Harmony Financial (HAFC) Q4 2025: Net Interest Margin Expands 37bps as Deposit Costs Fall
Net interest margin expansion and disciplined cost control defined Harmony Financial’s fourth quarter, as management leveraged deposit repricing and a diversified loan book to counter softer non-interest income. Operational execution remained steady despite competitive deposit markets and heightened payoff activity, with management signaling continued focus on relationship banking and prudent credit oversight into 2026. Investors should monitor expense cadence and deposit retention as the bank navigates an evolving rate landscape.
Summary
- Deposit Cost Management Drives Margin: Lower deposit rates and stable funding mix supported net interest margin gains.
- Loan Book Diversification Accelerates: C&I and residential lending growth outpaced legacy CRE concentration, reducing risk profile.
- Expense Discipline Remains in Focus: Leadership flagged mid-single-digit expense growth with selective talent and tech investments in 2026.
Performance Analysis
Harmony Financial delivered a quarter marked by net interest margin (NIM) expansion and resilient loan growth, even as non-interest income declined due to timing of loan sales and the absence of one-off insurance proceeds. Net interest income rose 2.9% quarter-over-quarter, as lower rates on interest-bearing deposits more than offset modest compression in loan yields. The NIM improvement, up six basis points to 3.28%, was attributed primarily to proactive deposit repricing following Fed rate cuts and a healthy mix of non-interest-bearing deposits, which held steady at 30% of the deposit base.
Loan production for the full year increased 36%, with notable strength in residential (up 90%) and C&I (up 42%) originations, reflecting management’s ongoing portfolio diversification push. Commercial real estate (CRE) exposure was trimmed to 61.3% of total loans, down from 63.1% a year ago. Deposit balances dipped 1.3% in the quarter, mainly from lower demand and savings balances, though time deposits grew and retention rates remained robust despite competitive pressures. Asset quality stayed strong, with non-performing assets at just 0.26% of total assets and net charge-offs minimal. Expense growth for the year was contained at 4.6%, improving the efficiency ratio to 54.7%, even as the bank invested in new talent and technology.
- Margin Expansion Outpaces Loan Yield Compression: Deposit repricing and stable funding mix offset lower asset yields.
- Loan Production Mix Shifts: Residential and C&I gains signal progress in portfolio diversification strategy.
- Expense Management Holds Despite Talent Investment: Efficiency gains delivered even as headcount and merit costs rose.
Shareholder returns were robust, with $42 million returned via dividends and buybacks in 2025. Management’s focus on relationship banking and selective pricing continues to underpin both deposit stability and franchise value.
Executive Commentary
"We believe we executed well on our priorities and advanced key initiatives we laid out at the start of the year. Specifically, we further enhanced the diversification of our loan portfolio and achieved mid-single-digit loan growth guidance. We made investments in our banking teams, which led to a significant increase in loan production. We managed the deposit cost and generated net interest margin expansion throughout 2025."
Bonnie Lee, President & Chief Executive Officer
"For the fourth quarter, net interest income grew 2.9% from the previous quarter to $62.9 million as the average rate on interest-bearing deposits declined 20 basis points, while the average yield on loans declined by only nine basis points, and the average balance of loans increased 2.4%... The decrease in deposit rates benefited net interest margin by approximately 14 basis points."
Ron Santarosa, Chief Financial Officer
Strategic Positioning
1. Loan Portfolio Diversification
Management continues to shift the loan book away from CRE concentration, with C&I (commercial and industrial) and residential lending now representing a larger share of originations. The C&I portfolio grew by 25% year-over-year, and residential loan production nearly doubled, reducing single-sector risk and aligning with regulatory scrutiny on CRE exposures.
2. Relationship-Based Deposit Franchise
The bank’s deposit base benefits from long-tenured customer relationships, with non-interest-bearing deposits comprising 30% of the total. Despite intense competition and aggressive CD promotions in the market, Harmony’s selective approach to retention and pricing has maintained deposit stability and supported margin preservation.
