Is First Hawaiian Bank (FHB) a Buy After Strong Q2 Earnings and Shareholder-Friendly Moves?

First Hawaiian Bank (FHB) has long been a staple of the regional banking sector, but its Q2 2025 earnings report has reignited investor interest. With revenue of $217.5 million—a 6.3% year-over-year increase and a $4.5 million beat on estimates—and EPS of $0.58 (18.5% above expectations), the bank has demonstrated a rare blend of operational discipline and financial resilience. Now, the question looms: Is FHB a compelling buy for long-term investors? To answer this, we must dissect its earnings momentum, dividend sustainability, and buyback strategy through the lens of valuation and market sentiment.

Earnings Momentum: A Recipe for Sustained Growth

FHB's Q2 performance was underpinned by a 1.9% rise in net interest income to $163.6 million, driven by a widening net interest margin (NIM) to 3.11%. This improvement, coupled with a leaner efficiency ratio of 57.2% (down from 58.2% in Q1), highlights the bank's ability to adapt to a high-interest-rate environment. Management's focus on cost control and asset quality has paid dividends, with capital ratios (CET1 at 13.03%) and a robust loan portfolio ($14.35 billion) signaling stability.

However, the bank's asset sensitivity—its exposure to rate cuts—remains a risk. While FHB's NIM expansion in Q2 suggests short-term strength, a prolonged Fed pause or rate reversal could pressure margins. Investors should monitor the bank's credit quality metrics, particularly its $14.35 billion loan portfolio, which includes a significant chunk in commercial real estate. For now, though, FHB's earnings trajectory appears sustainable, supported by its disciplined balance sheet management.

Dividend Strength: A High-Yield Attraction

FHB's 4.09% dividend yield, above the Financial Services sector average of 2.88%, is a draw for income investors. The $0.26-per-share quarterly payout has remained unchanged since 2019, but the payout ratio of 56.5%—while higher than the sector average—leaves room for flexibility. This strikes a balance between shareholder returns and capital preservation, especially compared to peers like National Bankshares (NKSH), which boasts a 5.24% yield but a dangerous 109.4% payout ratio.

The chart above illustrates FHB's consistent yield, which, despite a slight decline from its 2020 peak of 6.54%, remains competitive. While the lack of recent hikes may concern growth-oriented investors, the stability of the payout suggests a focus on reliability over rapid growth—a trait that aligns with FHB's conservative risk profile.

Buyback Strategy: Shareholder Value Maximization

FHB's 2025 repurchase program has been aggressive, with 1.04 million shares retired in Q2 at $23.99 apiece, using $25 million of the $75 million remaining authorization. This follows Q1's $25 million in buybacks, reducing the float by ~4.2% year-to-date. At current prices, the program could retire an additional 3.1 million shares with the remaining $75 million, potentially boosting EPS by ~10% if executed.

The buybacks are underpinned by FHB's strong capital position (CET1 at 13.03%) and a ROE of 11.03%, which outperforms the sector average. While the stock's P/B ratio of 1.11 suggests it's trading near intrinsic value, the DCF-derived fair value of $41.02 implies a 38% upside if the bank continues to delever its balance sheet and optimize its NIM.

Valuation and Market Sentiment: Undervalued or Overlooked?

FHB's P/E ratio of 13.6x is below its peer average of 17.9x but above the broader banking sector's 11.6x, creating a valuation sweet spot. Analysts have set a 12-month price target of $25.93—just 2% above the current price—suggesting modest near-term optimism. However, the stock's 38% discount to DCF fair value indicates long-term potential for those who can stomach macroeconomic risks.

The chart highlights FHB's competitive valuation against peers like Cathay General Bancorp (CATY, P/E 11x) and WesBanco (WSBC, P/E 31.6x). While FHB's growth expectations are modest, its conservative capital structure and shareholder returns make it a compelling value play.

Risks to Consider

Despite its strengths, FHB faces headwinds. Its asset sensitivity could hurt margins if rates fall, and Hawaii's economy—reliant on tourism and real estate—is vulnerable to national trends like tariffs or reduced federal spending. Additionally, the bank's loan growth has been tepid ($58.8 million in Q2), raising questions about its ability to scale in a low-growth environment.

Conclusion: A Buy for Patient Investors

FHB's Q2 results underscore its ability to navigate a challenging macroeconomic landscape with agility and discipline. While the stock isn't a high-growth story, its combination of a 4.09% yield, aggressive buybacks, and undervaluation relative to peers makes it a solid long-term hold. For investors seeking income and downside protection, FHB offers a compelling risk-reward profile. However, those prioritizing rapid capital appreciation may find better opportunities elsewhere. In a market where “boring” stocks are often undervalued, FHB's steady hand and shareholder-friendly policies could prove rewarding over time.

This chart illustrates FHB's outperformance against the broader market, driven by its dividend and buyback-driven returns. While volatility is inevitable, the bank's fundamentals suggest a path to outperforming in the long run.

Investment Recommendation: Buy for income-focused investors with a 3–5 year horizon. Maintain a conservative position size to mitigate sector-specific risks.