First Hawaiian, Inc. ($FHB)

Good day, and thank you for standing by. Welcome to the First Hawaiian, Inc. Q1 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Kevin Haseyama, Investor Relations Manager.

Thank you, Josh, and thank you, everyone, for joining us as we review our financial results for the first quarter of 2026. With me today are Bob Harrison, Chairman, President and CEO; Jamie Moses, Chief Financial Officer; and Lea 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 1 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, everyone, for joining us today. I want to start by sharing our support for the communities impacted by the recent flooding in Hawaii from the Kona Low storms and Typhoon Sinlaku and Guam and Saipan. It's really important for us to support our communities, and we are actively providing relief and support to help our customers and those affected in the relative communities. Moving on to an outlook. The statewide unemployment rate remained relatively stable at 2.2% in January. That compares to the national rate at 4.3% for the same month. Through February, total visitor arrivals were up 7.1% compared to last year, primarily due to more visitors from the U.S. Mainland and Japan. Year-to-date spending through February was $4.2 billion, up 14.8% compared to 2025 levels for the same period. At this point, it's too soon to know how tourism and the local economy might be impacted by the recent global events. The housing market remains stable with the median single-family home sales price on Oahu in March at $1.2 million, up 3.4% from the prior year. And the median condo sales price on Oahu in March was $510,000, up 2% from the prior year. Turning to Slide 2. We had a strong start to the year. Loans and deposits grew, credit quality remained solid, and we remained well capitalized. Our return on average tangible assets of 1.2% and return on average tangible equity of 15.3% for the first quarter. The effective tax rate for the first quarter was 22.5%. Turning to Slide 3. The balance sheet remains solid as we continue to be well capitalized with ample liquidity. We remain asset sensitive and well positioned to benefit from a higher for longer rate scenario. During the quarter, we repurchased about 1.3 million shares at a cost of $32 million. Turning to Slide 4. Total loans grew over $128 million in the quarter, up 3.6% on an annualized basis. We had good growth in CRE and C&I loans, partially offset by runoff in residential loan portfolio and payoffs in the construction loan portfolio. Some of the growth in the CRE portfolio and decline in the construction portfolio were due to completed construction projects converting to permanent financing. Now I'll turn it over to Jamie.

Thanks, Bob. Turning to Slide 5. We delivered solid deposit momentum in the quarter with total deposits increasing by $262 million, driven primarily by growth in public operating balances. Retail and commercial deposits were modestly higher and importantly, did not experience the typical seasonal outflows we have seen at the start of prior years, which we view as a positive signal. Public deposits increased $244 million, reflecting higher operating account balances. We continue to see meaningful improvement in funding costs with the total cost of deposits declining 7 basis points to 1.22%. Our noninterest-bearing deposit ratio remained healthy at 31%, reinforcing the strength and stability of our core funding base. On Slide 6, net interest income for the quarter was $167.5 million, down $2.8 million from the prior quarter. Net interest margin was 3.19%, a decline of 2 basis points sequentially. This reflects the full quarter impact of the December rate cut. As we look ahead, we expect the balance sheet repricing story to continue throughout the year. Turning to Slide 7. Noninterest income totaled $52.8 million for the quarter. The decline from last quarter was primarily attributed to lower BOLI income and swap fee activity, which we view as timing related rather than structural. Noninterest expense was $127.9 million, and there were no material unusual or nonrecurring items in the quarter. Our expense profile remains well controlled and aligned with our full year outlook. With that, I'll turn it over to Lea to review our credit performance.

Thank you, Jamie. Moving to Slide 8. The bank continued to maintain its strong credit performance and healthy credit metrics in the first quarter. Credit risk remains low, stable and well within our expectations. Overall, we're not observing any broad signs of weakness across either the consumer or commercial books. Criticized assets decreased by 21 basis points and nonperforming assets and loans 90 days or more past due were 30 basis points of total loans and leases, down 1 basis point from the prior quarter, resulting from a decrease in dealer flooring nonaccruals. Quarter-to-date net charge-offs were $4.9 million or 14 basis points of average loans and leases, unchanged from the fourth quarter. The bank recorded a $5 million provision in the first quarter. The allowance for credit losses increased by just under $1 million to $169 million with a coverage ratio of 1.17% of total loans and leases. We believe that we are conservatively reserved and ready for a wide range of outcomes.

