First Hawaiian, Inc. (FHB) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to the First Hawaiian, Inc. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Haseyama, Investor Relations Manager. Please go ahead.

Thank you, Kevin and thank you, everyone, for joining us as we review our financial results for the fourth quarter of 2025. With me today are Bob Harrison, Chairman, President and CEO; Jamie Moses, Chief Financial Officer; and Lea Nakamura, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the Investor Relations section. During today's call, we will be making forward-looking statements, so please refer to Slide 1 of our -- for our safe harbor statement. We may also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements. And now I'll turn the call over to Bob.

Hello, everyone. Thank you for joining us today. I'll start with some local economic highlights. The state unemployment rate continued to fall and was at 2.2% in November compared to the national unemployment rate of 4.5%. Through November, total visitor arrivals were down 0.2% compared to last year, primarily due to fewer visitors from Canada. Japan remained a bright spot, up 2.8% on a year-to-date basis. However, year-to-date spending through November was $19.6 billion, up about 6% compared to the same period of last year. Housing market remained stable with the median single-family home price on Oahu in December was $1.1 million, up 4.3% from the prior year. The median condo sales price on Oahu in December was $512,000, down 5.2% from last year. Turning to Slide 2. We had another strong quarter. Our NIM expanded, net interest income grew, expenses were well contained and credit quality remained strong. Our profitability measures remained solid with return on average tangible equity at 15.8% in the fourth quarter and 16.3% for the full year. The effective tax rate in the fourth quarter was 24.8%. This was due to the reversal of our previously accrued tax benefit. We expect the effective tax rate to return to about 23.2% going forward. Turning to Slide 3. Balance sheet remains solid. We continue to be well capitalized with ample liquidity. We had good growth in C&I loans as well as retail and commercial deposits. During the quarter, we repurchased about 1 million shares, which used the remaining $26 million of our $100 million purchase authorization for 2025. Our new stock repurchase authorization is for $250 million. And unlike prior authorization, the current authorization is not for a specific time frame. Turning to Slide 4. Total loans grew $183 million in the quarter or 5.2% on an annualized basis. We had good growth in C&I loans, primarily due to draws on existing lines as well as the addition of a new auto dealer customer. The CRE growth and decline in construction was primarily due to a couple of construction deals that were converted from construction to CRE. Outside of those conversions, balances in both portfolios were relatively flat. Now I'll turn it over to Jamie.

Thanks, Bob. Turning to Slide 5. We saw good growth in retail and commercial deposits, while a lot of the public operating deposits that came in during the third quarter flowed out in the fourth quarter as we expected. Retail and commercial deposits increased $233 million, while public deposits declined by $447 million. That dynamic resulted in a net increase in deposits of $214 million in the fourth quarter. The total cost of deposits fell by 9 basis points to 1.29%, and our noninterest-bearing deposit ratio was 32%. On Slide 6, net interest income was $170.3 million, $1 million higher than the prior quarter. The NIM in the fourth quarter was 3.21%, up 2 basis points compared to the prior quarter. The increase in the margin was primarily driven by lower deposit costs and the full quarter benefit of the borrowing that matured in September, partially offset by lower loan yields. The exit NIM for the month of December was 3.21%. Turning to Slide 7. Noninterest income was $55.6 million. Noninterest expense in the fourth quarter was $125.1 million. And now I'll turn it over to Lea.

Thank you, Jamie. Moving to Slide 8. The bank continues to maintain its strong credit performance and healthy credit metrics. Credit risk remains low, stable and well within our expectations. Overall, we're not observing any broad signs of weakness across either the consumer or commercial books. Classified assets decreased by 7 basis points, while special mention assets increased by 16 basis points. Quarter-to-date net charge-offs were $5 million or 14 basis points of total loans and leases. Year-to-date net charge-offs were $16.3 million. Our annual net charge-off rate was 11 basis points, unchanged from the third quarter. Nonperforming assets and 90-day past due loans were 31 basis points of total loans and leases at the end of the fourth quarter, up 5 basis points from the prior quarter, primarily driven by a single relationship. Moving to Slide 9. We show our fourth quarter allowance for credit losses broken out by disclosure segments. The bank recorded a $7.7 million provision in the fourth quarter. The asset ACL increased by $3.2 million to $168.5 million with coverage increasing to 118 basis points of total loans and leases. We believe that we continue to be conservatively reserved and ready for a wide range of outcomes. And now I'll turn it back over to Bob.

