underlying trends also show a slowdown in deposit rotation. Mr. Reske projected a downward deposit beta of around 25% and stated normal cash levels are under $50 million. Mr. Price confirmed active interest in M&A, emphasizing a disciplined approach.

Kelly Motta asked about the outlook for loan growth in Hawaii for 2026, considering the updated UHERO forecast, and the expected mix of growth between Hawaii and mainland markets. She also questioned the potential for positive operating leverage, inquiring if there's additional room for expense management if growth is weaker, or areas for investment if growth accelerates.

Answer

David Morimoto, Vice Chairman and COO, explained that the UHERO forecast upgrade indicated a lighter downturn, with the loan pipeline focused on commercial areas. He anticipates 2026 to be a stronger growth year than 2025, with the Hawaii/mainland mix fluctuating based on risk-return. Arnold Martines, Chairman, President, and CEO, added that 2025 saw strong growth in targeted commercial portfolios (+10% YoY) while declines in consumer portfolios were by design to shift the mix. Dayna Matsumoto, EVP and CFO, confirmed a focus on expense discipline and technology investments for efficiency, with flexibility to adjust spending based on revenue performance.

Kelly Motta inquired about the outlook for loan growth in Hawaii, considering the revised UHERO forecast, and the anticipated mix of low single-digit loan growth between the islands and the mainland. She also asked about the company's expense management strategy, specifically if there's additional flexibility to adjust spending based on revenue performance or opportunities to invest further if growth accelerates.

Answer

David Morimoto, Vice Chairman and COO, noted the UHERO forecast improved from a deeper to a lighter downturn, and the company has a strong commercial pipeline. Arnold Martines, Chairman, President and CEO, added that 2025 saw strong growth in targeted commercial areas (construction and commercial mortgage up 10% year-over-year), with overall declines driven by strategic drawdowns in consumer portfolios. For 2026, they are cautiously optimistic for stronger commercial growth and less consumer drawdown. Dayna Matsumoto, EVP and CFO, confirmed a continued focus on expense discipline while investing in technology for growth and efficiency, with flexibility to adjust spending as needed.

Kelly Motta asked about the drivers behind the projected 10% loan growth for 2026, specifically inquiring if Texas and other new markets would be significant contributors. She also sought clarification on the fourth-quarter net interest margin, asking about any interest reversals and the bank's asset sensitivity. Finally, Motta questioned the flat 2UniFi expense guidance for 2026, given the goal of increasing the user base and potential partnership impacts.

Answer

Aldis Birkans, President, and John Steinmetz, Executive Vice Chair, explained that 2026 loan growth would be driven by a combination of all markets, including strong momentum from Q4 2025 commercial loan originations, and the added expertise and markets from the Vista acquisition, particularly Texas and resort markets. Nicole Van Denabeele, CFO, clarified that the December margin was a strong 3.97%, with no interest reversals, and that deposit pricing was managed to overcome a lag effect. Regarding 2UniFi, Nicole Van Denabeele confirmed the flat $22 million expense includes a full year of capitalized asset depreciation, and any financial upside from a partnership is not yet included in the 2026 guidance.

Kelly Motta asked about the key drivers behind National Bank Holdings Corporation's strong 10% loan growth outlook for 2026, specifically inquiring about the contributions from Texas and other market opportunities. She also sought clarification on the fourth quarter's net interest margin performance, including any impact from interest reversals due to credit issues and the company's overall asset sensitivity. Furthermore, Motta questioned the 2UniFi expense guidance, asking if it incorporated potential partnership impacts and why expenses remained flat despite anticipated user base expansion.

Answer

Aldis Berkans, President, stated that 2026 loan growth would be driven by a combination of all markets, building on strong Q4 2025 production, which was NBH's second-highest in company history, with C&I loans growing over 10% annualized. John Steinmetz, Executive Vice Chair, highlighted significant growth potential in Texas and resort markets, leveraging NBH's balance sheet and expanded services. Nicole Van Denabeele, Chief Financial Officer, clarified that the December 2025 margin was 3.97%, and NBH managed well through 75 basis points of rate cuts in 2025, achieving 9 basis points of margin expansion. She confirmed no interest reversals as problem loans were already nonaccrual and explained the deposit pricing strategy that caused a temporary lag effect now overcome. Ms. Van Denabeele also noted that 2UniFi's flat expense guidance for 2026 is significant due to a full year of capitalized asset depreciation, and any partnership benefits are considered upside not included in current guidance.

Kelly Motta asked about National Bank Holdings Corporation's loan growth, noting a step-up in production despite a decline in balances. She questioned if paydowns were credit-driven and sought an outlook for Q4 given strong pipelines. She also inquired about the full benefit realization of the July cost-save plan, the specific 2UniFi expenses in Q3, and what's included in the Q4 expense guidance. Additionally, Ms. Motta asked about the pace of M&A discussions post-Vista announcement and any inbound interest, and later, about NBH's exposure to NDFI lending and other potential credit risks.

Answer

Tim Laney, Chairman and CEO, clarified that Q3 loan reductions were not credit-driven but resulted from heavy payoffs as temporary financing transitioned to permanent solutions, often from alternative lenders. Aldis Birkans, President, confirmed healthy CRE production and strong pipelines, expressing optimism for Q4 growth. Nicole Van Denabeele, CFO, stated that expense reduction commitments are being met, noting Q3 was impacted by $1.7 million in acquisition expenses and $6.2 million in 2UniFi expenses. She projected Q4 2UniFi expenses to be $7 million-$9 million. Mr. Laney confirmed high M&A activity and interest in expanding in Texas and other existing markets. Mr. Birkans stated NDFI exposure is minimal, while Mr. Laney highlighted ag (commodity row crops) and transportation as sectors to watch for potential risks, noting NBH's limited exposure.

Kelly Motta asked about the company's exposure to NDFI (Non-Deposit Financial Institutions) lending, potential risks in that sector, and other areas of the loan portfolio that management is closely monitoring for risk.

Answer

Aldis Birkans, President, stated that the company's NDFI exposure is minimal, well below 1% of total loans. Tim Laney, Chairman and CEO, highlighted the agricultural sector, particularly commodity row crops, and the transportation sector (trucking) as areas facing significant headwinds that the company monitors, noting their limited exposure to these segments.

Kelly Motta sought clarification on the expense outlook, specifically the jumping-off point for Q1 2026 given elevated Q4 2025 expenses and typical seasonality, and asked about the factors contributing to the strong yield on new loan production.

Answer

Romolo C. Santarosa, CFO, outlined seasonal expense patterns, including higher advertising in Q4, payroll taxes in Q1, and annual merits in Q2, but could not provide an exact jumping-off point for Q1. Anthony Kim, Chief Banking Officer, added that a slight mix shift in personnel and year-end activity contributed to Q4 expenses. Mr. Santarosa also stated that the strong yield on new production is a result of focusing on protected programs, maintaining appropriate yields, and being selective in loan originations to prioritize returns.

Kelly Motta sought clarification on the expected expense cadence for 2026, specifically how to project the jumping-off point from the elevated Q4 2025 non-interest expenses, considering both discrete items and typical seasonality. She also inquired about the factors contributing to the strong yield on new loan production, asking if it was due to mix or improved spreads.

Answer

CFO Romolo C. Santarosa outlined seasonal expense patterns (Q4 advertising, Q1 payroll taxes, Q2 annual merits) but noted difficulty in giving a precise jumping-off point from Q4 due to offsetting factors. Chief Banking Officer Anthony Kim also contributed to the expense discussion. CFO Romolo C. Santarosa stated the company remains focused on protected programs and is being very selective in loan originations, prioritizing returns to maintain appropriate yields on new loans.

Kelly Motta inquired about Hanmi Financial's loan growth outlook, the drivers for reaching the mid-single-digit range, and the composition of the pipeline. She also asked for details on the net interest margin, including spot deposit rates and the cadence of CD repricing. Additionally, she sought color on credit quality, the drivers behind the significant reduction in criticized assets, the nature of the large charge-off, the go-forward tax rate, and the run rate for occupancy expenses.

Answer

CEO Bonita Lee confirmed the low to mid-single-digit loan growth target, citing a strong Q3 pipeline and typical second-half seasonality. CFO Romolo Santarosa provided June spot deposit costs (3.60%), noting a potential 10-11 basis point benefit from maturing Q3 CDs, which should lead to continued but slowing NIM expansion. Regarding credit, CEO Lee attributed the improvement in criticized assets to proactive resolutions, including a $20 million paydown on one loan, and confirmed the large charge-off was on a syndicated office CRE loan. CBO Anthony Kim added that the remaining office portfolio shows no major repricing risks. CFO Santarosa guided to a full-year effective tax rate of around 29.5% and stated that occupancy costs should remain stable.

Kelly Motta from Keefe, Bruyette & Woods asked for details on the net interest margin, including the spot rate on deposits in March and new CD pricing. She also questioned the volume of loans maturing or repricing and sought more color on a specific non-performing syndicated credit, including its industry, reserve level, and the size of the total syndicated loan book.

Answer

CFO Romolo Santarosa provided March deposit costs, noting CDs at 4.10% and average interest-bearing deposits at 3.67%. He anticipates that while margin expansion may continue, its pace will slow significantly. He also stated the overall loan book yield should remain stable with a slight upward bias. Executive Bonita Lee identified the non-performing loan as a syndicated office CRE property for which a $6.2 million reserve was taken. She also confirmed the total syndicated loan book is approximately $255 million.

On behalf of Kelly Motta, an analyst inquired about the competitive landscape for deposits, repricing trends for CDs in 2025, and the performance and overall exposure of Hanmi's SBA loan portfolio.

Answer

CEO Bonita Lee stated that while deposit competition is fierce, Hanmi avoids leading on price, relying instead on its relationship banking model. She also affirmed the SBA portfolio is performing well, with an exposure of approximately $250 million. CBO Anthony Kim added that in Q1 2025, about $770 million in CDs are rolling off at a rate of 4.70%, offering a significant repricing opportunity.

Kelly Motta inquired about the net interest margin (NIM) outlook, particularly loan yield sensitivity to potential Fed rate cuts. She also questioned the company's capital management strategy, asking why it wasn't pursuing more aggressive share buybacks, and sought details on the recent migration of loans to the special mention category.

Answer

CFO Romolo Santarosa projected a potential 10-20 basis point NIM expansion in Q4, contingent on Fed rate cuts, and stated that loan yields should remain stable for now. Regarding buybacks, he cited the need to balance risk management with capital return, highlighting that the total payout ratio is already 64%. Executive Bonita Lee explained that the special mention loans, two hotels and one C&I loan, were proactively downgraded despite being current, and the bank does not anticipate any of them becoming nonperforming.

