First Hawaiian, Inc.

Thank you for standing by, and welcome to First Hawaiian, Inc.' 's third quarter 2024 earnings conference 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, you will need to press star 1-1 on your telephone. To remove yourself from the queue, you may press star 1-1 again. I would now like to hand the call over to investor relations manager, Kevin Asayama. Please go ahead.

Thank you, Lateef, and thank you everyone for joining us as we review our financial results for the third quarter of 2024. With me today are Bob Harrison, Chairman, President, and CEO, Jamie Moses, Chief Financial Officer, and Lee Nakamura, Chief Risk Officer. We've 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'll be making forward-looking statements, so please refer to slide one 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.

Thank you, Kevin. I'll start by giving a quick overview of the local economy. The overall Hawaii economy continues to be resilient. While Maui continues its recovery from the wildfires, the rest of the state has seen relatively stable tourism numbers and a low unemployment rate. The statewide seasonally adjusted unemployment rate for September was 2.9% compared to the national rate of 4.1%. Through August, total visitor arrivals were down 2.2%. And spending was down 2.3% compared to 2023 levels for the same period. Housing market remained stable. In September, the median sales price for a single family home on Oahu was $1.1 million, 6% higher than last September. And the median sales price for condos on Oahu was $518,000, 2.8% below the previous year. Turning to slide two, I'll give an overview of our third quarter results. We're really pleased that the momentum we saw building in the second quarter carried over to the third quarter. Deposit balances flattened out, and deposit costs were up only one basis point from the second quarter. Unexpected loan payoffs were a headwind for loans in the third quarter, but credit quality remained excellent, and assets repriced up, driving margin expansion. Non-interest income continued to be solid, and we continued to exercise good discipline on expenses. During the quarter, we released 3.8 million of tax reserves we recorded in connection with our 2016 separation from BNPP. This increased expenses for the third quarter by 3.8 million and reduced income tax expense by the same amount, resulting in no impact to net income. Turning to slide three, I'll go over some balance sheet highlights. The investment portfolio runoff is still being used to fund loan growth and reduce high-cost deposits. We continue to have ample liquidity. We had a $500 million SHLV advance mature in the third quarter and took out a new $250 million 12-month advance at a lower rate. The balance sheet remains well capitalized and our capital levels continue to grow due to strong earnings and a favorable AOCI change. Because of our strong and growing capital levels, we intend to resume share repurchases in the fourth quarter. Turning to slide four, total loans were down $119 million compared to the prior quarter. And while construction loans grew as expected and we had good activity in the CNI and CRE Unexpected payoffs in those portfolios were a headwind in the third quarter. The pipeline in the fourth quarter remains strong, but due to those payoffs in the third quarter, full-year loan growth will be relatively flat. Now I'll turn it over to Jamie.

Thanks, Bob, and good morning, everyone. On slide five, we see that the positive deposit trends we saw in the second quarter continued in Q3. Total deposits were down $91 million driven by a $112 million decline in total public deposits. Retail and commercial deposits stabilized and were slightly up compared to the prior quarter. Commercial deposits increased $112 million and that was partially offset by a $91 million decline in retail deposits. The migration of non-interest bearing deposits to higher cost accounts continued to taper and the ratio of non-interest bearing deposits to total deposits remains a solid 34% unchanged from the prior quarter. Deposit costs also continue to level off, and our total cost of deposits only increased one basis point from the prior quarter. We've been proactively managing deposit rates in anticipation of the Fed rate cut, and we saw our September cost of deposits decrease by one basis point to 171 basis points from 172 basis points in August. Turning to slide six, I'll go over net interest income and the margin. Net interest income was $156.7 million, $3.9 million higher than the prior quarter. The margin was up three basis points, primarily due to the asset repricing dynamics that we've detailed in prior calls and stable deposit costs. Looking forward, we expect the NIM to decline modestly in the fourth quarter and be around 2.9%. On slide seven, non-interest income and expenses are detailed. The income was $53.3 million, about $1.5 million more than the prior quarter. And the increase in non-interest income was due to higher volume-driven credit and debit card fees and higher bully income. And that was partially offset by lower other income. As a reminder, that other income line included about $2 million of insurance recoveries in the prior quarter. Non-interest expenses were $4.1 million higher than the prior quarter. And as Bob mentioned, we recognize the $3.8 million expense in the third quarter that was offset equally by a $3.8 million reduction in income taxes, having no impact on net income. Excluding that, expenses in the third quarter were essentially flat to the second quarter. We continue to expect full-year expenses to be in the $500 million range. And now I'll turn it over to Lee.

