First Hawaiian, Inc.

is being recorded. And now I'd like to introduce your host for today's program, Kevin Haseyama, Investor Relations Manager. Please go ahead, sir.

Thank you, Jonathan. And thank you everyone for joining us as we review our financial results for the second quarter of 2025. With me today are Bob Harrison, Chairman, President, and CEO, Jamie Moses, Chief Financial Officer, and Lee 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 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 for joining us today. I'll start by giving a quick overview of the local economy. Statewide seasonally adjusted unemployment rate continued to drift lower and was 2.8% in June compared to the national unemployment rate of 4.1%. Through May, total visitor arrivals were up 2.8% compared to last year as the strength in U.S. mainland arrivals more than offset weakness in the Japanese and Canadian markets. Year-to-date, spending was $9 billion, up 6.5% compared to 2024. Interesting to note, we went back and looked, and for the first five months of 2019 to the first five months of 2025, visitor arrivals are down still 3.9%, but the spend is up over 24%. So while there's been a few less visitors, the spend is up substantially. Turning to slide two, we had a very strong second quarter. Our net income increased over 23% compared to the prior quarter. The improvements in our results compared to the last quarter were broad-based, driven by higher net interest and non-interest income, good expense control, and lower provision expense. Our results also include the impact from a change in California tax law that resulted in a net benefit of $5.1 million. Turning to slide three, the balance sheet remains solid. We continue to be well capitalized with ample liquidity. Loans and deposits were stable during the quarter, and we repurchased about 1 million shares at a total cost of $25 million. We have $50 million of remaining authorization under the approved 2025 stock repurchase plan. We resumed reinvesting the investment portfolio cash flows in the second quarter, and we plan on maintaining the portfolio balance at its current level. Turning to slide four, total loans increased about $59 million, or 0.4% from the prior quarter. The largest increase was in the CNI portfolio, which was primarily due to a $125 million increase in dealer floor plan balances. This was largely offset by payoffs from several completed construction projects in our commercial real estate portfolio. Looking forward, we expect full-year loan growth will be in the low single digits. And now I'll turn it over to Jamie.

Thanks, Bob. Turning to slide five, total deposits increased slightly in the second quarter. as growth in public deposits more than offset the decline in commercial and retail deposits. On the retail side, they were down 23 million in the quarter, and commercial deposits were down 127 million. The decline in commercial deposits was due to the normal operational fluctuations that we see in that book. Total public deposits increased by 166 million, all in operating accounts. There was no change in the balance of public time deposits. Total deposit costs fell by four basis points in the quarter, and our non-interest-bearing deposit ratio remained at 34%. On slide six, we see that net interest income was $163.6 million, $3.1 million higher than the prior quarter, and the NIM was 311, up three basis points compared to the prior quarter. The increase in the margin was driven entirely by lower deposit costs, primarily due to CD repricing. While we didn't see the anticipated benefit from fixed asset repricing in the second quarter, the underlying balance sheet dynamics driving the NIM remain intact, and we anticipate that the NIM in the third quarter will increase a couple of basis points to 3.13%. On to slide seven, where non-interest income was $54 million in the quarter and benefited from a few items that went our way. We continue to expect that recurring piece of non-interest income will be about $51 million per quarter. Expenses were better than expected in the first half of the year, but we expect them to tick up just a bit in the back half. We think expenses in the third quarter will be up around 2% on a linked quarter basis, and that full-year expenses will be better than originally expected at around $506 million. And now I'll turn it over to Lee.

Thank you, Jamie. Moving to slide eight, the bank continues to maintain its strong credit performance and healthy credit metrics. Credit risk remains low, stable, and well within our expectations. We are not observing any broad signs of weakness across either the consumer or commercial portfolios. Classified assets increased by $31.6 million on the quarter. These loans are well secured, and we continue to work closely with the borrowers. Quarter to date net charge-offs were $3.3 million, or nine basis points. Year to date net charge-offs were $7.1 million, Our annual year-to-date net charge-off rate was 10 basis points, one basis point lower than in the first quarter. Non-performing assets and loans 90 days or more past due comprised 23 basis points of total loans and leases at the end of the second quarter, up six basis points from the prior quarter, resulting from an uptick in non-accruals. Most of these were residential loans with low loan-to-value ratios, so we feel that the lost content in these loans is very low. Moving to slide nine, we show our second quarter allowance for credit losses broken out by disclosure segments. The bank recorded a $4.5 million provision in the second quarter. The asset ACL increased by $1.2 million to $167.8 million, with coverage remaining flat at 1.17% of total loans and leases. We believe that we continue to be conservatively reserved and ready for a wide range of outcomes. Let me now turn the call back to Bob for any closing remarks.

