First Hawaiian, Inc. (FHB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the First Hawaiian, Inc. Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Kevin Haseyama, Senior Vice President, Strategic Planning, Investor Relations. 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 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, Ken. Appreciate everybody joining us today. Turning to Slide 2. I'll start by providing an update on the acquisition. As you can see from the slide, we're making good progress obtaining the necessary regulatory and shareholder approvals. The next major milestones are the shareholders special meetings on October 29 and obtaining final regulatory approvals. Integration planning is going well, and we continue to expect to close this quarter. We'll provide updates throughout the process. Now a quick overview of the local economy. It's been a challenging year as the state deals with dual headwinds of both higher energy costs and unusually active storm season. In spite of that, the economy continues to grow, albeit at a slower pace. Statewide unemployment rate was relatively stable at 2.8% for September compared to the national employment rate of 4.2% for the same month. Visitor industry continues to be resilient. Total visitor arrivals were up 1.8% compared to last year, primarily due to visitors from the Mainland, U.S. and Japan. Year-to-date spending through August was $15.2 billion, up 4.1% and for the comparable period in 2025. The housing market remains stable. Median single-family home price on Oahu was $1.1 million in September, down 3.9% from last year. The condo prices remained stable at $523,000, up 2.8% from 2025. Turning to Slide 3. Our results for the quarter reflect the continued solid performance by the team. Net interest income increased, deposit cost declined, while deposit balances grew and the margin increased 5 basis points. Net interest income was in line with expectations, and noninterest expenses came in below expectations, excluding merger-related costs and a tax settlement expense. The $24.3 million tax settlement expense stemmed from a settlement with the State of California on tax liabilities resulting from our 2016 separation from BNP Paribas. The aforementioned tax settlement also resulted in a $31 million tax benefit in the third quarter. Overall, credit quality remains good, but we did have some noise in our credit metrics this quarter, and we will provide more details when she goes over that later. Turning to Slide 4. The balance sheet remains solid. We continue to be well capitalized with ample liquidity. Balance sheet remains asset sensitive and well positioned to benefit from a higher for longer rate scenario. During the quarter, we did not repurchase any shares. Turning to Slide 5. Total loans declined $115 million in the quarter. Decline was primarily due to unexpected CRE loan payoffs, a slight decline in dealer floor land balances and runoff in the residential loan portfolio. As an example, we did have 1 large CRA loan -- CRE loan that was paid off unexpectedly being refinanced by [indiscernible] that offered very aggressive pricing, and I think that's a reflection of the credit quality of the portfolio as well as demand. Payoffs were more heavily weighted towards the end of the quarter as average balances in Q3 were slightly higher than the previous quarter. Now I'll turn it over to Jamie.

Thanks, Bob. Turning to Slide 6. Total deposits were up about $50 million, while our total cost of deposits fell by 3 basis points in the third quarter. Increased commercial and public operating deposit balances were partially offset by a decline in retail deposits, and our noninterest-bearing deposit ratio was 32%. On Slide 7, net interest income was $174.1 million, $3.1 million more than the prior quarter. The increase in NII was driven by the increase in the margin, along with the higher average loan balances in the quarter. The NIM in the third quarter was 3.30%, up 5 basis points linked quarter with both asset yields and funding costs helping to drive that NIM accretion. Turning to Slide 8. Noninterest income was $56.1 million, in line with our outlook. Noninterest expense in the third quarter was $160 million. The quarter included $6.7 million of merger-related costs and, as Bob mentioned, also included $24.3 million expense related to a California tax settlement agreement related to our 2016 IPO. This expense was more than offset by the $31 million tax benefit that we recognized as part of that settlement. Excluding these items, operating expenses were well within our expectations. And now I'll turn it over to Lea.