Thanks, Lea. Turning to Slide 9. We have updated our outlook for key performance drivers. We continue to expect full year loan growth to be in the 3% to 4% range. With the markets now expecting no rate cuts this year, we have revised our full year NIM outlook to be in the 3.22% to 3.23% range. We expect second quarter NIM to be up 2 to 3 basis points from the first quarter. Our outlook for noninterest income remains about $220 million for the year. And finally, we expect expenses to gradually increase throughout the year, and we continue to forecast full year expenses will be about $520 million. That concludes our prepared remarks, and now we'd be happy to take your questions.

[Operator Instructions] Our first question comes from Anthony Elian with JPMorgan.

Jamie, on the outlook, the drivers of the 2 to 3 basis point sequential increase in NIM in 2Q, could you help us unpack that a little bit? What's driving that the range for full year moving higher? And is that entirely coming from no rate cuts this year?

The right answer to that is the balance sheet repricing story that we've had and seen for the last year or two. So again, just to remind everybody, we have about $400 million of fixed rate cash flows that come off every quarter that get repriced at about a 155 basis point spread higher on a weighted average basis between loans and securities. And so Tony, that's really the driver as we go forward, right? So we still are an asset-sensitive balance sheet. So we will see a decline in NIM if there is a rate cut in any given quarter, but then the balance sheet repricing dynamics after that will sort of drive the NIM higher as we go forward.

And then on expense, so you reiterated the outlook of $520 million for the full year, but I think 1Q came in a little bit lower than what we were expecting, which would imply a pretty good pickup over the course of the year. Is that the right way to think about it? And what are the areas driving the increase in expense?

Yes. I mean it's going to be kind of broad-based, Tony, in terms of the areas. Hopefully, we'll get some more salary expense in there, as we've talked about, we're looking to hire folks -- talented folks to come over and drive revenues for us. So hopefully, that's where we'll see much of that pickup. But generally broad-based, and I think you are thinking about it correctly in terms of a little pickup and a ramp as we get throughout the year.

Our next question comes from Jared Shaw with Barclays.

When you look at the growth, C&I growth has been pretty good. Any specific drivers sort of underpinning that? And can you update us on your appetite for Mainland expansion? Any of the hires, Jamie, that you're talking about, should we think are coming maybe off island?

Yes, Jared, let me -- this is Bob. Let me start with the loan outlook. Really, the $71 million in C&I growth for the quarter, about $24 million of that was dealer floor plan and the rest were draws on existing lines of credit, both local companies and mainland companies. So it was really pretty broad-based. Good growth in dealer flooring, which we appreciate. So we look at that for the rest of the year as being an opportunity along with commercial real estate to continue to grow. On the hiring, yes, we're looking for people all over. Of course, we would strongly prefer to hire here locally. But if we are unable to do so, depending on that, we would look to the Mainland.

On the floor planning, are you seeing utilization get back to more normal levels? I know it was pretty low for a while. Or is that growth coming from expanding the network?

We added a new dealer relationship during the quarter, but that wasn't all of it. I think it was a little bit of utilization. So a mix of both.

Okay. And then maybe separately, the securities yields are still pretty low. And with the capital -- the extra capital you have, would you consider sort of just putting on more of a classical leverage play here or utilize some of the extra deposit growth on securities and sort of prefund some of that cash flow that's going to be coming off? Or should we really just think that you're going to be reinvesting cash flows as they happen?

Yes, Jared, I think the answer to that is the latter piece of that. We're just going to be reinvesting cash flows as they come off. No plans to do any sort of restructuring or anything at the moment. And again, at the moment, no plans to expand the size of the securities portfolio either. So for now, it's just going to be that just cash flows coming off and we'll reinvest them.

Our next question comes from David Feaster with Raymond James.

