Good day, and thank you for standing by. Welcome to the First Hawaiian Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Haseyama, Investor Relations Manager. Please go ahead.

Thank you, Shannon. And thank you, everyone, for joining us as we review our financial results for the second 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 fhp.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.

Good morning, everyone. I'll start by giving a quick overview of the local economy. Hawaii's economy continues to perform well. The state unemployment rate has remained low, tourism is steady, and we enjoy a healthy construction industry. The state-wide seasonally-adjusted unemployment rate for June was 2.9% compared to the national rate of 4.1%. Through May, total visitor arrivals were down 4.1% and spending was down 4.9% compared to 2023 levels. The year-over-year decline was primarily due to the drop in visitors to Maui. On a year-to-date basis, Kauai and Hawaii island also saw small declines in arrivals. Japanese visitors continue to return to Hawaii, but the numbers remain well below pre-pandemic levels. The housing market has remained relatively stable, despite reduced activity levels. In June, the median sales price for a single-family home on Oahu was $1.1 million, 6.7% higher than March of this year. The median sales price for condos on Oahu was $530,000, 3.9% below last year. Turning to Slide 2, I'll give an overview of our second quarter results. Overall, we're very pleased with our strong financial performance. We had good loan production, improving deposit trends, and a well-controlled cost of deposits at 1.7%. Credit quality remained excellent and several key credit metrics improved in the quarter. Our results also benefited from solid noninterest income and good expense discipline. Additionally, we believe that the trends we saw in the quarter put us in a good position for a strong second half of the year. Turning to Slide 3, the balance sheet remains a source of strength. We continued to use the runoff in the investment portfolio to fund loan growth and reduce high-cost deposits. We also maintained ample liquidity. Our deposit mix continued to show signs of stability. The ratio of noninterest-bearing deposits to total deposits was unchanged from the prior quarter at 34%. We remain well-capitalized and our capital levels continued to grow during the quarter. Turning to Slide 4, total loans grew by $39.7 million over the prior quarter. Overall, we had good production in several areas, led by draws on existing construction loans and new leasing opportunities. C&I production was driven by an increase of about $150 million in dealer flooring loans. This was partially offset by paydowns and payoffs of other C&I loans. In particular, we sold two criticized SNC loans at par that totaled $27.5 million. The decline in consumer loan balances was due to runoff in the indirect auto portfolio. Looking forward, the pipeline is strong, and we think the production will pick up in the second half of the year, weighted towards the fourth quarter. Our outlook for the full year is low-single-digit loan growth. Now, I'll turn it over to Jamie.

Thanks, Bob. Turning to Slide 5, total deposits were down $351 million, driven by a $216 million decline in total public deposits. Overall results in the second quarter continued to demonstrate the strength of our deposit franchise as we saw several positive trends that should put us in a good position for the second half of the year. The migration of noninterest-bearing deposits to higher-cost accounts slowed in the quarter, and the ratio of noninterest-bearing deposits to total deposits remains a solid 34%, unchanged from the prior quarter. This favorable deposit mix contributed to our low 170 basis point total cost of deposits, which increased only 5 basis points in this quarter compared to a 9 basis point increase in the first quarter. Overall, deposit pricing in the local market has remained rational and we anticipate that these trends will continue to support our performance in the second half. On Slide 6, we see that net interest income was $152.9 million, $1.6 million lower than the prior quarter. The decline was primarily due to lower average balances of cash and investment securities than the prior quarter. The margin was up 1 basis point, as the benefits from asset repricing, changes in balance sheet mix, and a maturing swap were partially offset by higher deposit costs. Looking forward, we expect the NIM in the third quarter to be relatively flat. We continue to believe that the balance sheet repricing dynamics support an upward trend for the NIM, but the timing and pace of rate cuts will impact that absolute level. Turning to Slide 7, noninterest income was $51.8 million, about $400,000 more than the prior quarter. Noninterest income in both the first and second quarters of this year included about $2 million of various insurance proceeds. So, we continue to expect quarterly noninterest income to be in the $49 million to $50 million range. Noninterest expenses were $6.7 million lower than the prior quarter. Now recall that first quarter expenses included a $4.1 million FDIC special assessment. We continue to expect our quarterly expense run rate to be in the $125 million range. And now, I'll turn it over to Lea.