Thank you, Jamie and Lee. And I'll be happy to take your questions.

Thank you. And our first question for today comes from the line of Liam Coonhill from Raymond James. Your question, please.

Hi, guys. Liam on for David. Thanks for taking my question. Just wanted to start out with CNI driving growth in the quarter. And taking into account the low single-digit outlook moving forward, how is the pipeline in terms of CNI, and is that the largest contributor? And I'm also curious on the CRE side, are we seeing increasing demand from those borrowers? Appreciate any call you might have. Thank you.

Sure. No, good question. Most of the CNI growth came in our dealer floor plan, and we have seen that pretty much continue to normalize back to what we had thought it would. So right about 600 million, let's see, no, 786 million for the quarter, at the end of the quarter. And that's up about 125 million from the previous quarter. So that moves up and down. Car sales have slowed a little bit, but still there's uncertainty out there with respect to tariffs. think there's just we don't know exactly what's going to happen with those balances but we don't think they'll move around a whole lot as relates to commercial real estate you know the thing there was that we had thought some of the commercial construction loans were going to extend into mini perms and they did which is a sign of very good credit quality but on the other hand you know it's a bit of a challenge for balances so we're still have a lot of those loans that are funding and That work is still going on. It's a little bit harder to predict when those will get paid off, so we changed our guidance a bit from low to mid single digits to low single digits for the full year. Just in anticipation of that.

Thank you, I appreciate that. You touched on tariff impact. How have you been seeing that net out with the improvement in tourism spend on the islands? Do you think it's kind of a wash between the two factors, or has that increased tourism spend kind of outpaced tariff concerns at this stage and softness of concerns versus last quarter? Thank you.

Really no change. And the only impact we really see for tariffs is the uncertainty it gives our car dealers. You know, they're still not exactly sure what those tariffs will be. I don't think it's had much of an impact on tourism. You know, Japanese and Canadian tourism is down. I think primarily for the Japanese, it's a little bit slower economy, and their exchange rate is still fairly weak for them. But U.S. West and all of the continental U.S. has been strong, and that's what led to the increase in arrivals and almost certainly the increase in spend.

Great. Thank you. And just last one for me. We see the repurchases of some shares in the quarter. Just wondering what your capital priorities are at this stage as we move into the back half of the year.

Yeah, I mean, I think the capital priorities remain the same. You know, we'd love to deploy that in organic growth areas. Want to make sure our dividends stable. And, you know, the third option there is the share repurchases. And so, you know, I think that's where we're going to end up deploying more of our repurchase authority in the back half of the year. And so, you know, I think that's probably where we'll end up on that.

Great. Thanks for the caller.

I'll step back. Thank you. And our next question comes from the line of Andrew Tyrell from Stevens. Your question, please.

Hey, good morning. Good morning. Maybe just to piggyback off of the last question around capital priorities. I mean, so I'm looking back, your capital position is stronger than it's been in a while. You've got a lot of capital. You know, the loan growth outlook is maybe a little bit lower following this quarter. You know, I'm curious how these things play together into your thought process on M&A and whether you know, M&A makes more sense for you guys at this juncture. And maybe if you could just kind of update us on your thought process there and if it does or doesn't make sense for you.

Sure. This is Bob. You know, I think that's something we always look at. We're not adverse to considering options, but we don't have anything we're looking at currently. But, you know, we're always out there talking to people as far as potentials for doing things with our capital. We're very comfortable with the capital levels. It's a little bit higher than we had guided to in years past. It was closer to 12%. We have increased the allowance. We do think there will be a rotation, as Jamie was getting to, out of securities and back into lending. And when that happens, you know, that can eat up the capital fairly quickly. So we want to make sure we maintain enough capital for loan growth.

Yeah, makes sense. And maybe just one for Jamie, you know, going back to the comments around the margin, and I appreciate the guidance for 3Q. That's helpful. What impacted or anything we should be aware of that impacted, you know, low yields in the second quarter and kind of mitigated what I thought would be a little bit better and kind of fixed repricing? Just any color you can provide on the underlying dynamics there would be helpful.

Yeah, so I think, Andrew, it was really a mixed issue. So we, you know, you see in the materials, we had a, you know, we had sort of large payoffs in the construction book and increases in the CNI book. And so there was just this timing, I'll call it a timing differential, where we had higher margin loans pay off and they were replaced by relatively lower margin loans. in the book. And so it was really a mixed issue there. I think in totality that story still remains the same, that the fixed rate cash flows coming off the books replaced by higher yielding assets in general will drive the NIM higher over time. Just kind of a weird quarter in terms of the mix of those things at the moment.

