First Hawaiian, Inc.

Thank you for standing by, and welcome to the first Hawaiian Inc. Third Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program 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 third quarter of 2025. With me today are Bob Harrison, Chairman, President, and CEO, Jamie Moses, CFO, and Lee Nakamura, Chief Risk Officer. We have prepared a slide presentation that we'll 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 our 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.

Hello, everyone. Thank you. And thanks for joining us today. And I'll start by giving a quick overview of the local economy. The state unemployment rate continued to drift lower and was at 2.7% in August compared to the national unemployment rate of 4.3%. Through August, total visitor arrivals were up 0.7% compared to last year, as strength in the U.S. mainland arrivals more than offset weaknesses in Japanese and Canadian arrivals. Year-to-date visitor spending was $4.6 billion, up 4.5% compared to the same period of last year. The housing market remained stable. The median single-family sales price on Oahu was $1.2 million in September, up 3.8% from last year. The median condo sales price on Oahu for September was $509,000, down 1.7% from the prior year. Before we move on, I wanted to discuss the federal government shutdown. And it's too early to measure the full impact on the Hawaii economy. But with our large civilian federal workforce, we expect that many families will begin to face financial hardship. Through the Hawaii Bankers Association, All the local banks have asked affected families to contact their local bank to discuss available relief measures. Turning to slide two, we had another strong quarter, a net income increase compared to the second quarter. The improvement relative to the prior quarter was driven by higher net interest and non-interest income, partially offset by a higher effective tax rate. As you might recall, Our second quarter results included the impact from a change in California tax law, which resulted in a net benefit of $5.1 million last quarter. The effective tax rate in the third quarter returned to a more normalized 23.2%. Turning to slide three, the balance sheet remains solid as we continue to be well capitalized with ample liquidity. We held the investment portfolio relatively flat and loans declined by $223 million. Average deposits were higher during the quarter, and we saw a surge at the end of the quarter due to inflows in public operating accounts. And Jamie will cover this in more detail in a little bit. We also repaid the $250 million FHLB advance that matured in September. And during the quarter, we repurchased about 965,000 shares at a total cost of $24 million. We have $26 million of remaining authorization under the approved 2025 stock repurchase plan. Turning to slide four, total loans declined by about $223 million in the quarter. The decline was primarily in C&I. Dealer flooring balances fell by $146 million and pay down on lines of credit by several Hawaii corporate borrowers. added about $130 million to the decline in the CNI balances. We're seeing strong originations so far in the fourth quarter and expect to end the year about flat to year-end 2024. Now I'll turn it over to Jamie.

Thanks, Bob. Turning to slide five, total deposits increased about $500 million in the third quarter. Commercial deposits increased $135 million and were partially offset by a $43 million decline in retail deposits in the quarter. The decline in retail deposits seems to be largely due to seasonality, where we have seen a pattern of declining balances in the third quarter, followed by growth in the fourth quarter. Total public deposits increased by 406 million, and all of that growth was in operating accounts. There was no change in the balance of public time deposits. In the fourth quarter, we expect seasonal increases in both retail and commercial deposits, while seeing outflows in public deposits. The total cost of deposits fell by one basis point and the ratio of non-interest bearing deposits to total deposits was a strong 33%. On slide six, net interest income was $169.3 million, $5.7 million higher than the prior quarter. The NIM in the third quarter was 319, up eight basis points compared to the prior quarter. The increase in the margin was primarily driven by higher asset yields as well as some non-recurring items such as loan fees. The run rate NIM for the month of September was 3.16%, and we continue to expect positive NIM momentum in the fourth quarter, and our current thinking is that the margin will advance a few basis points from the September NIM. This guidance reflects the impact of our fourth quarter loan and deposit outlook and additional 25 basis point rate cuts in both October and December. Turning to slide seven, non-interest income was $57.1 million in the quarter. Non-interest income benefited from higher BOLI income due to favorable market movements and swap income. We continue to expect the normalized run rate of non-interest income will be about $54 million per quarter. There were no unusual expense items in the third quarter. And based on our year-to-date expenses, we now expect that full-year expenses will come in below our most recent outlook of $506 million. And now I'll turn it over to Leigh.