Thanks, Lea. Turning to Slide 10. We have summarized our current full year 2026 outlook for some of our key earnings drivers. Starting with loans, we expect full year loan growth to be 3% to 4% range. The growth will be driven primarily by CRE and C&I loans. We anticipate that the full year NIM will be in the 3.16% to 3.18% range. We continue to expect tailwinds from fixed asset repricing but additional Fed rate cuts and a decreasing deposit beta will remain headwinds. We expect noninterest income to be stable and to come in at about $220 million for the year. And finally, we expect expenses to be about $520 million in 2026. That concludes our prepared remarks and now we'd be happy to take your questions.

[Operator Instructions] Our first question comes from David Feaster with Raymond James.

I wanted to start on the loan growth. It was really encouraging to see some of the trends that you guys had and especially to see the C&I growth. I was hoping to maybe just get some color on, I guess, first of all, how pipelines are shaping up and how much of the growth in C&I was increasing utilization versus new relationship growth? Just kind of curious some of the underlying trends you're seeing there. And then just some commentary, too, on mainland versus Hawaii as well.

Sure. Great question. Thanks, Dave. This is Bob. So on the loan growth, when we looked at it, it really was more -- as far as what happened in the quarter, it wasn't quite what we thought it would be. We had some payoffs in the CRE portfolio that we had anticipated to come in later, which is why we didn't quite hit the number we had talked about on the third quarter call. But having said that, it really was pretty broad-based in local, primarily in some mainland draws under lines and then the new dealer relationship helped out as well. We'll see more of that, I think, in the quarters to come. So as we look forward, what we're really looking towards is, as far as the pipeline of multifamily is still there, we're very, very busy. And of course, when you book those deals, it will take a while for them to fund. We're still a little bit outrunning the payoffs that happened in that gap period we talked about on the last call of SVB kind of slowing down production for a while, a couple of years ago. So that's behind us mostly in the first half of the year, and we expect the second half of the year to start to see more normalized growth in the CRE on the mainland. We are still seeing activity here in Hawaii. A good amount of the activity this past quarter in Q4 was Hawaii-based but not exclusively. Does that cover what you're thinking about?

That's extremely helpful. And could you maybe talk about -- the payoffs and paydowns have been a real headwind in the industry. Could you maybe touch on what led to maybe some of the payoffs and paydowns coming sooner than expected? And as you think about your outlook that you guys have laid out for loan growth, does that contemplate continuation of payoffs and paydowns? Or is that a risk that you all are concerned about? Just kind of curious your thoughts on that side.

Sure. I think there's 2 pieces to that. The first piece is are the payoffs coming sooner than we expected. They have been a bit this year. I think all the permanent lenders are just as hungry for assets as the banks are. And so they're coming in maybe a little bit earlier than normal, not like we saw a few years ago when they were coming in before properties were even completed construction. But maybe before full stabilization, you're seeing permanent lenders come in on some of those multifamily projects. So that's kind of moving up the calendar a bit but not really a big difference. The paydowns in the industry, as we talked about before, I think we're in that belly of the part of the curve that -- where deals didn't get done a couple of years ago after the concerns about liquidity with SVB, First Republic, Signature, et cetera. So we think that should be kind of burning through in the first half of this year and in the back half of the year, that should get better. But there is still a high desire for assets out there and of good quality assets, which is the ones we like to fund, people are looking for that.