Understood. And if I could sneak one more in, I think you talked about $51 million of fee income as kind of a core number. It seems like the kind of credit and debit card fees and service charges that were both up this quarter, it seems like there's normally a carry forward of strength in kind of the third quarter there as well. So I'm hoping just to clarify, is that kind of just like what you view as core longer term? How should we think about third quarter on fee income?

Yeah, I think fee income in the third quarter is somewhere in that $51, $52 million range. I mean, I think that's probably where we'll be. We have, from time to time, we have a lot of things that happen from a, let's call it a market's perspective, where we have to revalue pension obligations, bully obligations, that kind of thing. So when the market's up quarter over quarter, we have small pops in these numbers. And so You know, we had a number of, like, let's call it onesies, twosies type things happen in this quarter in the $2 million-ish range that we know happen, right? These things happen for us from time to time. It's just hard to predict when they'll happen. So, you know, that $51, $52 million range, I think, is probably a good number for where we'll be in the third quarter.

Great. I'll step back. Thank you for taking the questions. Yep.

Thank you. And our next question comes from the line of Kelly Mata from KBW. Your question, please.

Hi. Good morning. Thanks for the question. With regards to the tax rate, I see for your DTA after this quarter that you called out and released. Jamie, can you provide an updated outlook on what this tax law change does to your tax tax rate outlook for this year and beyond? Thank you.

Yeah, you got it, Kelly. So where normally we would say we would outlook at like 23% for our effective tax rate, the outlook for the rest of the year is 23.2% on that tax rate.

Okay, so fairly immaterial. Got it, okay. And then on the deposit costs, you know, you've done such a great job getting your deposit costs down in the first round of rate cuts. It seems like there's a declining benefit absent future cuts, but when those do come, I'm wondering how you're thinking about deposit data on the next round of cuts. You are asset sensitive, but that would be a nice offset.

Yeah, so we have talked in the past about declining betas related to tax cuts. I don't think we're fully there yet at the moment. I think we probably have a few more rounds available to us before it starts to become a real issue. I would say that from the perspective of a rate cut, if we were a 95 beta or so on our rate-sensitive deposits over the last two cuts, that maybe drops to 90 or so over the next couple of cuts. So we still feel pretty strongly that we'll be able to pass through a large portion of those cuts to those rate-sensitive customers. But after maybe another 1% or so, the beta will decline over time on that. So I think 90 is an okay number for the next one or two.

Oh, wow. Great. Got it and then I left for me just a higher a higher picture question. Um, more growth this quarter. Really nice. He and I, but you had the construction pay downs and seems like. The outlook is a little bit lower than than at the start of the year. So still quite good. Yeah. As you look ahead, kind of more broadly speaking, what do you think are the main factors that would get increased activity among your client base to really pick up? And over the longer term, what's the more normalized growth rate? Do you think more mid-single digits would be something that could be achieved more longer term without the payoff headwinds? Thank you.

Yeah, Kelly, this is Bob. I'm a little reluctant to look out longer term. Most banks were following the economies of the areas we're in, so that's kind of making a bigger forecast that I'm comfortable with. But just to talk maybe a little more specifically about what happened this quarter, one of the reasons we lowered our guidance just a tad was that we had thought some of these construction loans were going to go into mini perm. And if the takeout market is as strong as it is, and they're getting paid off, you know, that does affect that. How much will dealer floor plan continue to grow? Hard to tell, but, you know, we had pre COVID, I think we're at 859 in total and, you know, now we're 786. So we're getting close to what pre COVID numbers were. So the amount of increase will, likely slow down. So it's really the interplay between those two. The teams are out there. They're calling on people. There's good pipelines developing, but it's just hard to, at this point, put that into a number between now and year end, other than what we've done. And past year end, I don't think we'd be comfortable commenting.

Got it. Maybe just last follow up on those construction loans getting taken out. Where are you seeing the most competition coming in? Is it from the local banks in Hawaii getting more aggressive on pricing, larger insurance companies, large banks?

Oh, no, this is, yeah, this is the end of construction where normally, you know, pre-COVID you get taken out right away. And then sometimes post-COVID, you know, it hangs around in a mini firm for a little while, which is always a feature of those loans. now we're seeing more of a return to normalcy with institutional buyers, sometimes insurance companies, sometimes others, taking out those loans upon completion of construction. It was never really designed to be a permanent loan for us. So it's not other local banks.

Got it. Awesome. Thank you so much. I'll step back.

Yep. Thank you. And our next question comes from the line of Jared Shaw from Barclays. Your question, please.

Hey there, thanks. Maybe just on the commercial loan growth that you're putting on, what are you seeing for spreads on CNI right now? Is that staying stable, or are you seeing some compression with competition?

