First Hawaiian's Q3 2025 Earnings Call: Contradictions Emerge in Loan Growth, Deposit Cost Management, and Mortgage Activity Outlooks

Guidance:

• NIM expected to advance a few basis points from September (Sept run-rate NIM 3.16%) with positive momentum in Q4, reflecting loan/deposit outlook and anticipated 25bp cuts in Oct and Dec.
• Normalized noninterest income run-rate ~ $54M per quarter.
• Full-year operating expenses now expected below prior outlook of $506M.
• Loans expected to finish roughly flat to year-end 2024; strong Q4 pipeline and targeted loan growth to absorb ~$1B cash flows.
• Total deposits expected roughly flat Q3→Q4; public deposits likely run off in Q4 and be replaced by retail/commercial growth.
• Capital: $100M buyback authorization ($74M executed); $26M remaining under 2025 repurchase plan.

Business Commentary:

* Economic and Business Overview: - The state unemployment rate in Hawaii was 2.7% in August, lower than the national rate of 4.3%, reflecting a stable local economy. - Through August, total visitor arrivals were up 0.7% compared to last year, driven by increased U.S. mainland arrivals. - The housing market remained stable with the median single-family sales price on Oahu at $1.2 million, up 3.8% from last year.

• Financial Performance:
• First Hawaiian reported an increase in net income, driven by higher net interest and noninterest income, partially offset by a higher effective tax rate.
• Total deposits increased by $500 million in Q3, with a strong ratio of noninterest-bearing deposits to total deposits at 33%.

• The net interest margin (NIM) in Q3 was 3.19%, up 8 basis points from the previous quarter, mainly due to higher asset yields and nonrecurring items.

• Loan and Deposit Trends:

• Total loans declined by $223 million, primarily due to paydowns in C&I and dealer flooring balances.
• Despite loan declines, strong originations are expected in Q4, aiming to end the year around the same level as 2024.

• Commercial deposits increased by $135 million, while retail deposits declined by $43 million, showing seasonal patterns.

• Risk and Credit Management:

• Credit risk remained low, and the bank maintained healthy credit metrics with net charge-offs of 12 basis points of total loans and leases in Q3.
• The allowance for credit losses decreased by $2.6 million, with coverage remaining at 117 basis points, reflecting conservative reserving.

Sentiment Analysis:

Overall Tone: Positive

• Management: "We had another strong quarter as net income increased compared to the second quarter." NIM up (3.19%, +8 bps QoQ); "Total deposits increased about $500 million"; credit: "Credit risk remains low, stable"; guidance: "expect positive NIM momentum in the fourth quarter" and full-year expenses now expected below prior $506M outlook.

Q&A:

• Question from David Feaster (Raymond James): Can you discuss the loan pipeline, demand drivers, and appetite for pool purchases or C&I/CRE acquisitions to accelerate organic growth?
  Response: Pipeline strong with significant Q4 production (CRE and C&I); bank is open to selective pool purchases where it has expertise (e.g., Hawaii residential pools or property-specific deals).

• Question from David Feaster (Raymond James): Where is core deposit growth coming from and how will you deploy the built liquidity?
  Response: Deposit growth driven by retail and commercial relationship teams; expect Q4 mix shift as public operating inflows normalize; deploying liquidity via loan growth and resuming targeted investment purchases while holding portfolio flat.

• Question from David Feaster (Raymond James): How will you manage deposit betas and can margin continue to expand despite Fed cuts?
  Response: Outcome depends on timing/magnitude of cuts; current view assumes sufficient loan and investment repricing (≈$1B cash flows at ~125bp; investment spreads 200–250bp) to support NIM expansion, but multiple cuts will compress spreads and create a floor.

• Question from Charles Driscoll (Keefe, Bruyette & Woods): What are your capital priorities and how are you thinking about the buyback and dividend?
  Response: Capital focus remains on originating loans that meet credit box; $100M buyback authorization with $74M executed; remaining repurchases depend on market; dividend likely unchanged for now.

• Question from Charles Driscoll (Keefe, Bruyette & Woods): How are you modeling deposit betas on the way down?
  Response: Expect high initial betas (~90% on next cut) that diminish with successive cuts (roughly 90%→88%→85% sequence).

• Question from Charles Driscoll (Keefe, Bruyette & Woods): Does your margin expansion outlook assume loan purchases?
  Response: No loan purchases assumed; expected margin expansion is driven by organic pipeline and strong Q4 loan growth.

• Question from Anthony Elian (JPMorgan): How much tailwind remains from loan repricing into Q4 and beyond given forward rate cuts?
  Response: Significant tailwind remains: ~$1B of fixed-rate cash flows repricing at ~125bp and $500–600M investment runoff to be reinvested at ~225–250bp, though these benefits shrink with more Fed cuts and hinge on loan growth.

• Question from Anthony Elian (JPMorgan): On fee income, which items drove the Q3 beat and should we expect declines in Q4?
  Response: Q3 benefited from favorable BOLI market moves and swap income; normalized noninterest income is expected around $54M per quarter and Q3 positives may not persist.

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

• Question from Matthew Clark (Piper Sandler): What drove the increase in substandard loans this quarter?
  Response: Increase was largely due to a single long‑time borrower; management is working with the customer and does not expect material loss.

• Question from Matthew Clark (Piper Sandler): Any update on M&A discussions since last quarter?
  Response: No change: open to opportunities, particularly on the Mainland/Western states, but no material developments to report.

• Question from Timur Braziler (Wells Fargo): Did you mean deposits are flat Q4 or flat for the year?
  Response: Expect deposits roughly flat Q3→Q4 with public deposits running off in Q4 and retail/commercial replacing them.

