Executive Summary / Key Takeaways

• First Hawaiian, Inc. (NASDAQ:FHB) leverages its deep historical roots and dominant market position in Hawaii and the Pacific to maintain a stable core deposit franchise and strong customer relationships, providing a foundational advantage against competitors.
• Recent financial performance, highlighted by a 6.8% year-over-year increase in Q1 2025 net income to $59.2 million, demonstrates resilience driven by expanding net interest margin (NIM) and disciplined expense control, despite a challenging revenue environment.
• The company's asset-sensitive balance sheet and strategic management of its investment portfolio are key drivers of expected continued NIM expansion, with guidance for Q2 2025 NIM at 3.10%, supported by lower funding costs and asset repricing.
• Loan growth remains a focus, with a pipeline showing strength, particularly in commercial segments, though payoffs introduce near-term uncertainty; management maintains a full-year 2025 growth outlook of low-to-mid single digits.
• Credit quality remains strong with low non-performing assets and net charge-offs, and management believes the allowance for credit losses, increased in Q1 2025 due to macroeconomic uncertainty captured by modeling, is conservatively reserved for potential outcomes.

The Enduring Foundation: First Hawaiian's Island Stronghold

First Hawaiian, Inc. stands as a financial bedrock in the Pacific, tracing its origins back to 1858 as Bishop & Company. This long history has cultivated a deep-seated presence and brand loyalty across Hawaii, Guam, and Saipan, establishing First Hawaiian Bank (FHB) as a dominant force in these markets. Operating through its Retail Banking, Commercial Banking, and Treasury segments, FHB offers a comprehensive suite of services, from consumer deposits and loans to sophisticated commercial financing and wealth management. This extensive reach, supported by a physical branch network that significantly outpaces local competitors like Central Pacific Financial (CPB) (FHB: 54 branches vs. CPB: ~30), fosters strong customer relationships and underpins a stable core deposit base—a critical advantage in the current interest rate environment.

The competitive landscape in Hawaii is primarily defined by a few key players: FHB, Bank of Hawaii (BOH), and CPB, alongside a smaller presence from national banks like Wells Fargo (WFC). FHB's competitive edge stems from its historical legacy, extensive local network, and diversified portfolio across consumer and commercial segments. While BOH presents a formidable challenge, particularly noted for its digital innovation speed and slightly stronger financial metrics (BOH ROE: 10-12% vs. FHB ROE: 8-10% TTM), FHB counters with its broader geographic reach across the Pacific islands and a strategic focus on comprehensive customer relationships. CPB, while smaller, competes effectively on cost and community banking. National players like WFC, despite superior scale and digital capabilities (WFC offers 20-30% more advanced digital tools), have a limited local footprint, positioning FHB favorably in terms of Hawaii-specific loyalty and retention (estimated 5-10% higher repeat business than national banks).

Strategically, FHB is adapting to the evolving banking landscape, which increasingly demands digital fluency and operational efficiency. While the company may not possess a single, unique "core differentiated technology" in the vein of specialized manufacturing, it has made significant investments in its technological infrastructure, including a core conversion and enhancements in digital tools and data analytics. These investments are aimed at improving operational efficiency, enhancing customer service, and streamlining processes. Management has indicated that these efforts are beginning to yield benefits, contributing to expense control and supporting strategic initiatives, although specific quantifiable metrics on the performance or comparative advantage of these digital tools over competitors like BOH are not explicitly detailed. The strategic intent is clear: leverage technology to maintain competitiveness and drive efficiency gains in response to market pressures and rival advancements.

Performance Amidst Shifting Sands

First Hawaiian's recent financial performance reflects a business navigating a dynamic economic cycle, marked by rising interest rates followed by expectations of cuts, and localized economic nuances. Net income for the first quarter of 2025 rose to $59.2 million, a notable 6.8% increase compared to $54.2 million in the same period of 2024. This improvement was primarily fueled by a 4% increase in net interest income (NII) and a 4% decrease in noninterest expense, partially offset by a higher provision for credit losses.

Net interest income reached $160.5 million in Q1 2025, up from $154.4 million in Q1 2024. This expansion was largely driven by a significant decrease in deposit funding costs and borrowing costs, which more than offset a decline in earning asset yields, particularly within the loan and lease portfolio. The total cost of deposits fell by 11 basis points year-over-year, reflecting proactive deposit pricing strategies and the benefit of repricing trends. Borrowing costs also decreased substantially following the maturity of a larger, higher-rate Federal Home Loan Bank (FHLB) advance and its replacement with a smaller, lower-rate one. The net interest margin (NIM) consequently expanded by 17 basis points year-over-year to 3.08% in Q1 2025. Management expects this positive trend to continue, guiding for a Q2 2025 NIM of approximately 3.10%, supported by ongoing balance sheet dynamics and the benefits of the Q4 2024 investment portfolio restructuring, which involved selling $293 million of lower-yielding securities and reinvesting at a 309 basis point higher yield, projected to add $8.6 million to NII and 4 basis points to NIM in 2025.

