First Hawaiian, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the first Hawaiian Q1 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, please press star 1 on your telephone. Please be advised to give conferences being recorded, and if you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Kevin Haseyama. Please go ahead.

Thank you, Sydney. and thank you everyone for joining us as we review our financial results for the first quarter of 2020. With me today are Bob Harrison, Chairman, President and CEO, Robby Malela, CFO and Ralph Misic, 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 one for our safe harbor statement. We may also refer to certain non-GAAP financial measures. The appendix to this presentation contains reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP measurements. And now I'll turn the call over to Bob.

Thank you, Kevin. We'll be changing our presentation this quarter. First, I'd like to address our response to the COVID-19 pandemic. Then we'll do a deep dive on our loan portfolio. and then lastly we'll do a quick overview of the financials for the quarter before taking your questions. Our thoughts go out to those directly impacted by the COVID-19 pandemic as well as the healthcare providers and all those on the front lines providing essential services to our country and our state. Hawaii has never faced a situation like this before and it will be difficult. Unemployment is high. The economy will be challenged until we can return to a new normal. The new normal will continue to be anchored by tourism and government spending, though, as the tourism, the allure of Hawaii, and also the strategic nature of the military here in the Pacific will continue to be an important role for us. Talking about the pandemic, sadly, 12 people have lost their lives here in Hawaii. The total cases has been just under 600, and it has been going down significantly over the last few days. Over the last seven days for the island of Oahu, there's been less than seven cases a day, and actually several days with zero cases. So our transmission rate as of yesterday was .45. There's a small group of state administrators, including the governor and one of his top aides, the head of the Senate, the head of the House, several people from the healthcare industry, myself, and another business person that are working on a plan to develop, to reopen Hawaii to both local people as far as being able to circulate freely as well as welcoming visitors to Hawaii. This is really important to get our economy back online and begin the recovery process. First Wind Bank has been serving Hawaii for 161 years and we play an important role in doing that. We take this responsibility very seriously. Turning to slide two, we have a few points here I'd like to make. One is we've enabled about half of our employees to work from home and employ social distances and different protection measures for those that need to continue to go into the office or also to the branch system to continue to operate. We've temporarily closed about 44% of our branches, 26 of them, and moved those employees to different projects to support the high volume areas, whether it be PPP loan processing, higher call center volume, et cetera. teletransaction volume is down about 50% and our mobile and ATM channels are seeing record usage. All that you would expect in a situation like this where most people are working from home. We've also stood up a separate operations center to maintain redundancy just in case something should happen. And we've also been very proactive about serving our customers. We process just under 2,400 applications for the PPP program write about $775 million, and we're geared up for the next phase that should be starting very soon. We've been very proactive in reaching out to both of our consumer and our commercial customers for deferral or forbearance, depending on what they need, and we'll talk about that a little bit later. We stood up a portal on our website to make the process very easy for our consumer customers in particular, and that's been very well received. Another thing we're doing to support our customers is we've waived the any check cashing fee for stimulus checks for non-customers. And we're really trying to support the community for those in greatest need so they don't have to go to check cashing businesses. Lastly, on this page, we've also launched an Aloha for Hawaii fund to support Hawaii's restaurant industry while donating up to a million dollars to certain nonprofits that are most directly affected by the pandemic. Moving to slide three, I'd like to talk a little bit about the management team. Because while no one knows the severity and longevity of the virus's impact on our economy, we entered this crisis with a strong balance sheet, ample liquidity, and high levels of capital. What's critical to the success is our senior management team has, on average, over 28 years of financial industry experience, and every single one of us went through the global financial crisis. Including that, four of us have been, or currently are, the chief risk officer and have broad experience in a number of different lending areas, So risk is definitely part of our culture. We've also participated in most of the large transactions in Hawaii and have often in the role of structuring or arranging the transactions. So really we are the commercial bank