Kelly Motta inquired about the slowdown in loan growth during the fourth quarter, seeking insights into pipeline strength, market opportunities, and potential contributing factors such as payoffs, demand, or deposit constraints. She also asked for guidance on the 2026 expense run rate, including expected moderation in legal and professional fees and other seasonal adjustments.

Answer

President and CEO Johnny Lee attributed the Q4 loan growth moderation to a combination of loan sales and strategic exits of classified credits, while affirming a healthy pipeline for both commercial and residential mortgages, expecting to maintain a strong pace. CFO Lynn Hopkins added that the company is in a strong position for 8%+ annualized growth, noting Q4 had higher loan sales and substandard credit resolutions. For expenses, Ms. Hopkins indicated that the Q4 run rate is a good baseline for 2026, with compensation reflecting company growth and management transition costs not expected to reoccur. She anticipates legal and professional fees to decline as credit stabilizes, projecting an $18 million-$19 million quarterly range, with an additional $750,000 in Q1 for pay raises and taxes before normalizing.

Kelly Motta asked about the recent slowdown in loan growth, the health of the loan pipeline, and the factors contributing to the growth rate, including payoffs, demand, and deposit constraints. She also sought guidance on the expected expense run rate for 2026, considering potential declines in legal and professional fees.

Answer

CEO Johnny Lee attributed the muted Q4 loan growth to a combination of loan sales and strategic exits of classified credits, while noting a healthy pipeline for both commercial and residential mortgages, expecting to maintain a strong pace. CFO Lynn Hopkins added that the company is well-positioned for high single-digit annualized growth, with underlying metrics remaining healthy despite Q4's higher loan sales. For expenses, Ms. Hopkins indicated that the Q4 run rate of $19 million is a good baseline for 2026, with expectations for legal and professional fees to moderate as credit stabilizes, projecting an $18 million-$19 million range after a slight Q1 increase due to seasonal adjustments.

Kelly Motta asked about the sustainability of net interest margin (NIM) expansion with potential future rate cuts, specifically whether declines in funding costs could offset earning asset impacts. She also sought the average rate on new originations last quarter and updated thoughts on capital allocation, including buybacks, M&A, and business investments.

Answer

CFO Lynn Hopkins anticipates continued NIM expansion even with another rate cut, citing strong loan origination yields outweighing funding cost impacts. She confirmed the average rate on new originations was 6.70%. On capital, Lynn mentioned focusing on credit progress, organic loan growth, and cost control to improve the stock price. She reiterated that the buyback remains an option, alongside sub-debt refinancing next year and investments in the commercial platform and technology, with no single priority currently dominating.

Kelly Motta asked about the sustainability of net interest margin (NIM) expansion with potential future rate cuts, specifically whether declines in funding costs could offset earning asset impacts. She also sought the average rate on new originations last quarter and updated thoughts on capital allocation, including buybacks, M&A, and business investments.

Answer

CFO Lynn Hopkins anticipates continued NIM expansion even with another rate cut, citing strong loan origination yields outweighing funding cost impacts. She confirmed the average rate on new originations was 6.70%. On capital, Lynn mentioned focusing on credit progress, organic loan growth, and cost control to improve the stock price. She reiterated that the buyback remains an option, alongside sub-debt refinancing next year and investments in the commercial platform and technology, with no single priority currently dominating.

Kelly Motta of Keefe, Bruyette & Woods (KBW) asked for color on the drivers behind the strong non-interest-bearing deposit growth during the quarter and inquired about the sustainability of the current tax rate, considering recent changes in California tax law.

Answer

President & CEO Johnny Lee attributed the non-interest-bearing deposit growth to a combination of deepening existing relationships, new C&I customer acquisition, and a new promotional bundle for money market and DDA accounts. EVP & CFO Lynn Hopkins added that the tax rate of around 28% is a reasonable run rate, as the impact of the California tax law change was included in the quarter's results and is not expected to be material going forward.

Kelly Motta from Keefe, Bruyette & Woods asked for an updated timeline on the nonperforming loan workout, sought more specific details on the bank's exposure to China-related tariffs, and inquired about the composition of the loan growth pipeline.

Answer

CEO David Morris targeted the second half of 2025 for NPL normalization, acknowledging the process would be lumpy. Johnny Lee and Lynn Hopkins addressed the tariff question, stating that while a specific China breakdown wasn't available for the small trade finance portfolio, outreach to seasoned borrowers revealed no immediate concerns. Johnny Lee described the loan pipeline as being primarily driven by CRE and single-family residential loans, with C&I and SBA loans expected to contribute more going forward.

Kelly Motta sought details on the construction loan portfolio's credit issues, the updated timeline for resolving NPLs, and how the bank is balancing credit remediation with strategic goals like M&A.

Answer

CEO David Morris explained the problem loans were originated during COVID and faced unique challenges, pushing the overall credit resolution timeline to the end of 2025. He affirmed that while cleaning up nonperforming assets is a top priority with a dedicated team, the bank is simultaneously pursuing its M&A strategy.

Kelly Motta questioned the drivers behind changes in expenses, specifically the decline in insurance costs and the increase in salaries. She also sought more detail on the credit migration, asking about the resolution timeline for nonperforming assets (NPAs), expectations for charge-offs, and the outlook for loan growth.

Answer

Executive Lynn Hopkins confirmed the lower insurance expense is a good near-term run rate and that higher salaries were driven by production incentives, expecting overall expenses to remain in the $17-$17.5 million range. Executive Johnny Lee addressed credit, stating they anticipate resolving roughly 70% of the large NPLs by mid-next year through actions like trustee sales or refinances. Lynn Hopkins added that they do not currently foresee charge-offs on these specific loans. Johnny Lee also noted the loan pipeline remains healthy, particularly in CRE, non-QM, and SBA.

Kelly Motta inquired about WSFS Financial Corporation's ongoing strategic evaluation of diversified businesses for risk-adjusted returns and profitability thresholds, following recent divestitures. She also asked for updated thoughts on M&A opportunities, particularly traditional banking M&A, given the company's internal focus and organic growth.

Answer

David Burg, CFO, mentioned the 'Relook' initiative for ongoing strategic evaluation of business fit, though no specific actions were on the immediate horizon. Rodger Levenson, Chairman, President, and CEO, added that 2025 divestitures targeted low-scale, low-profitability partnerships, and the company continuously evaluates profitability to reallocate capital to higher-growth areas. On M&A, Mr. Levenson stated that WSFS continues to invest organically in fee and banking businesses, but would consider traditional banking M&A that strengthens its position in the greater Philly/Delaware region, leveraging its proven execution ability, while also being confident in organic growth opportunities.

Kelly Motta asked for updated thoughts on M&A, specifically traditional bank M&A, given it's been several years since the last deal and the company's strong organic growth and integration work.

Answer

Rodger Levenson (Chairman, President, and CEO) reiterated that WSFS would consider bank M&A that strengthens its position in the greater Philly/Delaware region, leveraging its proven execution ability. He emphasized confidence in achieving 2026 objectives through organic growth, supplemented by inorganic opportunities as they arise, including talent lift-outs or small firm acquisitions.

Kelly Motta inquired about any portfolio analysis related to new tariff policies, potential changes to underwriting standards, and the necessary catalysts to reignite net loan growth.

Answer

Chairman, President and CEO Rodger Levenson responded that while WSFS has identified portfolios potentially exposed to tariffs, it has not yet changed underwriting criteria due to the fluid nature of the policies. He emphasized that the primary catalyst for loan growth is 'certainty.' Levenson explained that entrepreneurial clients can adapt once the 'rules of the road' are clear, but the current volatile environment is causing them to pause investment decisions.

Kelly Motta sought more detail on the risks within the Cash Connect business beyond interest rates, following the idiosyncratic client loss. She also asked about the flexibility to manage expenses if revenue growth is challenged and requested color on the recent migration of loans to nonperforming asset (NPA) status.

Answer

CEO Rodger Levenson explained the Cash Connect client was terminated due to financial stress in the owner's other enterprises, and that the primary risk in the business is managing large cash volumes, for which he believes controls proved effective. On expenses, Executive David Burg and CEO Rodger Levenson identified variable incentive pay, the timing of new hire costs versus revenue, and technology investments as key levers. Levenson noted their business mix dictates a sustainable efficiency ratio around 60%. Regarding NPAs, he clarified the increase was driven by a single relationship with two loans (an industrial land loan and a multifamily construction loan) to a sponsor facing cash flow issues, but he believes the loans are well-secured. David Burg added that most loans have recourse, mitigating loss potential.

Kelly Motta asked for details on the downward repricing of the CD portfolio in 2026, the overall net interest margin dynamics and sensitivity to potential rate cuts, and an update on the integration and strategy for Hawaii operations following the Territorial Bancorp acquisition.

Answer

CFO Julianna Balicka clarified that $6.3 billion in CDs are set to reprice in 2026, with new branch CDs rolling on at 3.75-3.80% and institutional CDs at 3.70%. For margin sensitivity, Ms. Balicka advised extrapolating from the Q3 and Q4 2025 margin trends relative to recent rate cuts, noting future cuts are anticipated in the second half of 2026. Chairman, President, and CEO Kevin Kim provided an update on Hawaii, highlighting the successful integration of teams, stable deposit levels, positive customer reception, and expectations for future growth from the strategy.

Kelly Motta of KBW inquired about the drivers of the loan growth outlook, specifically regarding new frontline hires and production cadence. She also asked for an update on asset quality, the details behind a specific CRE credit migration, remaining one-time merger costs, and the core drivers of the unchanged NII guidance.

Answer

Chairman, President & CEO Kevin Kim confirmed that new, experienced bankers are driving increased loan production. SEVP & COO Peter Koh expressed cautious optimism on asset quality, noting a decline in criticized assets. EVP & CFO Juliana Balicka estimated a few million dollars in one-time merger costs for both Q3 and Q4. She explained the NII guidance was maintained as the benefit from securities repositioning offset negative impacts from delayed rate cuts and lower accretion income.

Kelly Motta of Keefe, Bruyette & Woods (KBW) inquired about the drivers and cadence of expected loan growth, particularly from new hires. She also asked for more color on asset quality trends, the amount of remaining one-time merger costs, and the factors behind the maintained Net Interest Income (NII) guidance despite a beneficial securities sale.

Answer

Chairman, President & CEO Kevin Kim confirmed that new, experienced bankers are expected to drive loan production higher. SEVP & COO Peter Koh described the asset quality outlook as 'cautiously optimistic,' noting a decline in criticized assets. EVP & CFO Julianna Balicka estimated a few million dollars in one-time costs for both Q3 and Q4. She explained the NII guidance was maintained because the securities repositioning benefit was offset by the negative impact of delayed Fed rate cuts and lower-than-expected loan accretion income.