Thank you, Jamie. Moving to slide eight. The bank maintained its solid credit performance in the third quarter. Our credit risk metrics remain strong and stable and well within our expectations. We are not observing any broad signs of weakness across either the consumer or commercial books, and we are very comfortable with our loan loss coverage levels. Classified assets increased by $64.6 million due mostly to a couple of downgrades. The recently downgraded loans are well collateralized, and we believe that the potential for loss is extremely limited. Moving to slide nine, we show our third quarter allowance for credit losses broken out by disclosure segments. The asset ACL increased by $3.2 million to $163.7 million, with coverage increasing three basis points to 115 basis points of total loans and leases. Turning to slide 10, We provide an updated snapshot of our CRE exposure. CRE represents approximately 30% of total loans and leases. Credit quality in this portfolio remains strong, with LTVs manageable and criticized loans continuing to comprise only a small portion. Let me now turn the call back to Bob for any closing remarks.

Don't have any closing remarks. Thank you for your participation. We welcome any questions you have.

Ladies and gentlemen, it's time to ask a question. Please press star one one on your telephone. Again, that's star one one on your telephone to ask a question. You may press star one one to remove your line. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Feaster of Raymond James. Your question, please, David. Hey, good morning, everybody.

Morning, David.

I just, I wanted to follow up on the growth side. I mean, appreciate the color on the growth outlook. And obviously, it sounds like, you know, this quarter was really impacted by payoffs and paydowns. I'm curious, how does the pipeline look in? Where are you seeing opportunities for growth? And, you know, just kind of maybe touch on the competitive landscape as well and where you're seeing new origination yields.

Yeah, great question, Dave. Thanks for that. You know, we had expected third quarter to be mostly flat, and then with the payoffs, it came in below that, obviously. We think the opportunities really continue to be in the commercial real estate space, both here in Hawaii and on primarily the West Coast, and also in our dealer floor plan area. So some growth here in Hawaii. We're onboarding a new relationship now, actually, but There's also some opportunities we have on the West Coast. I think really those two to begin with are the top opportunities. The consumer side is still going to be soft. There's not a lot of action in residential or home equity. So we're really looking to the C&I and commercial to see the growth.

Okay. And then just thinking about the earning asset, you know, repricing and remixing side, I'm curious, how do you – Could you just touch on the securities cash flows, the roll-off rates that are coming there, the loan cash flows and what you're seeing there, and just how you think about, again, where are new loan yields? Where are you able to put new loan yields on, especially with this cut coming in?

Right. Yeah. Thanks, David. Jamie. So we continue to see, you know, about 400 million per quarter of fixed rate cash flows coming off the books. And so, you know, that that repricing dynamic there. So, you know, that's coming off, let's say, you know, in the four and a half percent range or so new loans coming on, you know, with the rate cuts, maybe in the six and a half percent to seven percent range, something like that. In total, I think that's probably the way to think about that in Q4. That dynamic itself is probably two to three basis points to the good for the NIM in Q4. So that's the dynamics there. We think when we really look at it, our guidance is based off of another rate cut in November Um, and then we, you know, we have the, the similar dynamics of that, you know, $6 billion of loans that, you know, reprice based off of that and about four and a half billion of deposits that'll reprice, um, off of any sort of rate cut news, um, as well. So, you know, we're getting to like maybe a two basis point decline in, uh, in Q4 on the NIM.

Okay. Perfect. And then, you know, maybe just touching on your ability, you know, exclusive of those index deposits, how are the conversations you're having with repricing deposits lower? What's kind of the new add-on rate for new, you know, new deposit growth? And is there any other ways to maybe help accelerate the margin side? I mean, you know, with rates coming down, is there any change in the appetite for securities restructuring or anything like that?