for the state of Hawaii. The strength of our team, along with our strong customer relationships over many years serving our marketing community, will get us through this crisis, just as they've carried us through a number of other crises over our history. Turning to slide four, I'd like to make a few comments before going through the slide. Our philosophy has always been to be a responsible lender and run the bank in a sustainable manner. We want to grow at a good, if not spectacular, rate and deliver stable and consistent results over the long term. We maintain a balanced and diverse loan portfolio and focus on areas we know well. Being a relationship bank, we do it to support our customers. This has worked well over the long term, and our loan portfolio reflects those values. The portfolio has a nice balance between commercial and consumer loans, roughly 55-45 right now, and a good mix across loan categories. Within the commercial book, we are balanced between small and large customers, and on the consumer side, about 75% of the portfolio is secured by residential homes, virtually all of which are in Hawaii, and another 15% is secured by automobiles. On the unsecured loan side, the credit card area, we have tremendous experience. Last year, we celebrated our 50th year of partnership with MasterCard and are their longest continuous issue of credit cards in the United States. The diversity we have across lending businesses has enabled us to not be too reliant on any one industry or segment. I want to talk a little bit about the mainland. About 20% of our loan book is to mainland borrowers and is focused in three areas we know well, and have done well in historically. C&I, CRE and dealer flooring. The mainland C&I lending is to large corporate names, many of which are shared national credits. Our shared national credit customers generally have operations in Hawaii and we are their Hawaii bank. We did take the opportunity last summer, as you recall, in Q3 to sell about $409 million of shared national credits and none of those had operations in Hawaii, and that just was better manage that book. With few exceptions, our long-time customers in this area, the loan amounts we generally have are at that target hold level of about $15 million. The Mainland CRE book consists of many of our best local customers, such as old-time estates or private wealth that have diversified their holdings and characterized by low leverage, good credit, a long investment horizon. The rest of the Mainland CRE portfolio is a niche strategy focused on large, well-capitalized sponsors with investment-grade real estate in supply-constrained gateway markets on the West Coast. The Mainland Dealer portfolio was started over 30 years ago as an extension of the business segment we dominate here in Hawaii, and I've been personally working with many of those customers since the late 1990s, so they're very well known to us. They are primarily large, multi-store operators, most of whom we bank through the financial crisis. All but one of the dealer credits are in California, primarily the Los Angeles and San Francisco markets. We have a highly experienced team managing our mainland CRE and dealer portfolios, and our two senior managers in those areas are exceptional bankers who headed similar operations for large national and super regional banks. So overall, our balanced and sustainable approach which resulted in lower unstable credit costs. The credit losses for the entire portfolio peaked at 72 basis points over the last cycle and were roughly 135 basis points cumulative in the 2009-2010 period. And lastly, CNI and CRE losses never exceeded 60 basis points per annum over the last cycle and residential losses were nominal. I spent a little bit of time talking about the individual slides, On slide four, I'd just like to bring your attention to a couple things here that I didn't already mention. First of all, not only do we have a lot of seniority on our senior management team, in our commercial lending area, the loan officers average over 25 years of experience. The mix on the shared national credit portfolios you see there is about one-third based on Hawaii, about 30% based in Hawaii, and about just under 70% on the mainland. And lastly, I do want to talk about the consumer side. We're primarily a prime and super prime lender, and over 90% of the portfolio is collateralized. Turning to slide five, you can see we're the largest commercial lender in Hawaii, a long-time niche focus. The corporate lending to SNCC, CNI is about $693 million, with our $15 million average hold level. And you can see this geographic diversification of Just over half in Hawaii, Guam, and Saipan are core markets, and just under half on the mainland. The dealer portfolio has flooring balances of $875 million, and the average length of relationship with Hawaii dealers is 18 years, and the mainland dealers is a little less at 8 years, with the longest being 32 years. And the reason that's a little bit lower is over the last several years, we've brought in new relationships on the mainland. virtually all of which our bankers have worked with in previous lives at different banks. So these are not new relationships to our bankers. As you can see at the bottom, our loss rate through the cycle and our peak loss rate has been very good in this book over many years. Turning to slide six, let's make a few