Kelly Motta of KBW asked for details on the drivers for the loan growth outlook, particularly regarding frontline hires. She also sought color on asset quality trends, the drivers of the maintained NII guidance despite a securities repositioning benefit, and the amount of remaining one-time merger costs.

Answer

CEO Kevin Kim confirmed the bank is hiring experienced commercial bankers to drive production, which is expected to increase through year-end. COO Peter Koh stated that asset quality remains manageable and stable, with a meaningful decline in criticized assets. CFO Julianna Balicka explained that the NII guidance was maintained because the benefit from the securities repositioning offset negative impacts from delayed Fed rate cuts and lower loan accretion income. She also projected a few million dollars in one-time costs for each of the remaining two quarters of the year.

Kelly Motta inquired about the strategy behind recent frontline hires for driving loan growth, the current outlook on asset quality, the amount and timing of remaining one-time merger costs, and the factors behind the maintained Net Interest Income (NII) guidance despite the benefit from the securities restructuring.

Answer

Chairman, President & CEO Kevin Kim confirmed ongoing hiring of experienced bankers is expected to boost loan production. SEVP & COO Peter Koh described the credit outlook as 'cautiously optimistic,' noting a decline in criticized assets. EVP & CFO Julianna Balicka projected a few million in one-time costs for both Q3 and Q4. She explained the NII guidance was maintained as the securities repositioning benefit offset negative impacts from a changed rate-cut outlook and lower expected accretion income.

Kelly Motta of Keefe, Bruyette & Woods (KBW) questioned the drivers behind the loan growth outlook, the company's view on asset quality, the amount of remaining one-time merger costs, and the factors behind the maintained Net Interest Income (NII) guidance despite new benefits from securities restructuring.

Answer

CEO Kevin Kim attributed the positive loan growth outlook to recent experienced hires and a strong production pipeline. COO Peter Koh expressed cautious optimism on credit, noting a decline in criticized assets. CFO Julianna Balicka estimated a few million dollars in one-time costs for both Q3 and Q4. Balicka explained the NII guidance was maintained because the benefit from the securities repositioning was offset by the negative impact of delayed Fed rate cuts and slightly lower loan accretion income.

Kelly Motta inquired about Popular's lower Additional Tier 1 capital compared to peers and its implications for capital management and return. She also asked about the resilience of loan yields despite rate cuts, the proportion of floating-rate loans, and the rationale behind the 2026 charge-off guidance.

Answer

Jorge García, EVP and CFO, highlighted that Popular has significantly less Additional Tier 1 capital (around 5 basis points) than peers (50-100 basis points), viewing this as an opportunity to optimize the capital structure. He noted stable or improving consumer loan yields in Puerto Rico due to low beta, with approximately 25% of total loans being variable/floating, primarily commercial. Lidio Soriano, EVP and CRO, clarified the 2026 net charge-off guidance range as 55-70 basis points, attributing it to a stable Puerto Rico economy and potential charge-offs from larger commercial relationships.

Kelly Motta asked about Popular's Additional Tier 1 capital being lower than peers and its role in capital management, the resilience of loan yields despite rate cuts, the proportion of floating-rate loans, and the drivers behind the 2026 charge-off guidance of 55-70 basis points.

Answer

Jorge García, EVP and CFO, Popular, noted that Popular has very little Additional Tier 1 capital (around 5 basis points) compared to peers, viewing this as an opportunity to optimize the capital structure. He explained that loan yields have held up due to low beta on loan pricing, with approximately 25% of total loans being variable/floating, primarily commercial. Lidio Soriano, EVP and CRO, Popular, clarified the charge-off guidance of 55-70 basis points, attributing it to a stable Puerto Rico economic outlook, consistent consumer portfolio behavior, and provisions for potential charge-offs from larger commercial relationships.

Kelly Motta asked for an update on the timing of achieving the 14% Return on Common Equity (ROCI) objective and whether this target represents a stopping point for sustainable ROCI. She also sought clarification on the reduced tax rate guidance, specifically if the full-year 2025 rate is a good core run rate going forward, and the impact of Puerto Rico tax code changes. Lastly, she inquired about market competition in Puerto Rico, particularly on the deposit side, and any news of new depository entrants.

Answer

Jorge García, EVP and CFO, stated that 14% ROCI is a guiding principle, not a stopping point, and the bank aims for sustainable performance through improved net income and operating leverage. He clarified that the 2025 effective tax rate guidance of 16%-18% is a 'fairly clean number' reflecting normal tax strategy and the reversal of related tax expense due to law changes, without significant discrete events. Javier Ferrer, President and CEO, confirmed no awareness of new depository entrants in Puerto Rico, acknowledging normal, vibrant market competition and the bank's rational approach to retaining clients.

Kelly Motta (KBW) asked for an update on the timing of achieving the 14% ROCI target and whether it represents a stopping point for sustainable returns. She also requested clarification on the reduced tax rate guidance, specifically if the full-year 2025 rate is a good core run rate for the future, and inquired about market competition for deposits in Puerto Rico and any new market entrants.

Answer

Jorge García, EVP and CFO, stated that 14% ROCI is a guiding principle, not a stopping point, emphasizing sustainable performance and continued execution. Regarding the tax rate, he clarified that the Q3 rate was lower due to the mix of taxable and tax-exempt income, and the full-year 2025 guidance of 16-18% is a "fairly clean number" without significant discrete events, serving as a good basis. Javier Ferrer, President and CEO, confirmed no new depository entrants in Puerto Rico but acknowledged normal, vibrant market competition for customers, asserting the bank's re-energized franchise and rational competitive approach.

Kelly Motta asked about the drivers of the strong loan growth, seeking color on expected construction loan runoff in the U.S. and the outlook for Puerto Rico. She also questioned the funding strategy and the reasons for expense outperformance excluding the new profit-sharing accrual.

Answer

CFO Jorge García confirmed strong loan pipelines for Q3 but expects U.S. construction loan payoffs to materialize more in Q4. On funding, he clarified that average non-public deposits grew strongly and that borrowings are used tactically for liquidity management. Regarding expenses, he attributed the outperformance to a combination of realizing sustainable efficiencies from the transformation program, increased expense discipline, and some project delays.

Kelly Motta of Keefe, Bruyette & Woods (KBW) sought details on loan growth dynamics, including expected U.S. construction loan payoffs versus Puerto Rico activity, and asked about funding sources for this growth and the drivers behind underlying expense efficiencies.

Answer

Executive VP & CFO Jorge García confirmed strong loan pipelines for Q3 but expects construction loan payoffs in the U.S. to occur more likely in Q4. On funding, he clarified that average non-public deposits grew significantly and the bank has ample liquidity, using short-term borrowings opportunistically. He attributed expense savings to a combination of transformation-related efficiencies, operational discipline, and some project delays.

Kelly Motta asked for an update on the consumer credit normalization trend and whether the strong Q1 performance suggests the cycle is contained. She also inquired about the key drivers required to bridge the gap from the current ~11.4% ROTCE to the long-term 14% target.

Answer

CRO Lidio Soriano acknowledged that while Q1 credit performance was strong enough to potentially lower the full-year net charge-off guidance, the company is maintaining its current range due to macroeconomic uncertainty. CFO Jorge Garcia explained that achieving the 14% ROTCE target is a long-term goal that requires comprehensive execution across the entire business, including sustained deposit growth, NIM expansion, expense discipline, and strategic capital management, not just share repurchases.

Kelly Motta inquired about how much of the potential $600M-$800M deposit runoff is incorporated into guidance and sought details on the drivers of fee income growth. She also asked about the expected cadence of net charge-offs in 2025, deposit seasonality, the basis for expense guidance, and potential risks from U.S. political changes to federal fund flows.

Answer

CFO Jorge Garcia confirmed the guidance includes their best estimate of deposit outflows and is based on GAAP expenses. He cited 'price for value' initiatives and credit card activity as fee income drivers. CRO Lidio Soriano projected charge-offs might be higher in the first half of 2025 before improving. CEO Ignacio Alvarez expressed confidence that Puerto Rico's infrastructure recovery funds are not the primary target of potential U.S. executive orders.

Kelly Motta sought clarification on whether expense guidance includes OREO items, inquired about the loan growth outlook, and asked about the remaining risk in the non-interest-bearing deposit base.

Answer

CFO Jorge Garcia confirmed expense guidance includes OREO. CEO Ignacio Alvarez described loan demand in Puerto Rico as very strong, especially in commercial. Garcia added that U.S. loan demand is now picking up after being negative year-to-date. On deposits, Garcia reiterated the potential risk of $600-$800 million in retail outflows due to spending, not competitive pressure.

Kelly Motta asked about the potential opportunity and expected cadence for growth in wealth management fees, and sought confirmation on the correct normalized expense base for 2025 to calculate the 2026 expense forecast.

Answer

Chief Risk Officer Brad Shairson discussed the traction in wealth management, noting over 2% linked-quarter growth in fees for Q4 and a strong pipeline, expecting to reach a 10% growth range or higher over time. CFO Brad Satenberg confirmed that the normalized expense base for 2025 was between $440 million and $441 million.

Kelly Motta asked about the fee income opportunity in wealth management, its potential cadence, and sought confirmation on the normalized expense base for the 3%-3.5% increase forecast for 2026.

Answer

President and Chief Banking Officer Jim Polk explained that the bank has been building its wealth opportunity for several years, seeing good internal traction and client engagement, with Q4 production being one of the highest. He anticipates reaching a 10%+ growth range in fees, potentially higher over time. CFO Brad Satenberg confirmed that the normalized expense base for 2025, used for the 2026 forecast, is between $440 million and $441 million.

Kelly Motta from KBW asked about the progress and strategic impact of Bank of Hawaii's wealth management initiatives, including talent acquisition, and sought clarification on the specific business segments driving the bank's significant deposit market share gains. Additionally, she inquired about updated plans for capital return, particularly share buybacks, given current capital levels and growth projections.

Answer

Chairman and CEO Peter Ho detailed the successful implementation of the Saterra partnership for wealth management, emphasizing enhanced client experience and advisor recruitment, with ongoing talent acquisition. He attributed deposit market share growth to a balanced performance across consumer, commercial, and municipal segments, driven by consistent market commitment. Regarding capital, Mr. Ho noted strong capital levels and a favorable opportunity for share repurchases in Q4 2025 and into 2026, while affirming the importance of the dividend.

Kelly Motta asked about the recent changes in Bank of Hawaii's wealth management strategy, including the Saterra partnership and Banco Advisors, the drivers behind the bank's consistent deposit market share gains, and the current stance on capital return, specifically share buybacks.

Answer

Chairman and CEO Peter Ho explained that the Saterra partnership is in production, enhancing client experience and advisor attraction. He highlighted efforts to improve collaboration between commercial bankers and wealth advisors in the high-net-worth segment, with ongoing talent acquisition. Regarding market share, Peter Ho noted balanced gains across consumer, commercial, and municipal segments, attributing it to consistent strategy. On capital, he expressed satisfaction with current levels and indicated a likelihood of share repurchases in the current and next quarter, given the stock's valuation.