Noninterest income saw a slight decrease of 2% year-over-year in Q1 2025, totaling $50.5 million. This was primarily due to lower credit and debit card fees and trust and investment services income, partially offset by an increase in other service charges and fees, notably from annuities and securities. Management expects the quarterly noninterest income run rate to average around $51 million in 2025.

Expense management remains a key focus, with noninterest expense decreasing by 4% to $123.6 million in Q1 2025 compared to $128.8 million in the prior year period. This reduction was largely attributable to a significant decrease in regulatory assessment and fees (related to the FDIC special assessment), lower contracted services and professional fees (including technology-related projects), and reduced card rewards program expense. These decreases more than offset increases in occupancy and salaries and employee benefits expenses. Management's full-year 2025 expense guidance projects an increase of approximately 2% to $510 million, reflecting a more normalized growth rate after prior years' significant technology investments, which are now contributing to operational efficiencies.

Loan and lease balances totaled $14.3 billion as of March 31, 2025, a modest decrease of 1% from December 31, 2024. This decline was primarily driven by decreases in commercial real estate and consumer loans, partially offset by increases in construction and commercial and industrial loans. Deposit balances also saw a slight decrease of 1% to $20.2 billion, mainly due to decreases in money market and demand deposits, partially offset by increases in savings and time deposits. Core deposits remain a substantial and stable funding source, representing 93% of total deposits.

Credit quality metrics remain strong. Non-performing assets stood at $20.2 million as of March 31, 2025, representing a low 0.14% of total loans and leases and OREO. Net charge-offs were $3.8 million for the three months ended March 31, 2025, annualized at 0.11% of average loans and leases, consistent with the prior year. The allowance for credit losses (ACL) for loans and leases increased to $166.6 million, or 1.17% of total loans and leases, up from 1.11% at the end of 2024. This increase in the ACL, along with a higher provision for credit losses ($10.5 million in Q1 2025 vs. $6.3 million in Q1 2024), was primarily driven by increased macroeconomic uncertainty captured by the bank's CECL modeling, particularly impacting the provision for consumer loans and unfunded commercial commitments, rather than observed broad signs of weakness in the portfolio. Management believes the reserve levels are conservative and adequate for a range of potential outcomes.

Capital levels remain robust, with the Common Equity Tier 1 (CET1) ratio increasing to 12.93% as of March 31, 2025, well above regulatory minimums and the bank's internal targets. This strength is supported by earnings and a decrease in risk-weighted assets, allowing the company to return capital to shareholders. The company repurchased approximately $25 million of its common stock in Q1 2025 under its $100 million stock repurchase program for 2025 and declared a quarterly cash dividend of $0.26 per share.

Outlook and Risks

First Hawaiian's outlook for 2025 is shaped by its strategic focus on leveraging its market position, managing its balance sheet effectively in a changing rate environment, and controlling expenses. Management guides for continued NIM expansion in the near term, driven by lower funding costs and asset repricing dynamics, although the pace and timing of potential future rate cuts introduce uncertainty. Loan growth is expected to be in the low-to-mid single digits for the full year, contingent on pipeline conversion outpacing payoffs, particularly in commercial segments. Expenses are projected to increase modestly, reflecting ongoing investments and inflationary pressures, but at a slower pace than in recent years due to realized efficiencies from past technology upgrades.

Key risks to this outlook include the sensitivity of NII and NIM to interest rate changes, particularly if the pace or magnitude of cuts differs from expectations. While the bank is asset-sensitive, rapid rate declines could pressure margins. Credit risk, though currently low, could be impacted by a deterioration in economic conditions in Hawaii or the U.S. Mainland, including potential effects from tariffs on specific industries like auto dealers or construction materials, or a slowdown in tourism. Geographic concentration in Hawaii, Guam, and Saipan also exposes the portfolio to regional economic shifts and natural disasters. Operational risks, including cybersecurity threats and system failures, are inherent in the business. The company also faces contingent liabilities related to its 2016 reorganization, the ultimate outcome of which is uncertain.

Conclusion

First Hawaiian, Inc. demonstrates solid financial performance and strategic execution, leveraging its deep roots and dominant market position in Hawaii and the Pacific. The company's ability to expand NIM through effective balance sheet management and maintain disciplined expense control has driven recent earnings growth. While loan growth faces headwinds from payoffs and economic uncertainty, a strong pipeline and strategic focus on commercial segments offer potential for improvement. Credit quality remains a significant strength, providing a stable foundation. The company's ongoing technology investments, though not a unique core differentiator, are contributing to operational efficiency and supporting its competitive stance against rivals like Bank of Hawaii and Central Pacific Financial. With robust capital levels and a commitment to shareholder returns, First Hawaiian is positioned to navigate the current economic environment. Investors should monitor the pace of loan growth, the trajectory of interest rates and their impact on NIM, and the broader economic health of its core markets, particularly in light of potential impacts from tariffs and tourism trends. The company's enduring local presence and strategic adaptability remain central to its long-term investment thesis.