First Hawaiian, Inc. Q4 FY2025 Earnings Call

Thank you, Kevin, and thank you, everyone, for joining us as we review our financial results for the fourth quarter of 2025. With me today are Bob Harrison, Chairman, President and CEO; Jamie Moses, Chief Financial Officer; and Lee Nakamura, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the Investor Relations section. During today's call, we will be making forward-looking statements. So please refer to Slide 1 for our safe harbor statement. We may also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements. And now I'll turn the call over to Bob.

Hello, everyone. Thank you for joining us today. I'll start with some local economic highlights. The state unemployment rate continued to fall and was at 2.2% in November compared to the national unemployment rate of 4.5%. Through November, total visitor arrivals were down 0.2% compared to last year, primarily due to fewer visitors from Canada. Japan remained a bright spot, up 2.8% on a year-to-date basis. However, year-to-date spending through November was $19.6 billion, up about 6% compared to the same period last year. The housing market remains stable with the median single-family home price on Oahu in December at $1.1 million, up 4.3% from the prior year. The median condo sales price on Oahu in December was $512,000, down 5.2% from last year. Turning to Slide 2. We had another strong quarter. Our net interest margin expanded. Net interest income grew, expenses were well contained, and credit quality remained strong. Our profitability measures remained solid with a return on average tangible equity of 15.8% in the fourth quarter and 16.3% for the full year. The effective tax rate in the fourth quarter was 24.8%. This was due to the reversal of our previously deferred tax benefit. We expect the effective tax rate to return to about 23.2% going forward. Turning to Slide 3. Our balance sheet remains solid. We continue to be well capitalized with ample liquidity. We had good growth in commercial and industrial loans as well as retail and commercial deposits. During February, we repurchased about 1 million shares, which utilized the remaining $26 million of our $100 million purchase authorization for 2025. Our new stock repurchase authorization is for $250 million. Unlike prior authorizations, the current authorization is not for a specific time frame. Turning to Slide 4. Total loans grew by $183 million in the quarter or 5.2% on an annualized basis. We had good growth in commercial and industrial loans primarily due to draws on existing lines as well as the addition of a new auto dealer customer. The commercial real estate growth and decline in construction were primarily due to a couple of construction deals that were converted from construction to commercial real estate. Outside of those conversions, balances in both portfolios were relatively flat. Now I'll turn it over to Jamie.

Thanks, Bob. Turning to Slide 5. We saw good growth in retail and commercial deposits, while a lot of the public operating deposits that came in during the third quarter flowed out in the fourth quarter, as we expected. Retail and commercial deposits increased by $233 million, while public deposits declined by $447 million. That dynamic resulted in a net increase in deposits of $214 million in the fourth quarter. The total cost of deposits fell by 9 basis points to 1.29%, and our noninterest-bearing deposit ratio was 32%. On Slide 6, net interest income was $170.3 million, $1 million higher than the prior quarter. The net interest margin in the fourth quarter was 3.21%, up 2 basis points compared to the prior quarter. The increase in the margin was primarily driven by lower deposit costs and the full quarter benefit of the borrowing that matured in September, partially offset by lower loan yields. The exit net interest margin for the month of December was 3.21%. Turning to Slide 7, noninterest income was $55.6 million. Noninterest expense in the fourth quarter was $125.1 million. And now I'll turn it over to Lea.

Thank you, Jamie. Moving to Slide 8. The bank continues to maintain its strong credit performance and healthy credit metrics. Credit risk remains low, stable, and well within our expectations. Overall, we're not observing any broad signs of weakness across either the consumer or commercial books. Classified assets decreased by 7 basis points, while special mention assets increased by 16 basis points. Quarter-to-date net charge-offs were $5 million or 14 basis points of total loans and leases. Year-to-date net charge-offs were $16.3 million. Our annual net charge-off rate was 11 basis points, unchanged from the third quarter. Nonperforming assets and 90-day past due loans were 31 basis points of total loans and leases at the end of the fourth quarter, up 5 basis points from the prior quarter, primarily driven by a single relationship. Moving to Slide 9, we show our fourth quarter allowance for credit losses broken out by disclosure segments. The bank recorded a $7.7 million provision in the fourth quarter. The allowance for credit losses increased by $3.2 million to $168.5 million, with coverage increasing to 118 basis points of total loans and leases. We believe that we continue to be conservatively reserved and ready for a wide range of outcomes. And now I'll turn it back over to Bob.

