First Hawaiian, Inc. (FHB) Q3 2026 Earnings Call Transcript

Standing by, and welcome to the First Hawaiian Inc.'s Third Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Kevin Hasayama, 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 Lee 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 one 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 gap measurements. And now I'll turn the call over to Bob.

Thank you, Kevin, appreciate everybody joining us today. Turning to slide two, 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 29th 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 Nash 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 dollars, up 4.1 percent for the comparable period in 2025. The housing market remained stable. Median single-family home price on Oahu was 1.1 million dollars in September, down 3.9 percent from last year. The condo prices remained stable at 523,000, up 2.8 percent from 2025. Turning to slide three, our results of the quarter reflect the continued solid performance by the team. Net interest income increased, deposit costs declined while deposit balances grew, and the margin increased five 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 $2.43 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 four, 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 five, 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, 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 six, total deposits were up about $50 million, while our total cost of deposits fell by three basis points in the third quarter. Increased commercial and public operating deposit balances were partially offset by a decline in retail deposits. And 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 five basis points link quarter, with both with both asset yields and funding costs helping to drive that in immigration. 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 dollar 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 lee thank you jamie moving to slide nine while we had some noise in the third quarter the overall loan portfolio remains healthy as the 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 a isolated situation. Our downtown Seattle office portfolio 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 This provision expense was driven by the office charge-off and the CRA 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 is placed on non-accrual since the end of excuse me 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 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 one to two percent growth, down from three to four percent 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 in the outlook to 3.26 to 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 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.

Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star one one on your telephone. Our first question for today comes from the line of Andrew Tenrell from Stevens. Your question, please.

Hey, good morning. Maybe I could just start on the loan growth. It looks like the expectations of, if I'm kind of reading it right, for 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 for growth out there right now yeah Andrew answer your question yeah no the pipeline is still there we still have quite a bit of loans in process it's really the 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 in the fold? And I know it may be tough to put a finger on, but can you just talk us through 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 tighten up the maybe expectations a little.

Hey, Andrew, it's Jamie. I appreciate the question and understand why you'd ask it. 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 $170,000, so we think the spread is maybe $160,000 to $170,000 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, you know, in a prior quarter, we would expect a couple 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 basis points or so just if rates remain flat. So, yeah, that's what I got for you today.

And, Andrea, this is Bob again. You know, just a little more color on the loan side. You know, we are seeing a still solid pipeline for CRE. Just to break it down a little bit, the residentials continue to run off. Given the rate outlook, you know, 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 pan. dealer floor plan balances. So that if we follow the usual norm, there should be an okay fourth quarter, but we did adjust our guidance to take into account what happened in the third quarter.

Great. Thanks so much for taking the questions.

Thank you. And our next question comes from the line of David Feaster from Raymond James. Your question, please.

Hi, good morning, everybody.

Morning, Dave.

I just wanted to start on the funding side. You know, 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?

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, you know, muted, let's call it. You know, we, all the large four banks here are, you know, we're all in the same boat in terms of loans to deposit ratio and things like that. So, you know, the competition is about kind of what it always has been so rates up I think will kind of drive you know sort of let's call it CD repricing slightly higher because of that and then we have our normal competition and you know where we're you know competitive with each other around around client acquisition so we're probably at a trough now I guess the best way to describe it is you know we think maybe interest sparing deposit betas somewhere in the 40 percent ratio in totality where in total deposit betas

will be like 30 or so some 30 basis points or so okay terrific and then i mean just looking at trico i mean they had a pretty solid quarter right and i'm just kind of curious as you guys are are working together getting prepared for the closing um still expecting to close by year end And I guess, you know, as you've gotten 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, like that, I think is one of the bigger risks with the deal, right? It's 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 make it as smooth a transition as possible?

Sure, Dave, this is Bob. Happy to answer that question. And, yes, we're very focused on that. We're working very closely with them. Jamie is actually heading our integration management office. Peter Weiss, their CFO, is heading it on their side. They're working closely on organizing the teams to get ready for post-closing, whenever that happens. It should be fourth quarter, 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 one, maybe two that are not, and, you know, 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 agree with you. The execution risk is what we're completely focused on, and that's what matters, and that's where we're spending a lot of time on it. exchanging visits between, you know, 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, you know, 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, you know, I guess, can you let Trico be Trico? Because Trico, as we talked about, this is a merger of two really good banks, right? And Trico is, you know, performing very well. How do you think about letting, you know, just the integration as, you know, two separate banks running in two separate markets? Kind of how do you think about letting them do what they do versus, you know, 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?

Yeah, 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 those 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's things they can learn from us, you know, 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 two folks at the top. It's really both sets of management teams thinking and working the same way.