Okay. And then maybe just shifting to the other side of the balance sheet. I mean, core deposit trends have been really good. It's not -- you already have a low cost of deposits and you're continuing to take it down further. A lot of the NIM expansion that we've seen has come from reduction in funding costs. I know your margin guide has, I think, 2 cuts in there. As you think about margin expansion going forward is [Technical Difficulty] on the funding cost side and the back [Technical Difficulty] is where you're seeing really the tailwind there? And just how has [Technical Difficulty] been to reducing deposit costs thus far? Like have you seen any attrition or much pushback as you work through that?

So Dave, you kind of cut out there a little bit but I'm going to answer the question, as I think you asked it and then you can let me know if I missed something for you. I think the margin guide reflects both an ability to continue to cut deposit rates when the Fed cuts, as well as that fixed asset repricing that we continue to talk about and we've seen those trends over time. We think the beta is probably going to be a little bit lower go forward than where we were before. So fourth quarter interest-bearing deposit beta around 35%. We would anticipate with 2 rate cuts that the interest-bearing deposit beta on that is somewhere between 30% and 35%. So less than where we've been but still pretty healthy for now at least. And then on the fixed asset repricing side, we kind of summarized that for you. So inclusive of all of the paydowns in the securities portfolio, as well as fixed rate cash flows coming out of the loan portfolio, we think that's about $400 million a quarter or so with about 150 basis point repricing accretion on that. So all of those things suppose a particular set of loan growth and obviously, the way that the pace and timing of Fed rate cuts will impact that as well. But yes, that's kind of where we're at on the NIM.

Our next question comes from Andrew Terrell with Stephens.

Just to start and just to clarify, the $385 million of fixed cash flows, that's on a quarterly basis. So kind of checks with the -- I think we've talked about like $1.5 billion in the past on an annual basis?

Yes. That was the fourth quarter to be very specific, Andrew. Yes.

Got it. Okay.

We did put that in deck. We got to clarify, that was the quarter and not some of the annual assumptions we had in there in the rest of that page. Thank you for clarifying.

Yes. Yes. No worries. Could you maybe help me just bifurcating that out a little bit? And I think we have a good sense of relative dollars on either side that you've given. But just I want to talk about maybe spread competition you're seeing for new assets today. How much in marginal pickup would you expect from securities cash flow versus where loans are running off versus where you're kind of able to reprice at today? Just -- we've heard a lot on competition recently from other banks. I'm curious if you're seeing the same thing on new loan growth.

Yes, I would say that there is some spread competition. We've definitely seen that. We still think it's 180, 200 basis points on the securities portfolio and that's pretty fixed. That's pretty well known. And so, again, that's about $600 million for the next year and then about $1 billion on the loan portfolio. So little bit less than that, maybe 100 basis points, somewhere in 80, 100 basis points pickup on the loans versus the 200 basis points or so on the securities.

Yes. Okay. And then on the -- just on the full year loan growth guide of 3% to 4%, it sounds like you might expect some payoffs maybe in the first part of the year but then better on the second half of the year. And I guess the question is, is it fair to think you could start at the low end or even below the guide in terms of loan growth and then it picks up throughout the year? Or should we just think about it as kind of ratable 3% to 4% throughout the year?

Yes. I think it's not so much more payoffs in the first half of the year. I think it's a normal payoff activity. There's just were fewer loans that are going -- that were done 1.5 years, 2 years ago that are going to be funding now. So it's really less of the new production from that multifamily portfolio and that should be through that in the back half of the year. So yes, a fair assumption that it should be probably lower in the first half and a pickup in the second half.

Our next question comes from Janet Lee with TD Cowen.

Just want to clarify on your deposit beta expectations for 30% to 35% after 2 cuts. So I see 40 -- if my calculation is correct, I think I see 47% interest-bearing deposit beta for fourth quarter. So starting in the first or second quarter, does that step down to 30% to 35%? Is that the right way to interpret?

Yes. I think that's the right way to interpret it, is that the interest-bearing deposit beta is going to step down over time. But we're -- I think we're okay with -- like with the 2 rate cuts, it should be -- it should continue to be close to what we've had in the past.

And that goes to -- we've got a very low deposit cost. So at some point, you just can't keep cutting rates, even though rates are coming down.