Thank you, Jamie. Turning to Slide 8, our overall credit quality remained excellent and we saw improvement in a number of key credit metrics compared to the prior quarter. As Bob mentioned on a previous slide, we sold two criticized SNC loans at par for a total of $27.5 million in the second quarter. This action was part of our continuous credit monitoring and management process, and we currently do not see any areas of credit concern in the portfolio. Moving to Slide 9, we show our first quarter allowance for credit losses broken out by disclosure segments. The coverage ratio remains unchanged at 1.12%. We continue to stress test the portfolio and believe that we remain well covered. Turning to Slide 10, we provide an updated snapshot of our CRE exposure. CRE represents approximately 30% of total loans and leases. Credit quality remains strong, with LTVs manageable and criticized loans continuing to comprise a very small portion of the portfolio. Let me now turn the call back to Bob for any closing remarks.

Thank you, Lea. Thank you, Jamie. All in all, we had a good quarter. We saw some very positive trends that will drive our performance in the second half of the year. Loan production is picking up. Deposits and deposit costs are stabilizing. Credit quality remains excellent. Expenses are well managed. And noninterest income is stable. Now, we'd be happy to take your questions.

Thank you. Our first question comes from the line of Steven Alexopoulos with JPMorgan. Your line is now open.

Hi, everybody.

Good morning, Steve.

I want to start, so, Bob, on the loan outlook, you're sticking with low single-digit. You're basically flat right now where you were at your-end. By my math, you need $300 million, $400 million of growth to get to low single-digit in the second half. Could you walk us through how you'll get there? Like, what will change that dramatically versus the first half?

We observed some paydowns in the first half that we do not expect to continue in the second half. This has eased some challenges. We believe the rate of indirect runoff will decrease. For the residential segment, we anticipate ongoing difficulties, so we don’t foresee significant changes compared to the first half. However, in the commercial and C&I sectors, we have several transactions in progress that we believe will contribute substantially to our balances. We've also noticed a recovery in dealer floorplan loans, which can be somewhat unpredictable, but it appears to be improving. As I've joked with Kevin and Jamie, if you say something often enough, it eventually becomes true, which seems to apply this quarter. Overall, the key areas of focus are C&I and CRE, with less emphasis on the consumer side.

Got it. Bob, could you help us understand, so if you look at the paydowns that occurred in the first half, just so we see what you're looking at, why you're confident they're not going to repeat again the second half, is it just maturities you had in the first half and you don't have the same degree in the second half? Just help us understand what gives you the confidence on the paydown side.

Yeah. We saw several loans pay off on the construction side in the first half. One of those we liked, which was this quarter we talked about on the last call, was that $24.5 million sub-standard multi-family deal that paid off. That was sooner than expected, but welcome. The couple of deals we just sold at par. We're not looking to prune the portfolio anymore at this time, so that is, again, helpful. We're not expecting too much in the way of construction completion during the second half of the year. So that continued build as the draws come in over the next six months will be helpful. So, those are really the things, Steve. The wildcard is still a little bit to dealer floorplan. It's hard to predict exactly what those balances will be.

Right. Okay. And then, on the margin and NII outlook, so it looks like, based on the inflation data today, we will very likely get a rate cut in September. Help us think through what your updated thoughts are on NIM. Can you grow NIM, hold NIM flat with cuts? And can you grow net interest income, which is probably even more important, in the backdrop of the Fed cutting rates, I don't know, once per quarter or something like that?

Yeah. That's a great question, Steve. So, from a NIM perspective, I guess I would say that we expect the trajectory of the NIM to continue to rise, but if there is a rate cut just on an absolute level, the NIM will decline in the quarter that there is a rate cut. We still do have a slightly asset-sensitive balance sheet. And you'd also expect one month SOFR to lower itself in anticipation of rate cuts as well. So, the repricing of loans happens slightly ahead of the repricing of deposits. And so, you'll see a small decline in the NIM based on that. But then, the underlying dynamics of the balance sheet should allow us to actually increase NIM even through the backdrop of rate cuts, but at lower absolute levels.

Okay. And what about your ability to grow net interest income if the Fed...

Net interest income will depend on loan growth and the continued shift from securities to loans, which could aid in increasing NII. However, on a comparable basis, NII would decline in that situation.

And just to add to that, Jamie's comments, which I agree with 100%, is the stabilization of our deposit balances is a big part of that as well. And at some point, if they start going the other way, which they haven't yet, that would certainly be helpful.

Thank you. I wanted to mention the securities portfolio; the yield is notably low. I understand you aren’t reinvesting, which contributes to that, but with around $6 billion in securities, have you considered or observed that many banks are restructuring their portfolios? You have the capital available to increase yield. What are your thoughts on this? Thank you.