Terrific. Thanks, everybody. Thank you. And our next question comes from the line of Anthony Elliott from J.P. Morgan. Your question, please.

Hi, everyone. slide six 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 deposit and overall deposit growth going forward yeah hey hey tony it's jamie um so uh i would i would call that um sort of normal flows that that we saw uh in the quarter on the commercial side um same kind of thing on the retail side you know some sort of what i'll call like normal outflows um typically what we have in the fourth quarter is is inflows across most across both retail and commercial for sure sometimes we see that in public but that's a little you know more event driven I would say you know if you look to our past fourth quarter growth guides those are kind of like where we usually come in in the fourth quarter you know 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, you know, we would expect some deposit growth in the quarter.

Thank you. And then my follow-up on credit, can you give us some more color on other office or career loans 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?

Thank you. yeah tony this is bob maybe i'll start and then hand it off to lee you know this i think it maybe is worth taking a second on the office building in seattle that's you know a key market that we've known for a long time it was a two bank deal with a very strong agent very strong sponsor at the time um it's still 75 occupied by a federal agency that's paying its rent it's just you know downtown Seattle if you haven't been there is is challenged right now and the the office market is severely impacted on that so that's why we consider that one 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 led to some of the regrades but but maybe I'll turn it over to Lee for any other comments she has.

No, I think we all understand that the high interest rates have stayed 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 to participate with who we choose as our sponsors um you know we don't have very much in mainland office um it's not one of the portfolios that we are actively expanding i think the other portions of our portfolios that we we advertised as our core, those are still very strong. So, yeah.

Does that answer your question, Tony?

It does. Thank you for the caller.

Thank you. And our next question comes from the line of Matthew Clark from Piper Sandler. Your question, please.

Hey, thank you. Good morning, everyone. Just running out the deposit cost conversation, do you have the spot rate at the end of September to give us some visibility?

Yeah, it was 117 basis points, same as it was for the quarter.

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 two that we should assume? I know it's going to get a little fuzzy with Trico, but that'd be helpful.

Yeah, so roughly, you know, let's call it $250 million on the loan side and $150 million on the security side in the, you know, 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 the four 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 credits, the types of properties, and kind of the outlook for each of those credits.

Three of the downgrades came out of the national SNCC exam. Two are to 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 But because we were looking for a little more diversification, we don't really have many of those assets left.

We look closely at the lost content, and we think whatever provisions we've made are appropriate for that, Matt.

And can you remind us of the size of your SNCC portfolio and the percentage that's criticized?

CNI SNCC is the credit-only pieces. so the pieces that we bought on the secondary that's 275 million in outstanding and everything's pass rated except for we have an 11.6 million dollar unfunded commitment and that's special mention but everything else is passed any uh series next oh we have series next i don't We might have to get back to you with that number.

Okay, thank you.

Thank you. And our next question comes from the line of Janet Lee from TD Cowan. Your question, please.

On the lending front, it looks like CNI was down most of it from the lower dealer flooring. is the expectation that CNI can still grow from here, but then being partially offset by still elevated CRE payoffs? Or some of your peers have been talking about how the CRE payoffs may moderate a little bit because of higher rates? Or do you see activity declining on either side, CRE or CNI, in terms of the demand?

Well, Jana, this is Bob. I think that, you know, part of that is much of our CNI, historically, the volatility is driven by a dealer floor plan, and that comes and goes, depends on what's happening in the market. Obviously, rates being up, dealers are going to do their best to manage their inventory, a little slower economy should lead to higher floor plan balances as cars don't move as quick. So those are both kind of offsetting. So it's not an easy, you know, answer one way or the other. The balances typically do go up in the fourth quarter. We have been onboarding a new client or two every quarter or so. So you have some natural growth in the portfolio as well, But it really is hard to predict exactly the rate of flow of what the balances are going to be. The only thing we do control is getting out there and working with new customers, potential prospects, and converting those. And so that's how we take charge of that portfolio. broadly in the market for for our cni and and unfunded lines you know the utilization has been within a few basis points about the same throughout the year so there might be bumps up or down but we really haven't seen a sustained growth in in working capital borrowings as an example. So does that answer your question?

Yeah, it does. Thank you. Jamie, just a follow-up to your beta comment, 40%-ish on interest bearing and 30 basis point, sorry, 30% on total deposit the beta, is that just for Legacy First Hawaiian, or does that include Trico?

Yeah, good question, Janet. That was just us. That's just Legacy First Hawaiian.

How would that change with Trico, if at all?