Kelly Motta of KBW requested details on the expected cash flows from the securities and loan books for the remainder of the year, questioned the drivers of the expected expense decline, and asked about the outlook for deposit flows and growth.

Answer

CFO Bradley Satenberg estimated contractual cash flows would be around $550 million per quarter, with repricing dynamics similar to the first half of the year. CEO Peter Ho clarified that the expense outlook is not due to deferring investments but rather ongoing cost discipline, which included some restructuring. Regarding deposits, Ho noted some seasonality in Q2 and Q3 and anticipates balances will likely end the year flat, with a focus on improving the deposit mix.

Kelly Motta of Keefe, Bruyette & Woods (KBW) requested details on expected cash flows from the securities and loan books for the back half of the year to model NII. She also asked if the projected lower expense run rate was due to deferring investments or specific cost-containment efforts, and inquired about deposit seasonality and the growth outlook.

Answer

Vice Chair & CFO Bradley Satenberg estimated contractual cash flows would be around $550 million per quarter, with roll-off and reinvestment rates consistent with recent trends. Chairman & CEO Peter Ho clarified that investment spending is not being curtailed and that ongoing expense discipline, including some restructuring, is driving efficiency. Ho also noted some seasonality in Q2 and Q3 deposits and expects overall balances to end the year flat, with a focus on improving the deposit mix.

Kelly Motta asked about the current rates for new and rolling-off certificates of deposit (CDs) and the activation cadence for the forward-starting swaps. She also inquired about the bank's client outreach and assessment of direct exposure to potential tariffs.

Answer

CFO Dean Shigemura indicated that new CDs are coming on at an average rate of 3.3% to 3.4%, which is 30-40 basis points below maturing CDs. He also detailed the forward swap cadence, starting in Q3 2025. Chief Risk Officer Bradley Shairson explained that the bank's analysis shows nominal direct tariff exposure, affecting only about 4% of the loan portfolio in specific service-oriented industries, highlighting the diversified nature of their C&I book.

Kelly Motta from Keefe, Bruyette & Woods asked about the strength of the loan pipeline following two quarters of growth, how much the NII growth outlook relies on loan growth, and the bank's strategy for managing upcoming FHLB maturities.

Answer

President and Chief Banking Officer Jim Polk confirmed the commercial pipeline remains strong, with Q4 being a record production quarter, and expects mid-single-digit growth to continue. CEO Peter Ho clarified that while loan growth is a contributor, the NII outlook is supported by diverse factors like deposit trends and balance sheet repricing. CFO Dean Shigemura corrected that the first FHLB maturities are in 2026, not 2025, and the bank actively monitors prepayment options.

Kelly Motta from Keefe, Bruyette & Woods sought clarification on the Q4 expense outlook, the drivers of elevated Q3 fee income, the mechanics of the NII impact from rate cuts shown on a presentation slide, the terms of the bank's FHLB borrowings, and the timing of its forward-starting swaps.

Answer

CFO Dean Shigemura clarified that full-year expense growth guidance is 1-1.5%, implying Q4 expenses will be closer to Q3's $107 million level. CEO Peter Ho noted that fee income strength was broad-based and feels recurring, with foreign exchange not being a significant factor. Management confirmed the NII slide only showed the impact of Fed funds rate changes. Dean Shigemura explained the FHLB debt has a 2-3 year maturity at a favorable 4.13% rate. He and Chief Risk Officer Bradley Shairson detailed that the forward-starting swaps begin in 2025-2026 and coincide with maturing swaps, thus not impacting total exposure.

Kelly Motta sought clarification on the upper end of the full-year expense guide and how it correlates with revenue growth and efficiency ratio targets. She also asked about new loan pricing and its contribution to the outlook, and the cadence and blended roll-off yields of securities cash flows for 2026.

Answer

Ron Copher, CFO, confirmed the upper end of the full-year core expense guide at $766 million, noting that higher expenses would be commensurate with increased revenues and talent additions. He reiterated the expectation to reach mid-50s efficiency ratio in the second half of the year. Randy Chesler, President and CEO, mentioned new loan pricing showing better-than-expected margins, closer to 3%, with December being strong. Ron Copher also stated that approximately $425 million in securities cash flow is expected quarterly for 2026, with blended roll-off yields in the low to mid-1% range.

Kelly Motta of KBW requested clarification on Glacier Bancorp's expense guidance, specifically the upper end of the range and its correlation with higher revenues, and the path to mid-50s efficiency. She also inquired about new loan pricing and its additive impact on the outlook, and the cadence and blended roll-off yields of securities cash flows for the upcoming year.

Answer

Ron Copher, CFO, confirmed the upper end of the full-year core expense guide at $766 million, noting that expenses would increase with revenues and talent additions, while reiterating the expectation to reach mid-50s efficiency by the second half of the year due to expense control and growing net interest income. Randy Chesler, President and CEO, stated that new loan pricing was showing better margins than expected, closer to 3% margin on new loans, particularly strong in December and January. Byron Pollan, SVP and Treasurer, estimated quarterly securities cash flow of approximately $425 million for 2026, with blended roll-off yields in the low to mid-1% range.

Kelly Motta from Keefe, Bruyette & Woods inquired about the factors contributing to the slightly lower near-term margin guidance, Glacier Bancorp's negligible exposure to non-depository financial institution lending, and the underlying credit philosophy that ensures strong credit quality.

Answer

Treasurer Byron Pollan explained the revised margin guidance was due to a more modest estimate for loan marks/purchase accounting accretion, softer repricing lift from the five-year curve, and timing noise from rate cuts. Chief Credit Administrator Tom Dolan confirmed immaterial exposure to non-depository financial institutions, emphasizing Glacier's core community bank model focused on direct relationships with local Main Street businesses and consumers, supported by strong covenant structures and regular borrower reviews.

Kelly Motta of Keefe, Bruyette & Woods (KBW) questioned the net interest margin outlook into 2026, asking if a return to pre-pandemic levels above 4% was feasible. She also inquired about key areas of technology investment the company is pursuing to support its acquisition-driven growth strategy.

Answer

SVP & Treasurer Byron Pollan expressed confidence that margin growth will persist through 2026, seeing no structural barriers to reaching historic norms. President & CEO Randall Chesler highlighted technology investments aimed at efficiency, including a new commercial loan platform and an upgraded treasury platform, which enhance capabilities for both internal teams and customers.

Kelly Motta of Keefe, Bruyette & Woods (KBW) inquired about the long-term net interest margin trajectory into 2026 and whether any structural factors would prevent a return to pre-pandemic levels. She also asked about technology investments being made to support growth.

Answer

SVP & Treasurer Byron Pollan expressed confidence that margin expansion will continue through 2026, seeing no structural impediments to reaching historical norms. President & CEO Randall Chesler highlighted key technology initiatives that are improving efficiency and customer experience, including a new company-wide commercial loan platform and an upgraded treasury management platform.

Kelly Motta of Keefe, Bruyette & Woods requested the expected exit margin for Q4 2025 and sought more detail on the factors driving optimism for a resumption in loan growth despite a slow first quarter.

Answer

Treasurer Byron Pollan projected a Q4 2025 exit margin around $3.40, potentially reaching $3.45 with the Bank of Idaho acquisition. Chief Credit Administrator Tom Dolan explained that loan growth headwinds from payoffs are abating, construction draws are increasing, and the company is entering seasonally stronger months, all of which support the low to mid-single-digit growth guide for the year.

Kelly Motta of Keefe, Bruyette & Woods, Inc. sought clarification on whether the loan growth outlook was organic and asked about the expected size of the balance sheet by year-end 2025. She also requested more detail on the quarterly expense guidance.

Answer

Chief Credit Administrator Tom Dolan confirmed the low to mid-single-digit loan growth guidance is purely organic. Treasurer Byron Pollan explained that while the organic balance sheet might delever, the Bank of Idaho acquisition will result in a larger balance sheet by year-end 2025. CFO Ron Copher reiterated the $151-$154 million quarterly expense guide is for the standalone company, with Bank of Idaho adding $9-$10 million per quarter post-closing.

Kelly Motta from KBW asked for guidance on a normalized expense growth rate for 2025 and beyond. She also inquired about loan growth dynamics, including any signs of pent-up demand ahead of potential rate cuts and the current state of the loan pipeline.

Answer

Treasurer Byron Pollan suggested a 3% normalized expense growth rate for 2025, citing ongoing efficiency gains balanced by investments in control functions to meet regulatory expectations. Chief Credit Administrator Tom Dolan noted that while customer optimism is present, it hasn't translated to significant new deal flow yet, with pipelines remaining stable. He anticipates similar low single-digit growth in Q4, which is a seasonally slower quarter.

Kelly Motta from Keefe, Bruyette & Woods inquired about the assumptions for deposit betas embedded in the net interest margin (NIM) outlook and the current competitive landscape for deposits. She also asked about credit trends, including migration into criticized assets, following the improvement in non-performing assets (NPAs).

Answer

CFO Heng Chen stated deposit betas are assumed to be in the 60% range for interest-bearing deposits, noting a "pretty rational" market in Q4. CEO Chang Liu added that the LA and New York markets remain competitive, with $4 billion in CDs maturing in Q1 2026 at an average yield of 3.8%. He mentioned plans for a Lunar New Year campaign to price below this rate while defending the deposit base and aiming to transition some funds to non-interest-bearing accounts. Regarding credit, Mr. Liu clarified there are no particular trends in special mention migrations, providing specific details on three downgraded relationships (a New York mixed-use project, a Pacific Northwest multi-family property, and a C&I exercise equipment distributor), expressing confidence in their resolution within 12 months.

Kelly Motta asked about deposit trends, specifically inquiring about deposit betas embedded in the Net Interest Margin (NIM) outlook for 2026 and the current market competitiveness for deposits. She also sought clarification on the beta calculation and asked about credit trends, including non-performing asset (NPA) improvement and migration into criticized loans.

Answer

Heng Chen, EVP and CFO, stated that deposit betas are assumed to be in the 60% range for interest-bearing deposits and noted that market competition was rational in Q4. Chang Liu, President and CEO, added that the local LA and New York markets remain competitive, with nearly $4 billion in CDs maturing in Q1 2026, and the bank aims to price below the current average yield of 3.8% while transitioning some into non-interest-bearing accounts. Regarding credit, Mr. Liu detailed specific special mention loan relationships, explaining their unique situations (e.g., a New York mixed-use project awaiting tax status, a Pacific Northwest multi-family property with a new tenant, and a C&I distributor with short-term financial issues but expected full-year profit).

