Good day, ladies and gentlemen, and welcome to the First Hawaiian Q2 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Kevin Haseyama, Investor Relations Manager. Sir, you may begin.

Thank you, Valarie, and thank you, everyone, for joining us as we review our financial results for the second quarter of 2018. With me today are Bob Harrison, Chairman and CEO; Eric Yeaman, President, COO and Interim CFO; and Ralph Mesick, 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 Web site at fhb.com in the Investor Relations section. Also, during today's call, we will be making forward-looking statements, so please refer to Slide 2 for our Safe Harbor statement. We will also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measures to comparable GAAP measures. And now I'll turn the call over to Bob who will provide you with the second quarter highlights, starting on Slide 3.

Thank you, Kevin. Hello, everyone, and thank you for joining us today as we report on our second quarter results. This was an eventful quarter, as we turned in a solid financial performance, driven by good loan growth and expanding NIM, resulting in a 7.7% increase in net interest income on a year-over-year basis. In addition, BNP Paribas completed another successful stock offering which combined with our share repurchase, brought their ownership in First Hawaiian below 50%. Starting with our financial highlights, net income was $69.1 million, up 1.6% from the prior quarter and 21.4% from the prior year. This performance was driven by solid loan growth and improving deposit mix, expanded net interest margin and continued excellent asset quality. Our profitability measures remain strong with the return on average tangible assets of 1.45% and a return on average tangible common equity of 18.83 and we maintained a 48% efficiency ratio. Yesterday our Board of Directors declared a $0.24 per share dividend payable on September 7 to shareholders of record at the close of business on August 27. Slide 4 contains the highlights of BNP's offering and our concurrent share repurchase. As a result of the offering of repurchase, BNPP's ownership stake in First Hawaiian saw the 48.8%, with their ownership falling below 50%, First Hawaiian no longer qualifies for the Control Company Exemption under NASDAQ listing guidelines. And we are required to have a majority of independent Board members by May 10, 2019, 1-year from the transaction date. As I said before, we intend to return capital to shareholders, so we do not need to prudently grow the business and the share repurchase demonstrates our commitment. Including the share repurchase, we’ve returned about $299 million or 79% of earnings to the shareholders since the IPO. Year-to-date we’ve returned a $148 million through dividends and share repurchase. At quarter end, we remained well capitalized with a total capital ratio of 13.23% and a leverage ratio of 8.61%. Now I will turn it over to Eric to go through the financials.

Thanks, Bob. Turning to Slide 5, we had a good loan growth in the quarter, up 1.4% on a linked quarter basis or 5.6% annualized in line with our mid single-digit guidance for the full-year. We saw strong loan growth in commercial real estate and construction, residential real estate and consumer loans, partially offset by a decline in C&I. CRE and construction grew a $158.8 million or 4.8% from the prior quarter. The majority of the growth was driven by a strong pipeline of deals, primarily in Hawaii and Guam. The residential portfolio grew by $80 million or 1.9% as last year switch to the mortgage loan officer model continues to show benefits. In consumer loans, both our indirect auto and credit card portfolios contributed to the growth of $36.1 million or 2.3%. We did see a decline in the C&I portfolio of $103 million. This decline was primarily due to dealer flooring, which fell by over $90 million as we saw dealers carefully managing down inventory levels as well as some increased competition by the captive financing companies. Looking forward, we still expect loan growth for the full-year to be in the mid single-digit range and our views on the drivers of growth remain unchanged. The CRE and construction pipeline remain strong and we continue to expect high single-digit growth in this area. We continue to expect mid to high single-digit growth in residential loans. Mid single-digit growth for consumer and low single-digit growth in C&I. We expect that C&I growth will remain challenging as the market continues to be competitive and the pickup in M&A activity presents financing opportunities, but it also drives payoffs. Turning to Slide 6. Deposit balances increased by $33.1 million to end the quarter as we continue to make progress in improving our deposit…