Maybe I'll start on that, Dave, and hand it over to Jamie. So, you know, on the way up, we were very clear with our deposit customers that we were going to give them the full benefit of rate increases basically immediately. And on the way down, you know, we've adjusted accordingly. And so those have been the conversations we've been having with them over the last couple of years. And that's really borne out and, you know, really transparent with folks and walking them through that. So as far as onboarding new deposits, of course, we're always trying to onboard new relationships, which includes operating accounts and people's personal accounts. So there's an element of non-interest bearing in that along with interest bearing. But to further your question, maybe I'll turn it over to Jamie.

Yeah, I think Bob summarized the deposit piece of that pretty well. Those deposits are not specifically indexed, but that's the expectation of of our customers. I think the teams have been really good, really proactive talking to them and everybody seems to understand sort of what the deal is on those. And so I think that's been a good story for us for sure. And then in terms of securities restructure, I mean, we see others do that. We understand why they do it. From my perspective, I think the share buyback this quarter is probably sort of a better use of I don't know, reduction in capital. If you want to think about a securities restructure that way, I think maybe that's a better way to return capital to the shareholders at least this quarter. And, you know, we'll continue to look at those things. But, you know, with a trajectory of continued declines in rates, you know, maybe we'd rather just have that accretion to tangible book value on the securities portfolio rather than try to, you know, remix it or do something different on the asset liability side.

I think that makes a lot of sense. Thanks, everybody.

Thank you. Our next question comes from the line of Andrew Leash of Piper Sandler. Question, please, Andrew.

Hey, everyone. Good morning. Thanks for taking the questions. Just a question on the provision in the quarter, and it looked like you built the reserve for the consumer in the home equity books. Just curious what might be behind that. Doesn't sound like there's anything concerning. Still curious on the reserve build.

I don't think it was particularly about consumer. FICO scores did go marginally lower, but we actually have some pieces of the book that we're spending a little more time looking at, like environmental, but it wasn't particularly about any one particular part of the book per se. We're not actually that concerned about our home equity position.

To add to Lee's comments, I think we're very well secured in those portfolios, so it's really not that. It's just as we do our modeling, we thought it was appropriate to tweak some of the coefficients as we look ended up. You know, there is a primarily quantitative side, but there's also a qualitative side to the model.

Got it. Helpful. And then, Jamie, the $500 million of expenses for the full year, I would assume that includes the $3.8 million tax reversal in this quarter. I guess that if you look at how, and then we'll give more detailed guidance on the January call. But if you just look at the natural rate of expense growth, given a lot of the investments that you've made lately, I mean, what do you think a better or a natural expense growth rate is with all these investments now?

You know, that's a good question, Andrew. And as you said, we're in the budget process right now. That's right. That's right. We're in the budget process. So, you know, we'll have a lot more guidance around that next year. But I think I think we've been pretty clear that the way that we've been thinking about it is we've made some strong investments. Those investments now are able to create efficiencies for us that weren't there before. And so we think our sort of natural growth rate of expenses is much more in line with what you would consider a sort of normal banking industry growth rate. So we expect to be kind of in line with that on a go-forward basis in general. And, you know, so that's pretty significantly lower than the 5.5%, 6% that we've seen over the past two or three years.

Got it. Good to hear. Thanks for taking the questions. I will step back.

Thank you. Next question comes from the line of Jared Shaw of Barclays. Your line is open, Jared.

Thanks. Good morning. Maybe just... Going back to the loan growth and the payoff activity you discussed this quarter, what's really driving that? Are you seeing other banks coming in and being aggressive for customers? What's driving the elevated level of paydown payoff activity, especially on the C&I side?

Sure. Thanks, Jared. Good question. This is Bob. What happened, there's a couple of deals we were participating with others We weren't the lead on in the floor plan area in the mainland. And maybe our pricing was a little bit higher as a group than someone else that came in and replaced it. So it was really a more aggressive mainland led there. And this was a pretty broadly syndicated four or five bank deal. So we weren't the lead. But that's what happens sometimes. We're big boys and girls. And you just have to be competitive in the market. And this is a very high quality name. or names, plural, that, you know, that's just the way it goes. So maybe in some sub-segments of what we're doing, there's more competition. But nothing that doesn't make sense is just, you know, that's what happens some days.

Yep. Okay. Got it. And then when you call out sort of the ability or the outlook for floor plan growth, I'm assuming that's sort of self-originated versus participation. And is that... And are you able, is that just getting bigger with existing customers, or are you actively out trying to take market share? Are you expanding sort of the geographic footprint of that business?