Thanks, Lea. Turning to Slide 10. We have summarized our current full year 2026 outlook for some of our key earnings drivers. Starting with loans, we expect full year loan growth to be in the 3% to 4% range. The growth will be driven primarily by commercial real estate and commercial and industrial loans. We anticipate that the full year net interest margin will be in the 3.16% to 3.18% range. We continue to expect tailwinds from fixed asset repricing, and additional Fed rate cuts and a decreasing deposit beta will remain headwinds. We expect noninterest income to be stable and to come in at about $220 million for the year. Finally, we expect expenses to be about $520 million in 2026. That concludes our prepared remarks, and now we'll be happy to take your questions.

Our first question comes from David Feaster with Raymond James.

I wanted to start on the loan growth. It was really encouraging to see some of the trends that you guys had and especially to see the commercial and industrial growth. I was hoping to maybe just get some color on, I guess, first of all, how pipelines are shaping up? And how much of the growth in commercial and industrial was increasing utilization versus new relationship growth? Just kind of some of the underlying trends you're seeing there. And then just some commentary too on mainland versus Hawaii as well.

Sure. Great question. Thanks, David. This is Bob. Regarding loan growth, it didn’t turn out quite as we expected this quarter. We experienced some payoffs in the commercial real estate portfolio that we thought would occur later, which is why we didn’t reach the number discussed during the third quarter call. However, we did see broad-based growth locally, particularly from some mainland draws on lines and a new dealer relationship. I believe we will see more of that in the upcoming quarters. Looking ahead, we are optimistic about the multifamily pipeline, which remains active. While it takes time for booked deals to fund, we are still managing to keep up with the payoffs that occurred during that gap period we mentioned in the last call related to SVB slowing down production a few years ago. That slowdown mainly impacted the first half of the year, and we anticipate returning to more normalized growth in commercial real estate on the Mainland in the second half. We are still seeing a good amount of activity here in Hawaii, with a significant portion of Q4's activity being Hawaii-based, though it's not limited to that. Does that address your inquiries?

That's extremely helpful. Could you talk about the payoffs and paydowns that have been a significant challenge in the industry? Can you share what might have caused some of the payoffs and paydowns to occur sooner than anticipated? As you consider your outlook for loan growth, does that include the possibility of continued payoffs and paydowns, or is that something you're worried about? I'm curious about your thoughts on that topic.

Sure. I think there's two pieces to that. The first piece are the payoffs coming sooner than we expected. They have been a bit this year. I think all the permanent lenders are just as hungry for assets as the banks are, and so they're coming in maybe a little bit earlier than normal, not like we saw a few years ago when they were coming in before properties were even completed construction, but maybe before full stabilization. You're seeing permanent lenders come in on some of those multifamily projects. So that's kind of adjusted the calendar a bit but not really a big difference. The paydowns in the industry, as we talked about before, I think we're in that belly of the part of the curve where deals didn't get done a couple of years ago, after the concerns about liquidity with SVB, First Republic, Signature, etc. We think that should be kind of burning through in the first half of this year, and the back half of the year should give more opportunity, but there is still a high desire for assets out there and good quality assets, which are the ones we like to fund; people are looking for that.

Okay. And then maybe just shifting to the side of the balance sheet. I mean core deposits, for instance, have been really good. You already have a low cost of deposits, and you're continuing to take it down further. A lot of the net interest margin expansion that we've seen has come from reduction in funding costs. I know your margin guide has, I think, two cuts in there. As you think about margin expansion going forward, is the funding cost side and the back producing really the tailwind there? And just how is the reduction in deposit costs so far? Have you seen any attrition or much pushback as you work through that?

So Dave, you kind of cut out there a little bit, but I'm going to answer the question as I think you asked it, and then you can let me know if I missed something for you. I think the margin guide reflects both an ability to continue to cut deposit rates when the Fed cuts, as well as that fixed asset repricing that we continue to talk about, and we've seen those trends over time. We think the beta is probably going to be a little bit lower going forward than where we were before. So fourth quarter interest-bearing deposit beta was around 35%. We would anticipate with two rate cuts that the interest-bearing deposit beta will be somewhere between 30% and 35%. So less than where we've been, but still pretty healthy for now at least. On the fixed asset repricing side, we kind of summarized that for you. So inclusive of all of the paydowns in the securities portfolio as well as fixed-rate cash flows coming out of the loan portfolio. We think that's about $400 million a quarter or so with about 150 basis point repricing accretion on that. So all of those things posed a particular set of loan growth, and obviously the way that the pace and timing of Fed rate cuts will impact that as well. But yes, that's kind of where we're at on the net interest margin.

Our next question comes from Andrew Terrell with Stephens.

To clarify, the $385 million in fixed cash flows is on a quarterly basis, which aligns with the previously mentioned $1.5 billion on an annual basis.

