First Hawaiian, Inc. (FHB) Q2 2025 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the First Hawaiian Bank Inc., Second Quarter 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Kevin Haseyama, Investor Relations Manager. Please go ahead, sir.

Thank you, Jonathan, and thank you, everyone, for joining us as we review our financial results for the second quarter of 2025. 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 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 recently -- to the most directly comparable GAAP measurements. And now I'll turn the call over to Bob.

Thank you for joining us today. I'll start by giving a quick overview of the local economy. Statewide seasonally adjusted unemployment rate continued to drift lower and was 2.8% in June, compared to the national unemployment rate of 4.1%. Through May, total visitor arrivals were up 2.8% compared to last year as the strength in U.S. Mainland arrivals more than offset weakness in the Japanese and Canadian markets. Year-to-date, spending was $9 billion, up 6.5% compared to 2024. Interesting to note, we went back and looked, and for the first 5 months of 2019 to the first 5 months of 2025, visitor arrivals are down still 3.9%, but the spend is up over 24%. So while there has been a few less visitors, the spend is up substantially. Turning to Slide 2. We had a very strong second quarter. Our net income increased over 23% compared to the prior quarter. The improvements in our results compared to the last quarter were broad-based driven by higher net interest and noninterest income, good expense control and lower provision expense. Our results also include the impact from a change in California tax law that resulted in a net benefit of $5.1 million. Turning to Slide 3. The balance sheet remains solid. We continue to be well capitalized with ample liquidity. Loans and deposits were stable during the quarter, and we repurchased about 1 million shares at a total cost of $25 million. We had $50 million of remaining authorization under the approved 2025 stock repurchase plan. We resumed reinvesting the investment portfolio cash flows in the second quarter and we plan on maintaining the portfolio balance at its current level. Turning to Slide 4. Total loans increased about $59 million or 0.4% from the prior quarter. The largest increase was in the C&I portfolio, which was primarily due to $125 million increase in dealer floor plan balances. This was largely offset by payoffs from several completed construction projects in our commercial real estate portfolio. Looking forward, we expect full year loan growth will be in the low single digits. And now I'll turn it over to Jamie.

Thanks, Bob. Turning to Slide 5. Total deposits increased slightly in the second quarter as growth in public deposits more than offset the decline in commercial and retail deposits. On the retail side, they were down $23 million in the quarter and commercial deposits were down $127 million. The decline in commercial deposits was due to the normal operational fluctuations that we see in that book. Total public deposits increased by $166 million, all in operating accounts. There was no change in the balance of public time deposits. Total deposit costs fell by 4 basis points in the quarter and our noninterest-bearing deposit ratio remained at 34%. On Slide 6, we see that net interest income was $163.6 million, $3.1 million higher than the prior quarter and the NIM was 3.11% million up 3 basis points compared to the prior quarter. The increase in the margin was driven entirely by lower deposit costs, primarily due to CD repricing. While we didn't see the anticipated benefit from fixed asset repricing in the second quarter, the underlying balance sheet dynamics driving the NIM remain intact, and we anticipate that the NIM in the third quarter will increase a couple of basis points to 3.13%. On to Slide 7, where noninterest income was $54 million in the quarter and benefited from a few items that went our way. We continue to expect that recurring piece of noninterest income will be about $51 million per quarter. Expenses were better than expected in the first half of the year, but we expect them to tick up just a bit in the back half. We think expenses in the third quarter will be up around 2% on a linked quarter basis and that full year expenses will be better than originally expected at around $506 million. And now I'll turn it over to Lea.

Thank you, Jamie. Moving to Slide 8. The bank continues to maintain its strong credit performance and healthy credit metrics. Credit risk remains low, stable and well within our expectations. We are not observing any broad signs of weakness across either the consumer or commercial portfolios. Classified assets increased by $31.6 million on the quarter. These loans are well secured and we continue to work closely with the borrowers. Quarter-to-date net charge-offs were $3.3 million or 9 basis points. Year-to-date, net charge-offs were $7.1 million. Our annual year- to-date net charge-off rate was 10 basis points, 1 basis point lower than in the first quarter. Nonperforming assets and loans 90 days or more past due comprised of 23 basis points of total loans and leases at the end of the second quarter, up 6 basis points from the prior quarter, resulting from an uptick in nonaccruals. Most of these were residential loans with low loan-to-value ratios, so we feel that the loss content in these loans is very low. Moving to Slide 9. We show our second quarter allowance for credit losses broken out by disclosure segments. The bank recorded a $4.5 million provision in the second quarter. The asset ACL increased by $1.2 million to $167.8 million, with coverage remaining flat at 1.17% of total loans and leases. We believe that we continue to be 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, Jamie, and Lea. Now I'd be happy to take your questions.