Thank you, Jamie. Moving to Slide 9. While we have some noise in the third quarter, the overall loan portfolio remains healthy. Asset quality remains strong, and the portfolio continued to perform within our expectations. Our risk appetite has not changed. We continue to manage our portfolio such that asset quality remains within our risk appetite as demonstrated by historical norms. This slide summarizes some of the drivers behind the changes in some of the key credit measures this quarter. Third quarter net charge-offs were $21.9 million, or 60 basis points of total loans and leases. This was primarily driven by a $12.5 million partial charge-off of our participated loan on an office building located in Downtown Seattle. This loan was originated in 2019 and performed well through COVID but has struggled due to the shifting economics associated with the city's contraction, in-office demand and higher for longer interest rates. We believe that this is an isolated situation. Our Downtown Seattle office portfolio consists of only 1 other loan, which continues to perform and is backed by a very strong sponsors with whom we have partnered for many years. Our year-to-date annualized net charge-off rate is 29 basis points. Criticized assets increased by 72 basis points in the third quarter. This increase was primarily the result of 4 nonoffice commercial real estate loan upgrades. It is important to note that while the credit review process resulted in these downgrades, we believe that the actual loss content is limited. The bank recorded a $20.3 million provision in the third quarter. The increased provision expense was driven by the office charge-off and the CRE loan downgrades. The allowance for credit losses decreased by $4 million to $164 million with a coverage ratio of 1.14% of total loans and leases. Nonperforming assets and loans 90 days or more past due were 45 basis points of total loans and leases at the end of the third quarter. This increase was primarily related to operational issues arising out of the recent outsourcing of our residential mortgage servicing as well as the previously mentioned charged-off office loan as the portion that was not charged off is placed on nonaccrual. Since the end of the quarter, 40% of these residential mortgage loans have been brought current, and we are confident that we will be able to resolve the remaining population in good order. Turning to Slide 10, you can see a summary of our key credit metrics. And now I'll turn it back over to Bob.

Thank you, Lea. On Slide 11, we have our updated outlook for key performance drivers. We obviously didn't get the loan growth we expected in the third quarter, so we're reducing our full year loan outlook, to 1% to 2% growth, down from 3% to 4% growth. Our asset-sensitive balance sheet continues to benefit from the higher interest rate environment. So we expect NIM in the fourth quarter to be between 3.34% to 3.35%, which increases our full year NIM outlook to 3.26% to 3.27%. Our outlook for noninterest income remains about $220 million for the full year. Expenses, excluding merger-related costs and tax expense in the third quarter related to that settlement, is expected to come in lower than previously looked than we previously thought. And our full year outlook is now in the $510 million to $515 million range. The effective tax rate should remain unchanged, and we're expecting approximately $25 million in merger-related costs in the fourth quarter. Now we'd be happy to take your questions.

[Operator Instructions] Our first question for today comes from the line of Andrew Terrell from with Stephens.

Maybe if I could just start on the loan growth. It looks like the expectations of, if I'm kind of reading it right, kind of pretty flat loans, maybe up a little bit in the fourth quarter. Can you just talk us through kind of the pipelines today, opportunities you're seeing for growth out there right now?

Yes, Andrew, Bob answering your question. Yes. No, the pipeline is still there. We still have quite a bit of loans in process. It's really the continuing battle of things getting paid off. So it's really -- that's the balance between a solid pipeline and looking over our shoulder a little bit for things that are unexpected?

Okay. And if I could ask just on the margin, I appreciate the guidance for the fourth quarter. There's, I think, a pretty wide range out there in terms of estimates for 2027 margin right now. Could you just talk to us when you put TriCo on fold, and I know it may be tough to put a finger on, but can you just talk us to the general expectation of what kind of pro forma margin is? I don't know the best way to slice it, but just trying to tieing up maybe expectations a little.