Thank you, Erick. We would like to turn your attention to Slide 9. You see that our asset quality was excellent at the end of the quarter. Net charge-offs were $4 million for the quarter. On an annualized basis, this amounts to 13 basis points on average loans and leases. This is two basis points lower than the prior quarter and two basis points higher than the second quarter of 2017. Total nonperforming assets were $13.8 million or 11 basis points of total loans and leases and other real estate loan. This is up one basis points from the prior quarter and four basis points year-over-year. For the second quarter the provision expense was $6 million, and the allowance for loan and lease losses increased by $2 million to a $140.6 million or 111 basis points of total loans and leases. Looking ahead we don't anticipate any shift in our overall credit quality. Before I turn the call back over to Bob, I'd like to offer some additional information regarding the volcanic activity on the big Island and our exposures there. First, it may be helpful to know that the eruption and lava flow is directly impacting a rural area, that has a long history of volcanic activity. It is not densely populated and its outside the major road system that connect the island. The bank's direct exposure in the lava impact zone is roughly $6 million. It is comprised of residential mortgages and each of our borrowers carry insurance against lava hazards. We started to receive payoffs from insurance claims made and our expectation is that our customers will be indemnified for losses they incur. In the Puna district, which includes the lava impact zone, we have approximately $30 million in outstanding balance. And our total on Hawaiian island is about $760 million, which is only about 6% of total bank balances. We have not seen a noticeable change in delinquencies on Hawaii Island and given the relatively small size of our exposure on the island, we don't anticipate the need for additional provisioning. We will update this assessment as appropriate. And now, I'll turn the call back over to Robert.

Thank you, Ralph. Turning to Slide 10, Hawaii's economy continues to perform well in the second quarter, led by strong tourism million real estate sectors, one of the lowest unemployment rates in the Nation. State on Unemployment Rate Was 2.1% in June compared to 4% nationally. The visitor industry remained robust through the first five months of the year. Year-to-date through May visitor arrivals were 4.1 million, up 8.4% versus the same period of last year. And visitor spending was $7.7 billion, an increase of 10.9% versus the same period last year. Real estate market remains sound. Sales volume for single-family homes were down slightly versus the prior year prices continue to increase. The condominium market remains strong as well as ,well as both sales volume and medium prices were up. Looking forward, the overall look for the economy remains positive. Before I wrap up, I want to mention a couple of things. Yesterday we announced the appointment of Ravi Mallela, as our CFO and Treasurer. Ravi comes to us from First Republic Bank where he was Senior Vice President, Head of Treasury and Finance. He brings the depth of knowledge in corporate finance expertise, that we will be able to leverage as we move forward with our strategic plans for the bank. We look forward to him officially joining us on September 4. You also probably saw the 8-K we filed last week regarding the change of our Board of Directors. Thibault Fulconis is no longer with Bank of the West, and as a result resigned as the Director First Hawaiian, Inc. and our subsidiary for First Hawaiian Bank. Mr. Fulconis has been on the Board since the IPO and I would like to thank him for his service. The Board of Directors has appointed Xavier Antiglio to fill the vacancy. Mr. Antiglio is currently the Chief Financial Officer, Bank of the West. With that, we would be happy to take your questions.

Thank you. [Operator Instructions] Our first question comes from Dave Rochester of Deutsche Bank. Your line is open.

Hi. Good morning, guys.

Good morning, Dave.

Hi, Dave.

On the NIM guidance, I just want to make sure that I had that right. Is that a few bps of expansion versus the 3.13%?

Yes, it's basically on a normalized basis, a three basis points, yes.

Okay. So, I mean, from this chart or this table here, it looks like you’re going to end up getting three basis points back as you move in 3Q, because you get pick up an extra data there. So that puts you kind of a 3.16% as the starting point. So would it be potentially 3.16% and then you get three basis points of expansion from the June hike, is that maybe how you can look at it also?

Yes. It really relates to the June hike, Dave. And we're really sort of talking about our NIM changes really focused on the adjusted NIM.

Yes, okay.

So that's kind of how it plays out.

So you get three more basis points from the extra day and then three bps from the rate hike and that kind of gets you to maybe a 3.19%-ish type of number, Rob?

Well, I think what we want to do is to stick to the normalized adjusted NIM and say from there, that's where we would see the increase, because we will take out any day count in the calculation.

Got you. Okay. And I noticed you mentioned mix shift benefits in the balance sheet as a driver for the NIM expansion. Do you think you can still get some of those additional benefits there in 3Q?

It's probably not going to be as dramatic as maybe what we saw in the second quarter. But we’re going to continue to reduce our exposure to the public deposits. Our investment securities are running off in the $250 million range and we’ve been sort of using that sort of fund our loan growth. So we're going to continue to sort of mange or actively manage the balance sheet, so that we can continue to drive improvement in our overall profitability.

