10-Q: First Hawaiian Q3 2025 Earnings Rise 20% on Lower Funding Costs

First Hawaiian, Inc. reported a 20% increase in net income for Q3 2025, driven by lower deposit funding costs and improved net interest margin, despite a decrease in total loans and investment securities.

Summary

• Net income for the three months ended September 30, 2025, was $73.8 million, an increase of 20% compared to $61.5 million in the same period of 2024.
• Basic and diluted earnings per share for Q3 2025 were $0.59, up 23% from $0.48 in Q3 2024.
• Net interest income for Q3 2025 increased by 8% to $169.3 million, with net interest margin improving by 24 basis points to 3.19%.
• The provision for credit losses decreased by 39% to $4.5 million in Q3 2025 compared to $7.4 million in Q3 2024.
• Noninterest income rose by 7% to $57.1 million in Q3 2025, while noninterest expense slightly decreased by $0.4 million to $125.7 million.
• For the nine months ended September 30, 2025, net income was $206.3 million, a 16% increase from $177.6 million in the prior year.
• Basic and diluted earnings per share for the nine months ended September 30, 2025, were $1.65 and $1.64, respectively, both up 19% from the prior year.
• Total assets as of September 30, 2025, were $24.1 billion, a 1.1% increase from $23.8 billion at December 31, 2024.
• Total deposits increased by 2% to $20.7 billion as of September 30, 2025, from $20.3 billion at December 31, 2024.
• Total loans and leases decreased by 2% to $14.1 billion as of September 30, 2025, from $14.4 billion at December 31, 2024.
• The allowance for credit losses (ACL) increased by 3% to $165.3 million, representing 1.17% of total outstanding loans and leases as of September 30, 2025.
• Non-accrual loans and leases increased to 0.22% of total loans and leases as of September 30, 2025, from 0.14% at December 31, 2024.
• The Common Equity Tier 1 (CET1) capital ratio improved to 13.24% as of September 30, 2025, up 44 basis points from 12.80% at December 31, 2024.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial performance with significant increases in net income, EPS, and net interest income, driven by effective management of funding costs and improved efficiency. Capital ratios remain robust, and liquidity is high. While there are some concerns regarding loan portfolio contraction and an increase in non-accrual loans, the overall financial health and profitability trends are very positive.

Positives

• Net income increased significantly by 20% for Q3 2025 and 16% for the nine months ended September 30, 2025.
• Basic and diluted EPS showed strong growth, increasing by 23% for Q3 2025 and 19% for the nine months ended September 30, 2025.
• Net interest income grew by 8% in Q3 2025 and 6% for the nine months ended September 30, 2025, primarily due to lower deposit funding costs.
• Net interest margin improved by 24 basis points to 3.19% in Q3 2025 and by 20 basis points to 3.13% for the nine months ended September 30, 2025.
• The efficiency ratio improved to 55.29% in Q3 2025 from 59.77% in Q3 2024, indicating better operational efficiency.
• Return on average total assets increased to 1.22% in Q3 2025 from 1.02% in Q3 2024, and return on average total stockholders' equity rose to 10.81% from 9.45%.
• The provision for credit losses decreased by 39% in Q3 2025, reflecting a more favorable credit outlook for the quarter.
• Total deposits increased by $407.3 million or 2% from December 31, 2024, indicating strong funding stability.
• Total stockholders' equity increased by $116.4 million or 4% from December 31, 2024, supported by earnings and other comprehensive income.
• Short-term borrowings decreased from $250.0 million at December 31, 2024, to nil at September 30, 2025, reducing funding costs.
• The company maintained its 'well-capitalized' status, with the CET1 ratio increasing to 13.24% from 12.80%, demonstrating robust capital adequacy.
• Gross unrealized losses in the investment securities portfolio decreased from $792.7 million at December 31, 2024, to $579.9 million at September 30, 2025, primarily due to lower market interest rates.

Negatives

• Total loans and leases decreased by $278.9 million or 2% from December 31, 2024, primarily due to decreases in commercial and industrial, residential real estate, construction, and consumer loans.
• The total carrying value of the investment securities portfolio decreased by $136.3 million or 2% from December 31, 2024.
• Non-accrual loans and leases increased by $10.3 million or 50% from December 31, 2024, with the ratio to total loans and leases rising from 0.14% to 0.22%.
• The provision for credit losses increased for the nine months ended September 30, 2025, by $4.0 million or 26% compared to the same period in 2024.
• Earning asset yields decreased, particularly in the loan and lease portfolio, driven by lower yields from adjustable-rate commercial real estate and commercial and industrial loans.
• Credit and debit card fees decreased by $1.7 million (10%) in Q3 2025 and $3.3 million (7%) for the nine months ended September 30, 2025.
• Trust and investment services income decreased by $1.1 million (4%) for the nine months ended September 30, 2025.
• Salaries and employee benefits expense increased by $2.0 million (3%) in Q3 2025 and $4.6 million (3%) for the nine months ended September 30, 2025.
• Occupancy expense increased by $1.9 million (9%) and equipment expense increased by $2.1 million (5%) for the nine months ended September 30, 2025.
• The Hawaii economy continues to experience mixed conditions, high consumer prices, and housing affordability challenges.
• International visitor arrivals have not yet recovered to pre-pandemic levels, increasing Hawaii's reliance on the U.S. mainland market.
• The local Oahu housing market is experiencing some softening due to increased interest rates, with condominium sales decreasing by 3.0% in the first nine months of 2025.