3. Disciplined Expense Control and Efficiency
Expense growth was held below 5% for the year, driven by targeted investments in talent and technology but offset by ongoing cost discipline. The efficiency ratio improved to 54.7%, positioning the bank favorably for further productivity gains as scale and automation initiatives progress.
4. Prudent Credit and Risk Management
Asset quality remains a core strength, with low non-performing asset ratios and conservative underwriting standards. The bank proactively downgraded a hospitality credit to special mention due to a property improvement plan, but management emphasized the strong sponsor and low loss probability, underscoring a proactive risk culture.
5. Capital Allocation and Shareholder Returns
Capital deployment was balanced between buybacks and dividends, with the board reviewing payout levels annually. Share repurchases were moderated as the stock traded above tangible book, but management signaled continued flexibility in capital returns for 2026.
Key Considerations
Harmony Financial’s quarter reflects effective navigation of a competitive and shifting banking environment. Several factors will shape the bank’s trajectory as it enters 2026:
Key Considerations:
- Deposit Pricing and Retention Challenges: Intense competition for CDs and ongoing rate cuts could pressure future deposit costs and retention rates.
- Expense Growth Trajectory: With mid-single-digit expense growth expected, investors should watch for cost creep as talent and tech investments ramp up.
- Loan Growth Sustainability: The ability to sustain diversified, high-quality loan growth amid elevated payoff activity will be key to maintaining top-line momentum.
- Credit Vigilance in CRE and Hospitality: Proactive credit monitoring is essential as select exposures, like hospitality, undergo improvement cycles or market stress.
- Capital Return Flexibility: The board’s approach to buybacks and dividends will hinge on share price, capital levels, and market conditions in 2026.
Risks
Competitive deposit markets and aggressive CD promotions by peers threaten deposit retention and cost control, especially as rates decline. Elevated payoff and paydown activity could pressure net loan growth, while any deterioration in CRE or hospitality credits could challenge asset quality. Expense growth, if not tightly managed, risks eroding recent efficiency gains. Regulatory or macroeconomic shifts remain ongoing uncertainties.
Forward Outlook
For Q1 2026, Harmony Financial guided to:
- Low to mid-single-digit loan growth, with continued portfolio diversification
- Stable to expanding net interest margin, supported by further deposit repricing
For full-year 2026, management maintained guidance for:
- Healthy loan and deposit growth
- Mid-single-digit non-interest expense growth
- Sustained strong asset quality and disciplined credit management
Management highlighted that continued focus on relationship banking, cost discipline, and prudent credit oversight will drive durable performance in an evolving macro environment.
- Deposit pricing power and retention will be tested as rate competition persists.
- Expense cadence will reflect a balance between growth investments and operational efficiency.
Takeaways
Harmony Financial enters 2026 with momentum in margin management, a more balanced loan book, and a disciplined cost structure. The bank’s relationship-driven model and proactive credit stance provide resilience, but competitive deposit markets and expense pressures warrant close investor scrutiny.
- Margin Defense: Deposit repricing and NIM expansion are offsetting headwinds in non-interest income and loan payoff activity.
- Strategic Diversification: C&I and residential lending growth is reducing concentration risk and positioning the bank for regulatory and market shifts.
- Expense and Deposit Discipline: Sustainable efficiency and stable funding are critical watchpoints as the bank pursues growth in a dynamic environment.
Conclusion
Harmony Financial’s fourth quarter demonstrated sound execution in margin management, loan portfolio diversification, and cost control. As the bank faces competitive funding markets and invests for the future, its relationship banking model and prudent risk approach will be key differentiators for durable shareholder returns.
Industry Read-Through
Harmony’s results highlight the critical role of deposit franchise strength and proactive cost management for regional banks in a falling rate environment. The competitive intensity in CDs and the need for portfolio diversification away from CRE are sector-wide themes. Peers with weaker relationship banking or less flexibility in deposit pricing may see greater margin compression. The focus on operational efficiency and selective capital returns is likely to persist across the industry as banks balance growth and profitability in 2026.