Good day and thank you for standing by. Welcome to the First Hawaiian, Inc. Q1 2024 Earnings Conference Call. Please be advised that today's conference is being recorded.

Thank you, Tanya, and thank you, everyone, for joining us as we review our financial results for the first quarter of 2024. 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.

Morning, everyone. I'll start with an overview of the local economy. Hawaii's economy continues to perform well with the state unemployment remaining low, tourism is steady, and the construction industry is healthy. The statewide seasonally adjusted unemployment rate for March was 3.1% compared to the national unemployment rate of 3.8%. The statewide visitor industry has continued to recover faster than expected following the Maui wildfires, but still remains slightly below 2023 levels. The legislative session is wrapping up, and additional funding was secured for the Hawaii Tourism Authority, and a new marketing campaign was announced a couple of days ago. So things are looking up for that. Through February, total visitor arrivals were down 0.6% and spending was down 1.9% compared to 2023 levels. That was primarily due to declines in Maui. Excluding Maui, arrivals and spending were above 2023 levels. Growth in international visitors has helped offset declining visitors from the U.S. mainland, with increases in Japanese visitors making up most of the increase in international arrivals. The housing market has remained relatively stable despite reduced activity levels. In March, the median sales price for a single-family home in Oahu was $1.1 million, 1.5% higher than 2023. The median sales price for condos in Oahu was $500,000, 6.7% below the previous year. Turning to Slide 2, I'll go over the highlights of our first quarter financial performance. We started the year with a solid quarter. Net income was $54.3 million or $0.42 per share. The return on average tangible assets was 0.94%, and the return on average tangible common equity was 14.53%. As expected, the net interest margin expanded in the first quarter. This drove a $2.6 million increase in net interest income versus the prior quarter. Turning to Slide 3, we continue to execute the balance sheet optimization that started in the fourth quarter with the sale of $526 million of investment securities. During the first quarter, we used those proceeds to pay down about $470 million of higher-cost public time deposits. The duration of the investment portfolio increased slightly in Q1 as a result of the security sale during the prior quarter. Our balance sheet strength continued to increase as we grew capital levels and have ample liquidity. Turning to Slide 4, period-end loans and leases were $14.3 billion, about $33 million lower than December 31. Line draws for ongoing construction projects drove a $72 million increase in construction loans. We did continue to face headwinds due to the slowdown in the residential real estate market and the continued runoff in the indirect auto portfolio. We still believe that loan demand will pick up in the second half of the year and that full-year growth will be in the low single-digit range. Now I'll turn it over to Jamie.

Thanks, Bob, and good morning, everyone. Turning to Slide 5, total deposit balances declined by $663 million, primarily due to the $470 million decrease in public time deposits. The decrease in higher-cost public time was intentional and was part of the overall balance sheet actions that we announced on our last call. Retail deposits increased by $142 million in the first quarter, and that was offset by a $355 million decline in commercial deposits. The drop in commercial deposits was primarily due to normal fluctuations in a few large commercial accounts, as well as about $170 million of insurance payments related to the Maui wildfires. The noninterest-bearing deposit ratio was 34% at the end of the quarter. The rate of increase in deposit costs continued to slow down in the first quarter. Our total cost of deposits for the quarter was 165 basis points, a 9-basis point increase from the prior quarter. Turning to Slide 6, net interest income increased $2.6 million from the prior quarter to $154.4 million, and our reported net interest margin increased by 10 basis points to 2.91%. We had a nonrecurring interest income related to the recognition of interest on deferred loans tied to the Maui wildfires that added about $1.5 million to interest income and 3 basis points to the margin in the first quarter. The spot NIM in March was 2.87%, and we are projecting the NIM in the second quarter to be about 2.89%. We do expect that the NIM will increase about 1 to 2 basis points per quarter for the remainder of the year. Through the end of the first quarter, the cumulative betas were 46.5% on interest-bearing deposits and 30.2% on total deposits. Turning to Slide 7, noninterest income was $51.4 million, $7 million less than the prior quarter. We had about $2 million of nonrecurring income in Q1 as a result of insurance proceeds we received for losses we incurred during the Lahaina wildfires. We continue to expect quarterly noninterest income to be in the $49 million to $50 million range. Noninterest expenses were $128.8 million in the first quarter and included a $4.1 million FDIC special assessment. Excluding that special assessment, expenses were in line with our expectations, and we continue to expect full year expenses to be around $500 million. Now I'll turn it over to Lea.

