First Hawaiian's Q3 2025: Contradictions Emerge on Loan Growth, Deposit Costs, and Strategy

Guidance:

• NIM: expect positive momentum in Q4; margin to advance a few basis points from September (Sep run-rate NIM 3.16%) with additional 25bp Fed cuts assumed in Oct and Dec.
• Loans: expect strong Q4 originations and to finish 2025 roughly flat to year-end 2024.
• Deposits: total balances expected roughly flat Q3→Q4; public operating deposits to run off in Q4 and be replaced by retail and commercial inflows.
• Noninterest income: normalized run rate ~ $54M per quarter.
• Expenses: full-year operating expenses expected below prior outlook of $506M.
• Capital: share repurchases opportunistic within remaining authorization.

Business Commentary:

• Strong Loan Growth Outlook:
• First Hawaiian, Inc. expects to end the year about flat to year-end 2024 in terms of total loans after a decline in Q3, driven by a significant paydown in C&I and dealer floor plan balances.

• The expected growth is supported by strong pipeline demand, particularly in CRE, indicating a positive outlook for Q4 and beyond.

• Deposit Growth and Management:

• Total deposits increased by $500 million in Q3, with commercial deposits rising by $135 million and retail deposits declining by $43 million.

• The company attributes this to seasonal factors and is expecting retail and commercial deposits to increase in Q4, while public deposits may decrease.

• Net Interest Income (NIM) Expansion:

• Net interest income was $169.3 million in Q3, up $5.7 million from the prior quarter, with the NIM at 3.19%, an 8 basis point increase.

• The increase in NIM was primarily due to higher asset yields and positive nonrecurring items, contributing to positive momentum anticipated in Q4 despite Fed rate cuts.

• Effective Tax Rate and Financial Performance:

• The effective tax rate in Q3 returned to 23.2%, reflecting a normalization from the impact of a California tax law change in Q2, which resulted in a net benefit of $5.1 million.
• The quarter's financial performance was driven by higher net interest income and noninterest income, despite the negative impact of the higher effective tax rate.

Sentiment Analysis:

Overall Tone: Positive

• Management: "We had another strong quarter"; NII $169.3M, NIM 3.19% (up 8 bps QoQ), September run-rate NIM 3.16%. Management noted strong loan pipeline, resumed investment purchases, and expected full-year expenses below $506M — all indicating constructive operating trends.

Q&A:

• Question from David Feaster (Raymond James): Can you discuss the loan growth outlook, pipeline strength, and appetite for pool purchases or C&I acquisitions to accelerate organic growth?
  Response: Strong pipeline with substantial Q4 closings; expect to finish year roughly flat to end-2024; will consider selective pool purchases only in areas where they have expertise (e.g., Hawaii residential) rather than broad buy programs.

• Question from David Feaster (Raymond James): Where is core deposit growth coming from and how will you deploy the liquidity you've accumulated?
  Response: Retail and commercial relationship activity drove deposit gains; expect public deposits to run off in Q4 and be replaced by retail/commercial; investment portfolio purchases have resumed to deploy liquidity while keeping duration similar.

• Question from David Feaster (Raymond James): How will you manage deposit costs as the Fed cuts and can margin continue to expand despite cuts next year?
  Response: NIM expansion depends on timing/magnitude of cuts and loan growth; they see ~$1B of cash flows to reprice (~125bp spread to new loans) and investment spreads 200–250bp, so margin expansion is possible but limited if multiple cuts occur.

• Question from Charles Driscoll (Keefe, Bruyette & Woods): What are your capital priorities and views on buybacks/dividend strategy?
  Response: Capital priority remains lending; buybacks are opportunistic (about $74M used of $100M authority); dividend likely unchanged for now.

• Question from Charles Driscoll (Keefe, Bruyette & Woods): How do you model betas on the way down for deposit repricing?
  Response: Expect high betas on rate-sensitive deposits (roughly ~90% on next cut), declining gradually with subsequent cuts (e.g., ~88% then ~85%).

• Question from Charles Driscoll (Keefe, Bruyette & Woods): Does your margin expansion assumption include any loan purchases?
  Response: No — the projected margin improvement assumes organic loan growth from the pipeline, not loan purchases.

• Question from Anthony Elian (JPMorgan): How much tailwind remains from loan repricing into 4Q and beyond given anticipated rate cuts?
  Response: Significant tailwind remains: ~$1B of fixed-rate cash flows expected to reprice at ~125bp spread; $500–600M of investment runoff replacing at ~225–250bp; continued benefit depends on replacing cash with loan growth.

• Question from Anthony Elian (JPMorgan): You mentioned a $54M fee-income run rate—what drove the Q3 upside and should we expect declines?
  Response: Q3 benefited from positive one-offs (favorable BOLI market movements and swap income); normalized noninterest income run rate is about $54M and Q3 outperformance isn't expected to fully persist.

• Question from Matthew Clark (Piper Sandler): What was the spot cost of deposits at the end of September?
  Response: Spot deposit cost was 136 basis points at end-September.

• Question from Matthew Clark (Piper Sandler): What caused the increase in substandard classifications this quarter?
  Response: Increase driven primarily by a single long-time borrower; management is working with the customer and does not expect a loss at this time.

• Question from Matthew Clark (Piper Sandler): Any update on M&A discussions since last quarter?
  Response: No change — open to discussions but no new developments; any M&A would target mainland (Western U.S.) opportunities only.

