First Hawaiian, Inc. Q1 FY2025 Earnings Call

Thank you for standing by. And welcome to the First Hawaiian Bank First Quarter 2025 Earnings Conference Call. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Jamie Moses, CFO. Please go ahead, sir.

Thank you, Jonathan. And thank you, everyone, for joining us as we review our financial results for the first quarter of 2025. With me today are Bob Harrison, Chairman, President and CEO; and Lea Nakamura, our 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.

Hello, everyone. I'll start by giving a quick overview of the local economy. Overall, the flight economy remains stable, but uncertainties are increasing due to recent weakness around international rivals and the lack of clarity about consumer confidence. The statewide seasonally adjusted unemployment rate remained stable in February at 3% compared to the national unemployment rate of 4.1%. Through February, total visitor arrivals were up 1%, and spending was up 4.5% compared to 2024 levels. Maui has seen the largest increases in arrivals and spending among all the islands. Also, the housing market remains stable. Turning to Slide 2, we continue to perform well in the first quarter. Net interest income increased versus the prior quarter. Noninterest income was stable, and expenses remained well controlled. Declining deposit costs in the fourth quarter investment portfolio restructuring helped drive a 5 basis point increase in NIM. And then finally, credit quality remained excellent, and we added to the reserve due to increased macroeconomic uncertainty. Turning to Slide 3, the balance sheet remains solid, and we are well positioned to support our customers. We continue to be well capitalized with ample liquidity. During the first quarter, we repurchased about 974,000 shares at a total cost of $25 million, and we have $75 million in remaining authorization under the approved 2025 stock repurchase plan. Turning to Slide 4, total loans declined $115 million or 0.8% from the prior quarter. The decline was primarily due to commercial real estate loans, where we experienced both scheduled and early payoffs and a few large credits. Growth within the C&I portfolio was partially offset by the normal fluctuations in dealer flooring, which declined by $28 million. Now I'll turn it over to Jamie.

Thanks, Bob. Turning to Slide 5, while total deposits declined slightly in the first quarter, we were pleased with the underlying performance of the retail and commercial deposit bases. Retail deposits increased $105 million in the quarter while commercial deposits more than offset that, falling by $167 million. The decline in the commercial book was largely due to normal fluctuations in a few of our larger accounts but was not reflective of any larger underlying trends. Our total cost of deposits fell by 11 basis points as the benefit from the Q4 rate cuts was fully priced in, as well as the repricing trends from approximately $1.4 billion of CDs in the first quarter. Our noninterest bearing deposit ratio remained an enviable 34%. On Slide 6, we see how the deposit performance benefited net interest income and the margin in the quarter. Net interest income was $160.5 million, $1.8 million higher than the prior quarter. The increased NIM in the first quarter was a result of those lower deposit costs and the benefit from the Q4 investment portfolio restructuring, which together offset some of the effects of the decline in the yield of our floating rate loan portfolio. Looking ahead, the underlying balance sheet dynamics driving the NIM remain intact, and we anticipate that the NIM in the second quarter will increase a few basis points to 3.10. I want to also point out that given the current macro environment, the level of uncertainty around our outlook has increased. Turning to Slide 7, noninterest income was $50.5 million, and noninterest expenses were $123.6 million. There were no significant nonrecurring noninterest income or expense items in the quarter, and our full year outlook for both of those lines remains the same. And 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. Credit risk remains low, stable, and well within our expectations. We're not observing any broad signs of weakness across either the consumer or the commercial books. Classified assets decreased by $3 million due primarily to paydowns. Year-to-date net charge-offs were $3.8 million, and our annual year-to-date net charge-off rate was 11 basis points. Nonperforming assets and 90-day past due loans came in at 17 basis points at the end of the first quarter, down 2 basis points from the prior quarter. Moving to Slide 9, we show our first quarter allowance for credit losses broken out by disclosure segments. The bank recorded a $10.5 million provision in the first quarter. The asset ACL increased by $6.2 million to $166.6 million, with coverage increasing 6 basis points to 117 basis points of total loans and leases. The reserve build reflects the more pessimistic forecast available to the economic forecasting component of our CECL model. We believe that we are conservatively reserved and ready for a wide range of outcomes. Let me now turn the call back to Bob for any closing remarks.