Yes. That was the fourth quarter to be very specific, Andrew. Yes.

We did put that in the deck. Clarify that was in the quarter and not some of the annual assumptions we had in there in the rest of that page. Thank you for clarifying.

Could you help me break that down a bit? I think we understand the relative dollar amounts you've mentioned. However, I want to discuss the competitive landscape for new assets currently. What kind of marginal increase do you anticipate from securities cash flow compared to the runoff of loans and your current repricing capabilities? We've heard a lot about competition from other banks lately, and I'm interested to know if you're experiencing that as well in terms of new loan growth.

Yes, I would say that there is some spread competition. We've definitely seen that. We still think it's 180 to 200 basis points on the securities portfolio, and that's pretty fixed. That's pretty well known. And again, that's about $600 million for the next year and then about $1 billion on the loan portfolio. So a little bit less than that, maybe 100 basis points, somewhere around an 80 to 100 basis points pickup on the loans versus the $200 million or so on the securities.

Yes. Okay. And then on the full year loan growth guide of 3% to 4%. It sounds like you might expect some payoffs maybe in the first part of the year, but then better in the second half of the year. And I guess the question is, is it fair to think you could start at the low end or even below the guide in terms of loan growth and then it picks up throughout the year? Or should we just think about it as kind of ratable 3% to 4% throughout the year?

Yes. I think it's not so much more payoffs than the first half of the year. I think it's a normal payoff activity. There are just fewer loans that were done 1.5 years, 2 years ago that are going to be funding now. So it's really less of the new production from that multifamily portfolio, and that should be through that back half of the year. So yes, a fair assumption that it should be probably lower in the first half and a pickup in the second half.

Our next question comes from Janet Lee with TD Cowen.

To clarify on your deposit beta expectations for 30% to 35% after two cuts. So I see if my calculation is correct I think I see a 47% interest-bearing deposit beta for the fourth quarter. So starting in the first or second quarter, does that step down to 30% to 35%? Is that the right way to interpret?

Yes, I think that's the right way to interpret it: the interest-bearing deposit beta is going to decrease over time. However, with the two rate cuts, it should remain similar to what we've experienced in the past.

We have a very low cost for deposits, and at some point, there’s a limit to how much we can reduce rates, even as they decrease.

Yes, definitely. And for the expenses. You've had, I guess, two years of flattish expense growth. It looks like it's going up about 4%, 5%. Is this just a normal adjustment of expense? Or are you hiring a little more in 2026? Or I mean it's a pretty specific number for the expense guide. How should we think about potentially your beating 520 or coming in above how should we think about your expense trajectory?

Yes, that's a great question, Janet. To provide some context, one of the main reasons we've managed to keep costs down over the past year or so is that we are still in the process of hiring. It has been challenging to find the right candidates, which is why we haven't fully staffed our hiring needs. Our successful expense management in recent years can be attributed to investments we've made in technology that allowed us to move away from higher-cost delivery methods by bringing more operations in-house. This transition has greatly benefited us as we've ended costly vendor contracts. Although our growth rate has been increasing over the past couple of years, it has been somewhat limited by our capacity to cut costs in other areas. Looking ahead to 2026, we expect that most of the cost-saving measures we've implemented will remain in place, though there could be a slight increase. We anticipate a return to a more typical rate of expense growth.

Our next question comes from Kelly Motta with KBW.

On capital return and the buyback, you've been pretty diligent with executing the $100 million you had for 2025. You noted the $250 million doesn't have any time period associated with it. I'm just wondering about your appetite for continuing on at a similar pace here and how you're thinking through that versus some other maybe M&A aspects of the capital.

Thanks, Kelly. I think that we have a pretty good appetite to continue the pace that we had set last year. I think there always will be other considerations as well. There will be some potential opportunities baked into the program that we've set out, but we haven't really made any firm commitment, I would say, internally, even around exactly the pace and timing of the share buyback other than that we recognize we have plenty of capital to do any number of things with. Organic growth is what we're really looking for, and then the share buyback is a way for us to return some of that capital. It's kind of a combination of all the things we are looking at that will determine that sort of pace.

Just to add to Jamie's comments, we've messaged for a couple of years now a 12% CET1 target, and we're certainly well above that at 13 plus. This larger buyback capacity is just an acknowledgment of that, and it gives us flexibility to bring it back closer to what we had targeted or messaged in the past.

Our next question comes from Matthew Clark with Piper Sandler.

Can we get the spot rate on deposits at the end of the year?

The spot rate on deposits at the end of the year was 1.24% in December.

Okay. In December or at the end of December?

That's December. I'm not sure my calculus is good enough to give you that derivative at the moment.