Risks

• The geographic concentration of business in Hawaii, Guam, and Saipan makes the company highly dependent on local economic conditions and susceptible to natural disasters.
• Current and future market and economic conditions, including inflationary pressures and the interest rate environment, could significantly impact financial performance.
• Dependence on the real estate markets in operating areas exposes the company to fluctuations in property values.
• Concentrated exposures to certain asset classes and individual obligors could lead to significant losses if those exposures deteriorate.
• Changes in interest rates can adversely affect net interest income, net interest margin, the fair value of investment securities, and mortgage loan activities.
• There is a possibility of deterioration in credit quality within the loan and lease portfolio, and the risk of underestimating credit losses.
• The ability to attract and retain customer deposits is crucial for funding, and deposit levels could decrease if interest rates increase significantly or if customers seek alternative investments.
• Restrictions on receiving dividends from the bank could impact the ability to pay dividends to common stockholders and satisfy obligations.
• Access to sources of liquidity and capital is essential, and disruptions could affect the ability to address liquidity needs.
• The ability to attract and retain skilled employees or changes in management personnel could impact operations.
• Maintaining the bank's reputation is critical, and damage from various factors could adversely affect business.
• Failure to properly use and protect customer and employee information and data, including cybersecurity risks, could lead to significant losses and reputational damage.
• Employee misconduct or mistakes could result in financial losses or operational disruptions.
• The actual or perceived soundness of other financial institutions could impact the company's stability.
• The effectiveness of risk management and internal disclosure controls and procedures is vital for mitigating various risks.
• The company's ability to keep pace with technological changes and the reliability of information and communications systems are critical for competitive advantage and operations.
• Intense competition in the financial services industry could affect business and profitability.
• Risks associated with the sale of loans and the use of appraisals in valuing and monitoring loans could lead to losses.
• Actual results may differ materially from estimates and forecasts due to inherent uncertainties.
• Fluctuations in the fair value of assets, liabilities, and off-balance sheet exposures can impact financial condition.
• Failure of any component of business infrastructure provided by a third party could disrupt operations.
• The potential for environmental liability exists.
• The company is subject to litigation and regulatory matters, which could have a material adverse effect.
• Changes in applicable laws, regulations, and accounting standards and policies could impact operations and financial reporting.
• Changes in trade, monetary, and fiscal policies of governments, agencies, central banks, and geopolitical tensions could affect the business environment.
• External events such as severe weather, geopolitical instability (war, terrorist attacks, pandemics), and natural disasters could disrupt operations and impact financial results.
• The potential impact of climate change is a long-term risk.
• Maintaining consistent growth, earnings, and profitability is subject to various internal and external factors.
• Contingent liabilities and unexpected tax liabilities may arise from the 2016 Reorganization Transactions.
• An extended U.S. federal government shutdown could curtail government spending and operations, affecting various consumers and sectors in Hawaii dependent on federal funding.
• The full impact of the 'One Big Beautiful Bill Act' (OBBBA), which introduced broad tax reform and spending cuts, is currently unknown.

Future Outlook

The Hawaii economy is expected to continue facing high consumer prices and housing affordability challenges, with international visitor arrivals not yet recovered to pre-pandemic levels, increasing reliance on the U.S. mainland market. The local Oahu housing market is softening due to increased interest rates. The full impact of the 'One Big Beautiful Bill Act' (OBBBA) and a potential extended U.S. federal government shutdown on the company's financial position and the broader Hawaii economy remains unknown. The company projects that net interest income will benefit from higher interest rates, as assets would reprice faster than liabilities, but would decline in a lower interest rate environment. The company expects to meet its routine funding requirements from bank dividends and believes existing cash, investments, and cash from operations are sufficient for future needs. The company will continue to monitor economic uncertainty, inflation, and geopolitical instability as factors driving expected credit losses.

