First Hawaiian’s Noisy Bridge to TriCo

A loan-growth cut, a Seattle office charge-off, and a deposit-cost floor make the last standalone quarter messier than the merger narrative.

FHB · Earnings Call · 2026-10-23

A noisy quarter before the altar

First Hawaiian’s Q3 2026 call was supposed to be a relatively simple bridge to the TriCo Bancshares merger, which management still expects to close this quarter. Instead, the quarter arrived with a guidance cut, a downtown Seattle office charge-off, and a California tax settlement that muddied the P&L. The stock has already voted: FHB is down 8.7% over the last 90 days and 16.5% below its July peak. That drawdown is the backdrop for everything management said. The tax item was one-time noise: a $24.3 million expense tied to a California settlement from the 2016 BNP Paribas separation, more than offset by a $31 million tax benefit. Merger related costs were $6.7 million in the quarter, with roughly $25 million expected in Q4. Strip those out, and operating expenses were actually below plan. But the market rarely gives banks full credit for “noise” when the credit tape is also noisy.

The loan-growth cut is the real surprise

The biggest negative was loan growth. Total loans declined $115 million in the quarter, driven by unexpected CRE payoffs, a slight decline in dealer floor-plan balances, and residential runoff. Management cut its full-year loan-growth outlook to 1% to 2%, down from 3% to 4%. That is a meaningful change from the prior call, when the message was still constructive on pipelines. “We still see a very robust pipeline in both the C&I and CRE.” — Robert Harrison, Chairman, President and CEO · 2026-07-24 That was Q2. By Q3, the tone had shifted. “We obviously didn't get the loan growth we expected in the third quarter. So we're reducing our full year loan outlook to 1% to 2% growth, down from 3% to 4% growth.” — Robert Harrison, Chairman, President and CEO · 2026-10-23 The culprit is not demand. It is payoffs. Bob Harrison described one large CRE loan that was refinanced away by a mainland lender offering “very aggressive pricing.” The pipeline is still there, but the bank is looking over its shoulder at unexpected prepayments. CRE payoffs are the swing factor, and they are harder to predict than new production. Dealer floor plan balances, normally a fourth-quarter tailwind, were also soft. The net effect: a bank that needs loan growth to replace securities cash flows is now guiding toward barely any growth at all.

Deposit costs have hit a floor

The margin story was better, but it came with a caveat. NIM rose 5 basis points to 3.30%, and the cost of deposits fell 3 basis points. Deposit costs have been a reliable tailwind for several quarters, but Jamie Moses told the call that the easy money is gone. “I think we're kind of at a trough in this quarter. I think this is probably as low as it's going to be, especially given the rate outlook that we've seen.” — James Moses, Chief Financial Officer · 2026-10-23 That matters because FHB has been able to offset weak loan growth with funding-cost reductions. If deposit costs are at a floor, the margin must be carried by asset repricing and, eventually, by loan growth. There is still help from the asset side. FHB is asset-sensitive and expects a couple of basis points of NIM accretion for each Fed rate increase, plus another couple from fixed-rate cash-flow repricing. Fed rate increase is a global theme this quarter, and FHB is on the right side of it. But higher rates are a margin tailwind, not a volume strategy. Net interest income has grown 45% over the past decade to roughly $170 million a quarter. The bank still needs assets to put that deposit base to work.

Credit: one Seattle office, four downgrades

The credit section was where the call got most specific. Net charge-offs were $21.9 million, or 60 basis points, driven by a $12.5 million partial charge-off on a participated office loan in downtown Seattle. Downtown Seattle is a new company-specific phrase in the keyword record, and it explains why investors are nervous. The loan was originated in 2019, performed through COVID, but has struggled with the city’s contraction in office demand and higher-for-longer rates. Management says it is isolated: the bank has only one other downtown Seattle office loan, and that one is performing with a strong sponsor.

Third quarter net charge-offs were $21.9 million or 60 basis points of total loans and leases. This was primarily driven by a $12.5 million partial charge-off of our participated loan on an office building located in downtown Seattle.
Lea Nakamura, Chief Risk Officer · 2026-10-23

The broader credit metrics were noisier. Criticized assets rose 72 basis points, primarily from four non-office CRE loan downgrades, three of which came out of the national SNC exam. Provision expense was $20.3 million, and nonperforming assets plus 90-day past dues rose to 45 basis points, partly because of operational issues from the recent outsourcing of residential mortgage servicing. Harrison called the Seattle situation “isolated,” and Lea Nakamura emphasized that loss content is limited. But the contrast with prior calls is stark. A year ago, the message was “the portfolio is performing as we expected. So we were pleased for a very long time the performance.” — Lea M. Nakamura, Chief Risk Officer · 2025-07-25 Now the bank is doing “deep dives” and reporting downgrades. Credit metrics are still strong by historical standards, but the direction of travel has changed.

TriCo is now the investment case

The merger remains the strategic centerpiece. The shareholder special meetings are set for October 29, and management still expects to close this quarter. Integration planning is underway, with Jamie Moses heading the Integration Management Office and TriCo CFO Peter Wiese leading on the other side. The stated philosophy is unusual for a bank deal: “the really long-term value comes from letting TriCo be TriCo and us supporting them with their customers and in their markets.” — Robert Harrison, Chairman, President and CEO · 2026-10-23 There is no branch overlap, so near-term disruption should be limited. The systems conversion is expected in the second half of next year, and management is not yet saying which platform the combined bank will use. TriCo also changes the growth mix. TriCo brings oil and gas and agricultural lending, areas FHB has not historically pursued, while FHB can bring hospitality expertise. The combined bank should be more diversified, but execution risk is real. Buybacks are paused for the deal; Harrison said it is “a little bit early to decide how much and when” they resume. Prior call: “We're probably not going to do buybacks throughout the rest of the year.” — Robert Harrison, Chairman, President and CEO · 2026-07-24 That stance is unchanged, but the capital question will become more important once the deal closes. Basel III could add roughly 100 basis points to CET1, which gives the combined bank plenty of capacity.

What actually changed

First Hawaiian came into 2026 as a well-capitalized, deposit-rich Hawaii bank with a rate-sensitive balance sheet and a merger that promised mainland scale. Q3 did not break that story, but it dented it. The loan-growth guide was cut, deposit costs hit a trough, and credit noise arrived from a mainland office loan. The stock’s 16.5% drawdown from July is a reasonable response to those three facts. At 1.3x book, the shares are near the low end of their decade range. The bull case is that the credit issue is truly isolated, the merger closes on schedule, and the combined bank can grow loans again in a higher-for-longer world. The bear case is that the loan-growth miss is structural—aggressive mainland lenders are taking away FHB’s best CRE relationships—and that the credit cycle is only now reaching the bank’s participated book. The quarter did not settle that debate. It just made the next one more important.