Kelly Motta from Keefe, Bruyette & Woods (KBW) asked for more color on the drivers of commercial loan growth, specifically regarding line utilization. She also inquired about deposit pricing, asking if the benefits from past rate cuts are fully realized and what the outlook is for deposit betas on future cuts.

Answer

President & CEO Chang Liu explained that Q2 loan growth was balanced, with a slightly larger proportion from CRE purchase/refinance activity and new C&I relationships, while advances on existing lines were less significant. EVP & CFO Heng Chen noted that the NIM should expand with future Fed cuts, supported by the repricing of fixed and hybrid loans. Chang Liu confirmed that the benefits from the 2024 rate cuts are now fully reflected in current deposit rates.

Kelly Motta from Keefe, Bruyette & Woods (KBW) asked for more color on the drivers of commercial loan growth, particularly regarding line utilization. She also inquired about the outlook for deposit pricing and net interest margin (NIM) expansion following recent interest rate cuts.

Answer

President & CEO Chang Liu noted that Q2 growth was balanced, with a slightly larger proportion from CRE purchase and refinance activity, alongside new C&I relationships, rather than significant draws on existing lines. EVP, CFO & Treasurer Heng Chen added that NIM should expand with future Fed rate cuts, supported by a tailwind from the repricing of fixed-rate residential and commercial real estate loans at higher current rates.

Kelly Motta of Keefe, Bruyette & Woods inquired about the specific drivers of the strong Q2 commercial loan growth and the outlook for deposit pricing and net interest margin (NIM) expansion, particularly in relation to potential future Fed rate cuts.

Answer

President & CEO Chang Liu noted that growth was balanced, driven by both CRE purchase/refinance activity and the addition of new C&I relationships. EVP & CFO Heng Chen added that while the benefit from past rate cuts is largely realized, future cuts are expected to expand the NIM, supported by the repricing of fixed and hybrid loans which constitute about 60% of the portfolio.

Kelly Motta asked how the increased scale from the Olympic Bancorp merger is expected to help generate better efficiency, given the company's historical mid-60% efficiency ratio and past efforts to mitigate profitability headwinds. She also inquired about any updated M&A conversations following the recent Olympic transaction.

Answer

CFO Don Hinson stated that overall efficiencies between the two organizations are expected, with the efficiency ratio continuing to decrease over time, primarily driven by revenue rather than expenses. CEO Bryan McDonald elaborated that the significant increase in Heritage's margin (from 3.36% in Q4 2024 to 3.72% in Q4 2025, with potential to reach 4%) and Olympic's low-cost deposits (1.02% cost of deposits, mid-60s loan-to-deposit ratio) offer substantial potential for additional leveraging and efficiency improvements. Regarding M&A, Bryan McDonald stated the primary focus is on successfully integrating Olympic in 2026, but the company continues to engage in active conversations within its footprint to remain a known partner for future opportunities, with no change from past practices.

Kelly Motta asked how the increased scale from the Olympic Bancorp merger is expected to contribute to generating better efficiency and the trajectory of the efficiency ratio. She also inquired about any updated M&A conversations following the recent Olympic transaction, given Heritage Financial's past activity.

Answer

Don Hinson (CFO) expects overall efficiencies and a continued decrease in the efficiency ratio, primarily driven by revenue growth. Bryan McDonald (CEO) added that Heritage's margin has significantly increased year-over-year, and the Olympic combination brings low-cost deposits (1.02% cost) and a lower loan-to-deposit ratio (mid-60s vs. Heritage's 80+), offering significant leveraging potential to drive the efficiency ratio lower. Mr. McDonald stated that the primary focus for 2026 is successfully integrating Olympic Bancorp. However, the company continues to engage in M&A conversations to remain a known party for potential partnerships within their footprint, indicating no change in their ongoing M&A dialogue, but a prioritization of the current integration.

Kelly Motta of KBW questioned whether recent economic uncertainty has altered Heritage Financial's full-year outlook on loan growth and credit appetite, and also inquired about specific geographic areas targeted for talent acquisition.

Answer

President Bryan McDonald projected an annualized loan growth rate of 5% to 8% for Q2, supported by a strong pipeline, but noted uncertainty makes H2 2025 harder to predict. He also stated the bank is open to hiring talent anywhere in its footprint, likely as smaller, targeted hires, reflecting a balance between seizing opportunities and controlling expenses.

Kelly Motta from Keefe, Bruyette & Woods inquired about the dynamics of deposit costs, including the potential for further reductions and the repricing schedule for CDs, and also asked about balance sheet strategy regarding the loan-to-deposit ratio and securities portfolio cash flows.

Answer

CEO of Heritage Bank Bryan McDonald explained that exception pricing on money market accounts is being lowered with each Fed adjustment and that most maturing CDs are shorter-term. Chief Accounting Officer Jennifer Nino detailed that nearly $780 million in CDs are maturing in the first half of 2025. Bryan McDonald added that the bank is comfortable with a higher loan-to-deposit ratio and that the lack of deposit growth in Q4 was due to customer cash usage rather than competitive outflows.

Kelly Motta inquired about the bank's preparations for eventually crossing the $10 billion asset threshold and asked about the optimal loan-to-deposit ratio management is targeting for the future.

Answer

CEO Jeff Deuel explained that while a framework to cross $10 billion exists, it is not an immediate priority as organic growth puts it several years away, though they are making incremental preparations. He also stated that management is comfortable with the loan-to-deposit ratio rising from the low 80s into the high 80s to better leverage the balance sheet, but likely not much higher.

Kelly Motta inquired about the expected normalized tax rate for 2026, given a Q4 adjustment, and asked about other notable items in non-interest income/expenses for a normalized fee rate, beyond building lease exit costs. She also questioned the expectation for commercial real estate payoffs and construction-to-permanent financing as a potential headwind in 2026.

Answer

Rob Butterfield, Chief Financial Officer, confirmed that the Q4 tax rate included annual year-end true-ups and that the expected normalized tax rate for 2026 is around 19%, consistent with the first nine months of 2025. He clarified that the $1.4 million loss on disposal of assets included a $1 million write-off of software no longer in use, which is a non-recurring item not typically excluded from core numbers. Jill Rice, Chief Credit Officer, reiterated that commercial real estate payoffs are expected to continue as a headwind in 2026. Despite this, she projected mid-single-digit loan book growth for 2026, assuming the economy holds up, driven by strong production numbers and the activity of new relationship managers.

Kelly Motta asked about Banner Corporation's share repurchase strategy, including valuation considerations and how it balances against maintaining dry powder for potential M&A. She also inquired about the drivers behind the strong deposit growth, whether any special promotions were run, and the company's approach to deposit pricing following the Fed's rate cut. Finally, she asked about the elevated cash balances and plans for optimizing the liquidity position.

Answer

CFO Rob Butterfield stated that share repurchases are an ongoing capital deployment alternative, with the current quarter's average price being attractive. He mentioned the existing repurchase authorization and that future activity depends on market conditions, noting the current blackout period. Regarding deposits, Rob Butterfield attributed strong growth to seasonality (ag clients), consistent team efforts, and no special promotions. He detailed post-Fed rate cut actions, including reductions in advertised CD specials and high-yield savings account tiers. He also explained that elevated cash balances serve as 'dry powder' to fund future loan growth without wholesale borrowings.

Kelly Motta of Keefe, Bruyette & Woods (KBW) asked about the current state of loan pricing and spreads, the sustainability of the loan yield expansion from back-book repricing, and any notable regional differences in loan growth activity.

Answer

EVP & Chief Credit Officer Jill Rice responded that loan pricing is holding up, with the recent dip in new production yield being a result of product mix rather than spread compression. EVP & CFO Robert Butterfield reaffirmed the expectation of a 4-5 basis point quarterly increase in loan yields as long as the Fed is on pause. Jill Rice added that recent middle-market growth was strong in the Pacific Northwest, while small business growth was broad-based, and she expects increased growth from California following recent hires of seasoned relationship managers.

Kelly Motta asked about loan pricing and spreads, the sustainability of the back-book repricing benefit on the margin, and whether loan growth was concentrated in specific geographic markets.

Answer

EVP & Chief Credit Officer Jill Rice stated that loan pricing is holding up well and that the lower new production yield was due to product mix rather than spread compression. EVP & CFO Rob Butterfield confirmed that a 4-5 basis point quarterly increase in loan yields remains a reasonable expectation in the near term, assuming the Fed is on hold. Jill Rice noted that recent middle-market growth was stronger in the Pacific Northwest but expects future growth from California following recent hires in that market.

Kelly Motta of Keefe, Bruyette & Woods (KBW) asked about loan pricing and spreads, the sustainability of the quarterly increase in loan yields, and any regional differences in loan growth activity.

Answer

EVP & Chief Credit Officer, Jill Rice, confirmed that loan pricing is holding up and noted recent middle-market growth was stronger in the Pacific Northwest, with future growth expected from California. EVP & CFO, Robert Butterfield, reaffirmed the 4-5 basis point quarterly loan yield expansion outlook, contingent on the Fed remaining on pause, though he noted this benefit would diminish over time.

Kelly Motta asked about the current state of loan pricing and spreads, the sustainability of the projected four to five basis point quarterly increase in loan yields, and whether there were any notable regional differences in loan growth activity and opportunities.

Answer

EVP & Chief Credit Officer, Jill Rice, responded that loan pricing is holding up well, with recent yield fluctuations driven by product mix rather than spread compression. EVP & CFO, Robert Butterfield, confirmed that a four to five basis point quarterly increase in loan yields is a reasonable near-term expectation, assuming the Fed remains on pause. Jill Rice also noted that while recent middle-market growth was stronger in the Pacific Northwest, she expects increased contributions from California due to recent hiring of seasoned bankers in that market.

Kelly Motta of KBW asked for confirmation on the effective tax rate for the year and requested an update on fee revenue initiatives, including the outlook for deposit fees and service charges.

Answer

EVP & CFO Robert Butterfield confirmed that the Q1 tax rate is a good estimate for the full year. For fee income, he suggested the Q1 level, excluding a BOLI claim, is a decent run rate. He noted mortgage banking is rate-dependent but highlighted significant growth in the SBA gain-on-sale business, which generated $800,000 in Q1 compared to a ~$400,000 quarterly run rate last year.

Kelly Motta inquired about growth opportunities across Banner's footprint, asking if there were specific areas targeted for adding scale or teams. She also questioned if the mid-single-digit loan growth outlook for 2025 was conservative and what factors could drive potential upside.

Answer

CEO Mark J. Grescovich stated that Banner is focused on organic growth within its current excellent markets rather than expanding its geographic footprint. He sees significant opportunity in hiring bankers and gaining market share from disruption. Executive Jill Rice reiterated the mid-single-digit loan growth target, explaining that while market disruption offers upside, potential downsides from interest rates, immigration reform, and tariffs justify a balanced, middle-of-the-road forecast.