Thank you, Jamie. Moving to slide eight. The bank continued to maintain its strong credit performance and healthy credit metrics in the third quarter. 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 books. Classified assets increased $30.1 million due primarily to a single borrower who is a longtime customer that we know well and are continuing to work closely with. Quarter-to-date net charge-offs were $4.2 million, or 12 basis points of total loans and leases. Year-to-date net charge-offs were $11.3 million. Our annualized year-to-date net charge-off rate was 11 basis points, or one basis point higher than in the second quarter. NPAs and 90-day past due loans were 26 basis points at the end of the third quarter, up three basis points from the prior quarter, resulting from a slight increase in non-accruals. Moving to slide nine. We show our third quarter allowance for credit losses broken out by disclosure segment. The bank recorded a $4.5 million provision in the third quarter. The asset ACL decreased by $2.6 million to $165.3 million, with coverage remaining at 117 basis points of total loans and leases. We believe that we continue to be conservatively reserved and prepared for a wide range of outcomes. Now we would be very happy to take your questions.

Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. Our first question comes from the line of David Feaster from Raymond James. Your question, please.

Hey, good morning, everybody. Good morning, Dave. I wanted to talk on, you know, just kind of the growth outlook. I mean, obviously, we've had some, you know, the deal reform plan was a headwind. some just natural declines in CNI. I was hoping you could first maybe touch on kind of how the pipeline is shaping up, you know, demand that you're seeing and other opportunities that you'd be interested in helping, you know, accelerate organic growth, whether it's, you know, is there any appetite for pool purchases or, you know, SNICs? Just kind of curious, kind of like your thoughts on, again, what are you seeing now in the pipeline and demand and organic growth and other opportunities to accelerate that?

Morning, Dave. This is Bob. I'll maybe start off, hand it off to Jamie. So, yeah, third quarter was a little unusual in that we saw some pretty significant paydowns in dealer floor plan. Part of that was one of our customers sold several franchises, so that impacted that negatively. But overall, we're still very bullish in that business. We're seeing very strong production in the pipeline. There are some of that already closed for the fourth quarter. Some of that CNI, a lot of that is CRE, so we think we're going to have a very strong fourth quarter. As we look to the future, we have considered pool purchases, but maybe I'll ask Jamie to comment on that.

Thanks, Bob. I think we're looking at, just in totality, as Bob said, we're looking at being able to get back to flat at the end of 2025, roughly to where we were at the end of 2024, which speaks to the strength of the pipeline that we see today. But to the broader question of pools and purchases, I think we always look at things and to the extent that we feel like we have some level of expertise or knowledge in particular areas, we look maybe to carve out things that we have expertise in. So for example, maybe like a residential pool, of Hawaii loans, right, might be something where we would think long and hard about purchasing. Or if there are opportunities around properties in Hawaii that we might look at as well. So, you know, for the most part, you know, we see where that we want to grow loans, but we're really looking for areas where we have some sort of expertise or niche knowledge around in order to be able to do that.

Okay. That's helpful. And then maybe just, I mean, the core deposit growth was tremendous. I was hoping you could maybe touch on a bit, you know, you talked on some continued growth in core deposits. Obviously there's some seasonality that you alluded to, but could you talk about where you're having success driving core deposit growth and And then just, again, you know, the good and the bad of that is we built liquidity. Like, how do you think about deploying some of that liquidity in the coming months?

Yeah. Yeah. Thanks. Thanks, Dave. So, you know, I guess we're going to we're going to expect that our deposit total balance is probably going to be roughly flat at the end of at the end of the year to where we are today. And that mix is gonna shift a little bit from, we expect to see some of our public deposits kind of run out here in the fourth quarter, but sort of replaced by retail and commercial deposits. So where we're having success really is our retail teams and our commercial teams are really out there and really talking to our customers and doing a really good job of maintaining, strengthening relationships in the community and, you know, I think we're really trying to focus on that relationship activity. And so we've had a lot of success with that and that's due to the efforts of our retail and commercial teams primarily, you know, out here on the ground.

And to add to Jamie's answer, you know, as far as the liquidity that we have, we have been, we are no longer letting the investment portfolio run down, so we're holding that flat. So we have or kind of restarted some purchases after a number of years of letting it run down. So we're keeping that relatively flat with similar duration and very similar categories of securities that we're looking at to purchase.