Thank you, Lea. Thank you, Jamie. Now we'd be happy to answer any questions.

Our first question comes from David Feaster from Raymond James.

I wanted to start with the loan side. I appreciate some of the commentary in the release and what you mentioned, Bob, about the strength of the economy. I'm curious about the pulse of your clients. How is the situation currently, considering the uncertainty? I'm also interested in how the pipeline is shaping up and the expectations for pull-through. Additionally, how much of the decline in commercial real estate this quarter was due to weaker demand, and how much was driven by payoffs and pay downs?

Let me start on that, and then Jamie or Lea have comments, we'll let them certainly join in. Actually, average loans for the quarter were up over Q4. So it really was just a few things during the quarter. We participated along that we originated in Q4. We participated out in Q1 just kind of normal stuff. The dealer paydowns are very typical to see a buildup at year-end and then some of that come off in Q1, and then we had some other paydowns. So there wasn't anything in Q1 that we thought was unusual. We do think that we are seeing the pipeline being pretty strong out there, but there's more uncertainty in the market. I mean you heard that with Lea's comments; the modeling has a little bit more uncertainty. So we think it's fine, but we certainly can't tell what's going to happen in the back half of the year. We think there's opportunity there, everything else being normal.

And then maybe touching on the other side of the balance sheet on the deposit side. You guys had a lot of success repricing deposits and doing some remixing. Obviously, there's some seasonality this quarter. I'm just kind of curious maybe the competitive landscape on the deposit front. How much leverage is there left for you to continue to reduce deposit costs? Just kind of curious what you're seeing there.

I guess what I think is that when we see rates continue to decline, we'll still have opportunities to also bring down those deposit costs as well. We've had a pretty strong beta from a downturn perspective, and I think that beta begins to decelerate but still exists. It's tough to go much lower than 1.43 from this point versus being at 2% or something like that, and there's just a lot more room from that perspective. And also, we pride ourselves on having full relationships and really growing those operating accounts from folks. And so having more DDA also limits our ability to reduce rates even further. But I don't think we want to apologize for that. I think we have pretty good deposit performance, and we're happy with how that's working out for us.

The only thing I would add to that is we're very pleased with the increase in the retail deposits of $100 million. That really shows that we're out there. The teams are out there serving their customers and growing their relationships. Literally a handful of large commercial accounts, they're all still great customers of ours, and just the fluctuations at the end of the quarter went negative instead of staying stable or going up. So we weren't concerned about the drop on the commercial side either.

So if I'm hearing you, Jamie, exclusive of rate cuts, not a ton of room that wood to chop, if you will, on the deposit cost side?

I think that's right. There's some ability still related to CD repricings that we have in the second and third quarters. But apart from that, I don't think there's a whole lot for us to really be able to do there.

Can you remind us what those roll-off rates are and where you're pricing new CDs?

So it fluctuates a little bit, but we're probably getting 20 to 30 basis points in total spread on that repricing.

And then just the last question I wanted to touch on was on the expense side. It came in better than expected here in the first quarter. Seasonally, there are some headwinds, right, with FICA bonuses, raises, and all that kind of stuff, but still reiterated the guidance at $5.10. Could you just maybe touch on the trajectory over the course of the year, where you're investing in and maybe some projects or just kind of how you think about expenses this year?

I believe we are always looking to invest in our business and our people, which is a crucial aspect for us. There was a slight slowdown in expenses during the first quarter, but we anticipate that these will increase throughout the year while remaining committed to our initial guidance. If other opportunities arise, we have some projects that we could consider that would provide returns in the coming years. However, we want to ensure we're more confident in our outlook before proceeding with those investments. Overall, we plan to maintain our guidance for now, with potential adjustments depending on external factors.