Kelly Motta asked for more color on deposit seasonality and whether normal trends are returning. She also inquired about capital management strategy, including plans for redeemable subordinated debt and the potential use of the share buyback authorization.

Answer

EVP and CFO Robert Butterfield confirmed that deposit flows appear to be returning to normal seasonal patterns, with Q3 being a particularly strong quarter. On capital, he stated they are evaluating whether to call and replace the sub debt or simply redeem it, given their strong capital position. He emphasized that the core dividend is the top priority, followed by evaluating share repurchases under the existing authorization.

Kelly Motta asked for further details on the non-interest-bearing deposit flows, specifically if the decline was due to customer attrition or normal seasonal movements. She also inquired about the bank's share buyback activity, asking if they are out of the market until the Heritage deal closes.

Answer

President and CEO David A. Brager clarified that there was no material loss of relationships, and the decline in non-interest-bearing deposits was normal seasonality, emphasizing that average balances are more indicative than point-in-time figures. He noted that new relationships are still bringing in significant non-interest-bearing deposits. Regarding the buyback, Mr. Brager confirmed that the bank has been out of the market since early December due to the S-4 prospectus for the merger, and the board will reevaluate after the deal closes.

Kelly Motta asked for further details on the decline in non-interest-bearing deposit flows, specifically if it was due to customer attrition related to loan exits or merely normal seasonal movements returning to pre-COVID trends. She also inquired about the bank's share buyback activity, noting its intensity this quarter, and whether the bank is out of the market until the Heritage deal closes.

Answer

David A. Brager, President and CEO, and E. Allen Nicholson, EVP and CFO, reiterated that the non-interest-bearing deposit movements were normal year-end seasonality, not due to material customer attrition or loss of significant relationships. They emphasized that new relationships continue to bring a high percentage of non-interest-bearing deposits. Regarding buybacks, David A. Brager confirmed that the bank has been out of the market since early December due to the S-4 prospectus for the Heritage merger and that the board will reevaluate buybacks post-merger close.

Kelly Motta of Keefe, Bruyette & Woods (KBW) questioned the company's M&A strategy, specifically asking if they would consider out-of-state acquisitions given California's economic headwinds. She also inquired about the expense run rate and any nuances to consider for future quarters.

Answer

CEO David Brager confirmed a strategic shift to be more open to acquisitions in 'new geographic markets,' as reflected in an updated investor presentation, though he reiterated that significant opportunities remain within California. CFO E. Allen Nicholson addressed expenses, explaining the Q2 decline was partly due to lower Q1 payroll taxes and that some growth should be expected from mid-year salary increases. He projected continued low single-digit overall expense growth, with technology being a key investment area. Brager added that active management of occupancy costs is also helping control expenses.

Kelly Motta of Keefe, Bruyette & Woods (KBW) followed up on the M&A discussion, asking if the bank would consider out-of-state acquisitions given California's economic headwinds. She also inquired about the expense run rate, noting the quarterly step-down and any nuances to consider for future periods.

Answer

CEO David Brager confirmed that the bank has strategically modified its acquisition strategy to include 'new geographic markets,' opening the door to opportunities beyond California, as reflected in its latest investor presentation. CFO E. Allen Nicholson explained that while H2 expenses will see a slight rise from mid-year salary increases, overall expense growth should remain in the low single digits, supported by technology-driven efficiencies and active management of costs like occupancy.

Kelly Motta of Keefe, Bruyette & Woods (KBW) questioned if the bank would consider out-of-state M&A given California's economic headwinds. She also asked for insights into the expense run rate, noting the quarterly step-down, and any factors to consider for future periods.

Answer

President & CEO David Brager confirmed a strategic shift, pointing to updated investor materials that now include "new geographic markets" for acquisitions, opening the door to opportunities beyond California. EVP & CFO E. Allen Nicholson explained the expense run rate, noting the Q1 to Q2 decrease is typical due to seasonal payroll taxes and that overall expense growth should remain in the low single digits, despite continued double-digit growth in technology investment. Brager added that proactive real estate management is also helping control occupancy costs.

Kelly Motta from Keefe, Bruyette & Woods asked about the company's willingness to pursue out-of-state M&A given California's economic climate. She also inquired about the expense run rate following the step-down in Q2 and any factors to consider for future quarters.

Answer

President & CEO David Brager confirmed an increased openness to out-of-state M&A, pointing to updated language in their investor presentation, though he noted a California-centric target is still preferred. EVP & CFO E. Allen Nicholson explained the Q2 expense decline was partly due to higher Q1 payroll taxes. He guided for low single-digit overall expense growth going forward, with technology spending increasing but offset by disciplined management of other costs, such as optimizing office leases. Brager added that the bank has achieved positive operating leverage for the past two quarters.

Kelly Motta inquired about the bank's opportunities to gain market share from competitor disruption in California and asked for guidance on the appropriate level of average interest-bearing cash for modeling purposes.

Answer

President and CEO David Brager confirmed they are seeing opportunities from market disruption, particularly in the Specialty Banking group, and anticipate more following the recent merger announcement involving a competitor. Executive E. Nicholson explained that the Q1 decline in average interest-bearing cash was tied to seasonal deposit outflows and expects the balance to rebound modestly in the second quarter.

Kelly Motta from Keefe, Bruyette & Woods asked for management's perspective on the California economic outlook amidst concerns about out-migration and wildfires. She also inquired about loan growth opportunities, new commercial real estate loan pricing, and the ability to offset potential rate cuts with new production.

Answer

President and CEO David Brager acknowledged the challenges but emphasized California's status as a large, diversified economy where the bank has significant market share to gain. He noted that while some customers move personally, their businesses often remain in California. On lending, Brager stated that new quality CRE loans are being priced in the 6.5% to 6.75% range. He cautioned that intense rate competition exists and stressed that CVBF will remain disciplined, comparing loan yields to risk-free investment alternatives.

Kelly Motta asked for color on the current rates for customer repurchase agreements. She also sought to clarify the net impact on Net Interest Income (NII) from the BTFP paydown and lower rates, and inquired about the expected size of future security sales.

Answer

CEO David Brager and Executive E. Nicholson explained that customer repo costs rose recently due to shifts from noninterest-bearing accounts but are expected to fall quickly with Fed rate cuts. David Brager clarified that NII faces headwinds from losing the positive carry on the BTFP (over $7 million) and the diminishing income from fair value hedges ($4.3 million in Q3). He estimated that future security sales would likely be smaller than the $300 million sold in Q3, perhaps one-third to one-half the size.

Kelly Motta of KBW inquired about the elevated credit provisions and larger Puerto Rico charge-offs in the quarter, seeking clarification on non-performing loan (NPL) movements, including sales and new non-accruals. She also asked about the drivers of the low single-digit loan growth outlook, specifically regarding auto lending competitiveness, and the confidence in the flat expense guidance for 2026, including efficiency drivers.

Answer

César Ortiz (Chief Risk Officer) explained that charge-offs resulted from a $17 million NPL sale, which generated a $3.9 million gain, offset by a $45 million telecommunications loan moving to non-accrual. Maritza Arizmendi (CFO) noted that $3.1 million of the $4.8 million charge-off from the sale was previously reserved. José Rafael Fernández (CEO) stated that auto balances are expected to stabilize and decrease by 2-3%, while commercial loans are projected to grow 5-6%, leading to overall low single-digit loan growth. Maritza Arizmendi (CFO) attributed flat expenses to continuous technology and talent investments, noting a reduction of 60 FTEs, with accelerated savings expected in 2027-2028. José Rafael Fernández (CEO) emphasized the intentional effort to drive efficiencies through technology and process simplification.

Kelly Motta of KBW inquired about the elevated credit provisions, seeking additional color on larger Puerto Rico charge-offs and the movement in non-performing loans (NPLs) due to sales and new migrations. She also asked about the drivers for the low single-digit loan growth outlook, particularly regarding auto lending, and the confidence in the flat year-over-year expense guidance, including drivers of increased efficiencies.

Answer

Chief Risk Officer César Ortiz explained that charge-offs resulted from a $17 million NPL sale, which generated a $3.9 million gain, offset by a $45 million telecommunications loan moving to non-accrual. CFO Maritza Arizmendi noted $4.8 million in charge-offs from the sale, with $3.1 million previously reserved. CEO José Rafael Fernández detailed loan growth expectations, anticipating auto balances to be down 2-3% and commercial loans up 5-6%, leading to overall low single-digit growth. Regarding expenses, CFO Maritza Arizmendi and CEO José Rafael Fernández attributed the flat guidance to continuous technology and talent investments, alongside efficiencies from a culture of continuous improvement, expecting accelerated savings in 2027-2028.

Kelly Motta asked about the Q4 net interest margin guidance of 5.10% to 5.20%, specifically the Fed funds assumption and reasons for the margin being down compared to previous expectations. She also inquired about the strategic approach and cadence for realizing efficiencies from AI investments and the go-forward outlook for capital priorities, including buybacks and M&A.

Answer

Maritza Arizmendi, CFO, attributed the Q3 margin deviation to better-than-expected savings account inflows and stated that Q4 guidance reflects asset-sensitivity and a modeled 50 basis point Fed funds reduction. José Rafael Fernández, CEO and Chairman, added that large deposit inflows/outflows contribute to quarterly volatility. He emphasized that AI investments deliver unique customer benefits and are starting to yield operational efficiencies, particularly in staffing, with 2026 expense guidance to follow. For capital, he prioritized loan growth, followed by buybacks and dividends, citing strong earnings momentum and a positive Puerto Rico economic outlook.

Kelly Ann Motta asked for clarification on the Q4 margin guidance of $5.10-$5.20, specifically inquiring about the underlying Fed funds assumption and any deviations from prior margin expansion expectations. She also questioned the strategic approach and cadence of AI investments aimed at driving efficiencies, and sought an update on capital priorities, including the outlook for buybacks and M&A.

Answer

Maritza Arizmendi, Chief Financial Officer, attributed Q3 margin deviation to better-than-expected savings account inflows. For Q4, she noted the impact of the late September 25 basis point Fed cut. José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors, clarified that they are modeling a 50 basis point reduction in Fed funds for Q4 and mentioned deposit volatility. Mr. Fernández emphasized that AI investments are delivering unique customer insights and are also starting to yield efficiencies in banking operations, particularly in people, with 2026 expense guidance to follow in Q4. On capital, Mr. Fernández stated that strong capital supports loan growth as the top priority, with more active buybacks expected in Q4 and 2026 due to strong earnings, followed by dividends, citing a robust Puerto Rico economy and onshoring benefits.