Thank you, Jamie. Moving to Slide 8, the bank maintained its strong credit performance and healthy credit metrics in the first quarter. While we have seen some modest deterioration in credit quality, our experience so far is well within our expectations. We are not observing any broad signs of weakness across either the consumer or commercial loan books, and we have more than sufficient loan loss coverage. Classified assets increased by $64.3 million, driven by several downgraded credits. This caused the ratio of classified assets to total loans and leases to increase by 45 basis points to 64 basis points of total loans and leases. Of that $64.3 million increase, $24.4 million was paid off in full after the end of the first quarter. Year-to-date net charge-offs were $3.8 million. Our annualized year-to-date net charge-off rate was 11 basis points, 2 basis points higher than in the fourth quarter. Nonperforming assets and loans past due 90 days or more were 15 basis points of total loans and leases at the end of the first quarter, unchanged from the prior quarter. And finally, the bank recorded a $6.3 million provision in the first quarter. Moving to Slide 9, we show our first quarter allowance for credit losses broken out by disclosure segments. The asset ACL increased by $3.3 million to $159.8 million, with coverage rising 3 basis points to 1.12% of total loans and leases. The ACL continues to include a reserve for the potential impact of the Maui wildfires. This estimate includes the potential impact of borrowers located both inside and outside of the fire zones as well as any insurance coverage.

Thank you, Jamie. Thank you, Lea. We welcome any questions that you would have.

Our first question will come from David Feaster of Raymond James.

Maybe just touching on the margin side a bit. I appreciate all the color that you guys gave. But I mean, really, the key driver to the margin is going to be deposit performance, right, especially on the NIB front. I'm curious if you could help us maybe think through how the NIB balances trended throughout the quarter? And just any thoughts on overall core deposits growth and the initiatives that you've got in place from that perspective. Just curious kind of on the deposit side, how you think things play out.

It's Jamie. Regarding your question about performance throughout the quarter, most of the decline in noninterest-bearing deposits occurred in January and February, with a notable moderation in March. Our forward guidance anticipates some ongoing movement from noninterest-bearing to interest-bearing deposit accounts. You've accurately identified the expectations for our net interest margin, which will largely depend on how this migration unfolds over the year. Our modeling indicates a decline from Q1 to Q2, followed by continued moderation in Q3 and Q4, which underpins our net interest margin guidance. In terms of deposit gathering initiatives, we are primarily focused on increasing net new checking accounts. Our securities portfolio is continuing to run off, easing our need to grow deposits. With our loan growth expected to be in the low single digits, the urgency to aggressively attract new money market accounts or CDs has lessened. Our main emphasis remains on acquiring new checking accounts. Additionally, the second aspect of our deposit strategy revolves around our customer relationships. We aim to support our customers as needed, and if there are deposit customers who are sensitive to rates, we will address that accordingly. We also welcome any opportunity to increase our noninterest-bearing deposits.

And Dave, this is Bob. Maybe just to add to Jamie's comments, which are spot on, is just remember from last quarter's call that this year, we have about $1.5 billion of fixed-rate loans rolling over and $600 million of securities. So that's what's really helping drive that NIM expansion throughout the year. You can't exactly predict what's going to happen with deposits to Jamie's point, but we do know that those will reset, and the securities will mature.

That's a great point, and it naturally leads to my next question. You are inherently sensitive to rates due to the strength of your deposit base, and you've been actively managing your balance sheet, including the securities portfolio. I'm interested in your current approach to managing the balance sheet. The outlook on rates is rapidly changing; one moment we are concerned about rate cuts, and now we are discussing a prolonged period of higher rates. Given this uncertainty regarding rates, how are you currently considering the management of the balance sheet?

