First Hawaiian, Inc. Common Stock 2026 Q3 Earnings Call

Thank you for standing by, and welcome to the First Hawaiian Inc.'s third quarter 2026 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 the session, you will need to press star one one on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. And now I would like to introduce your host for today's program, Kevin Haseyama, Senior Vice President, Strategic Planning and 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 will turn the call over to Bob.

Thank you, Kevin. Appreciate everybody joining us today. Turning to slide 2, I will start by providing an update on the acquisition. As you can see from the slide, we are making good progress obtaining the necessary regulatory and shareholder approvals. The next major milestones are the shareholder 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 will provide updates throughout the process. Now, a quick overview of the local economy. It has been a challenging year as the state deals with dual headwinds of both higher energy costs and an 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 unemployment 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% 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 remain stable at $523,000, up 2.8% from 2025. Turning to slide 3, our results for the quarter reflect a continued solid performance by the team. Net interest income increased, deposit costs declined while deposit balances grew, and the margin increased 5 basis points. Net interest income was in line with expectations and non-interest 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 Lee 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 plan balances, and runoff in the residential loan portfolio. As an example, we did have one large CRE loan that was paid off unexpectedly, being refinanced by a mainland lender that offered very aggressive pricing. 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. Our non-interest-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 yield and funding costs helping to drive that NIM accretion. Turning to slide 8, non-interest income was $56.1 million, in line with our outlook. Non-interest 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. Now I'll turn it over to Lee.

Thank you, Jamie. Moving to slide 9. While we had some noise in the third quarter, the overall loan portfolio remains healthy. Asset quality remains strong and the portfolios continue 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 a 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 one other loan, which continues to perform and is backed by a very strong sponsor 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 four non-office commercial real estate loan downgrades. 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. Non-performing 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 was placed on non-accrual. 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. Now I'll turn it back over to Bob.

Thank you, Lee. 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%-2% growth down from 3%-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%-3.35%, which increases our full year NIM outlook to 3.26%-3.27%. Our outlook for non-interest 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 we previously thought, and our full year outlook is now in the $510 million-$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.