Okay. That's helpful. And then maybe just last one for me. I appreciate the margin commentary there. You know, I mean, look, you're naturally rate sensitive just given the strength of your core deposit base and, you know, the floating rate nature of some of your loans. Just kind of curious. I mean, there's a lot of moving parts in here, right? You got liquidity deployment, you know, and there's a lot of moving parts. But I'm just kind of curious, you know, first, how do you think about managing deposit costs as the Fed cuts? And then just given the tailwinds from back book repricing, remixing, and some of this liquidity deployment that we're talking about, Do you think that we can see the margin continue to expand even with Fed cuts next year?

I think, Dave, that depends kind of on the timing and the magnitude of those cuts. I think that is, you know, ultimately by the end of the year, it could be a challenge to see an expansion at the end of the year. But for now, you know, I think for now... By the end of the year, you meant 2026. That's right. Yeah. Yeah. But for now, what we see is that we have sufficient loan growth and sufficient loan growth to sort of cover this, right? So we're still, you know, we're looking at a billion dollars of cash flows over the next 12 months at like a, we'll call that like a 125 basis point spread right now to loans that we're putting back on the books. And we have a 200 to 250 basis point spread on the investment portfolio. right now, you know, that we're sort of, you know, that we're keeping flat. So there are a lot of underlying dynamics. And of course, those spreads will decrease, right, the more the Fed decreases as well. You know, but I think the trajectory for now looks like we can still support, you know, increasing expansion of the margin. But of course, there will be a natural spot. You know, I think that's maybe you know, that's maybe like a percent or so from now. So four to five rate cuts, something like that. There'll be a natural floor to our ability to drive out further decreases in the deposit book. So, you know, good and bad news, right? Got a great deposit base, but it can only go so low, right? There's a floor on that. So I think there is opportunity to continue to expand the NIM. And again, you know, you know, I think that is going to be largely dependent on our ability to generate loans.

Terrific. That's helpful. Thanks, everybody. Thank you. And our next question comes from the line of Charlie Driscoll from KBW. Your question, please.

Hi, this is Charlie on for Kelly Mata.

Hey, Charlie.

Just if you could... Remind us of your capital priorities, how you're viewing the buyback. And from an A perspective, the environment's obviously heating up. Just remind us of your strategy on that front. Thank you.

Yeah, thanks, Charlie. So capital priorities continue to be the same. You know, we'd love to, you know, we're doing all the loans that fit our credit box and profile. We want to do all those that we can. And we have a share buyback authority of $100 million. You see that we've done $74 million so far, and the rest of that is going to depend on, I'll call it market conditions for sure. And, you know, I think the dividend is, you know, pretty good yield kind of a place. And also, just in terms of a, you know, the ratio of earnings that we pay out is relatively high. So, probably not going to see an increase in the dividend or anything like that as part of that at the moment.

That's helpful. Thank you. And then, I guess... Like circling back to the deposit rate conversation, the pricing in Hawaii has been rational and anticipating some cuts. Like we've been hearing some changes and expectations from banks. Maybe just put some numbers around how you're thinking about betas on the way down. Thank you.

Yeah. So, Charlie, we tend to talk about it as beta on our rate-sensitive portfolio. So we continue to have a roughly $4.5 billion rate-sensitive deposit portfolio. We've been very successful with past rate cuts. We're talking maybe 90%, 95% betas on that portfolio relative to a Fed rate cut. We think that drives a little bit lower, and it gets successively lower for each rate cut that we have. But I think right now, I think about maybe like a 90 beta on the next rate cut, 88 on the next one after that, 85, something like that. So we still think we have a range there where we can drive deposit costs lower, of course, when the Fed cuts rates as well. It's a decreasing ability to do that for sure, but still relatively high at the moment.

Great. Thank you. And then I guess just like a little bit of detail with the margin expansion and the 50 bits of additional cuts, are you assuming any loan purchases in that or not?

No loan purchases in that. That's just what we're looking at in terms of looking at our pipelines and talking with the teams over the past month or so. We just expect to have really strong loan growth here in the fourth quarter.

Okay, great. Thank you for taking my questions. I'll step back.

Okay, Charlie.

Thank you. And our next question comes from the line of Anthony Elion from JP Morgan. Your question, please.

Hi, everyone. Jamie, just to follow up on Nim, just to follow up on Nim, you know, slide six, you saw a really nice tailwind from loan repricing, and it looks like every one of your loan yields increased from the prior quarter. I'm just wondering how much of a tailwind is left from loan repricing, maybe in 4Q and beyond, just given the outlook for rate cuts in the forward curve?