Yes, okay. And just on the deposit market, I know you had a competitive raised rates in your market, and then we learned, you guys responded with increases of your own in June. Has the market been relatively stable since you raised rates and then how you’re thinking about your positioning at this point? Are you thinking that deposit growth could be at least decent in the back half of the year based on how you’re positioned?

It's still a pretty rational market outside of the public deposits that we’ve been talking about for the last quarters, several quarters. We did increase our rates in a measured way in June as you referenced. And so, we will continue to monitor the situation, but overall it's pretty rational. If you actually look at our deposits and you take out the impact of the reduction in our public deposits, and then in the first quarter we referenced one large corporate customer, reduced their balance by $266 million. We grew deposits excluding those two items about 1.4%. And so we would expect to be able to accomplish that in the second half of the year as well.

Okay. And one last one, if I could, just on the borrowings you brought in, sorry if I missed it. But what were the terms on those and then as you’re looking to maybe where some more of those and I guess its depending on how strong loan growth is? Are you -- just looking for fixed termed type of borrowings, are you going overnights with the rest of it?

Yes, we took out $200 million as you will see in the balance sheet and it was right towards the end of the quarter. So it really didn't have much of an impact on the numbers. It was two year money at 2.79%.

Okay. All right. Great. Thanks, guys.

Thanks, Dave.

Thanks, Dave.

Thank you. Our next question comes from Steven Alexopoulos of JPMorgan. Your line is open.

Just a follow-up on the deposit conversation. We are seeing quite a few banks in the U.S mainland start paying much higher rates. Are you a corporate customer starting to demand a higher rate? I would imagine that have access to those.

Well, certainly -- Steve, this is Bob. We certainly have been very responsive to the corporate deposits. It's something that we've been talking with them about through the last year. We did increase, I think as we mentioned on our earlier call, our earnings credit rates about a year-ago. We also give them different options, either time CDs, money markets or off-balance sheet options as well.

Has it been broad-based, Bob, or it has been one-offs?

It's been pretty much one-offs. But more and more people are talking about as rates increase.

Okay. And what is your expectation that deposit beta has been very reasonable so far. But what’s the expectation for the back half of the year?

Well, beta, for the quarter is roughly been about 20%. We saw 5% -- of five basis point increase in our overall deposit costs on a 25 basis point increase in the fed rate. Steve, honestly it's hard to tell looking out how things are going to shape up. The good news is that the Hawaii consumer market is pretty rational. And I think on the commercial side, as you point out, there's little bit more pressure but all in all we feel pretty good about how we’ve been able to maintain that deposit base in light of the changes going on.

Okay. And just one separate question. On the C&I decline, what were -- what was C&I loan growth X dealer, and it follow a trend for extra dealer decline.

Yes, I don’t have that off the top of my head, but the dealer reduction was about $93 million for the quarter. And just to expand on that a little bit, they are managing their inventory better in light of where car sales are and the fact that interest rates are rising. So it's costing them more to hold the inventory.

Yes, so Steve, this is Bob. As you look at about $103 million decline in C&I for the quarter. And there.93 of the dealer. So it's right about $10 million for the rest of the book decline.

Okay, got you. Thank for taking my questions.

Yes, you’re welcome.

Thank you. Our next question comes from Ebrahim Poonawala of Bank of America. Your line is open.

Hey, guys. Good afternoon.

Hi.

So I’m sorry if I missed this, but just wanted to get a sense of as we think about expensive in terms of -- I know we talked about the 48% efficiency ratio that you reaffirm. But even looking out a little bit, if you had any better understanding of how the expense trajectory was going to play out going into next year, given sort of the full stand alone and vendor contracts, hitting towards the end of the year.

Yes, hi, Ebrahim. This is Eric. I think you might be referring to the whole public company transition costs. And so our pick at on -- basically through last year, 2017, we had about $11 million of that cost embedded in our cost structure. And then for 2018 we estimate that we were rolling another $3 million, probably about 1.2 to 1.3 in the first half of the year. Thus far the other remain $1.7 million coming in the second half of the year. And again, that’s all accounted for in our 48% efficiency ratio, we are still working through our forecast for 2019. So I’m not prepared to give you any guidance for '19. But we did say when we went public that our transition costs is going to be between 14 million and 17 million. And so you feel that we will still be able to manage within that range. And I think we’ve pretty strong cost management and discipline at the company that we will be able to accomplish that.

Yes. So, Ebrahim, this is Bob. So that wrapping that up. So by the end of the year we expect to have about 14% to 17% in the number. And then you will see some more that in 2019.