Yeah. Thanks, Steve. So, we're aware we've seen people do that out in the marketplace. We did that a little bit in the fourth quarter of last year, but we continue to think that the right move here is to sort of continue to run the securities balances down and just try to rotate that into loan growth at the moment. So, we're aware. We kind of weigh the costs and benefits of that. We understand why people do it. We understand the reasoning behind it. But at the moment, we're comfortable with how we are managing it, which is to just continue to run securities down and try to rotate that into loan growth.

Steve, there's one clarification we want to make with you as well that on the $1 million donation in Maui, along with the Federal Home Loan Bank, that did come from the bank, as it has to in that situation, but they triple matched us. So, we put in a $250,000 and they put in $750,000. So, the total is $1 million. So, just to give you that additional detail.

Got it. Okay. Thank you. All right. Thanks for taking my questions.

Thank you. Our next question comes from the line of David Feaster with Raymond James. Your line is now open.

Hi. Good morning, everybody.

Hey, David.

Good morning, David.

I just wanted to dig into maybe some of the core deposit trends. You laid out some of the dynamics that we saw in the quarter, public funds moving out, some of the pressures on retail and commercial deposits. But I was hoping you could maybe talk, too, about some of the movement that you saw throughout the quarter, kind of from early in the quarter through quarter end, and what gives you confidence that things are stabilizing?

Thanks, Dave. We observed most of the deposit outflow occur in the early part of the quarter. We experienced a similar situation in the first quarter, but the overall change, particularly in noninterest-bearing deposits, was considerably smaller in Q2 compared to Q1. Therefore, we remain cautious about this trend, but we are optimistic about the future. We believe the magnitude of the deposit shift indicates that conditions are improving. Additionally, considering the broader economic context and potential rate cuts, we feel that the worst may be behind us regarding the movement from noninterest-bearing to interest-bearing deposits.

All right. That's great color. And then maybe somewhat of a difficult question to answer because there are a lot of moving parts, but I'm just curious, how do you think about the size of the balance sheet going forward? Obviously, we talked about loan growth improving, and maybe to the extent that we do get core deposit growth, would you expect to reduce higher-cost funding and use securities cash flows to fund growth and the balance sheet maybe remain relatively stable or even decline? I'm just kind of curious, how do you think about it?

Yeah, Dave, maybe I'll start and then hand it off to Jamie. So, we see that shrinkage slowing as deposit runoff is slowing. And that's what really drives it for us. We aren't in a situation with a 70% loan-to-deposit ratio where we're stretching and doing outside funding, market-based funding, to be able to fund loan growth. So, as the securities portfolio runs off and the deposits stabilize, that should give us a floor on really where the balance sheet is at. But, Jamie, anything you'd add to that?

Yeah. No, I think you said it really well, Bob.

Okay. That makes sense. And then, last one for me. Just wanted to touch on the HELOC side. Look, that's the largest portion of your NPAs. I just wanted to get a sense of what you're seeing in that book and maybe how do you think about the mortgage portfolio as well? And I know you mentioned that things are stable, but just any thoughts on the housing market more broadly?

I can start and see if Lea wants to add anything. The housing market here is very strong. We have observed prices continuing to rise, and there is very little new supply entering the market. What is available is still receiving multiple offers. Therefore, we don’t see any need for borrowers to offer discounts. This isn't a concern for us, but regarding the HELOC, I'll let Lea address that.

As far as credit quality, we continue to monitor it closely, but we're not seeing anything within the portfolio that we feel is outside of what we would normally expect. So at this point, we're quite comfortable still with the portfolio and how it's performing.

It's challenging out there. While unemployment is low, we are in a high-cost state, and that creates a balance. Many people still experience some financial stress in their daily lives.

Yeah. Okay.

We'll work through it.

Yeah. Thanks, everybody.

Thank you. Our next question comes from the line of Andrew Liesch with Piper Sandler. Your line is now open.

Hey, guys. Good morning. Question on capital here. It continues to build these last several quarters now above the CET1 ratio of 12% that you've been targeting over the long-term. So, what are your thoughts on the buyback? And then, the dividend has been at this level for some time. Just curious, sort of the capital return thoughts?

Yeah. Thank you, Andrew. Great question. Maybe starting with the dividend, we had started out when we went public almost eight years ago to the day now that with a relatively high dividend payout of roughly 50%. And so, we're still at that 50%, 54%, 55%, we're very comfortable with. We think that's a very solid payout. We'll certainly look at that as income grows over time. But we are going to start looking in the second half of the year, as I think we talked about earlier for restarting the buybacks. There's still people out there, I won't name names, but there's still people out there that are still doing marks and looking at us kind of oddly, in my opinion, but I won't delve into that. So, we still think it's a prudent time to have adequate capital. But at some point in the second half of the year, you can look to us to restart the buybacks.

