First Hawaiian, Inc.'s Q2 2025 Earnings: Navigating Rate Pressures with Strength in Hawaii's Recovery

As First Hawaiian, Inc. (FHB) prepares to report its Q2 2025 earnings on July 25, investors are closely watching how the bank is faring amid persistent high interest rates and the evolving dynamics of Hawaii's economy. With tourism rebounding, real estate markets stabilizing, and digital banking initiatives driving efficiency, FHB's resilience could position it as a standout regional banking play. Let's dissect the key metrics and strategic advantages that make this stock worth considering.

Net Interest Margin: A Beacon of Stability

First Hawaiian's net interest margin (NIM) has been a bright spot in recent quarters. In Q1 2025, the NIM improved by 5 basis points to 2.92%, driven by lower deposit costs and the benefits of its Q4 2024 investment portfolio restructuring. Management expects further gains in Q2, anticipating a rise of a few basis points due to ongoing deposit cost reductions.

This margin resilience is critical in an environment where regional banks face pressure from flat or declining rates. FHB's ability to manage deposit costs—particularly after repricing $1.4 billion in certificates of deposit in early 2025—demonstrates strong balance sheet discipline. With the Federal Reserve signaling potential rate cuts by mid-2025, FHB's strategy of optimizing its balance sheet could sustain NIM stability even as rates shift.

Loan Growth: Navigating Headwinds in Tourism and Real Estate

While total loans dipped 0.8% in Q1 due to paydowns in commercial real estate (CRE) and dealer flooring, FHB's long-term outlook remains cautiously optimistic. Management has flagged low to mid-single-digit annual loan growth, buoyed by Hawaii's recovering tourism sector and construction activity.

Tourism-Driven Momentum:
Visitor arrivals to Hawaii rose 1% year-over-year through February 2025, with Maui leading in spending growth (4.5%). This bodes well for hospitality and retail borrowers, key FHB clients. The bank's exposure to tourism-linked loans, including hotel renovations and retail expansion, positions it to capitalize on the rebound.

Real Estate and CRE Opportunities:
Despite Q1's CRE paydowns, FHB is eyeing multifamily and resort construction projects. The CMBS market's volatility has pushed borrowers toward mini-perm financing, a niche FHB is well-equipped to serve. Real estate floorplan loans, though below all-time highs, remain robust at $661 million. Critically, credit quality is pristine: non-performing assets fell to 17 basis points in Q1, underscoring prudent underwriting.

Digital Banking: Cutting Costs, Boosting Efficiency

FHB's retail deposits grew by $105 million in Q1, reflecting strong customer retention in its core banking services. While specific Q2 digital banking updates are pending, the bank's existing online and mobile platforms have historically reduced reliance on costlier branches. This focus on cost efficiency—coupled with a non-interest-bearing deposit ratio of 34%—gives FHB a structural advantage in managing expenses amid a competitive landscape.

Economic Tailwinds: Hawaii's Resilient Recovery

Hawaii's economy is a microcosm of FHB's opportunities. Tourism's rebound is not just about visitor numbers but also higher spending per traveler, particularly in luxury sectors. Real estate, while cautious, shows no broad distress, with stable housing demand and construction activity in high-value segments.

The bank's geographic focus is a double-edged sword: risks like tariffs on imported goods (impacting dealer loans) or a slowdown in tourism could test resilience. However, FHB's diversification—balancing CRE, consumer loans, and tourism-related credit—mitigates sector-specific shocks.

Investment Thesis: A Compelling Regional Play

FHB's stock closed at $23.29 post-Q1 results, with a market cap of $2.97 billion. At this valuation, the bank trades at 1.2x tangible book value, a discount to its peers. Key positives include:

1. Strong Balance Sheet: Capital ratios exceed regulatory thresholds, and credit metrics are among the best in the sector.
2. Regional Dominance: As Hawaii's largest bank, FHB benefits from sticky customer relationships and a lack of direct competitors.
3. Resilient Earnings: The NIM trajectory and deposit growth suggest earnings stability even in a slowing economy.

Risks to Monitor

• Tariffs and Trade: Uncertainty around U.S. tariffs on imported vehicles could pressure dealer floorplan loans.
• Rate Cuts: While beneficial for borrowers, a prolonged low-rate environment could compress NIMs.
• Economic Softness: A slowdown in tourism or construction could stall loan growth.

Conclusion: A Strategic Buy for Patient Investors

First Hawaiian, Inc. is a testament to the power of geographic focus and balance sheet discipline. With Hawaii's economy on an upward trajectory and FHB's NIM resilience and loan pipeline intact, the bank is positioned to outperform peers in a challenging rate environment.

Investors should view FHB as a long-term hold or buy, especially if the stock dips below $22 on near-term volatility. The upcoming earnings call—where management will address Q2 NIM trends, loan dynamics, and digital initiatives—will be a key catalyst. For those willing to bet on Hawaii's recovery and FHB's execution, this regional gem offers both stability and growth potential.

Disclosure: This analysis is for informational purposes only and should not be construed as personalized investment advice.