Yes, definitely. And for the expenses, you've had, I guess, 2 years of flattish expense growth. It looks like it's going up about 4%, 5%. Is there -- is this just a normalization of expense? Or are you hiring a little more in 2026? Or I mean, it's a pretty specific number for the expense guide. How should we think about potentially you beat $520 million or coming in above? How should we think about your expense trajectory?

Yes. Great question, Janet. Let me kind of back up a little bit and tell you, one of the primary reasons why we've been able to hold costs down in the last year or 2 has been, we're still going out and trying to hire people. Just to answer that part of your question. It's difficult to find the people we want to hire. So we haven't been able to staff all the people we want. But the reason for our good expense control over the last couple of years has been some of the investments we made in the past in technology enabled us to exit higher cost delivery, whatever it was, higher cost ways of doing business as we've brought things in-house. And so that's really been a huge help for us over the last couple of years as we've terminated expensive vendor relationships and been able to take that in-house. So we've -- our rate of growth has been increasing over the last couple of years but it's been held down by our ability to reduce costs in other areas of our expense base. So as we go forward into 2026, we see that most of that we've captured. There'll still be a little bit of it and we are going back to a little bit more of a normalized expense growth number.

Our next question comes from Kelly Motta with KBW.

On capital return and the buyback, you've been pretty diligent with executing the $100 million you'd had for 2025. And you noted the $250 million doesn't have any time period associated with it. I'm just wondering your appetite for continuing on at a similar pace here and how you're thinking through that versus some other maybe M&A aspects of the capital stack.

Thanks, Kelly. I think the -- that we have a pretty good appetite to continue the pace that we had set last year. I think there always will be other considerations as well. There will be some -- potentially some opportunism baked into the program that we've set out. But we haven't really made any firm commitment, I would say, internally even around exactly the pace and timing of the share buyback other than that we recognize we have plenty of capital to do any number of things with. I think that, obviously, organic growth is what we're really looking for. And then the share buyback is a way for us to return some of that capital. So I think it's kind of a combination of all the things that we are looking at and that will determine that sort of pace.

And just to add to Jamie's comments, we've messaged for a couple of years now 12% CET1 target and we're certainly well above that at 13% plus. So I think this larger buyback capacity is just an acknowledgment of that and just gives us flexibility to bring it back closer to what we had targeted or what we had messaged in the past.

Our next question comes from Matthew Clark with Piper Sandler.

Can we get the spot rate on deposits at the end of the year?

Spot rate on deposits at the end of the year, 1.24% in December.

Okay. In December or at the end of December?

In the month of December.

It was at December. I'm not sure my calculus is good enough to give you that derivative at the moment.

Okay. Just wondering if it was lower at the end of the year. Okay. And then on the -- on expenses, as for the first quarter, can you remind us how the seasonality works, whether or not it's more in the first quarter or second or a combination of both? Just trying to get a sense for the run rate to start the year.

Yes. For the most part, the expenses are pretty flat throughout the year. We do see a pickup, a little bit, in the first quarter. You can see that in our numbers last year and the year before and they kind of decline a little bit from that. But in general, I think we're thinking about it pretty flat at the moment.

Okay. Okay. And then just your updated thoughts on mainland M&A. Any discussions you've been having whether or not things are more active? And maybe just remind us what your ideal target would look like?

Yes. No, we're -- so as Jamie mentioned, our focus is still on growing our core business but it's still an option for us to consider for M&A. Some of the things we've talked about in the past, just to reiterate, we'd be looking for a strong management team who will stick around, be good partners with us, obviously, a disciplined lending culture, which is similar to the way we look at the business, strong deposit franchise. And I guess it's a little more touchy-feely but we want it well managed. We're not looking for a fixer-upper, if we were looking to partner with somebody. And just for location, West of the Rockies is more what we're familiar with as an organization and where we had people on the ground and where we have had a lot of relations already. And as far as size, probably somewhere between $2 billion and $15 billion would be the range.