Yeah, so, you know, I think there's still tailwind there. I guess I'll start with that. Um, but then, you know, as, as we look out, um, we, you know, we have a billion dollars of, uh, fixed rate cash flows coming off of the portfolio over the next 12 months. Um, and you know, right now we think that that's repricing higher at like a 125 basis point spread, um, at the moment. So there, there's still a pretty significant tailwind there. Now, the 125 basis points, you know, that's an average and, you know, The more the Fed cuts, the tighter that spread gets for sure. But there is still an ability to reprice those cash flows higher. On the investment portfolio, where we're seeing $500 million to $600 million of runoff over the next 12 months, we're getting like a 225 to 250 basis point spread on those purchases. So, there's still a really significant sort of balance sheet role impact that we're seeing that should be a tailwind, not only in the fourth quarter, but into the first and second quarters as well. Now, again, all of this is dependent on being able to replace those cash flows with loan growth, and we think we can do that. but it will be dependent upon that sort of loan growth trajectory. And to the extent that we don't get the loan growth, we would consider other things. We would consider maybe increasing the size of the investment portfolio. It's not our preferred option, but there are things that we would do to manage the balance sheet and to try to manage that NIM to continued expansion, or at least sort of trying to keep it flat as we get you know, those third and fourth and fifth anticipated rate cuts.

Okay. And then my follow-up, I think you pointed to $54 million of fee income in 4Q. Just what are the areas or headwinds you expect to decline this quarter? Is it just the two items you call out on slide seven? Thank you.

Yeah. I think that's right, Tony. Yeah, it's not really headwinds. It's just we kind of got some good positive surprises here in the third quarter and wouldn't necessarily expect that to continue into the fourth.

Yeah, and to add to that, we have been kind of messaging more in the 51 to 52 range, and now just given the strength of the overall fee business, we're moving that up to 54 as kind of our expected run rate.

Thank you. Thank you. And our next question comes from the line of Matthew Clark from Piper Sandler. Your question, please.

Hey, good morning, everyone. Good morning. Just to close out the NIM discussion, do you have the spot rate on deposits at the end of September?

That was 136 basis points end of September.

Okay. Thank you. And then the negative migration you saw in substandard this quarter, can you just speak to what drove that increase?

So it's primarily that single loan to our long-time customer. We're not really worried about loss or anything like that. We work closely with the customer. We just feel it's prudent to continue to update the ratings as we see the financials.

Okay, I may have missed it, but the type of customer in the situation there?

We didn't share that one, Matt, so we'd rather not. It's a small town.

Understood. And then just on the capital question, I don't think we've finished up on the M&A piece, and again, I may have missed it, but just any updated commentary on M&A, discussions you might be having, whether or not Things have changed materially since last quarter?

No, unchanged. We're still open to talking to people and would certainly consider the right opportunity, but no change from previous guidance and discussion.

Okay, great. Thank you.

Thank you. As a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. Our next question comes from the line of Timur Braziler from Wells Fargo. Your question, please. Hi, good morning.

Jamie, your comment on total deposits, I want to make sure I heard that right. Is it flat for 4Q or flat for the year?

It's flat third quarter to fourth quarter. So we expect public to run out in the fourth quarter a little bit while we increase retail and commercial.

Okay.

And then maybe back to Matt's last question, just more specifically mainland M&A. Sounds like that's been something that's at least on the table more recently. Is that still the case? And maybe just remind us if that is the case, kind of what you'd be looking at as far as criteria goes.

Well, we, you know, no change to what I said, Timur. I think the only thing would be It would only be mainland M&A for us because with our HHI and market share here, there's nothing we'd be able to do in Hawaii. So, but no change. We're certainly open to talking to people and would consider the right opportunity. Okay, that's a good point.

And then, Bob, your starting comment on expecting many families will face potentially some real hardships here from a prolonged government shutdown. I guess that comment and then looking at the last New Hero report, which is calling for a mild recession over the course of the next year. I mean, is that any different really from kind of the operating trends on the island over these last couple of years? Has that changed? the way that you guys are thinking about the local economy, and I guess more pointed, just how much of that is already factored in in the reserving that you have, particularly on the consumer side?