Maybe just to add a little bit to that. As we've talked about in the past, we kind of did the big tech spend over the last several years. So there's always projects that we're working on, and certainly in data and analytics and other areas that we're trying to provide value to the line folks to better do their jobs and take care of our customers. But it's not on the scale that we've had in previous years, which has allowed us to kind of keep our guidance where it is and work maybe one quarter or a little below, but we're still keeping that guidance.

And our next question comes from the line of Jared Shaw from Barclays.

When I'm looking at the growth in the allowance, and you mentioned sort of the qualitative overlay there, if we assume that UHERO sort of catches up to the expected slower visitor arrivals, do you just feel like that qualitative overlay is front-loading some of that, or could we expect to see the ACL ratio go up if the UHERO deteriorates?

So it's not the qualitative overlay; it's the quantitative portion of the model that generated that increase. So we do put in more than just UHERO; it's a multiple of factors. So it's hard to say what will happen with the coverage ratio.

One of the things that actually happened during the quarter was that changed a little bit as we saw better performance on Maui, and so now we're reducing some of that qualitative overlay, and other things are kicking in to Lea's point. So there's a lot of different factors in that.

And then could you just sort of walk through some of your thoughts around the floor plan businesses, exposure to tariffs, and if we do end up seeing significantly higher pricing for imported cars? How does that sort of impact the dynamic of the floor plan, either balances or credit or growth there?

We finished the quarter with a floor plan of $661 million, which is certainly an increase from the previous level, though still well below the all-time highs. The business landscape has changed. Let's talk about the dealers; they are adept business people. During COVID, they demonstrated their ability to adapt by shifting from selling new cars to used cars and focusing on service while adjusting their cost structures. From a credit standpoint, we remain open-minded and have no concerns in that area. The balances will depend on the potential implementation of tariffs. We noticed some last-minute purchasing activity at the end of the third quarter and into April, as people anticipated these changes and wanted to secure their preferred vehicles. However, there's still a significant amount of uncertainty regarding which countries will be affected by tariffs, whether they will apply to subsidiary parts, and how this will be managed. Additionally, we have not received any updates on how manufacturers will support the dealer network. This remains an unknown factor. Will manufacturers step in to help the dealers or pass on costs? These questions will be clarified in the coming weeks and months. We are confident in the dealers' capabilities. Regarding the balances, we will have to wait and see how this evolves.

And our next question comes from the line of Kelly Motta from KBW.

I think maybe turning to deposits. Can you remind us about the seasonal trends there and what we should be expecting in the upcoming quarter, given whatever line of sight you have into that?

So as we would expect, there should be some tax implications in the first quarter as folks pay taxes and so draw down some balances. What we've seen in the past is that really the back half of the year is where the deposits start to build. What's different for us this quarter and what makes it a little tough to prognosticate at the moment is that we did see that really good increase in retail deposits in the first quarter. And so it really kind of just depends on how those trends play out relative to the commercial deposits, right? So we mentioned earlier we have some accounts that have large fluctuations on a normal basis. And so depending on where the quarter ends, they're either up or down. But I think in general, we're seeing good net account growth. We're seeing good customer growth, and that's a credit to our retail teams. They're doing a great job out there, and the Street is just making connections and servicing our customers. So I think that's just part of what we do, and we're generally pretty happy with where that's going.

The only thing I would add to that, similar to the loans, the average deposits for the quarter were up over the fourth quarter. So this is kind of normal fluctuation in mix. What that tells us about the future is a little less clear given the uncertainty in market conditions, etc. But the economy is still growing; great production by the retail teams to Jamie's point.

And I guess maybe the last question from me. It looks like average cash balances were elevated a bit in the quarter. Tying that in with your commentary just now about deposits potentially seeing growth picking up in the back half with seasonal trends. Would you expect the overall size of the balance sheet to grow commensurate with that, or are you still funding some of the potential loan growth with cash flows off the securities book? Just trying to get a good sense of the size of the balance sheet.