• Question from Timur Braziler (Wells Fargo): Is Mainland M&A still on the table and what geography/criteria would you consider?
  Response: Still open to Mainland M&A, focusing on Western states only; would consider the right strategic opportunity.

• Question from Timur Braziler (Wells Fargo): Does the government shutdown or UHERO's mild recession outlook change your credit/reserving stance?
  Response: No material change yet; local economy remains resilient, no observable credit deterioration so far, and ACL remains conservatively calibrated with ongoing vigilance.

• Question from Jared David Shaw (Barclays): Is federal spending in Hawaii likely to remain defense‑focused long term despite current shutdown?
  Response: Yes — long‑term federal spend remains defense‑focused and is expected to be stable to improving given large Navy/shipyard projects.

• Question from Jared David Shaw (Barclays): What are dealers' expectations for auto volumes and how might tariffs affect floorplan balances?
  Response: Dealers are uncertain due to tariffs; potential pass‑through of costs could reduce demand which, if volumes slow, could increase floorplan balances — an outcome that could help the bank's balances.

• Question from Jared David Shaw (Barclays): Any change in local competitive pricing after ownership changes?
  Response: No observable change in competitive dynamics or pricing in the Hawaii market.

• Question from Sun Young Lee (TD Cowen): If you pursued Mainland M&A, what would make sense and where would you focus?
  Response: Focus would be on Western U.S. opportunities that fit strategic and cultural fit; otherwise no additional detail to share.

• Question from Sun Young Lee (TD Cowen): Would a drop in mortgage rates back to ~5% materially boost residential activity for you?
  Response: Yes — lower rates would likely increase mortgage activity and be constructive for balances, though supply constraints may limit pace.

• Question from Sun Young Lee (TD Cowen): The $130M corporate line paydown — seasonal or one‑off?
  Response: Not seasonal — timing artifact: earlier draws were for specific purposes and several paydowns coincidentally occurred this quarter; nothing unusual otherwise.

Contradiction Point 1

Loan Growth Outlook and Dealer Floor Plan Dynamics

It involves differing perspectives on the outlook for loan growth, particularly regarding dealer floor plan balances, which could impact the company's financial performance.

What are the headwinds from dealer floor plans and C&I paydowns on the growth outlook? What are the opportunities for asset pool purchases or full acquisitions? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q3: The third quarter saw significant dealer floor plan paydowns, but we're bullish due to strong demand. We're seeing strong pipeline production, especially in C&I and CRE. - Robert Harrison(CEO)

What is the growth rate of the C&I pipeline and is it the largest growth contributor this quarter? Are commercial real estate borrower demand levels rising? - Liam Coohill (Raymond James)

2025Q2: Most of the C&I growth came from dealer floor plan balances, which have normalized back to pre-COVID levels. - Robert Harrison(CEO)

Contradiction Point 2

Deposit Cost Management and Rate Cuts

It highlights differing expectations regarding the bank's ability to manage deposit costs amidst rate cuts, which is crucial for preserving net interest margins.

What are your capital allocation priorities and views on the buyback strategy? - Charles Driscoll (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q3: We have a significant rate-sensitive deposit portfolio. We expect sufficient loan growth and investment portfolio spreads to support increasing the margin, but the ability to drive deposit costs lower will decrease with each Fed rate cut. - James Moses(CFO)

What are your expectations for deposit betas in response to future rate cuts? - Kelly Motta (KBW)

2025Q2: Betas are expected to decline over time, but they're still strong enough for the bank to pass through a significant portion of future rate cuts. The bank anticipates a beta of 90% or so for the next one to two cuts. - James Moses(CFO)

Contradiction Point 3

Mortgage Activity and Interest Rate Sensitivity

It involves differing views on how interest rate changes will impact mortgage activity, which affects loan balances.

How could lower mortgage rates impact your market? - Sun Young Lee (TD Cowen, Research Division)

2025Q3: Lower rates could increase mortgage activity, benefiting balances, despite supply constraints. - James Moses(CFO)

How will yield curve flattening and lower mortgage rates impact your market? - Jared Shaw (Barclays)

2025Q2: We expect these lower mortgage rates to unfavorably impact mortgage banking income by 1% for the quarter. - James Moses(CFO)

Contradiction Point 4

Deposit Growth Outlook

It involves differing perspectives on deposit growth outlook, which is crucial for funding loan growth and maintaining balance sheet stability.

Can you discuss core deposit growth and liquidity deployment? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q3: We expect our deposit total balance to remain flat, with public deposits running off and retail and commercial increasing. Growth is driven by efforts of retail and commercial teams. - James Moses(CFO)

What are your expectations for deposit growth in the new year, and how would you optimize the deposit base using securities to fund loans? - David Feaster (Raymond James)

2024Q4: We expect continued strong deposit growth, which we will use to fund loan growth. Excess deposits may be deployed back into the securities portfolio, focusing on shorter durations and high-quality securities. - Jamie Moses(CFO)

Contradiction Point 5

Loan Growth and Repricing Outlook

It involves differing perspectives on loan growth and the impact of repricing, which are crucial for understanding the bank's financial performance and strategic direction.

Can you outline the growth outlook, factoring in dealer floor plan headwinds and C&I paydowns? What are the opportunities for pool purchases or full acquisitions? - David Feaster (Raymond James & Associates, Inc., Research Division)

2025Q3: We still think low to mid single digits is possible. Q2 loan growth is uncertain but there are deals in the pipeline. - Robert Harrison(CEO)

What drove the decline in CRE loan growth this quarter, and how are client activity and the loan pipeline shaping up? - David Feaster (Raymond James)

2025Q1: Average loans were up in Q1. The decline in CRE was due to scheduled and early payoffs and a few large credits. The pipeline is strong, but there's more uncertainty in the market. - Bob Harrison(CEO)