Our next question comes from Anthony Elian with JPMorgan.

On deposits, Jamie, how are you thinking about balances in 1Q? If I look at your past couple of 1Qs, you typically see a seasonal decline?

Yes. I think that's fair. Again, that's probably something that we should expect in the first quarter. And then in totality, throughout the year, I think we're sort of mostly focused on what we can do with commercial and retail deposits. And so we're expecting kind of low single digits on that for the entire year. And then for us, it's tough in totality, the public deposits that we have to kind of fluctuate, generally speaking, quarter-by-quarter, week-by-week even. But I think those, in general, we should probably see some normal like state like a [ GSP ] type increase with those things. So I think that's how we're thinking about balances.

Okay. And then on the full year NIM guide of 3.16% to 3.18%, so that's a pretty tight range. Do you expect each quarter to be within that range this year?

Probably -- that's maybe a little -- taken a little too far. But I think it's going to -- it really will depend on the amount of rate cuts that we see and the timing of those and whether they're 25 or whether they're 50. So this contemplates sort of a May, September version of that. And so I guess that's how I'd answer it.

Any direction for the 1Q NIM specifically relative to the 3.21% you printed for 4Q?

Yes. I think -- we think it's going to come down a little bit. We had 2 cuts -- 2 rate cuts in the quarter, obviously, 1 in December. So we think it's probably going to come down a few basis points off of the December number.

Our next question comes from Timur Braziler with Wells Fargo.

Maybe just going back to the loan growth and trying to bifurcate how much of it is expected to come from some of the increased draws on production in years past versus what the opportunity to kind of reengage on the mainland with seemingly some better momentum starting there.

Tim, I'm not sure I 100% understand your question. But there has been, for our existing lines, it's a little hard to predict with our larger corporate and commercial customers exactly when an opportunity will come up that they need to fund versus their line versus new production. We are seeing, while still continued activity here in Hawaii for sure and in Guam, there's just a broader economic base on the West Coast where we operate and there's a lot of opportunities up there. So we're continuing to pursue new dealer opportunities as well as commercial real estate opportunities on the mainland U.S., primarily on the West Coast. So I don't have a breakdown for you per se but I guess that's broadly how we're looking at it.

Okay. And maybe another way of asking that, just if you can kind of frame the opportunity set of -- I think you had mentioned the multifamily production that was booked 12, 18, 24 months ago that is going to start funding up, just how much of an opportunity that's going to be?

Yes. I don't have that number handy but we can look into that.

Okay. And then during the prepared remarks, you had made a comment that you had a couple of construction deals that were converted to commercial real estate. I'm just wondering, is that pretty normal to have kind of the construction piece of it and then do the permanent financing in-house? Like is that a pretty normal kind of continuation for you guys?

It depends on the sector. For customers kind of within the footprint, that is very normal. For the multifamily construction activity we're doing primarily in the mainland on the West Coast but it's not. And so it wasn't those deals. It was really more of our other customers within the footprint. So it really depends on the customer segment, if that's "normal or not."

Okay. Got it. And then just last for me. The C&I yields held up really well this quarter. I'm just wondering, is that kind of new production maybe offsetting some of the decline in the variable rate portfolio? Or maybe just kind of talk me through internally, if you were maybe surprised or that was kind of a expected decline within the C&I book because it seemed to hold up pretty well relative to the type of decline we saw during the 2024 rate cutting cycle.

I think a little bit -- well, I'm not -- I don't have a perfect answer for you. But given that the draws were under lines -- existing lines, so I think that speaks to why the rate -- the yield didn't change as much in the fourth quarter. I think if you go back to, right, when the pandemic happened, you had a lot of backup lines with very highly rated customers that just had lower pricing at the time. And so when they were drawing that pricing structurally in those agreements was lower than more of our "normal base." But I need to do more analysis to make certain of that.

[Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back over to Kevin for any further remarks.

We appreciate your interest in First Hawaiian and please feel free to contact me if you have any additional questions. Thanks again for joining us and have a good weekend.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.