You know, hard to know or say at this point. You know, I think, you know, once we finally get closed and we can you know we'll be working together between now and then we'll you know we'll figure out um how all of our uh strategies will interact and how this will all work out together but you know for now it's kind of kind of hard hard to hard to say other than uh that we think very highly of how trico has managed their deposit costs over a very long period of time and you know we we would imagine that we we're both going to continue to manage our costs in the same way that we do today or in very similar ways.

Thank you.

Thank you. And our next question comes from the line of Andrew Leach from Stonex. Your question, please.

Morning, everyone. So recognize that you didn't buy back any stock this quarter. Looking to next year, deals closed, capital ratios felt it would still be pretty solid. How are you viewing capital or the buyback at that point?

I mean, your capital ratio should be really strong here after the deal closes.

Yeah, so this, Bob, is certainly something that we've done consistently for a long time, ever since we went public, and we did pause it for the transaction. The expectation would be that as we put the two organizations together and have the combined balance sheet, we see a lot of accretion. We see a lot of profitability that will add to that. And so together, that would certainly be something we would look to. We still have authorization to do buyback, so all of that's on the table. It's just a little bit early to decide how much and when.

And then with the new Basel III rules, still expecting maybe 100 basis points to CET1?

Yep, yep. That would be our expectation around that.

Got it. That's my question. Thanks so much. Thank you. And our next question comes from the line of Megan Lynch from KBW. Your question, please.

Hi, thanks for taking my question. So sort of with Trico coming on, I was sort of wondering back to loan growth and your outlook, is there any interest or thoughts about reducing the mainland participation book Or, like, how are you sort of thinking of your mix as you become one with Trico?

Megan, this is Bob. That's certainly something we're looking at and talking to the Trico team about. Obviously, we'd always rather have a full relationship with whoever we're doing business with and not have just a lending relationship. and that the combination of the two of us will allow us to build out the relationship with existing customers of ours that are today lending only or lending in cards only. So that will benefit, I think, across the board. And although we're both very liquid, if we have the opportunity to take some of that liquidity and capital and put it towards broader relationships, we'll certainly do that. and over time, you know, do less of the credit-only type of lending.

Okay, awesome. Thank you. That was helpful. And then on the systems conversion, have you decided which platform the combined bank will use?

You know, we haven't really talked about that yet. We are, you know, we're in discussion. We're continuing to think that, you know, the second half of next year is when we'll have our conversion. The teams are working very well together right now. I'm very excited about watching the relationships between Trico and us develop inside the IMO offices. As Bob mentioned earlier, having people back and forth, getting to know each other a lot better. We feel really good about the way that this partnership is developing, and we still continue to be very excited about the strategic nature of this deal. and we know they feel that the same way as well.

Yeah, and this specific to your question, though, we're not ready to announce that at this point.

Oh, I got it. Thank you. And then just one more. Could you provide a spot in?

Yes, it was 333 in September.

Okay, perfect. Thank you. That's it from me.

Thank you. And once again, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. Our next question comes from the line of Jared Shaw from Barclays. Your question, please.

Hi, this is John Ralph for Jared. I guess maybe building on the last couple of questions, as you've gotten to know Trico more and more of the frontline employees there, have you thought more about the balance of the combined company between California and Hawaii and any areas of living that they're focused on that you think are worth investing in post-deal close?

Yeah, this is Bob. We're certainly having a lot of conversations about that. There's a couple things that they do that we have not done historically, just lack of availability. One is oil and gas, and the other is more agriculture and agriculture-related lending. They do a great job in those spaces, and we're certainly going to support them. If there's opportunities to grow there, that we would certainly look to grow in that. A couple of things that we do that maybe we can take over there and see if the opportunity exists. We know the hospitality business very, very well. And again, that's going to be some of that cross-fertilization between the two teams to see how we can learn off each other, lean in, and grow the combined bank.

Okay, great. Thanks for that. And then I guess leading into the deal close and after, are there any deposit promos or anything you're doing on the deposit side to make sure you retain those balances over the next like six to 12 months?

Well, you know, we will be looking at all of that stuff over time. You know, I think, I think maybe the right way to think about it is there won't, there's no branch overlap. so no branch closures if you're if you're a California customer of Trico you're gonna continue to walk into the same branch you always walked into with with the same with the same people and your same favorite teller that you always got to talk to you so there's you know that sort of disruption be very much minimized and you know the disruption will come around the the time of, like, say, probably conversion. So, you know, we've got some time to think about that, but we will be very, very focused on retaining customers to the best of our abilities, obviously, in California and here in Hawaii, like we always do. You know, I think, you know, customer retention is something we always think about, and we'll continue to think about that, you know, in the next phase here.

Okay, that's all I have.

Thank you. this does conclude the question and answer session of today's program. I'd like to hand the program back to Kevin Asayama for any further remarks.

Thank you. 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.

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