I think the answer is that you actually hit it on the head, which is that to the extent that our deposits are growing, the size of our balance sheet will grow along with that. There's a chance that maybe those cash balances were a little bit elevated. And so the size of the balance sheet may be slightly smaller, but sort of the efficiency of that balance sheet should be better. So in terms of NII, if that's what you're thinking about, I think that's probably exactly the right way to think about it.

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

Just following up on loan growth. Do you think the second quarter could be a growth quarter for total loans? And then what are you expecting on a full-year basis, still that low to mid-single digits range?

I will begin by discussing the full year. We haven't adjusted our guidance. There is some uncertainty, but we still believe there's a chance to achieve low to mid-single digit growth depending on economic conditions and potential tariffs. In regard to the second quarter, it's more difficult to predict. There are several loans in the pipeline, but this uncertainty may lead to fewer construction loans being refinanced, particularly in the multifamily sector. Given the current market conditions, including CMBS trends, it’s a bit more challenging, and these loans may end up being spread across various areas. We are monitoring this situation closely and discussing it with our borrowers. While there are deals in the pipeline, it's uncertain which quarter will show growth for the rest of the year.

And then my follow-up, you provided good color on the dealer floor plan loan portfolio; not concerned about the credits there. Are there any other loan portfolios more broadly you're maybe paying closer attention to given the heightened exposure to tariffs, manufacturing, supply chain, anything like that, anything proactive you're doing now on those portfolios?

The kind of broad base of C&I is something we're also staying close to our customers on, C&I ex-dealer, which we talked about earlier. It's just a variety of businesses in there, and the impact of what's happening with not so much tariffs, but a lot of small businesses are obviously going to be impacted by higher costs associated with goods that are imported from somewhere else. And so that's something that the credit teams and the line are spending a lot of time talking about just to stay close to those customers. Nothing at surface yet, but just the heightened awareness for us.

And Tony, just to add quickly to that, the credit and risk teams feel really strongly that the impacts of tariffs and other disruptions are really customer dependent, not necessarily by portfolio. And so this is where it's really helpful that we have such strong relationships with our borrowers that we're able to really be tight with them and really understand their businesses so that we can really understand what those impacts are and work through and with them throughout the course of time.

And our next question comes from the line of Andrew Terrell from Stephens.

Jamie, if I could just start on the margin. Would you happen to have the spot deposit cost at the end of the period and then maybe the margin in the month of March?

Yes, spot deposit cost was 1.41, and the margin in March was 3.10. So embedded in our forecast, right, is that there's going to be a rate cut in June. And so that 3.10 guidance that I'm giving is inclusive of that as well. And so that's why maybe it seems like it's not expanding off of March, that's the reason the rate cut in the forecast would offset that.

And then could you just remind us on the buyback? I saw you guys were active this quarter, this past quarter. There's obviously a bit of volatility in the market. Just expectations around the buyback moving forward. And specifically, any interest in maybe accelerating the pace of buyback given some of the volatility we've seen?

I mean, I think that there's definitely interest when the price is lower, right? But I think the way to think about it and the way that we're trying to be real careful and think about it is that this is a program that we have in place, and we're trying to do things very programmatically. That doesn't necessarily mean that there won't be an acceleration of the buyback when we see opportunities. But just broad-based when we're thinking about it, we're thinking about this not trying to time markets and things like that. We're really trying to just put this program in place to return capital to the shareholders. So it's possible, but I would think that it's more likely the $25 million per quarter kind of thing is where we're more looking at.

And our next question comes from the line of Andrew Liesch from Piper Sandler.