And our first question for today comes from the line of Liam Coohill from Raymond James.

This is Liam on for David. Just wanted to start out with C&I driving growth in the quarter and taking into account the low single-digit outlook moving forward, how is the pipeline in terms of C&I? And is that the largest contributor? And I'm also curious on the CRE side, are we seeing increasing demand from those borrowers? Appreciate any color you might have.

Sure. No, good question. Most of the C&I growth came in our dealer floor plan, and we have seen that pretty much continue to normalize back to what we had thought it would. So right about $600 million -- let's see, no, $786 million for the quarter, at the end of the quarter, and that's up about $125 million from the previous quarter. So that moves up and down. There's -- car sales have slowed a little bit, but still, there's uncertainty out there with respect to tariffs. So I think that's just -- we don't know exactly what's going to happen with those balances, but we don't think they'll move around a whole lot. As it relates to commercial real estate, the thing there was that we had thought some of the commercial construction loans were going to extend into mini perms, and they didn't, which is a sign of very good credit quality, but on the other hand, it's a bit of a challenge for balances. So we still have a lot of those loans that are funding. That work is still going on. It's a little bit harder to predict when those will get paid off. So we changed our guidance a bit from low to mid-single digits to low single digits for the full year, just in anticipation of that.

I appreciate that. And you touched on tariff impact [indiscernible], how have you been seeing that net out with the improvement in tourism spend on the islands? Do you think it's kind of a wash between the 2 factors? Or has that increased tourism spend kind of outpaced tariff concerns at this stage and [indiscernible] any softness of concerns versus last quarter?

Really no change. And the only impact we really see for tariffs is the uncertainty it gives our car dealers. They're still not exactly sure what those tariffs will be. I don't think it's had much of an impact on tourism. Japanese and Canadian tourism is down. I think primarily for the Japanese, it's a little bit slower economy and their exchange rate is still fairly weak for them. But U.S. West and all of the Continental U.S. has been strong, and that's what led to the increase in arrivals and almost certainly the increase in spend.

Great. And just last one for me. We did see the repurchases of some shares in the quarter. Just wondering what your capital priorities are at this stage as we move into the back half of the year?

Yes. I mean I think our -- the capital priorities remain the same. We'd love to deploy that in organic growth areas. I want to make sure our dividend is stable. And the third option there is the share repurchases. And so I think that's where we're going to end up deploying more of our repurchase authority in the back half of the year. And so I think that's probably where we'll end up on that.

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

Maybe just to piggyback off of the last question around capital priorities. I mean, so I'm looking back, your capital position is stronger than it's been in a while. You've got a lot of capital the loan growth outlook is maybe a little bit lower following this quarter. I'm curious how these things play together into your thought process on M&A and whether M&A makes more sense for you guys at this juncture? And maybe if you could just kind of update us on your thought process there and if it does or doesn't make sense for you?

Sure. This is Bob. I think that's something we always look at. We're not adverse to considering options, but we don't have anything we're looking at currently, but we're always out there talking to people as far as potentials for doing things with our capital. We're very comfortable with the capital levels. It's a little bit higher than we had guided to in years past. It was closer to 12%. We have increased the allowance. We do think there will be a rotation as Jamie was getting to out of securities and back into lending. And when that happens, that can eat up the capital fairly quickly. So we want to make sure we maintain enough capital for loan growth.

Yes. Makes sense. And maybe just one for Jamie. Going back to the comments around the margin, and I appreciate the guidance for 3Q. That's helpful. What impacted or anything we should be aware of that impacted loan yields in the second quarter and kind of mitigated what I thought would be a little bit better in kind of fixed repricing. Just any color you can provide on the underlying dynamics there would be helpful.

Yes. So I think, Andrew, it was really a mix issue. So we -- you see in the materials, we had sort of large payoffs in the construction book and increases in the C&I book. And so there was just this timing, I'll call it a timing differential, where we had higher margin loans pay off and they were replaced by relatively lower margin loans in the book. And so it was really a mix issue there. I think in totality, that story still remains the same that the fixed rate cash flow is coming off the books replaced by higher-yielding assets in general will drive the NIM higher over time. Just kind of a weird quarter in terms of the mix of those things at the moment.

Understood. And if I could sneak one more in. I think you talked about $51 million of fee income is kind of a core number it seems like the kind of credit and debit card fees and service charges that were both up this quarter. It seems like there's normally a carryforward of strength in kind of the third quarter there as well. So I'm hoping just to clarify any -- is that kind of just like what you view as core longer term? How should we think about third quarter on fee income?