It's a great question, Dave. I think the way that I'm kind of thinking about it right now is that we have the securities portfolio. It's yielding around 230 basis points. On the margins, we're funding that with 5% higher-cost deposits. At the moment, we're kind of waiting and buying our time, I would say, right? We're managing through that natural grind. We feel really good about the cash flows of that portfolio. They were structured in such a way so that they wouldn't extend or contract too much given a different rate environment. So what we're really focused on is helping our customers, being there for our customers. To the extent that there are loan growth opportunities with our customers, we want to be there for that. In the meantime, we're really thinking about the overall balance sheet, kind of on the margins and the securities portfolio. That's going to continue to run off. And we will fill in the gaps where we need on the funding side with public time deposits, if that's required. So we're not really thinking about hedging anything at this point. We feel pretty good about where we're at, even in a down-rate scenario, say, 100 basis points down, 200 basis points down, that's still a net positive action with replacing securities portfolio and running off the time deposits. We also have an FHLB borrowing that is going to mature in the third quarter. So there's a lot of moving parts there. But at the moment, I think we're comfortable with the balance sheet. We like the way we're doing it. As you say, rate outlooks change intraday even today, right? So we're really trying to just be focused on our customers and just grinding through this sort of odd mix at the moment with the securities portfolio and the marginal higher cost of funds.

That's extremely helpful. Could you remind us the size of that upcoming maturity and the rate on it?

The FHLB, it's $500 million. It's going to mature on September 1, and I think it's at a rate of approximately 4.90%.

Okay. Perfect. And then just the last one for me. Look, you guys touched on credit broadly. And you feel that you're well covered, talked about some downgrades that you saw in the book? I mean, nonaccruals held steady, and it's benign, talked about some downgrades. I was curious what drove those? And maybe just your thoughts more broadly on credit, what you're seeing, and what you're watching closely? Just any thoughts even on CRE, just given the market's hyper-focused on that segment?

Dave, this is Bob. I'll start maybe and hand it over to Lea. It's a really interesting quarter other than a handful of downgrades as she can speak to better. Really across the board, we stayed the same or got better on every other metric—delinquencies, NPAs, et cetera. So we aren't seeing any signs. It's something we pride ourselves on is being very thoughtful about supporting borrowers and making sure that they can—have the ability to pay us back, but it's not unusual for this part of the cycle to see a little bit of weakness in a handful of names. So with that, Dave, I'll hand it over to Lea.

I don't really have much to add other than our metrics—our delinquency metrics start at a very low base. So it doesn't take much for it to pop. We're staying close to the borrowers that we think are a little bit under duress, and we talk to them constantly. We understand what the projects are. We're actually quite comfortable even with that loan that we mentioned that we paid off. We actually— we're very comfortable with the loan. There are circumstances that require us to categorize it a certain way. But I think fundamentally, the portfolio is actually quite strong.

And our next question will be coming from Steven Alexopoulos of JPMorgan.

I want to start—so Jamie, you just indicated on the noninterest-bearing. I thought you said that trends moderated in March. I'm not sure exactly what you mean by it. Do you mean that you still saw outflows in March, but not to the degree of January and February? And I say that because the period-end noninterest-bearing deposit balances were, I think it was $200 million or so below the average. So your period-end was down fairly materially.

Yes. That's right. So I mean I think the right way to think about it is most of that outflow happened in January and February. And then in March, it was pretty much flat.

It was flattish in March, okay.

Yes.

Got it. And you're assuming flattish. Is that what you're assuming for the rest of the year?

No. Actually, that 1 to 2 basis point guide would assume that, say—we were $500 million down, say, in the first quarter that, that sort of moderates down to flat by the end of the year.

Got it. Okay. What about the public time? What's your thinking on that for the rest of the year because those continue to come down too?

Yes, we think that we're going to be able to bring that down in line with the size of the balance sheet. Hopefully, we have—hopefully, that noninterest-bearing moderation that we're talking about slows down even more, which would allow us to pay even—pay down more of those public time deposits. So at the moment, we think that's going to come down, then there's going to be a need for a little bit of funding in September with the FHLB borrowings. And so we'll kind of—we're going to— we'll manage that on what's best for us in terms of financials, right, around the rate on those things. So it's possible that the public time increases in Q3 with the paydown of the FHLBs, or it's possible maybe we'll find some other borrowing source that maybe makes a little more sense economically for us at that time. So the public time really is going to be a function of the extent of the loan growth that we have and the other deposits either growth or declines that we have.