Andrew, it's Jamie. I appreciate the question. I understand why you'd ask it. Well, that's kind of hard for me to answer at the moment, for sure. I can speak to our margin. We continue to see the effects of fixed rate cash flow repricing on our balance sheet. It's about $400 million or so a quarter, and spread in this past quarter was about $170 million. So we think the spread is maybe $160 million to $170 million kind of going forward on that. And of course, that depends on Fed rate increases or not. And just a reminder, we expect, generally speaking, if there's a Fed rate increase in the prior quarter, we would expect a couple of basis points of margin accretion based on that. And then with the fixed rate cash flow repricing and then just general repricing on the balance sheet, we would expect another couple of basis points or so just if rates remain flat. So yes, that's what I got for you today.

And Andrew, this is Bob again. Just sort of color on the loan side. We are seeing still a solid pipeline for CRE, just to break it down a little bit. The residentials continue to run off given the rate outlook. It's going to be difficult to see residential activity really picking up. But we are seeing CRE still being strong. And typically, we don't know if it's going to come true. But typically, at the end of the year, you do see an increase in dealer floor plan balances. So if we follow the usual norm, this should be an okay fourth quarter, but we did adjust our guidance to take into account what happened in the third quarter?

And our next question comes from the line of David Feaster from Raymond James.

I just want to start on the funding side. You've got a huge advantage being in Hawaii. And the kind of the closed-loop nature of that market, funding costs have continued to come down. I'm just kind of curious, the competitive landscape here as rates are going higher, do you have more funding cost leverage left? Or do you think we're kind of at a trough here?

David, it's Jamie. I think we're kind of at a trough in this quarter. I think this is probably as low as it's going to be, especially given the rate outlook that we've seen. Of course, that can change. Competitive pressures here in Hawaii continue to be muted, let's call it. All the large 4 banks here are -- we're all in the same boat in terms of loan-to-deposit ratio and things like that. So the competition is about kind of what always has been. So rates up, I think, will kind of drive sort of, let's call it, CD repricing slightly higher because of that. And then we have normal competition in where competitive with each other around client acquisition. So we're probably at a trough now. I guess the best way to describe it is we think maybe interest-bearing deposit betas somewhere in the 40% ratio in totality, where in total deposit betas will be like 30 or so -- some 30 basis points or something like that.

Okay. Terrifi? And then, I mean, just looking at TriCo, I mean, they had a pretty solid quarter, right? And I was just kind of curious as you guys are working together, getting prepared for the closing. I'm still expecting to close by year-end. I guess as you've got to know their team more, like how's lockups going? How are you preparing for the integration and conversion? Just kind of any updates on -- because I mean I think is one of the bigger risks, but the deal right is just the execution of integrating this and getting that done smoothly. Could you just touch on some of the things that you're working on to prepare for that and [indiscernible] the transition as possible?

Sure. Dave, this is Bob. Happy to answer that question. Yes, we're very focused on that. We're working very closely with them. Jamie is actually heading our Integration Management Office. Peter Wiese, our CFO, is heading it on their side. They are working closely on organizing the teams to get ready for post closing, whatever -- whenever that happens, it should be for quarters as we've talked about. So that's happening. We've reached out to a number of their people, the vast majority are staying on with us. There are 1, maybe 2 that are not, and that's not unexpected, but really, we're excited to be working with them. And so far, really working closely together to see how we can get that done. We totally [indiscernible] the execution risk is what we're completely focused on, and that's what matters, and that's what we're spending a lot of time on it. Exchanging visits between TriCo to First Hawaiian and First Hawaiian employees going up to TriCo, everybody getting to know each other, really spending the time so that when we do close, we can really hit the ground running to make this work.

Okay. And then maybe just kind of following up on that. When I talk to investors, one of the biggest concerns that they have is -- I guess, can you let TriCo be TriCo? Because TriCo, as we've talked about, this is a merger of 2 really good banks, right? And TriCo is performing very well. How do you think about letting -- just the integration -- 2 separate banks running in 2 separate markets, how do you think about letting them do what they do versus what are you going to bring in-house and maybe change some of what they do? I'm just kind of curious, how do you think about that whole concept?