No, Jared, this is Jamie. They're staying pretty stable, I think, in totality. We have the weighted average roll on is in mid to upper sixes in totality in the books. But mostly stable, I would say, the spreads.

Okay. And then can you just walk through a little bit on the investment securities with the decline in yield this quarter? And you talked about sort of reinvesting some of those cash flows. What are you purchasing in terms of yield and duration? And should we expect to see some recovery in the securities yield, or is it staying lower here?

Yeah, no, you should expect maybe 2.25% pickup on the things that we're putting back on versus the roll-off. So what's rolling off is about 2% in that book, and we're going to be putting on maybe somewhere between 4% and 4.25% And so keeping the duration a little bit, keeping the duration sort of same, flat in the book. And we're replacing cash flows that roll off with same type of assets that we, that are rolling off. So mortgage securities with, you know, with, you know, that are good structures and, you know, have either through, collateral features or structure features that sort of give us a tight prepay window. So, you know, in that five duration area.

Okay. All right. Thanks. And then just finally for me on credit, you know, I know we're talking about low numbers, but when you look at sort of the growth in resi mortgage non-performers, you know, over the last few quarters, that's been significant. pretty big compared to where you've been before. What's driving that weakness? I know that there's probably not a lot of loss content there, but is that, you know, what's sort of driving the underlying concern with the consumer on those?

Jared, this is Bob. Maybe I'll start and then Lee can add some comments. You know, the consumer at the, say, the lower end is getting a little stretched. Their savings as they accumulated during COVID have gone away and it's just getting a little bit tougher. I think you had mentioned on collateral, but anything you want to add?

No, not really. I mean, the portfolio is performing as we expected. So we were pleased for a very long time with the performance, and we continue to be very pleased and confident with the portfolio.

Yeah, for a very long time, we had zero. So anything above zero is going to look like a big number. Yeah, yeah. But we're not concerned about it from a loss perspective, as I think Lee mentioned.

Yep. Okay. Thank you very much. Thank you. And our next question comes from the line of Tamar Brasiler from Wells Fargo. Your question, please.

Yes. Hi. Good morning. Maybe just keeping to the line of commentary on credit, the increase in commercial criticized assets Can you just help us reconcile kind of that increasing trend versus the still really strong level of charge-offs? And how do you see that ultimately playing out? Do you think that is going to somehow correlate to maybe an uptake in charge-off activity, again, off of a really low base? Or do you think that ultimately they'll just end up curing themselves?

For the most part, they will end up curing themselves. We already know of two that, well, one paid off right after the end of the quarter, and then there's another one that we expect to pay off. And as you mentioned, right, the base is so low that you just have one loan move in and it moves significantly at the percentage. So, again, you know, we don't go into these without some expectation that some will have troubles. But when you stay close to the borrower, you can be confident that you'll come out very satisfactorily.

So... Okay, thanks for that. And then... Sorry, go ahead.

No, you know, we are confident in our book. The book is strong.

Okay. Thanks for that. Maybe following up on... the completed construction loans being refied away. I'm just trying to get the magnitude here of what's coming due from a construction completion standpoint. And then similarly on the CRE side, for those resets that are approaching, I'm just wondering if you're seeing an increased level of competition from some of those potentially being refied away as well here.

Yeah, Timur, I don't have the specific numbers of what's coming up. We had three loans pay off in the quarter, which kind of led to that pay down for several, actually. We're not seeing additional competition as far as refinancing. As far as new deals coming forward, pricing had expanded a bit during COVID. It's coming back a little bit more to pre-COVID spreads. but it's still solid and I think appropriate for the risks that we're underwriting.

Okay. And then maybe just tying in some of the payoff activity The fact that the floor plan book here is reaching a level of stabilization and your comments around the bond book reaching a level of stabilization. Is the expectation here that we start seeing asset growth or just given some of the dynamics, assets likely remain somewhat stagnant here for at least the near term?

Yeah, Timber, yeah, I think maybe we'll see some balance sheet growth. You know, we're going to keep the bond book stable where it's at. And we should see some loan growth in the back half of the year. So I would expect a larger balance sheet by year end.

And just to add to Jamie's comments, some of the things that have been a drag over the last several years, our indirect book pre-COVID was well over a billion, billion, billion, one. Now it's 600 million. So over the whatever it is, five and a half years gone down by 500 plus million. That's now stabilized, so the market's reasonable, and so we don't have that headwind now. A little bit of a headwind in residential lending is, I think, for all the banks here in Hawaii, but just not a lot of new volume as things mature. But on the commercial side, to Jamie's point, we're optimistic. There's deals out there, and we're looking at them and feel pretty good about the pipeline.

Got it. Thank you for the questions.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Kevin Haseyama for any further remarks.

Thank you. 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.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.