Kelly Motta asked for details on the net interest margin, focusing on the timing and strategic rationale for taking on FHLB wholesale funding and its impact on liquidity. She also questioned the pricing dynamics and competitive landscape for the strong loan growth. In a follow-up, she inquired about the outlook for government deposits, the strategy for expense control amid technology investments, and sought clarification on the full-year tax rate guidance.

Answer

CFO Maritza Arizmendi Díaz explained the FHLB advance was an opportunistic move to secure funding at a favorable rate (4.13%) to support the strong loan pipeline. CEO José Fernández added that the decision was made mid-quarter and noted that while lending is competitive, the bank is seeing diversified growth across auto, commercial, and mortgage lending. Fernández also stated that government deposits are expected to roll over for several more quarters and detailed the expense strategy as a balance of investing in technology while relentlessly pursuing process efficiencies. Arizmendi clarified the 24.9% full-year tax rate guidance excludes the Q2 discrete benefit.

Kelly Motta of KBW inquired about the 2025 outlook for net interest margin (NIM) amidst potential rate cuts, future expense management in light of digital investments, and the drivers behind the Q4 credit reserve build. She also asked about capital allocation priorities, including share buybacks, and the company's perspective on M&A opportunities.

Answer

CEO José Fernández and CFO Maritza Arizmendi addressed the NIM, reaffirming a 5.30% to 5.40% range for 2025, supported by investment portfolio performance and strong customer growth from digital products. Fernández detailed the 'Digital First' strategy's success, justifying a projected quarterly expense run rate of $95-$96 million for continued investment. Regarding credit, Executive Cesar Ortiz-Marcano explained that the reserve build was for specific U.S. commercial loan challenges and seasonal auto delinquency trends, while the overall credit environment in Puerto Rico remains stable. Fernández confirmed that the capital allocation strategy prioritizes organic loan growth, followed by dividends and methodical share buybacks, and stated a focus on organic growth over M&A.

Kelly Motta inquired about the outlook for loan growth in Puerto Rico and the U.S., deposit trends including migration and government account flows, the drivers behind the updated Net Interest Margin (NIM) guidance, the strategy for securities purchases, plans for capital returns like buybacks, and the rationale for acquiring a mortgage servicing portfolio.

Answer

Executive José Fernández expressed continued optimism for loan growth in Puerto Rico, supported by strong economic activity, and a more constructive view on the U.S. market. He noted deposit migration from demand to time accounts should stabilize in 2025 and confirmed a large government deposit exit was delayed to November. Executive Maritza Arizmendi clarified the revised NIM outlook of 5.3% to 5.4% was due to a larger-than-expected 50 basis point Fed rate cut. Both executives affirmed that securities purchases are a deliberate strategy to extend duration and reduce asset sensitivity. Fernández acknowledged capital returns via buybacks were slow in Q3 and will be reviewed, and explained the mortgage servicing acquisition was to fully own a relationship they already sub-serviced, adding approximately $900,000 in quarterly fee income.

Kelly Motta questioned the rate sensitivity of the asset base, the current competitive environment for deposits in Puerto Rico, and whether there has been any tangible movement on manufacturing onshoring.

Answer

Executive Maritza Arizmendi identified the commercial loan book (53% variable rate) and cash as the most rate-sensitive assets. Executive José Fernández described the deposit market as 'relentlessly competitive' but noted OFG is performing well, with 5% year-over-year net customer growth. He reiterated that while onshoring is an opportunity, it is still 'too early to tell' if there is tangible movement, as commercial clients are managing uncertainty by building inventory.

Kelly Motta asked about F.N.B. Corporation's capital deployment strategy, specifically regarding price sensitivity for share buybacks and any updated thoughts on M&A. She also inquired about the long-term sustainability of the bank's efficiency ratio, particularly the low 50s target, given past performance and ongoing technology investments.

Answer

CFO Vincent Calabrese stated that F.N.B. Corporation believes its stock is undervalued, making buybacks attractive even at current levels, with no strict price threshold. Chairman, President, and CEO Vincent Delie emphasized a focus on organic growth and internal capital generation, noting that M&A is not a high priority and any potential deal would need to be an opportunistic, non-dilutive fit that accelerates organic growth. Regarding efficiency, Vincent Delie explained that automation, digitization, and leveraging data science platforms are expected to drive further cost reductions and revenue generation, making the low 50s efficiency ratio sustainable. Vincent Calabrese concurred, stating that sustaining around the low 50s-50% level feels very achievable.

Kelly Motta asked about F.N.B. Corporation's capital deployment strategy, specifically regarding price sensitivity for buybacks and updated thoughts on M&A. She also inquired about the long-term sustainability of the bank's efficiency ratio in the low 50s, given past trends and ongoing technology investments.

Answer

CFO Vincent Calabrese stated that F.N.B. believes its stock is undervalued, making buybacks attractive even at higher valuation levels, without a specific bright line for stopping. Chairman, President, and CEO Vincent Delie emphasized the company's focus on internal organic growth and leveraging technology investments. He noted that M&A is not a high priority, and any opportunistic deal would need to be a good fit, not dilute the strong non-interest-bearing deposit mix or tangible book value, and accelerate organic growth. Regarding the efficiency ratio, Mr. Delie explained that automation, digitization, and the use of AI and data analytics are driving efficiency and revenue generation, with significant potential still to come. Mr. Calabrese added that sustaining an efficiency ratio around the low 50s or 50% level feels very achievable due to these factors.

Kelly Motta with Keefe, Bruyette & Woods, Inc. inquired about F.N.B.'s solid loan growth, particularly in residential mortgage, and potential headwinds from refinancing risk in the secondary markets as interest rates decline. She also asked for additional color on the drivers of strong deposit growth, especially non-interest-bearing deposits, and the impact of growth markets, e-store, and AI initiatives.

Answer

Chairman, President, and CEO Vincent J. Delie explained F.N.B.'s strategic shift towards aggressive pricing in conforming mortgage space and moving assets off-balance sheet, noting that accelerated prepayment speeds in the mortgage book could allow capital redeployment into commercial lending. He highlighted the focus on jumbo mortgage loans for wealthy individuals and physicians, cross-selling wealth products, and retaining servicing. Delie and CFO Vincent J. Calabrese attributed strong deposit growth across the footprint to solid execution, technology offerings like the common application and AI, and commercial bankers targeting depository-only relationships, emphasizing the company's consistent growth model and market share gains in MSAs.

Kelly Motta from Keefe, Bruyette & Woods (KBW) asked about FNB's capital management strategy, including potential uses for excess capital and target ratios, and inquired about future de novo expansion plans and key areas of focus.

Answer

CFO Vincent J. Calabrese stated that the 10% CET1 ratio is now viewed as an "operating floor" and that the company has flexibility for share repurchases, potential dividend actions, and funding loan growth, which is the top priority. Chairman, President & CEO Vincent J. Delie added that capital allocation decisions will be based on what is best for shareholders. Regarding expansion, Delie highlighted a focus on high-growth markets in the Carolinas, Virginia, and the D.C. area, noting the long-term payoff of these de novo investments.

Kelly Motta of KBW inquired about the drivers for the high end of the fee income guidance and whether a capital markets rebound was necessary. She also asked about deposit cost trends, drivers of noninterest-bearing deposit growth, and the cost of new funding.

Answer

CEO Vincent J. Delie detailed a broad range of diversified fee income streams beyond capital markets that could drive growth, including derivatives, wealth management, treasury management, SBA lending, and the new investment banking acquisition. He also highlighted the new digital direct deposit switch capability as a key initiative to attract primary banking relationships and lower-cost deposits. CFO Vincent J. Calabrese added that CDs are repricing favorably, with new rates around 3.50% compared to maturing rates near 3.70%.

Kelly Motta from KBW questioned the path to achieving positive operating leverage in the latter half of 2025 and asked if management has observed greater optimism and investment appetite among commercial clients.

Answer

CFO Vincent J. Calabrese confirmed the goal of achieving positive operating leverage for the full year 2025, driven by disciplined expense management and revenue-focused investments. CEO Vincent J. Delie noted that long-term efficiency will be enhanced by automation and AI. He also confirmed seeing increased optimism among clients, who are beginning to plan for capital investments, which he expects will lead to higher loan demand.

Kelly Motta asked for clarification on the deposit beta outlook, trends in commercial loan spreads across different markets, and the financial impact of the upcoming headquarters move.

Answer

CFO Vincent J. Calabrese specified the 15% beta is for total deposits and that the down-cycle beta could be around 30% by the end of 2025. CEO Vincent J. Delie stated that loan spreads are surprisingly consistent across all regions, with some increased pricing power in CRE. He confirmed the new headquarters move is on track for November and that a portion of the duplicate rent expense from 2024 should reverse as a benefit next year.

Kelly Motta questioned WaFd's strategy regarding mortgage-backed securities (MBS) purchases exceeding single-family runoff, specifically the use of borrowings, and whether this approach would continue. She sought clarification on the active portfolio growth expectations, asking if the 8%-12% target was over two years rather than just fiscal 2026. Motta also inquired about the implications of the 'needs to improve' CRA rating appeal, particularly what opportunities would be unlocked if it were lifted, and asked about the assumptions for interest rate cuts baked into the 3% margin trajectory.

Answer

Kelli Holz (EVP and CFO) confirmed the intentional acceleration of MBS purchases and stated that, absent meaningful loan growth, borrowings and deposit growth would continue to be used for investments. Brent Beardall (President and CEO) clarified active portfolio growth expectations as 6%-10% for fiscal 2026 and the higher end of 8%-12% for fiscal 2027, driven by an expanding pipeline. Beardall explained that a lifted CRA rating would primarily ease branching activities and make mergers and acquisitions less difficult. He also indicated that the 3% margin trajectory bakes in one to two rate cuts this year, based on the forward curve and internal assessment.

Kelly Motta asked for clarification on the strategy for MBS purchases, specifically if the inactive runoff was intended to fuel these purchases and why borrowings were used in excess this quarter, and if this strategy would continue. She also sought to clarify the active portfolio growth expectation, asking if 8%-12% was over two years or for fiscal year 2026. Lastly, Ms. Motta inquired about what opportunities would be unlocked if WaFd's 'needs to improve' CRA rating was lifted, and what 'recipe' of rate assumptions and balance sheet adjustments would be needed to achieve the 3% margin goal.

Answer

EVP and CFO Kelli Holz explained that WaFd intentionally accelerated MBS purchases this quarter beyond single-family runoff, using borrowings and deposit growth to continue growing the balance sheet for investments if opportunities arise. President and CEO Brent Beardall clarified that active portfolio growth is expected to be 6%-10% in fiscal year 2026 and on the higher end of the 8%-12% range in fiscal 2027, driven by pipeline expansion. Regarding the CRA rating, Mr. Beardall stated that lifting it would ease branching activities and make mergers and acquisitions less difficult, though they are not actively pursuing M&A. For the 3% margin goal, he indicated they are baking in one to two Fed rate cuts this year into their assumptions.