Okay. That's helpful. And actually, I was going to ask on the loan growth. Quite a few banks were fairly optimistic with the pipeline. They didn't have a lot of growth this quarter, but they were more optimistic. What are you guys seeing on the pipeline? I'm talking more commercial, C&I pipeline.

Sure. Steve, this is Bob. So we expect—flooring came down a little bit this quarter, not unusual to have it pop up at year-end and come down in Q1. So we think that'll have some strength to it. You're seeing production levels at much higher levels through most manufacturers. Some of the foreign brands, in particular, Toyota has been challenged, although I'm sure they'll be catching up by year-end. So that's one area. We are seeing still some deal flow from the commercial real estate side and in particular deals that we put on a year ago that, of course, on the construction side, the equity money goes in first, and then you start with the draws. We saw that strength in this quarter, and we think there will continue to be some strength. We're seeing slightly better pricing in the indirect world as well. So we think the decline in that portfolio will start to moderate, and we'll see where that goes. If it makes sense, we want to do that business, and it's a good business. We know it extremely well. Just the economics for a while just didn't make sense for us. So I think really those areas, one area that we're not forecasting any real recovery in is residential. We hope it gets better, but that's just a hope that's not a forecast. So we're going to just watch that and be there for our customers as needed. But hard to see a lot of uptick in residential in the back half of this year.

Got it. And Bob, if I can ask one other one, just on capital, you continue to accrete capital pretty nicely here. What are you thinking of from a share buyback perspective, right? Because your credit quality overall is pristine, and you're not using capital to grow the balance sheet. So it seems like you're just going to continue to accrete capital. How do you think about returning some of that to shareholders?

A great question, and we have the authorization to do that. I think the only thing we're looking at now, one, as we've talked about previously, we wanted to get through that uncertainty period of what happened a year ago with SVB and just a lot of questions out there in the market. So I feel that we're past that. So that's the good news, the most important thing. Our ratio across the board, not just common equity Tier 1, but all the other ratios have improved to a point where that's off the table. And then the second one is there is a remixing, and this is what we're watching as we remix the balance sheet out of securities and into loans, obviously, a much higher capital rate going up from 20% to 100%. So it really is looking at that. And then if not this quarter, certainly in the back half of the year, we'll be looking closely at that and deciding when and if a share repurchase makes sense. But that is more likely in the back half of the year.

And our next question will be coming from Timur Braziler of Wells Fargo.

Circling back on just balance sheet size. So I get your commentary on continued paydowns of the public funds. And then I guess with the FHLB borrowing that's coming due in September, is the expectation there or is the willingness there to pay that off or roll that into new borrowings? And I guess just more broadly, is there an outcome where the balance sheet grows in the next couple of quarters? Or do you really need to see some pickup on the lending activity before we should start to see the balance sheet actually expand?

Timur, it's Jamie. Yes, I mean I think the last comment you made is probably the right one there, right, which is the size of the balance sheet is really going to be mostly dependent upon what we do on the lending side. I feel pretty comfortable for the time being about the securities portfolio and the runoff associated with that. So yes, I think the size of the balance sheet will be dictated by the lending side because that cash flow is pretty certain on the security side. The other part of your question regarding FHLB borrowings, so yes, there's a chance that we roll that over if needed in September. There are also other opportunities in either the public CD market or even in our retail CD market. So at that point, it's going to be kind of dependent upon the economics of what we see. Potentially—there are potential reasons to either roll that over or to do public time deposits at that time. So we will think through that, for sure.

And then circling back on credit. It looks like a large portion of the increase in the criticized loans—in the multifamily construction, and you have a footnote in here saying that it's centered around rental and for-sale housing. I guess just maybe more broadly, what occurred in that portfolio? And to what extent is the tourism driving that result? Any kind of additional color you could provide there would be helpful.

Timur, this is Bob. That loan in particular, and you'll see it on Page 16, is multifamily construction. It was a mainland deal. It's a very strong sponsor. They stepped up to the plate and paid it off. So that criticized portion there is 0 as of today, to give you an idea. More broadly in the portfolio, as we've looked at for deals we do on the mainland, we look first to the sponsor as well as the agent bank and make sure those two are people we want to work with. Not every deal works out exactly as you plan, and you just need to work through some of them. That's what we did in this case. So more broadly, we're still very comfortable with the strategy. We're still very careful about which markets we go into, which sponsors we work with, and which agent banks we want to partner with on that. Does that answer your question?