Yeah, maybe I'll start and ask Lee if she has any additional comments. Really no change. We think that the local economy is resilient. I mean, people are, that's the first time this has happened. It's been a little while since there's been a shutdown that's affected you know, salaries and all that. But we just want to make sure, and that's why we want to do it with all the banks here, want to make sure we're open and people know they can approach us if there's a need. But we've had just very few inquiries. Lee, maybe you have any additional comments?

Not really. You know, we haven't really seen any effects in the credit metrics yet, but we're always cautious and we always take it into consideration when we try to figure out what the right valuation is for the ACL.

And on that, I mean, to speak to consumer credit metrics, Lee didn't mention it earlier, but the two that tend to pop up soonest is credit cards and indirect, and they're doing quite well. So really nothing observable at this point, Timur. Great. Thank you. I'll come back.

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

Hey, everybody. Just following up on that, when you look at the impact of federal spending apart from military in Hawaii, are you concerned at all that it could be impacted by a reshifting of federal priorities, or is it still pretty heavily defense-focused. So, you know, while we're dealing with the shutdown now, you still feel that it's not going to change the long-term contribution of federal government spending into Hawaii?

Yeah, I totally agree. The long-term trend is defense-focused and it's going to be very strong. I'm heading down to Guam for next week and the spend there is phenomenal and the projects on deck here are very, very strong. So, We're not expecting that. Our core federal employee workforce is pretty stable. The largest employer being the Pearl Harbor Naval Shipyard, which has been identified as a key resource in the Navy. So really, you know, stable to improving, I guess, would be the long-term view.

Okay. And then... In conversations with your floor plan dealers, what's their expectation for sort of auto sale volume going into the next year? Are they thinking that there's going to be a slowdown in purchase activity? And is that incrementally, I guess, better for you with floor plans if inventories stay around longer?

Certainly, you know, we have... really great customers with strong credit, so we'd love to see higher balances with those same customers. The discussions haven't been as much around next year. It's really been more topical about tariffs and the impacts of tariffs, and different manufacturers are picking up some of the impacts of those additional costs. Others, I think we'll start, based on conversations we're having, we'll start to soon start passing those through. to customers, and so there's a fair amount of uncertainty still on the end impact of the tariffs that started at the beginning of this year and what consumers will do with potentially higher price points and how that will affect demand. If it slows down demand, maybe not in next year, but even into the fourth quarter, first and second quarters of 2026, that would definitely help us.

Okay. And then just finally for me, Have you seen any change in pricing behavior from some of the change in ownership of other Hawaii competitors over the last year? It sounds like earlier in the year there wasn't really any big change, but are you seeing any change in how they're approaching pricing in the markets?

We haven't seen any change in the market as far as competitive dynamics or pricing.

Okay. Thank you. Thank you. And our next question comes from the line of Janet Lee from TD Securities. Your question, please.

Hello.

Hey, Janet.

Hi. Going back to M&A just quickly, I know you guys touched up on it just a few times on this call, but can you remind us what is your stance, what is your current stance on that M&A, potential M&A opportunity if you are looking to, you know, you're considering opportunities, like what would make sense in the mainland?

You know, really nothing to add to earlier comments. I guess the only thing would be in the western states, it's not that we're going to go, you know, central or east, but, you know, there's just, we're open to talking to people and would consider the right opportunity and really nothing more to share than that at this time.

Okay. at it fair. I think people are entertaining the idea of resi mortgage coming back if the rate comes down to the five handle. Would that be something that would be helpful to your market or perhaps not because it's more of a supply issue? How should I think about the positive impact from that point on your resi?

Yeah, Janet, it's a good question. I think that the lower the rates go, just the more activity you will see. You are correct that there is some sort of supply constraints around that for sure. But I think it would be helpful for balances. I think that there should be some good opportunities there. So, yeah, I mean, I think ultimately for the mortgage business in particular, if the rates go a little bit lower, we could see some increased activity in that area, and that should be constructive.

Got it. And apologies if this was already covered, but that pay down on $130 million of pay down on corporate lines, was that just seasonality that is coming back or just one-off? Or is it usually a big quarter for paydowns?

No, it wasn't necessarily seasonally. These were earlier draws for specific things, and now that that's done, they're getting repaid. You know, it was odd in that several happened in the same quarter, but there is nothing unusual about the borrowing and repayment. It just all kind of landed – The draws weren't in the same quarter, but the paydowns were. So that's why we didn't call it out on the way up, but we're calling it out on, you know, when it got repaid.

Okay. Got it. Thank you.

Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. And 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.