comments on this slide. Most of our exposure, as you can see, is in Hawaii, just under 80%, 22% on the mainland. We do have some hotel exposure, as you can see there. The loan-to-value is just over 50%. It's spread in a number of different properties that we'll talk to a little bit later in a later slide. A large office exposure is a mix of Honolulu Central Business District and West LA properties, which are typically done in multi-property pools with an average size of 35 million. So we're not dependent on any one single property. and again at the bottom of the page, you can see our credit experience has been outstanding in this area with through the cycle losses of two basis points and peak losses of 30 basis points, substantially outperforming national norms. Going to slide seven, the construction size is a smaller portfolio for us, just over 4% of our total loans and leases, roughly split between Hawaii and the mainland. The Hawaii focus is for sale, multifamily. All the loan-to-values are 60%, low 60% or less, except for some of the retail. The through-the-cycle losses were very low. Peak losses were low as well. And this is a very important portfolio for us, and we rely heavily on the sponsor and the category to do well in this area. There are a couple of areas I do want to highlight in particular, and that's on slide eight. and this is select industries that have gotten a lot of attention recently in leveraged lending. You can see the hospitality and hotels. The CRE there in the hotel area, we have 20 loans with a weighted average loan-to-value of 53%. Over 80% of those balances are at a four-star resort beachfront, so you've got the best property with low loan-to-value that will certainly hold its value through a cycle. For the hospitality names, we have some larger exposures, but those are the largest global hospitality names in the world, and we have strong other relationships with them as well. For the retail, just want to talk a little bit about the CRE exposure. The top 20 loans averaging $15 million, and overall, 43% of the loans are less than $5 million with low loan-to-value. Transportation, much of that is either essential service or ground transportation, no air carriers. And then in food service, we had a large payoff right after the end of the quarter, and so that's just under $100 million now. And most of that exposure is to multi-region franchise operators, more in the QSR segment. And lastly on the page, you have the high-risk CNI. And everybody has a slightly different definition of this. but some of this is included in the above. So the total leverage loan portfolio is 344 million. 116 million of that is investment grade. A large portion is passed and then 28 million is criticized. That I'd like to go to page nine, which are residential HELOC consumer loans. You can see this page, very conservative lending. Virtually all of our home, and Home Equity Exposure is in Hawaii. Low loan-to-value. Our monitoring FICO score is high at 764, primarily prime, super prime. Low peak charge-offs and very low through-the-cycle losses. All of our auto loans are within our footprint, most of them in the prime section. We do have a portion, about 10% of the portfolio has recourse, and this is common in Guam and Saipan. This is not... This does not exist in Hawaii. And so recourse means you have recourse back to the seller of the car or the car dealer. So we underwrite the car dealer and have a line for them and then do recourse for lower quality customers, lower credit quality customers. I had good experience in this area, very good profitability throughout the cycle. We know this well. We have the advantage of you can't ship the car off the island without the – approval of the lender, so you generally have access to the collateral should you need it. Skipping down to credit cards, we have a very large, a very long annual account age, over 13 years, and so that's much higher than the normal. This is really a transactional business for us, much less of a revolved business. Customers that we've known for a long time, our relationship customers, use this daily for their needs. This has been a very good portfolio for us, as I say, for many, many years. All the comments I have on that, I would like to move to page 10, talk a little bit about our deferrals before turning it over to Rao. We've been very, very proactive in outreach to our customers that needed deferrals. We think this is an important way to manage our risk as well as take care of our relationships. So we made it very easy for consumers to defer. We also reached out to them to make sure that they knew it was available. That's why we have the 19,000 consumers, many of which are in the auto. but not exclusively, and 600 businesses. We also did a lot of outbound calling. And then I think really the important thing on this slide is the third bullet really is to make sure that we carry them through this crisis and give them the opportunity to get through the liquidity crisis if they did lose their job, to get unemployment, get the business back up and going, get reemployed so they can continue making their payments. Auto dealers in particular, we reached out to them proactively and virtually every single one of them chose to defer their loans on the commercial side. And we thought that was a good decision to make. With that, I will turn it over to Ralph to cover our CECL.