Management Comments

• Management is not aware of any conditions or events that have occurred since September 30, 2025, to change the capital adequacy category of the Company or the Bank.
• Management believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of such risks.
• Management believes that the exposure to repurchase requests related to representation and warranty provisions and servicing activities is not material due to historical levels and loss trends.
• The Allowance for Credit Losses (ACL) as a whole was considered appropriate by management as of September 30, 2025 and December 31, 2024.
• The ACL was considered adequate based on ongoing analysis of estimated expected credit losses, credit risk profiles, current economic outlook, coverage ratios and other relevant factors.
• The stock repurchase program may be suspended, terminated or modified at any time for any reason.

Industry Context

The Hawaii economy is experiencing mixed conditions, characterized by persistent high consumer prices and housing affordability challenges. While the statewide unemployment rate of 2.7% at August 31, 2025, is lower than the national rate of 4.3%, international visitor arrivals have not returned to pre-pandemic levels, increasing the state's reliance on the U.S. mainland market. The local Oahu housing market shows signs of softening due to increased interest rates, with condominium sales declining. The recent U.S. federal government shutdown (commencing October 1, 2025) poses a risk to Hawaii's economy, which is dependent on federal funding. The Federal Reserve's recent decrease in the federal funds rate to 4.00%-4.25% (effective September 18, 2025) impacts the broader interest rate environment, affecting loan and deposit pricing across the banking industry. New tax legislation, such as the 'One Big Beautiful Bill Act,' introduces further uncertainty for businesses and individuals.

Comparison to Industry Standards

• The company's capital ratios, including a Common Equity Tier 1 (CET1) ratio of 13.24%, significantly exceed the 'well-capitalized' regulatory minimum of 6.50%, indicating strong capital adequacy compared to industry benchmarks.
• The efficiency ratio improved to 55.29% in Q3 2025 from 59.77% in Q3 2024, demonstrating enhanced operational efficiency, which is a positive trend in the banking sector.
• The Hawaii unemployment rate of 2.7% is notably lower than the national seasonally adjusted unemployment rate of 4.3%, suggesting a relatively stronger local labor market compared to the broader U.S. economy.

Corporate Governance

Legal Proceedings

• Various legal proceedings are pending or threatened against the company, incidental to the conduct of its business.
• Management does not expect that the aggregate liability, if any, resulting from these proceedings would have a material adverse effect on the company's financial position, results of operations, or cash flows.

Stakeholder Impact

• Shareholders are positively impacted by increased net income, EPS, improved returns on equity, and continued quarterly cash dividends. The stock repurchase program also enhances shareholder value.
• Employees benefit from an increase in salaries and employee benefits expense. However, pension and postretirement benefit plans are frozen to new participants.
• Customers may experience mixed impacts; lower deposit funding costs benefit the bank, while lower earning asset yields on loans could be favorable for borrowers. An increase in non-accrual loans suggests some customers are facing financial difficulties.
• Creditors are positively impacted by the company's strong capital ratios and high liquidity, which indicate a healthy financial position and reduced credit risk.
• Regulatory bodies observe the company's 'well-capitalized' status and its evaluation of new accounting standards, indicating compliance with regulatory requirements.

Next Steps

• The company will include required disclosures for ASU No. 2023-09 in its Annual Report on Form 10-K for the year ending December 31, 2025.
• The company is evaluating the impact of ASU No. 2024-03 (effective for annual periods beginning after December 15, 2026) and ASU No. 2025-06 (effective for annual periods beginning after December 15, 2027) on its consolidated financial statements.
• The company is in the process of evaluating the impact of the 'One Big Beautiful Bill Act' (OBBBA) on its financial position and results of operations.
• A quarterly cash dividend of $0.26 per share was declared in October 2025, to be paid on November 28, 2025, to shareholders of record on November 17, 2025.
• The stock repurchase program may continue, with $26.0 million remaining authorized, subject to management's discretion and market conditions.
• The company will continue to monitor factors that drive expected credit losses, including economic uncertainty, inflation, and geopolitical instability.

Key Dates

Recommendation

The company delivered robust financial results, significantly increasing net income and EPS while improving its net interest margin and efficiency ratio. The strong capital position, well above regulatory minimums, and high liquidity provide a solid foundation. Although there's a slight contraction in the loan portfolio and an increase in non-accrual loans, these are outweighed by the overall profitability and operational improvements. The stock repurchase program further signals confidence and shareholder value creation. The positive outlook on net interest income in a rising rate environment (though rates have recently decreased) and effective management of funding costs make this an attractive investment.

Keywords

Banking, Financial Services, Hawaii, SEC Filing, 10-Q, Quarterly Report, Net Interest Income, Earnings Per Share, Deposits, Loans, Credit Quality, Capital Ratios, Asset Quality, Risk Management, Interest Rate Risk, Commercial Banking, Retail Banking, Treasury, Stock Repurchase, Dividends, Economic Outlook, Mortgage, Consumer Loans, Commercial Real Estate