Kelly Motta followed up to clarify the go-forward effective tax rate after accounting for the one-time items and other adjustments in the quarter.

Answer

Aurelio Alemán, CEO, advised using the estimated full-year 2025 effective tax rate of 22.2% as guidance, expecting it to remain in the 22-22.5% range, reflecting anticipated improvements and tax benefits from investment portfolio reinvestment and commercial lending growth.

Kelly Motta followed up on the effective tax rate, seeking a clear go-forward approximation after accounting for one-time adjustments and other operational factors.

Answer

CFO Orlando Berges-González confirmed that the estimated effective tax rate of 22.2% for the full year 2025 already incorporates expected improvements, including tax benefits from investment portfolio reinvestment and commercial lending growth. He advised using this figure as guidance, expecting the rate to remain within the 22-22.5% range.

Inquired about the confidence in achieving mid-single-digit loan growth, any changes in line utilization rates, and future technology investments that might impact the long-term expense run rate and efficiency ratio.

Answer

The company is confident in its loan growth guidance as the pipeline looks better than it did at the start of the year. They will provide data on line utilization later. Regarding efficiency, the company has been making ongoing investments in technology (cloud migration, self-service tools, AI) for some time and expects to sustain these investment levels without a significant peak, continuing to drive long-term efficiencies.

Kelly Motta from Keefe, Bruyette & Woods (KBW) questioned the level of confidence in achieving the mid-single-digit loan growth guidance and asked about long-term expense plans, particularly regarding technology investments and their impact on the efficiency ratio.

Answer

President & CEO Aurelio Alemán-Bermudez expressed strong confidence in the loan growth guidance, citing a robust pipeline that has improved since the beginning of the year. Regarding expenses, he explained that significant technology investments in areas like cloud migration and digital applications are ongoing and sustained, so no major spike in spending is anticipated. The company remains focused on maintaining its best-in-class efficiency ratio.

Kelly Motta asked about current deposit trends and the overall outlook for deposit stability. She also had a modeling question regarding a linked-quarter decrease in insurance and supervisory fees and requested clarification on the pace and plan for the stock buyback program.

Answer

CEO Aurelio Alemán-Bermúdez described deposit trends as more stable than in the prior two years, with growth in core noninterest-bearing accounts. CFO Orlando Berges-González did not have a specific reason for the quarterly variance in insurance fees. Regarding the buyback, Mr. Alemán-Bermúdez confirmed the goal was to complete $50 million in Q2 (finishing in April) and deploy the remaining $100 million in the second half of the year, while maintaining opportunistic flexibility.

Inquired about the seasonality of Q4 expenses, the competitive landscape for deposits in Puerto Rico, and the overall balance sheet size outlook for 2025.

Answer

The Q4 expense increase is seasonal, driven by year-end customer events and marketing campaigns. Core deposit costs are unlikely to decrease without Fed rate cuts, but there are opportunities to lower costs on brokered CDs and some government deposits. The balance sheet is expected to be flat to slightly up in 2025, as investment cash flows are redeployed into loans and securities, with NII growth driven by this remix.

Asked about capital return plans, specifically the 100% payout target and buybacks; the reasons for deposit outflows and prepayments in the Virgin Islands; the potential for mortgage banking revenue to increase with rate changes; and the proportion of the loan book with floating rates.

Answer

The company maintains its goal of a 100% earnings payout and will keep its options open, including buybacks. The Virgin Islands activity was driven by a government loan repayment and normal Q3 seasonality. Mortgage banking revenue could increase if lower rates drive more conforming loan activity. 54% of the commercial loan book has a floating rate.

Kelly Motta asked about capital return plans, including buybacks and the 100% payout target. She also inquired about the drivers of balance sheet changes in the Virgin Islands, the outlook for mortgage banking revenue, and the percentage of the loan book with floating rates.

Answer

President & CEO Aurelio Alemán-Bermúdez stated the company maintains optionality on capital returns and the 100% payout goal remains for now. EVP & CFO Orlando Berges-González attributed the Virgin Islands variance to a government loan repayment and typical Q3 tourism seasonality. Aurelio Alemán-Bermúdez noted lower rates could boost mortgage noninterest income. Orlando Berges-González specified that 54% of the commercial loan book is floating rate, breaking it down by index (SOFR, Prime, Treasury).

Kelly Motta sought more detail on the drivers behind the optimistic loan growth outlook for the second half of the year, inquired about plans for hiring additional commercial producers, and asked about the ideal M&A partner size to absorb the costs of crossing $10 billion in assets.

Answer

President Dave Antolik explained that growth is expected from C&I augmenting steady CRE and consumer lending, supported by four recent commercial banker hires, with plans to continue recruiting. CEO Chris McComish clarified that the primary financial impact of crossing $10 billion is the Durbin revenue hit, as infrastructure is already in place. He specified that the ideal M&A target would be a bank with assets in the $1 billion to $5 billion range.

Kelly Motta asked about the potential for further talent acquisition to support the organic growth story and sought an update on the M&A environment.

Answer

President Dave Antolik stated that S&T Bancorp plans to continue recruiting customer-facing bankers through 2025, potentially matching 2024's 15% team expansion. CEO Christopher McComish added that after years of building foundational functions, the company's focus has shifted to revenue-generating roles. Regarding M&A, McComish confirmed that industry conversations are becoming more active and that S&T, with its record capital levels, is well-positioned to be an opportunistic partner.

Kelly Motta asked about the confidence in slowing loan payoff headwinds and the potential risk of refinancing as rates decline. She also questioned the management of liquidity, the elevated cash balance, and the strategy for crossing the $10 billion asset threshold, including offsetting the Durbin Amendment impact.

Answer

President Dave Antolik noted that prepayment penalties and proactive banker conversations help manage refinancing risk. CEO Chris McComish added that rate clarity is boosting customer investment confidence. Executive Mark Kochvar explained that cash was intentionally elevated to pay off brokered CDs at quarter-end. Regarding the $10 billion threshold, Mr. McComish stated the $6-7 million Durbin impact is manageable, as the bank has been preparing for increased regulatory oversight and is focused on growing fee income to offset the hit.

Kelly Motta of Keefe, Bruyette & Woods asked about the sustainability of the deposit pipeline, questioning if the 'low-hanging fruit' from new teams might diminish. She also requested details on average loan sizes for new originations and current C&I line utilization rates. Finally, she inquired about the fee income contribution from cubiX.

Answer

President and CEO Sam Sidhu asserted a long runway for deposit growth, noting that recently hired commercial teams are at less than 20% of their former books, with a three-year plan to replenish them. He provided average new loan sizes: ~$6M for commercial banking, $6-10M for venture, and ~$7.5M for CRE. CFO Philip Watkins added that C&I line utilization is normal, though slightly lower in areas like fund finance. Sidhu confirmed Q1 cubiX fee income was $2.1 million, contributing to a stable annual run rate of about $8 million.

Kelly Motta inquired about the outlook for continued deposit cost reduction, given the significant progress already made. She also asked about the competitive opportunity in the digital asset space with a potentially friendlier regulatory environment and how the bank plans to maintain its lead. Lastly, she asked for clarity on the timing of a recent securities portfolio restructuring.

Answer

President and CEO Samvir Sidhu outlined the ongoing deposit remix strategy, noting a plan to replace approximately $500 million in higher-cost funds in Q1 and an expectation for new teams to generate $1.5 to $2.0 billion in low-cost deposits in 2025. On digital assets, Sidhu emphasized the bank's first-mover advantage, deep institutional relationships, and superior in-house technology as durable competitive strengths. EVP and CFO Philip Watkins clarified the securities restructuring occurred late in Q4 and is expected to provide about 5 basis points of incremental NIM benefit in 2025.

Kelly Motta from KBW asked why the benefits of the deposit remix weren't yet visible in the overall deposit costs. She also sought to reconcile the change in NIM guidance and asked for an update on the digital asset business and the associated regulatory order, including its longevity and value.

Answer

CFO Philip Watkins attributed the lag in deposit cost reduction to timing, as average interest-bearing deposits increased, and the need to avoid immediate rate cuts on newly onboarded accounts. He explained the NIM change was due to lower-than-expected discount accretion and proactive balance sheet actions. CEO Samvir Sidhu added that the digital asset business is viewed as a payments business and the company is building a proprietary platform to enhance risk management, which they believe will create a regulatory moat. He stated the work for the order should be mostly done in a year, with orders typically lasting around two years.

Kelly Motta of KBW asked for clarification on expense drivers beyond the new team hires and questioned the company's capital allocation priorities, particularly regarding the new share buyback program.

Answer

CFO Philip Watkins identified two other expense drivers: a $1.2 million reserve for unfunded loan commitments and about $1 million in expenses tied to a consumer HFS program that had associated revenue. President and CEO Sam Sidhu emphasized that while the buyback is a useful tool, the bank's primary focus for capital remains franchise-enhancing organic growth, especially now that it has achieved its key capital ratio targets.

Speaking on behalf of Kelly Motta, an analyst inquired about the drivers behind the healthy construction loan growth and the bank's comfort level with its Commercial Real Estate (CRE) concentration, which is approaching 306% of capital.

Answer

CEO Greg Steffens explained that the construction growth stemmed from the continuation of existing projects and draws from a stable pipeline. He anticipates the pace of this growth will slow as projects are completed in the latter half of the fiscal year. Regarding CRE concentration, Steffens stated that the bank's internal limit is 375%, and they target a range of 300-325%, indicating comfort with current levels.

Kelly Motta asked if the significant increase in loan yields during the quarter was influenced by any outsized loan fees or nonaccrual interest recoveries. She also inquired about the current M&A environment and conversation activity.

Answer

President and CAO Matthew Funke stated that while there was a minor impact of a couple of basis points from nonaccrual interest, it was not significant enough to be a primary driver of the yield increase. CFO Stefan Chkautovich added that he does not expect a material increase in yields from fixed-rate loan repricing in the upcoming quarter. Regarding M&A, Mr. Funke confirmed that conversations remain preliminary and nothing is imminent, though he believes activity is likely to pick up.

Kelly Motta from KBW inquired about the outlook for the mortgage banking line item, particularly the potential for gain on sale of loans to normalize. She also asked for a reminder of the company's strategic M&A priorities regarding target markets and sought guidance on a sustainable level for cash on the balance sheet.

Answer

President Matthew Funke stated that while they anticipate a long-term recovery in secondary market mortgage activity, recent strength has been in in-house portfolio loans with no immediate signs of a secondary market turnaround. On M&A, he reiterated target markets including St. Louis, Kansas City, Northwest Arkansas, and Little Rock. CFO Stefan Chkautovich addressed liquidity, noting that cash levels should range in the $50 million-plus range, suggesting the current level is a low point.