Got it. That's helpful. Regarding your earlier comments on deposits, did I miss whether the reduction in public funds is planned because you don't need that funding? Also, how do you anticipate those trends will develop over the remainder of the year considering any seasonal effects?

Yes, Andrew. This is Jamie. Most of the decrease in public deposits was in public time deposits, which we utilize to address any balance sheet gaps at any moment. We expect to continue seeing that decline over time. Regarding seasonality, we don't observe much variation in the operating public accounts; it's largely driven by inflows and outflows related to ongoing operations with those entities.

Got it. Very helpful. Thanks for taking the questions here. I'll step back.

Thank you. Our next question comes from the line of Kate Ashley with KBW. Your line is now open.

Hi, this is Kate on for Kelly Motta.

Hey, Kate. Good morning.

So just to back on the margin, so came in a bit better than you'd expected last quarter. I was just wondering if you could walk us through any differences from what you were initially expecting versus what we saw.

Yeah. I think the last quarter we talked about slowing noninterest-bearing deposit migration. And generally speaking, I would say, that was the thing that came in better than what we had modeled through the range of outcomes that we were giving as forming our guidance. And so, that was the thing that kind of came in better for us than anticipated. And so that still continues to inform the guide. As we go forward, that will be the pace of noninterest-bearing deposit inflows and outflows will really determine sort of the shape of the NIM along with loan growth. And of course, if rate cuts happen, that will impact as well.

Great. That's helpful. I'll step back. Thank you.

Thank you. Our next question comes from the line of Timur Braziler with Wells Fargo Securities. Your line is now open.

Hi. Good morning.

Good morning.

Hey, Timur.

Just curious what the pace of bond repricing is over the next couple of quarters. And if you can give us a sense of kind of the runoff rate for what's coming due?

Are you specifically talking about the securities portfolio, Timur?

Yeah.

We are currently managing about $50 million a month in our securities book, which totals approximately $600 million for the year. The bonds are maturing at around 2.15% to 2.25%, and the runoff aligns closely with the overall portfolio yield.

Okay. Got it. And then maybe looking at the linked quarter increase in dealer floorplan, I mean, that was a nice little bump there. But your comments maybe suggest that one quarter don't make a trend. Can you just maybe give us a sense of what's going on within that industry and why maybe the results this quarter don't portend to a rebound in that space?

We believe there will be a natural rebuilding over time. The dealers enjoyed a favorable situation for a period with high demand and low supply. Now, we are seeing demand decrease slightly while supply is increasing. This is the reason for the rebuilding of inventories on the lot. There are specific manufacturers and details we could discuss, but generally, as the economy slows and people's willingness and ability to buy cars diminishes while production improves after the pandemic slowdowns, we are witnessing the inventory levels increase, which is reflected in our returning balances.

Okay. With that statement, why do you think this trend isn't sustainable? What makes you believe there's still some volatility?

Manufacturers have not introduced many programs recently because they have been enjoying robust margins. As inventory accumulates in some manufacturers' lines, I expect there will be pressure. We are beginning to hear signs of this. Next week, I will be in California to meet with our customers. Manufacturers will feel the need to create incentive programs to assist dealers in moving inventory. This is part of the normal cycle, which fluctuates and reflects a return to pre-COVID conditions. We will need to assess how this affects our inventory levels moving forward.

Got it. And then just last for me, looking at Slide 10, multifamily criticized, you had mentioned that the loan discussed last quarter, that sub-standard loan had been paid off, but it looks like the criticized balances there actually ticked up a little bit. Did something backfill that sale and just maybe talk more broadly about what you're seeing within that multifamily space?

I think if you go back a couple more pages, you'll see that multifamily construction was the area that paid off. And now that's gone to zero. What page is that, Lea?

It is on Slide 16. Construction. But the change in the multifamily criticized is mostly the denominator actually went down slightly. So, there was no change in the actual numerator or the amount of criticized. The percentage just changed slightly because of the denominator decreasing slightly on the quarter.

Yeah. And the payoff is shown on Slide 16, Timur.

Got it. Great. Thanks for the questions.

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Kevin Haseyama for 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.

This concludes today's conference call. Thank you for your participation. You may now disconnect.