FIRST HAWAIIAN, INC. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Economic Overview: The Hawaii economy was resilient, with Maui recovering from wildfires, stable tourism numbers (though visitor arrivals and spending down vs. 2023), and a low statewide unemployment rate of 2.9% in September. Housing market stable, with Oahu single-family home median price up 6% year-over-year.
• Financial Results: Third-quarter momentum continued from Q2. Deposit balances flattened, deposit costs up 1 basis point. Unexpected loan payoffs were a headwind, but credit quality was excellent, and assets repriced up driving margin expansion. A $3.8 million tax reserve release had no impact on net income.
• Balance Sheet: Investment portfolio runoff funded loan growth and reduced high-cost deposits. Ample liquidity, with a $500 million FHLB advance maturing and a new $250 million 12-month advance at a lower rate. Well capitalized with capital levels growing due to strong earnings and AOCI change, resuming share repurchases in Q4.
• Deposit Details: Total deposits down $91 million, with public deposits down $112 million. Retail and commercial deposits stabilized. Migration of non-interest-bearing deposits to higher cost accounts tapered, and deposit costs leveled off, with September cost of deposits decreasing 1 basis point.
• Net Interest Income/Margin: NII up $3.9 million, margin up 3 basis points. NIM expected to decline modestly in Q4, around 2.9%.
• Non-Interest Income/Expenses: Non-interest income was $53.3 million, ~$1.5 million higher than prior quarter, driven by credit/debit card fees and BOLI. Non-interest expenses up $4.1 million, with a $3.8 million tax reserve release offsetting income tax expense.
• Credit Performance: Solid credit risk metrics, classified assets increased but well collateralized. CRE portfolio credit quality strong with manageable LTVs and small criticized loan portion.

Segment Performance

• Deposits: Total deposits were down $91 million in Q3, driven by a $112 million decline in public deposits. Commercial deposits increased $112 million while retail deposits decreased $91 million. Non-interest-bearing deposits to total deposits ratio remained at 34%. Deposit costs increased 1 basis point from the prior quarter.
• Loans: Total loans were down $119 million compared to the prior quarter. Construction loans grew as expected, but unexpected payoffs in C&I and CRE portfolios were a headwind. Full-year loan growth was relatively flat due to Q3 payoffs.
• Net Interest Income: Net interest income was $156.7 million, $3.9 million higher than the prior quarter. The margin was up 3 basis points primarily due to asset repricing dynamics and stable deposit costs.
• Credit Quality: The bank maintained solid credit performance. Classified assets increased by $64.6 million due to downgrades, but the recently downgraded loans were well collateralized. CRE represents approximately 30% of total loans and leases, with strong credit quality and manageable LTVs.

Guidance

• Resuming share repurchases in the fourth quarter.
• Net interest margin expected to decline modestly (~2 basis points) in Q4, around 2.9%.
• Full-year expenses expected to be in the $500 million range.
• Loan growth pipeline strong in Q4, but full-year loan growth relatively flat due to Q3 payoffs.

Risks

• Unexpected loan payoffs in Q3 impacted loan growth and full-year loan growth outlook.
• Competitive Mainland lenders being aggressive in certain sub-segments, affecting origination yields.
• Potential impact of further rate cuts on net interest margin and deposit repricing dynamics.
• Classified assets increase in multifamily loans, though well collateralized and not indicative of broader portfolio weakness.

Question and Answer

Q: Follow up on growth side, pipeline, and competitive landscape.

A: Opportunities in commercial real estate (Hawaii and West Coast) and dealer floor plan. Some competition from aggressive Mainland lenders in certain deals.

Q: Provision build in consumer/home equity.

A: Modeling tweaks and qualitative factors, with portfolios well secured and not overly concerned about home equity position.

Q: Loan growth payoff activity drivers.

A: Aggressive Mainland lender replaced the bank in syndicated deals, with mix of new and existing customers in floor plan growth.

Q: Deposit pricing and margin impact of rate cuts.

A: Transparent with deposit customers on rate changes, $4.5 billion of deposits not directly indexed but pricing can be adjusted with rate cuts.

Q: Fee income drivers.

A: Strong credit/debit card fees and BOLI, with market-driven BOLI potentially flat in Q4.

Q: Classified assets increase.

A: Primarily in multifamily, due to rate environment affecting cash flows, but loans are performing and well collateralized, not indicative of trend.