I wanted to touch on maybe the competitive side. You kind of got a unique perspective. Just kind of curious maybe if you could touch on the competitive dynamics, both comparing and contrasting the Mainland versus Hawaii. Are you starting to see competition shift from just pricing to more pushing on structures and standards? Just kind of curious what you're seeing on that front.

Yes, David, this is Bob. Maybe I'll start off on that. the competitive nature, we really haven't seen -- it's always been a little bit more competitive -- put it this way, cyclically competitive on pricing. So now we're getting a little bit more competitive on price, both primarily on the Mainland, but a little bit here. It's always been a bit more competitive on price in Hawaii, given the various banks' low loan-to-deposit ratios. Everybody's got liquidity they're looking to put to work here in Hawaii. So that's always been an issue here. We are seeing it kind of cycle down slightly in our Mainland markets. A little bit of that is, say, multifamily construction was higher on a spread 1.5 years ago than it is today. So I think that kind of speaks to that. The other thing we're seeing are the larger banks are taking bigger pieces of deals. And so there's less available. So there is a little bit more competition for deals themselves as some of the larger banks are increasing their hold levels. Does that address your question?

Yes. No, that's helpful. And then I appreciate -- you guys reiterated the fee income guide. I was just hoping you could walk through some of the business lines and kind of some of the underlying trends and some of the puts and takes that you're seeing there.

Maybe I'll start on the wealth side. We're continuing to see really good interactions between our customers and our wealth advisers. So that business has continued to grow year after year for many years now. And so I think that's been a nice opportunity. The fees associated with our credit card business have been pretty stable. There's movement quarter-to-quarter, a little stronger in Q4, a little less in Q1. But that's pretty standard as far as what we would expect in that business. Jamie, anything you would add to that?

Yes. I guess the only thing to add is there's a portion of our BOLI that is market-driven. And so that can be somewhat volatile, and we saw that a little bit here at the end of the first quarter with the market kind of underperforming, let's call it. And so we took less fees related to that. And then swap fee income in our loan book can kind of also be sort of cyclical, just depending on what kind of lending we're doing in a particular quarter and what our customers want. So I think combine those couple of things with all of what Bob mentioned, I think, is where you get to on the fee guide.

Okay. And then maybe just touching on the funding side. I mean you've had a lot of success. This quarter was great, a lot of benefit from public funds this quarter. I was hoping you could touch on maybe some competition on the funding side and just how you think about gaining share and driving market share growth on the deposit front? And what's going to be the key drivers of that? Do you see more opportunity on the commercial or the retail side? Just kind of curious some of the funding trends you're seeing.

Yes. For that and most of the -- well, virtually all of our deposits are here in market in our [indiscernible] is just day in, day out getting out there and meeting with customers and prospects and trying to show them the different products and services we offer and see how we can make that work for them. So it really is a ground game, I would call it, more than anything else. There's no -- there's not a lot of magic to it where it would change quarter-over-quarter. But certainly, our folks are out there and trying to meet with customers, both on the consumer, small business and larger business side.

Our next question comes from Kelly Motta with KBW.

Maybe on capital, really solid here. I apologize if it was asked already, but have you guys done any work on the proposed capital changes and the potential impact to your ratios here?

Yes. We've done a little bit of work on it. We think that it could possibly add maybe like 1% CET1 to our capital levels. But again, proposed and we're not going to change our capital allocation strategy or our plans based on that. But if it goes through the way it is, we think it's about a 1% add.

Got it. That's really helpful. And then otherwise, I mean, you've been very consistent here with the share repurchase. It seems like that's probably even with the growth having picked up, probably a good expectation. But I wanted to hear your thoughts on how you're thinking about that.

Yes, Kelly, I think you summarized it pretty well for us. Maybe we can hire you to do that again. Yes. No, I think you nailed it, yes.

Yes. So we have the $200 million allocation, and we used $34 million in Q1. And so it's not set for -- timing-wise, it's not set for a particular year. And so we're just looking at what makes sense going forward.

Yes. And just to be clear, the amount of the authorization was $250 million.