Got it. So, I mean, max, I guess. There is maybe about $2 million to $3 million more, then it's next year. Understood.

It's probably going to be closer to the higher end of the revenue.

It will be at the higher end. So we don’t have an exact number, but …

Another $3 million next year, okay. I guess, just moving in terms of capital needs obviously the go to CCAR results, Bob. Any clarity around as we move forward. One, if you could just remind us when does the lockup expire for PNB. And any clarity around what flexibility you have to repurchase shares, further if at all there is another secondary for PNB.

Sure. So the lock up expires on August 8, and of course the underwriters can chose the way the lock up but they -- if they were like to -- in our capital plan that we filed as part of the ICU. We did include options for additional capital return to shareholders, much like we had in last year's plan. And that’s why are able to do a share repurchase with the May secondary offering. And so, what the -- we’ve in the plan options that we kind of grew.

Options that we connect glue. Understood. Thanks for taking my questions.

Thank you. Our next question comes from Jacquelynne Bohlen of KBW. Your line is open.

Hi, good morning or good afternoon. You are morning, so good morning everyone, sorry.

Hi. Good morning, Jackie.

So dealer floorplan, I understand that the higher cost of interest for the dealers and why they’re keeping their inventory tighter. But the release also mentioned heightened competition. Are you seeing that broadly across your floorplans, or is it more state centric?

It was more here in Hawaii, Jackie, and as just the -- some of the captives are being very aggressive and the -- they have a few more levers to pull as far as with the dealers, given that they’re also under the same umbrella as a manufacture. So that’s where it was coming into play. We haven't seen that in the Mainland, just a couple specific dealers here in Hawaii.

Okay.

And Jackie, it was more of a small part of this shift, not -- the most of it was due to. Pairing back inventory balances.

Okay. And where does that portfolio stand at the end of the quarter?

Yes, total dealer flooring was $856 million.

Okay. And that’s down that $93 million from that quarter right?

Down some -- yes, down $93 million, correct.

Okay. And do you -- I guess, how often do you add new dealers to that and is it something that you actively looked at you or just you find opportunities available?

We are always -- Jackie, this is Bob. We are always actively looking to add other additional plans. But we are very selective in the process. So generally we’ve been adding two or three clients a year.

Okay.

In the last couple of years.

And would you say that most of the dealers now to your knowledge have tightened up their inventory already or would there be more to come next quarter?

I think they are all looking at it. Of course, they’re going to adjust as they see the outlook for sales versus having enough inventory to satisfy the sales outlook they have, but also right in interest rate costs as Eric mentioned is one of the factors they are taking under consideration.

Okay. So it -- though it was more meaningful this quarter as possible like current and next quarter, the decline.

Jackie, it's hard to tell. But the other thing I would add is, we really look at this as a positive shift just given where auto sales have been and where it may be trending going forward. So we don't necessarily look at this as sort of a bad thing.

Okay. So from a credit standpoint, you’re very pleased with that.

Correct.

That makes sense. And then just one last one for me. The bump up in Credit and Debit card fees, was there any particular driver of that.

No, as you know, I mean, volume was definitely higher, but as you know there's a lot of moving parts with credit and debit card revenue and rewards and those kinds of things. And so most of it really was driven by just higher volume. And we’ve been seeing higher volume throughout the year.

Just particularly good quarter.

Yes.

Okay, great. Thank you.

Thank you, Jackie.

Thank you. [Operator Instructions] Our next question comes from Jared Shaw of Wells Fargo Securities. Your line is open.

Hi. Thanks. Maybe just circling back on the public deposits. Did you say that the overall total public deposits were only down $17 million or is that $17 million in addition to the 95?

No, so that -- yes, public deposits was down $17 million in the quarter, but the public time was down $95 million. So what we don’t control -- yes, we don’t controls within their checking account essentially. That's fairly volatile.

Yes, the checking account -- operating account balances probably on average about $0.5 billion, but they fluctuate between $300 million and $600 million throughout the quarter.

So if you step back more from the time deposits and step back from participating in that competitive side, you run the risk of losing some of those operating accounts or do you feel that the core deposit relationship is secure?

It is actually a contract that we bid on every five years. So we have the operating contract with the entities that we do, and they would continue to deposit with us until that contract comes up for renewal.

Okay. Okay. And then looking at the cash flow on the securities book, would you continue to -- would you look to continue some of that to fund loan growth or where would you like to see the securities fall out as a percentage of assets?