Not expanding the geographic footprint, but new customers, well, you know, some new customers and some additional lines of existing customers.

Okay.

So a mix of both. I'm not trying to evade the question, but it is truly a mix of both.

Got it, got it. Okay, and then in terms of the buyback, I guess how aggressive should we think you are with whittling away at that existing authorization and should we be looking at a near-term CET1 target or what's going to be the driving factor on the pace of the buyback?

Well, we have the, as we mentioned earlier in the year, authorization for the $40 million, and we expect that's where we'll stay.

Okay, so once that's done, then not looking to reload it?

For 2024. You know, we tend to look at it.

Oh, okay.

So, yeah, no, we do it annually, so that's our annual outlook, and TAB, you know that's part of our planning process for 2025 is we certainly look at capital levels, you know the past week. TAB, talked about a minimum of 12% ct one and clearly we're above that so that's part of the discussion we're having internally and we'll have at the board and the various regulators.

TAB, got it Thank you. Thank you. Our next question comes from the line of Kelly Mata of KBW. Please go ahead, Kelly.

Hey, good morning. Thanks for the question. You know, your expenses were really well controlled, and I appreciate the full year color. It might be a bit early with where you are in the budgeting process, but given the investments you've made with the core conversion and what you're doing on the ground, how should we be thinking about the natural growth rate of expenses from here and thoughts around positive operating leverage ahead with the current outlook for rates?

Thanks for the question, Kelly. Maybe I'll start and pass it over to Jamie. So, you know, we're deep into that. There's always, in our budgeting process, there's always a lot of good investment opportunities, you know, internally that we look at. And we have to just see how those stack up relative to where we want to be. And we think that Jamie's earlier comments, I'll let him speak for himself in a second here. We just want to be disciplined as we go forward now that we've made those significant investments.

Yeah, thanks, Bob. Yeah, Kelly, I think, you know, from an expense perspective, you know, I think that our growth targets around expenses are going to be much lower than they have been over the past, you know, few years given the dynamics that Bob talked about. And also when we consider the positive operating leverage scenario, right, that you just brought up. And so the challenge for a spread-based bank is that when you expect rates to go down, You know, we have a, you know, there's probably an expectation that net interest income is going to go down as well, which creates challenges around positive operating leverage, as you know, and is part of the reason for the question, I'm sure. You know, and so we're going to do everything that we can to try to minimize that drop in margin. We're going to try to grow loans prudently, manage our balance sheet as well as possible, and be very proactive on the funding side as well. and try to extend our advantages that we have in our markets to be able to do that and to try to create that positive operating leverage that you're talking about. In a down rate environment, tough in general probably to do that, but I think we're in a good position to be able to take advantage of of our market and where we're at. And so, you know, I think we're well positioned to perform pretty well next year.

Thank you, Jamie. That's really helpful. And I believe in your prepared remarks, you talked about some exception pricing where you were, you know, maybe pretty generous on the way up or more generous on the way up with offering rate, and conversely, you have some pretty ample room to cut with rate cuts. I apologize. I may have missed it, but have you quantified at all the magnitude of that piece of the deposit portfolio?

Yeah, we have. So, that's about $4.5 billion of deposits. That is not directly tied to an index, but that we control the pricing on and with the expectation that we'll be able to drive that pricing down along with the Fed rate cuts. We price those customers and those deposits up on the way up and we feel pretty strongly that we'll be able to price those down when rates go down as well.

Got it. Maybe a final one for me. The fee income came in really, really strong this quarter. It looks like there was particularly strong uptick in credit and debit card fees as well as a bit of an increase in BOLI. So I'm hoping you could give some color around the drivers of that and if there was any BOLI death benefits in there. It looks like that number has jumped around a little.

Yeah, no death benefits in the quarter. That's sort of market driven. Generally speaking, when rates drop, we'll kind of get a pop in that line. So in the fourth quarter, depending on what happens, you know, we're sort of expecting that to be kind of flat. And so, you know, with that, I think, you know, I think we're probably 50 plus million in the, you know, in fourth quarter in fee income. You know, somewhere in that, you know, 50 to 51 million, probably. You know, we're seeing some good growth in particular in the card portfolios that you noted. And so, you know, we've seen some strength there, and we probably continue to expect that to happen.