Got it. That's -- that's really helpful. And then otherwise, I mean, credit looks [indiscernible] anything to know any -- anything you're watching or pulling away from?

I don't think anything we're pulling away from just given the uncertainty in the environment, the volatility, the recent natural disaster events that have happened in our footprint. We're just watching certain portfolios very carefully, but we haven't really seen anything so far.

Our next question comes from Andrew Terrell with Stephens.

I wanted to go back a little bit on the margin. I hear you on the near-term guidance and kind of full year guide. The majority of what underpins that is some of the fixed repricing. Can you just talk about, is there any level of benefit you'd expect or work to do on the deposit base as you move throughout the year? Just absent rate cuts, do you feel like you've kind of fully exhausted the ability to reprice lower? Any other tweaks you could look to make on the funding side?

So there's still some ability to work on that, in particular, with CD pricing, kind of what sort of rolls over every quarter. We've seen a pretty significant decline in sort of the competitive environment around those from, say, a year or so ago. So we could still see some benefit from that perspective. The March deposit number, Andrew, was [ 1.20% ] so a little bit lower than what we had in the quarter. So maybe there's still like you can see the sort of dynamics of the CD repricing around that. So I wouldn't expect it to go too much lower with rates staying the same in totality in terms of deposit costs. But the guide for the year on the NIM is inclusive of any sort of rate actions we might take on the deposit side as well as the repricing story.

Yes. Yes. Okay. And then last quarter, you talked about -- I think you gave -- I forget the specific dollar amount of the fixed cash flows for the year, but roll-off yield 4%, new asset yield 5.5%. There's obviously been a lot of rate volatility throughout the first quarter and I'm not asking for a total crystal ball, but do you feel like 5.5% blended new asset yield is still kind of a fair assumption based on what you're seeing for loan origination yields and where you're buying securities at today?

Yes, I think so. I mean it's going to depend quarter-to-quarter based on what type of lending activity we do in any given quarter, right? If it's -- if activity is primarily in lower spread things, then it might be a little bit lower than that. But for the year, I think $150 million is a good number and that $400 million per quarter of cash flows coming off and repricing still is a good number.

Got it. Okay. And if I could ask just one last one. I think we started talking more about Mainland M&A interest last year, some of you guys. And I just wondered if anything's changed there. Can you maybe rehash any willingness or kind of appetite or your view of the M&A market as it stands right now?

Yes. This is Bob. No updates. We're still talking to people to see if there's things that might make sense, but we haven't really changed our profile or what we're looking for. We're really looking for a good fit, first and foremost, and then take it from there.

Our next question comes from Matthew Clark with Piper Sandler.

Just a couple of follow-ups here on the cash flows on the asset side. Can you -- I know it's $400 million a quarter, but can you give us a split between loans and securities on average and those -- we can guesstimate the rates, but I'm just trying to forecast those individual yields.

Yes. Yes. So I guess the right way to think about it is for the year, we expected $600 million of cash flows coming off the securities portfolio. So that leaves $1 billion in cash flows from the loans. And that spread of 150 that we talked about is inclusive of the roll-off and roll-on yields. So in the quarter, we added in the securities portfolio in the 4.90% range of yield and a little bit higher than that, 6.20% or so on our loan yields. So yes, that's -- I think that gives you what you need there, Matthew.

Okay. Great. And then just to drill into the CDs, same kind of question. How much do you have coming due here in 2Q and roll-off and roll-on rates?

Yes. So Q2, we're going to have about $1 billion come due. That's currently somewhere in the neighborhood of like a [ 290 ] or so CD rate. And then I think that will roll over something in like a [ 250 ] weighted average range or something like that. Hard to tell for sure because some folks roll into promos and some folks roll into rack rate. So don't know for sure around that. But again, right, I think if you back into the margin guidance that we've given, you can kind of get your way what you need on the CD side of things.

Yes. Okay. Yes, I'm kind of getting to a NIM that's a little bit above what you're forecasting for 2Q. So thank you.

Thank you. I would now like to turn the call back over to Kevin Haseyama for any closing remarks.

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. This concludes the conference. Thank you for your participation. You may now disconnect.