That does, yes. And then maybe just a follow-up there. Just can you give us the geography that loan was in? And then maybe just some broader commentary about what you're seeing in the mainland portfolio.

Yes. That was in the California market. And again, those are the gateway cities we've been talking about for some time ever since we started the strategy, and that's why it was able to get refinanced and we got paid off just because of the strength of the project and even there's some weakness in some of those markets, but you have to be very specific about, even within some of those gateway cities, exactly where you're doing the deal and where the deals are being done. Building that expertise and being able to execute on that is really what drives a lot of the credit quality as well.

And our next question will be coming from Jared Shaw of Barclays.

Maybe just first on Maui. What's the remaining expected insurance benefit or payment from outstanding claims? Or is that all tied up with what we saw this quarter?

So yes, just to be very clear about what that insurance benefit was, that was insurance on our building, on our branch that burned down. We had—that was that insurance claim for this quarter from us. And then on the deposit side, there were claims that came into the bank that got paid out in the quarter to recipients. So I just want to clarify those two comments. And then if that didn't address your question, then maybe if you could ask it again that we can—either Lea or Bob can handle it.

Yes, I think that's it. So that $2 million that you called out for the branch, there's really no other FHB claims outstanding then, is the way to think of it?

There will be once we start the actual rebuild on the branch.

Yes, that will be further out. So—but that's kind of the initial and then as time goes by, and it's hard to determine when that will happen or specifically the amount at this point in time.

And then my follow-up, there's a competitor bank that's been in the news lately with a parent that's struggling a little bit. What's your—or do you have any thoughts on how that could impact the market? Is that an opportunity for you to either take market share or protect market share? And would you envision a situation where potentially a new competitor would come on to the islands and be in the market? Or do you think that this position there would likely involve Hawaii banks?

Yes, we prefer not to speculate on that, and that's—very much going to just wait and see how that plays out. So I don't have any comment on that one.

And our next question will be coming from Andrew Liesch of Piper Sandler.

Just one quick question for me. You've covered everything else. Do you have the balance of Shared National Credits? And how is the credit quality performing in those right now?

So we do have the balance of Shared National Credit. So we actually divide the portfolio up into credit-only versus noncredit-only. So the outstanding balance on the credit-only SNCs at the end of the quarter was $324 million. And how is the credit quality standing up? There's been some weakness admittedly, but we do have expectations for resolutions on those; none of them are on nonaccrual or anything. They're just incorporated into our table on Slide 15.

Does that answer your question or...

Yes, absolutely. Really helpful.

Yes, just a little broader context maybe because obviously, the portfolio is much larger, and we have different cuts on it. The first cut is Hawaii-based Shared National Credit, which is mainland-based Shared National Credits. And then within the mainland-based Shared National Credits are the ones that really have a presence here in Hawaii that we have a broader relationship with. And there are some that deploy some of our excess capital liquidity. We're—credit only as we call it, and that's what Lea was referring to.

And our next question will be coming from Kelly Motta of KBW.

I apologize I dropped off the call, so I apologize if this has been asked already but in the quarter, there was quite a nice uptick in loan yields. I'm wondering—your release did call out a 3-basis point impact, a sort of one-time benefit in margin. Just wondering if there is any of that in the loan yields that maybe there are nonaccrual recoveries or anything that would be helpful when modeling the margin as we look ahead.

Kelly, it's Jamie. That was—that 3 basis points that was on the loan side of things, in particular, was in the residential mortgage bucket. It was related to kind of like timing differences, I would say, in deferral take-ups related to Maui. We kind of had some catch-up interest that happened in Q1. That was about $1.5 million. So that was like a nonrecurring piece of that in Q1.

Thank you, Tanya. We appreciate your interest in First Hawaiian. Please feel free to contact me if you have any additional questions. Thanks again for joining us and have a good weekend.

And this concludes today's conference call. Thank you for participating. You may now disconnect.