Okay. Just wondering if it was lower at the end of the year. Okay. And then on the expenses, can you remind us how the seasonality works, whether or not it's more in the first quarter or second or a combination of both? Just trying to get a sense for the run rate to start the year.

Yes. For the most part, the expenses are pretty flat throughout the year. We do see a pickup a little bit in the first quarter. You can see that in our numbers last year and the year before, and then they kind of declined a little bit from that. But in general, I think we're thinking about it pretty flat at the moment.

Okay. And then just your updated thoughts on Mainland M&A any discussions you've been having and whether or not things are more active? And maybe just remind us what your ideal target would look like?

Yes. As Jamie mentioned, our focus remains on expanding our core business, but we are still open to considering M&A opportunities. To reiterate what we've discussed before, we would be seeking a strong management team that would remain with us and be good partners. We also value a disciplined lending culture aligned with our business approach and a well-managed deposit franchise. While this aspect is somewhat subjective, we definitely want strong management. We're not interested in taking on a distressed company. In terms of location, we prefer areas west of the Rockies, where we have local presence and existing relationships. Regarding size, we are looking for targets in the range of $2 million to $15 million.

Our next question comes from Anthony Elian with JPMorgan.

On deposits, Jamie, how are you thinking about balances in the first quarter? If I look at your past couple of first quarters, you typically see a seasonal decline.

Yes, I think that's reasonable. We should anticipate that in the first quarter. Overall for the year, our main focus is on commercial and retail deposits, which we expect to grow in the low single digits. It’s challenging for us as public deposits tend to fluctuate significantly on a quarterly and even weekly basis. However, we are looking for some standard growth, similar to a GSP type increase, in those areas. That's our perspective on balances.

Okay. And then on the full year net interest margin guide of 3.16% to 3.18%, so that's a pretty tight range. Do you expect each quarter to be within that range this year?

That might be a bit far off. However, it will really depend on the number of rate cuts we experience, the timing of those cuts, and whether they are 25 basis points or 50. This assumes a scenario similar to May and September. That's my response.

Any direction for the first quarter margin, specifically relative to the 3.21% you printed for the fourth quarter?

Yes, we believe it will decrease slightly. We had two rate cuts in the quarter, one in December. We expect it will likely reduce by a few basis points from the December figure.

Our next question comes from Timur Braziler with Wells Fargo.

Maybe just going back to the loan growth and trying to bifurcate how much of it is expected to come from some of the increased draws on production in years past versus the opportunity to kind of reengage on the Mainland with seemingly some better momentum starting there.

Timur, I’m not entirely sure I understand your question, but for our current lines, it’s somewhat challenging to predict when our larger corporate and commercial customers will need to fund as opposed to draw from their line or whether they will require new production. We are definitely seeing ongoing activity in Hawaii and Guam. Additionally, there is a wider economic base on the West Coast where we operate, which presents numerous opportunities. We are also actively seeking new dealer and commercial real estate opportunities in the Mainland U.S., mainly on the West Coast. I don’t have a specific breakdown for you, but that’s generally our perspective.

Could you provide some insights on the potential opportunities related to the multifamily production that was booked 12 to 24 months ago and is set to begin funding?

Yes. I don't have that number handy, but we can look into that.

Okay. And then during the prepared remarks, you had made a comment that you had a couple of construction deals that were converted to commercial real estate. I'm just wondering, is that pretty normal to have the construction piece of it and then do the permanent financing in-house? Is that a pretty normal kind of continuation for you guys?

It depends on the sector. For customers within the footprint, that is very normal. For the multifamily construction activity we're doing primarily on the Mainland on the West Coast, it's not. It wasn’t those deals. It was mostly our other customers within the footprint. So it really depends on the customer segment if that's normal or not.

Okay. Got it. And then just last for me. The commercial and industrial yields held up really well this quarter. I'm just wondering; is that kind of new production maybe offsetting some of the decline in the variable rate portfolio? Or maybe just kind of talk me through internally if you were maybe surprised or that was an expected decline within the commercial and industrial book because it seemed to hold up pretty well relative to the type of decline we saw during the 2024 rate cutting cycle.

I don't have a perfect answer for you, but since the draws were under existing credit lines, that explains why the yield didn't change much in the fourth quarter. If you look back at the start of the pandemic, many highly rated customers had backup credit lines with lower pricing at the time, and when they drew from those, the pricing was structurally lower than what we usually see. I will need to conduct further analysis to confirm this.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Kevin for any further remarks.

We appreciate your interest in First Hawaiian, and please feel free to contact me if you have any additional questions. Thanks again for joining us, and have a good weekend.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.