Just a quick question to follow up on the margin commentary here. So you're going to be at 3.10 for the second quarter. How quickly can you offset any rate cuts? So if we look out further into the year, can you offset the rate cut in the third quarter and keep the margin flat at 3.10, or is there going to be an initial drop? I know you have a fair amount of asset repricing that's still going to be at a positive differential. So do you think you can hold the margin flat, or do you think the margin will be down in the quarter?

I think that's going to be dependent upon our loan growth. And so if we're able to grow loans at a very good clip, then there's a chance that we can fully offset that in a quarter. If not, then maybe you'll see a small decline, but then you should continue to see a general march higher when those repricing dynamics continue. So it's tough to say without knowing all the moving parts around that. But there are opportunities in our rate-sensitive deposits, and we have the CDs that also reprice in the second and third quarter. So I feel confident that once we hit a rate cut, we reprice things, it's obviously lower, but then we have the ability to then drive it higher. So those fundamentals still remain intact.

And then just a follow-up question. What's the tax rate you should be using here?

23% we think is a good number for the year.

And our next question comes from the line of Timur Braziler from Wells Fargo.

Starting big picture for me, just looking at tariffs. I guess, where could tariffs potentially be more multiplicative for Hawaii, given that there are just more stops along the way for the islands? And then, Bob, maybe you can help frame the risk both from the tariffs and then what's slowing visitor arrivals in the economy?

I guess broadly from tariffs, Jamie touched on it a bit earlier. We don't have businesses that are doing manufacturing that you're seeing things come in. I guess one of the concerns would be, and we didn't touch on this yet, so a very good question, would be in construction; are you seeing higher raw material costs, or where could that take us? No projects have been canceled by any of our customers. The developers are, of course, working closely with contractors to make sure that the prices are solid before they launch into a project. So that’s more of a look forward opportunity that creates a little bit of uncertainty around that. Given the importance and strength of construction in Hawaii, that's maybe the area that you'd look to, but we have some pretty conservative contractors too. I know one that whenever they bid a job and then they get awarded, they buy all the materials right then to make sure they lock in their cost. So it really depends on the customer and the situation. But clearly, if there's a dramatic increase in construction material costs that are important, that could, in the future, affect construction. That's really the only one. The other point that Jamie made that it ties into various C&I loans of customers, we're just staying close to people on that. Maybe the last thing is as it affects tourism, I think was the last part of your question, there are stories up. We haven't seen any evidence of foreign visitors being less willing or more reluctant to travel to the US, which could include Hawaii as well. But we're seeing a tiny bit in the numbers through February, but the numbers haven't come out yet for March, and future bookings are anybody's guess. So that's something we're watching closely and staying in close contact with our hospitality customers. Does that answer your question?

It does, yes. And then I guess just second for me, looking at the reserve build this quarter, it seems like much of that was driven by the consumer portfolio. I'm just wondering about broader thoughts around your consumer exposure and the thought process of building that reserve over these last couple of quarters.

The allocation is primarily based on the economic forecasting model, which uses a different methodology. In general, we haven't observed the level of consumer decline that the forecasts predicted. So far, it is performing well for us. However, we are cautious, as Hawaii is susceptible to tariffs and reductions in federal spending. Nevertheless, consumers have remained resilient, although this is something we need to monitor closely along with other factors.

And maybe it's worth mentioning on the federal spending. The Defense Secretary stopped by on his way to Asia and made a very strong statement that Indo-Pacific Command is going to remain fully funded, given its mission here in the Pacific and all the way through India. That doesn't mean there won't be impacts. There's a number of other things that the federal government is looking to reduce costs on that will affect Hawaii, but kind of the largest driver in and of itself, which is Department of Defense Indo-Pacific Command, appears to be at least on most recent statements as of whatever it was a week or 10 days ago, that won't be subject to any consequences.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jamie Moses, CFO, for any further remarks.

Okay. Thanks, Jonathan. We appreciate your interest in First Hawaiian. And please feel free to contact me or Kevin Haseyama, our Investor Relations Director, if you have any additional questions. Thanks again for joining us, and have a great rest of your week.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.