Yes, we're really looking at it from a total balance sheet perspective. Clearly, our preference is always to fund the loan growth through deposit growth. But we are actively managing our total funding base, which includes the borrowings as well as our investment securities portfolio. Right now the securities portfolio, as I mentioned, is running off at about $200 million to $250 million a quarter, and what the runoff is running off at a lower yield than the total portfolio. So we’ve been seeing a couple of basis points uptick as a result of the runoff. But if the deposit growth is not there because we’re shrinking the public time deposits than we will use various sources including the investment securities runoff.

Okay. And then could you …

We are trying to balance, Jared. We are just trying to balance overall the balance sheet and the growth in our earnings. And so we did -- we were able to reduce our earning assets and still grow net interest income in the quarter, which is what we like to try to do.

Okay. And then, could you also just give us an update on the balance assured national credits and what your activity was in the -- in that portfolio during the quarter?

Sure. Our total SNC was $1.5 billion. $1.1 billion of that was on the Mainland. So $1.5 billion total and it went up about $80 million from the end of the prior quarter. $37 million of that was related to the Mainland SNC.

So we actually grew the SNC book larger in Hawaii over the quarter.

Okay, great. Thank you.

Thanks, Jared.

Thanks, Jared.

Our next question comes from Laurie Hunsicker of Compass Point. Your line is open.

Yes, hi. Thanks. Good morning. Just wondered, I’m just staying with loans, your total dealer floorplan loans, do you have that amount and then the amount that actually resides in California?

Yes. So the total, Laurie, is $856 million and the Mainland portion is $580 million.

Okay, great. And then jumping over to the income statement, within your expense line, the $92 million, how much was one-time IPO costs?

I think we call it the sort of public company transition costs was about $700,000.

Okay. And that compares to $500,000 last quarter, is that correct?

Right, right.

Okay. Okay. And then just to go back to margin, just to go back to some of the questions that I guess Dave was asking you, just so that I get this right, I’m thinking about this, so in the quarter your premium amortization adjustment was negative 1.1 that compares to negative 1.9 in march and then a positive 4.3 in the December quarter. Is that correct?

I don’t have the fourth quarter information.

But I guess just -- right. I’m going to …

But you’re correct, as it makes to first and second quarter, yes.

So, I mean, I guess, just thinking about your premium amortization it was in last year with a positive $19 million. So a substantial swing in your margin versus where we sit today. If I'm just stripping out only the premium amortization through linked quarter margin, you were 3.09%, 3.09% and then 3.16%. If we suddenly see a swing back in premium amortization is it unrealistic to think that potentially that could be back to that same level? In other words, will we see it adding into your margin another 10 basis points? Or how should I be thinking about that?

I guess the best way to really look at it is what we call the adjusted NIM. We basically take the reported NIM adjust it for the day count and the premium amortization. And that's sort of what we measure off of. So if we see all things being equal, no day impact and no premium amortization, our basis, the 3.13% and so our guidance of a few basis points is on top of that.

Got it. Okay. That’s helpful.

It's really hard to predict what the premium amortization is going to be.

Sure. Sure. Understand. Okay. And then last question, just going back to deposits, can you talk a little bit about your money markets and just the jump there and then what we could expect to see? And I’m just talking linked quarter. You went from those costing 26 basis points to those costing 40. How should we be thinking about that? Thanks.

Laurie, I don't have the numbers in front of me. Can you repeat that again?

Yes. So your money markets in the December quarter, which comprise 15% of your deposits, they were costing 26 basis points in December. I'm sorry in March, I apologize, in March they were 26 basis points. And then for the June quarter they’re costing 40. And so it just seem like a bigger increase. Just -- I mean, are there specials you're running? Are we going to continue to see that?

No, I mean, in general, we're always running special. But basically I think the bigger shift was -- there was a bump up in the public money market rates.

Okay. And just -- and then just remind me, the public money, how much of that falls into the money market?

Yes. Its -- well, in the total …

We haven't.

Yes, we haven't disclosed that, Laurie, honestly. We just disclosed the total operating account money and then the public time separately. So I’m not prepared to disclose it further.

Got it. Okay. Thanks. I will leave it there.

Thanks.

Thank you. I'm showing no further question at this time. I would like to turn the call back over to Kevin Haseyama for any closing remarks.

Thank you for joining us on today’s call. We appreciate your interest in First Hawaiian, and enjoy the rest of your day. Thank you.

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation. You may now disconnect.