Yes. Rick and I have spent a lot of time talking about that. It is the most important thing to get right, so to speak. Of course, you need to do the core conversion, you need to do all the other things. But the really long-term value comes from letting TriCo be TriCo and us supporting them with their customers and in their markets. And if there's things we can learn from them, we will. If there are things they can learn from us, I'm sure they're open to that. I know they are because we've talked about it. So execution will prove that, and we just need to get through that. But that is a top priority for both Rick and myself and both sets of management teams as well. It's not just the 2 folks at the top. It's really both sets of management teams, thinking and working the same way?

And our next question comes from the line of Anthony Elian from JPMorgan.

Slide 6. You call out -- you saw some nice growth in commercial deposits from 2Q. Can you give us some more color on what drove that and how you're thinking about commercial deposits and overall deposit growth going forward?

Yes. Anthony, it's Jamie. So I would call that sort of normal flows that we saw in the quarter on the commercial side. Same kind of thing on the retail side, some sort of, what I'll call it, normal outflows. Typically, what we have in the fourth quarter is inflows across both retail and commercial for sure. Sometimes we see that in public, but that's little more event driven. I would say, if you look to our past fourth quarter growth guides, those are kind of like where we usually come in, in the fourth quarter. I hesitate -- I kind of always say this, we hesitate to call it seasonal because we're not sure what really drives it. It just seems to happen for us in the fourth quarter every year. So we would expect some deposit growth in the quarter.

And then my follow-up on credit. Could you give us some more color on other office or reloans you may be taking a closer look at? Your level of confidence that 3Q is just a one-off quarter in terms of the migration you saw? And any additional credit reviews you're doing?

Anthony, this is Bob. Maybe I'll start and then hand it off to Lea. I think it maybe is worth taking a second on the office building in Seattle. That's a key market that we've known for a long time, it was a 2 bank deal with a very strong agent, very strong sponsor at the time. It's still 75% occupied by a federal agency that's paying its rent. It's just Downtown Seattle, if you haven't been there, is challenged right now. And the office market is severely impacted on that. So that's why we consider that on really a one-off. Having said that, we like to tell all the information we can as soon as we can. So just like we did during COVID, we've been doing deep dives throughout the whole portfolio, and that's what led to some of the regrades. But maybe I'll turn it over to Lea for any other comments you ask.

No, I think we all understand that the high interest rates have been around a lot longer than we thought. And a lot of these loans were put on in a different interest rate environment. So we've been watching very carefully what's been happening to these properties. And by and large, we're very comfortable. We remain comfortable. When we enter these deals, we know that potentially, there could be some downside, and that's why we have to be very careful about who we choose to participate with, who we choose as our sponsors. We don't have very much in Mainland office. It's not one of the portfolios that we are actively expanding. I think the other portions of our portfolios that we advertise as our core, those are still very strong. So -- yes.

Does that answer your question, Tony?

It does.

And our next question comes from the line of Matthew Clark from Piper Sandler.

Just running out the deposit cost conversation to the spot rate at the end of September to give us some visibility?

Yes, it was 117 basis points [indiscernible] the quarter.

Okay. Great. And then on the $400 million of cash flows on the asset side, can you split that between loans and securities? And the related spread pickup between the 2 that we should assume? I know it's going to get a little fuzzy with TriCo, but that would be helpful.

Yes. So roughly, let's call it, $250 million on the loan side and $150 million on the security side. In the -- let's call it, 110 basis points spread on the loans and maybe 200 basis points or so on the securities at this moment.

Okay. Great. And then just on the downgrade of the 4 CRE loans, can you just provide a little more color there? It sounds like it's rate related, but the size of each of those credit types of properties and kind of the outlook for each of those credits?

So 3 of the downgrades came out of the National [indiscernible] exam. 2, our portfolio loans, which are multifamily properties in multiple areas, they were entered into several years in 2020, again, in a different rate environment. And again, not an area that we are -- not a type of asset that we have actively grown in many, many years. We went into it because we were looking for a little more diversification. We don't really have many of those assets left.