First Hawaiian (FHB) Q1 2026: Deposit Costs Fall 7bps as Asset Sensitivity Supports NIM Resilience
First Hawaiian’s Q1 revealed a disciplined funding cost decline and a balance sheet positioned for sustained higher rates. Deposit growth, stable credit, and controlled expenses signal operational strength, while management’s NIM guidance embeds asset sensitivity and repricing levers. Investors should watch for expense ramp and competitive shifts as the year progresses.
Summary
- Deposit Cost Leverage: Lower deposit costs and a stable non-interest-bearing mix underpin margin guidance.
- Operational Discipline: Expense control and broad-based loan growth support steady profitability.
- Forward Asset Repricing: Management’s NIM outlook relies on ongoing asset repricing and limited rate cut risk.
Performance Analysis
First Hawaiian delivered a quarter marked by solid deposit inflows, disciplined expense management, and continued asset sensitivity, reinforcing its competitive position in a shifting rate environment. Total deposits rose $262 million, driven by growth in public operating balances, with retail and commercial deposits also modestly higher. Notably, the bank avoided typical seasonal outflows, a positive deviation from historical trends.
Deposit cost improvement was a central theme, with total cost of deposits declining seven basis points to 1.22 percent and a healthy 31 percent non-interest-bearing ratio, demonstrating core funding strength. Net interest margin (NIM) compressed slightly by two basis points to 3.19 percent, reflecting the full-quarter impact of the December rate cut, but management expects a sequential uptick in Q2 as repricing dynamics unfold. Non-interest income dipped due to lower bank-owned life insurance (BOLI) and swap fees, which management described as timing-related. Expenses remained well-controlled, with no unusual items, and credit quality stayed robust with criticized assets and nonperformers both declining.
- Deposit Momentum: Public deposits drove funding growth, offsetting seasonal pressures and supporting margin stability.
- Loan Book Mix: CRE (Commercial Real Estate) and C&I (Commercial & Industrial) loans expanded, while residential and construction run-off partially offset gains.
- Credit Quality: Criticized and nonperforming assets improved, with net charge-offs stable at 14 basis points of average loans and leases.
Share repurchases continued at a measured pace, with $32 million deployed in Q1 out of a $250 million authorization, signaling ongoing capital return discipline amid stable capital ratios.
Executive Commentary
"Loans and deposits grew, credit quality remained solid, and we remained well capitalized. Our return on average tangible assets of 1.2% and return on average tangible equity of 15.3% for the first quarter."
Bob Harrison, Chairman, President, and CEO
"We continue to see meaningful improvement in funding costs, with the total cost of deposits declining seven basis points to 1.22%. Our non-interest-bearing deposit ratio remained healthy at 31%, reinforcing the strength and stability of our core funding base."
Jamie Moses, Chief Financial Officer
Strategic Positioning
1. Asset Sensitivity and Balance Sheet Repricing
FHB remains asset sensitive, meaning its balance sheet benefits from higher interest rates as fixed-rate assets reprice at higher yields. CFO Jamie Moses highlighted $400 million in quarterly fixed-rate cash flows that reprice at a 155 basis point spread higher, providing a recurring margin tailwind absent further rate cuts.
2. Deposit Franchise and Funding Cost Control
Stable non-interest-bearing deposits and proactive CD repricing have allowed FHB to lower funding costs even as competition for deposits intensifies, especially on the mainland. The ability to maintain a 31 percent non-interest-bearing ratio demonstrates the depth of its core franchise in Hawaii’s unique banking market.
3. Loan Growth and Portfolio Mix
Loan growth was broad-based, with C&I expansion led by dealer floor plan utilization and new relationships, while CRE continued to grow as construction loans converted to permanent financing. This mix shift supports both credit quality and yield, though residential and construction run-off remain mild headwinds.
4. Expense Management and Investment in Talent
Expense discipline was evident in Q1, but management signaled a ramp in hiring and salary expense through the year as it seeks to drive revenue growth. The willingness to invest in talent, both local and mainland, reflects a commitment to organic expansion and competitive positioning.
5. Capital Return and M&A Stance
Share repurchases remain opportunistic, with no change in capital allocation strategy despite potential regulatory capital changes. Management continues to evaluate M&A for strategic fit, but no near-term deals are expected.
Key Considerations
This quarter’s results highlight a bank leveraging its asset sensitivity and funding advantage while managing expenses and credit risk against a backdrop of competitive and macro uncertainty.
Key Considerations:
- Repricing Momentum: Ongoing asset repricing is expected to offset modest NIM compression from any future rate cuts, sustaining margin resilience.
- Expense Ramp Watch: Investors should monitor the pace of expense growth as hiring accelerates, with management targeting higher salary expense to drive revenue.
- Deposit Competition Dynamics: While public deposits provided a Q1 lift, competitive pricing—especially for CDs—remains a watchpoint as market rates evolve.
- Credit Vigilance: Credit quality remains robust, but management is closely monitoring portfolios given recent natural disasters and economic volatility in the region.
- Capital Flexibility: Share repurchase activity is expected to continue, but no near-term changes to capital strategy or significant securities portfolio expansion are planned.
Risks
Primary risks include a shift in the rate environment, with unexpected rate cuts potentially compressing NIM before repricing benefits flow through. Competitive pressure in both loans and deposits could challenge growth and funding cost management, particularly as larger banks increase hold levels and deposit pricing remains fluid. Regional economic shocks, such as further natural disasters or a tourism downturn, could impact credit quality or deposit stability, though current metrics remain strong.
Forward Outlook
For Q2 2026, First Hawaiian guided to:
- Net interest margin up 2 to 3 basis points sequentially
- Continued loan growth, with full-year target of 3 to 4 percent
For full-year 2026, management maintained guidance:
- Net interest margin of 3.22 to 3.23 percent
- Non-interest income about $220 million
- Total expenses around $520 million
Management cited ongoing asset repricing, stable deposit base, and expense investment as key factors supporting the outlook, while reiterating a conservative stance on credit and capital allocation.
- Asset sensitivity remains a core margin lever
- Expense growth expected to ramp as hiring accelerates
Takeaways
First Hawaiian’s Q1 2026 results reinforce its position as a disciplined, asset-sensitive regional bank with strong funding and credit fundamentals.
- Funding Cost Advantage: Deposit cost declines and a stable non-interest-bearing mix anchor NIM, providing visible margin support if rates remain elevated.
- Expense and Growth Balance: While Q1 expenses were contained, investors should track the pace and productivity of hiring as management invests for revenue growth.
- Watch Competitive Dynamics: Margin and loan growth resilience depend on FHB’s ability to defend its deposit franchise and loan pricing amid intensifying competition, especially on the mainland.
Conclusion
First Hawaiian enters the rest of 2026 with a resilient balance sheet, disciplined funding, and visible margin levers. The bank’s ability to manage deposit costs and asset repricing, while investing in talent and maintaining credit quality, will be central to sustaining its current trajectory in a competitive and uncertain environment.
Industry Read-Through
FHB’s results highlight the continued importance of funding cost control and asset sensitivity for regional banks in a higher-for-longer rate landscape. The ability to reprice assets, maintain a high proportion of non-interest-bearing deposits, and exercise expense discipline will be key differentiators. Competitive pressure for both loans and deposits is intensifying, particularly as larger banks take bigger deal allocations and deposit pricing remains fluid. Other regional banks with less asset sensitivity or weaker deposit franchises may see greater margin compression and funding volatility, especially if rate cuts materialize or competitive intensity escalates.