• Question from Timur Braziler (Wells Fargo): Did you mean deposits flat for Q4 or flat for the year?
  Response: Flat Q3→Q4: expect some public deposits to run off in Q4 while retail and commercial deposits increase, resulting in roughly flat total balances.

• Question from Timur Braziler (Wells Fargo): Is mainland M&A still being considered and what geography/criteria would you target?
  Response: Still open to mainland M&A (Western states); no change in stance and will consider the right opportunity.

• Question from Timur Braziler (Wells Fargo): Given the federal shutdown and UHERO's mild recession call, does this change your economic or reserve assumptions?
  Response: No material change observed yet; local economy remains resilient, credit metrics stable, and ACL remains conservatively reserved while monitoring developments.

• Question from Jared David Shaw (Barclays): Is federal spending in Hawaii at risk of being reshaped away from defense long-term?
  Response: Management expects long-term federal spending in Hawaii to remain defense-focused and stable to improving, citing large Navy-related projects and employment.

• Question from Jared David Shaw (Barclays): What are dealers' expectations for auto sales and how might that affect floorplan balances?
  Response: Dealers are focused on tariff-related cost pressures and uncertainty; if demand slows it could increase floorplan balances, which would benefit the bank.

• Question from Jared David Shaw (Barclays): Any observed change in competitor pricing behavior in Hawaii after ownership changes?
  Response: No — management has not observed meaningful changes in competitive dynamics or pricing.

• Question from Sun Young Lee (TD Cowen): If you pursue mainland M&A, what would make sense (geography/criteria)?
  Response: Focus would be Western U.S. mainland; otherwise no additional details—still open to the right opportunity.

• Question from Sun Young Lee (TD Cowen): Would lower mortgage rates (~5%) meaningfully help residential balances in your market given supply constraints?
  Response: Yes — lower rates would likely boost mortgage activity and balances, though supply constraints could limit volume increases.

• Question from Sun Young Lee (TD Cowen): The $130M paydown on corporate lines—was that seasonal or one-off?
  Response: Not seasonal — repayments were of earlier draws that coincidentally paid down in the same quarter, not indicative of broader weakening.

Contradiction Point 1

Loan Growth and Pipeline Outlook

It reflects differing expectations regarding loan growth and the strength of the pipeline, which are crucial factors for assessing the bank's financial health and growth prospects.

Can you discuss the growth outlook, current pipeline status, demand trends, and opportunities to accelerate organic growth, including potential acquisitions or C&I expansion? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q3: The third quarter was unusual with significant paydowns in dealer floor plan due to one customer selling franchises. Overall, we're bullish with strong production in the pipeline. - Robert Harrison(CEO)

What is the C&I pipeline status and is it the main growth driver? Is CRE borrower demand rising? - Liam Coohill (Raymond James)

2025Q2: Most C&I growth came from dealer floor plan balances, which increased $125 million to $786 million. - Robert Harrison(CEO)

Contradiction Point 2

Deposit Cost Management and Fed Rate Cuts

It involves differing opinions on how the bank plans to manage deposit costs in response to Fed rate cuts, which is critical for maintaining financial stability and profitability.

How do you manage deposit costs during Fed rate cuts, and with existing repricing and liquidity initiatives, can margins continue expanding despite rate cuts next year? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q3: It depends on timing and magnitude of Fed cuts. For now, we have sufficient loan growth covering deposit costs. There is a range for deposit cost reduction, but there's a floor to that ability. - James Moses(CFO)

How are you factoring deposit betas into the next round of rate cuts? - Kelly Motta (KBW)

2025Q2: Deposit betas will likely drop to 90% over the next 1 or 2 cuts. - James Moses(CFO)

Contradiction Point 3

Deposit Growth and Strategy

It involves differing statements about the strategy and expectations for deposit growth, which are crucial for understanding the bank's funding and competitive positioning.

Where are you seeing success in driving core deposit growth, and what are the advantages and disadvantages of building liquidity? How do you plan to deploy the liquidity in the coming months? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q3: Success is due to retail and commercial teams maintaining and strengthening relationships. Retail and commercial deposits are expected to increase, replacing public deposits. - James Moses(CFO)

What drove strong deposit growth, especially in demand deposits? How competitive is the deposit market in Hawaii? What are your 2025 loan and deposit growth expectations? - David Feaster (Raymond James)

2024Q4: We've had a significant drop-off in public funding, especially from large customers...That clearly has helped us build liquidity and has helped us replace some of those higher cost funding sources with lower cost funding sources. - Jamie Moses(CFO)

Contradiction Point 4

Loan Growth Projections

It involves changes in expectations for loan growth, which impacts revenue projections and strategic planning.

Can you discuss the growth outlook, including how the pipeline is shaping up, current demand, and opportunities to accelerate organic growth through acquisitions or C&I expansion? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q3: The third quarter was unusual with significant paydowns in dealer floor plan due to one customer selling franchises. Overall, we're bullish with strong production in the pipeline. - Robert Harrison(CEO)

Do you expect Q2 to show total loan growth? Will full-year loan growth remain in the low to mid-single-digit range? - Anthony Elian (JPMorgan)

2025Q1: We still expect low to mid single-digit loan growth for the full year, but Q2 growth is less certain due to market uncertainties and potential changes in construction financing. - Bob Harrison(CEO)