Great. Nice quarter, guys. I'll step back.

Thank you. Our next question comes from the line of Anthony Illion of JP Morgan. Please go ahead, Anthony.

Hi, everyone. Just a few follow-up questions from me. Back to the payoffs, do you have in dollars how much the payoffs weighed on your loan growth in the third quarter in dollars?

Don't have that on this spot. Don't have that. Do you have that, Jamie?

We can get it to you. Yeah, we can get it to you. It's probably in the neighborhood of 90, 95 million, something like that is probably the unexpected payoff number that we saw.

Okay, got it. And then my follow-up, the slide six, you call out the non-risk bearing remaining stable from the prior quarter. Is Do you think the bottom for non-interest-bearing deposits is a percentage of total, or do you think there could be some continued declines from here in the percentage? Thank you.

Yeah, thanks. So the percentage has been pretty stable now for the last couple quarters, the last six months or so. So good trends there. We're hopeful that that's the case, and we hope that as we move forward, we're able to you know, take market share in those areas. And of course, like part of part of deposit gathering is in that non-interest bearing space. So we're hoping that we can sort of stem that number and keep that in that 34% range. That's about where we were, I think, ahead of the 2019 ahead of the pandemic. So seems like a decent spot to think about it that way. So, yeah, I think that's the, you know, that's our outlook. We don't know for sure, but the trending has been good in that direction.

Thank you.

Thank you. Again, to ask a question, please press star 1-1 on your telephone. Again, that's star 1-1 to ask a question. Our next question comes from the line of Tamir Brasilei. of Wells Fargo Securities. Please go ahead, Timur.

Hi. Good morning, everyone. Just maybe, sorry to keep following up on this, but just the expectation for loan growth versus payoff cadence. I guess the fixed rate loan kind of repricing schedule, How much could that be impacted by payoff cadence? Are those kind of mutually exclusive? Are you expecting that everything that rolls off is brought back on at that incremental 200, 250 basis points of spread? Or is there some risk to that dynamic if payoffs stay elevated?

Yeah, thanks, Timur. So that $400 million cash flow forecast would be sort of independent of these I'll call them unexpected payoffs that we see. So there would be risk to that number if there were more unexpected large payoffs that happened in the fourth quarter. Of course, they're unexpected for a reason, and so we aren't forecasting that. But that full cash flow repricing that we talked about, $400 million in the quarter, we would expect that to, if you assume we're flat in loans for the quarter, we would expect that to be repriced up to that 250 basis point level or so.

Got it. And then the FHLB advance that was rolled into that $250 million, what was the rate on that?

4.14 I think was the exact rate on that. So, you know, there's, you know, when we think about, you know, that maturing advance, you know, we're thinking about asset liability management as well as sort of, you know, income dynamics and what other opportunities there are in the market for funding. as well as our liquidity metrics. And so, of course, you have a little bit more of term associated with that FHLB borrowing, and so that helps our liquidity metrics as well.

Okay, last one on the margin for me. Just looking at security deals, link order, it looked like those stepped down a decent amount in 3Q. I'm just wondering what the dynamic is there and how we should think about the roll-off, roll-on of the cash flows going forward.

Yeah, so in the securities portfolio, we do have a small amount of floating rate loans there. So maybe that's like $600 million, $700 million or so. And so when rates drop, you'll see a small dynamic in there as well. So that's that three to four basis point drop in the quarter that you see generally speaking we are not reinvesting in the in the portfolio at this time so the if rates continue to go down you'll probably you're likely to see the the rate in that securities portfolio to go down as well however right when those loan when those securities come off in that 175 2% range every quarter we don't have to fund those with you know for 4.5% FHLB fundings, for example. So there's a positive income dynamic associated with just running off that portfolio.

Great. And then just last question for me, maybe for Leah. It looks like classified assets were a little bit higher, 2x versus second quarter. Just any kind of color on what drove the increase in classified assets?

So it was primarily in multifamily. And it was really just a handful of performing loans. These are actually well collateralized. But in this rate environment, they don't really have the level of cash flows that we would prefer to see. But we don't actually believe that these loans are indicative of any kind of trend in the portfolio. And the loans are performing.

Great. Thank you for the questions.

Thank you. I would now like to turn the conference back

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.

This concludes today's conference call. Thank you for participating. You may now disconnect.