Yes. I think fee income in the third quarter is somewhere in that $5 million, $52 million range. I mean, I think that's probably where we'll be. We have -- from time to time, we have a lot of things that happen from a, let's call it, a markets perspective, where we have to revalue pension obligations, BOLI obligations, that kind of thing. So when the market is up quarter-over-quarter, we have small pops in these numbers. And so we had a number of, like, let's call it, onesie-twosies type things happen in this quarter in the $2 million-ish range that we know happen, right? These things happen for us from time to time. It's just hard to predict when they'll happen. So that $5 million $52 million range, I think, is probably a good number for where we'll be in the third quarter.

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

With regards to the tax rate, I see your [DTA up] this quarter that you called out in the release. Jamie, can you provide an updated outlook on what this tax law change does to your tax rate outlook for this year and beyond?

Yes, you got it, Kelly. So where normally we would say we would outlook at like 23% for our effective tax rate. The outlook for the rest of the year is 23.2% on that tax rate.

Okay. So fairly immaterial, got it. Okay. And moving on the deposit costs. You've done such a great job getting your deposit costs down in the first round of rate cuts. It seems like there's a declining benefit after future cuts. But when those do come, wondering how you're thinking about deposit betas on the next round of cuts. You are asset sensitive, but that would be a nice offset.

Yes. So we have talked in the past about declining betas related to tax cuts. I don't think we're fully there yet at the moment. I think we probably have a few more rounds available to us before that starts to become a real issue. I would say that from the perspective of a rate cut, if we were a 95 beta or so on our rate-sensitive deposits over the last 2 cuts, that maybe drops to 90 or so over the next couple of cuts. So we still feel pretty strongly that we'll be able to pass through a large portion of those cuts to those rate-sensitive customers. But after maybe another 1% or so, the beta will decline over time on that. So I think 90% is an okay number for the next 1 or 2.

Great. Got it. And then last for me, just a higher picture question. Loan growth this quarter, really nice C&I, but you had the construction paydowns. It seems like the outlook is a little bit lower than at the start of the year, still quite good. As you look ahead kind of more broadly speaking, what you think are the main factors that would get increased activity among your client base to really pick up? And over the longer term what's a more normalized growth rate? Do you think more mid-single digits would be something that could be achievable longer term with these -- without the payoff headwinds? Thank you.

Yes, Kelly, This is Bob. I'm a little reluctant to look out longer term, just as most banks were following the economies of the areas we're in. So that's kind of making a bigger forecast that I'm comfortable with. But just to talk maybe a little more specifically about what happened this quarter, one of the reasons we lowered our guidance, just a tad was that we had thought some of these construction loans were going to go into mini perm and if the takeout market is as strong as it is and they're getting paid off, that does affect that. How much will U.S. floor plan continue to grow? Hard to tell. But pre-COVID, I think we're at $859 million in total and now we're $786 million. So we're getting close to what pre COVID numbers were. So the amount of increase will likely slow down. So it's really the interplay between those 2. The teams are out there. They're calling on people. There's good pipelines developing, but it's just hard to, at this point, put that into a number between now and year-end other than what we've done in the past year, and I don't think we'd be comfortable commenting.

Got it. Maybe just last follow-up on those construction loans getting taken out. Where are you seeing the most competition coming in? Is it from the local banks in Hawaii getting more aggressive on pricing, larger insurance companies, large banks?

No, this is -- yes, this is the end of construction where normally pre-COVID, you get taken out right away. And then sometimes post- COVID, it hangs around in mini-perm for a little while, which is always a feature of those loans. Now we're seeing more of a return to normalcy with institutional buyers, sometimes insurance companies, sometimes others taking out those loans upon completion of construction. It was never really designed to be a permanent loan for us. So it's not other local banks.

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

Maybe just on the commercial loan growth that you're putting on, what are -- what are you seeing for spreads on C&I right now? Is that staying stable? Or are you seeing some compression with competition?

Jerry, this is Jamie. They're staying pretty stable. I think in totality, we have -- with the weighted average roll-on is in mid- to upper 6s in totality in the books. So -- but mostly stable, I would say, the spreads.

Okay. And then can you just walk through a little bit on the investment securities with the decline in yield this quarter? And you talked about sort of reinvesting some of those cash flows. What are you purchasing in terms of yield and duration? And should we expect to see some recovery in the securities yield? Or is it staying lower here?

Yes. No, you should expect maybe 2.25% pickup in the -- on the things that we're putting back on versus the roll-off. So what's rolling off is about 2% in that book, and we're going to be putting on maybe somewhere between 4% and 4.25%. And so that keeping the duration a little bit -- keeping the duration sort of same, flat in the book. And we're replacing cash flows that roll off with same type of assets that we -- that are rolling off. So mortgage securities with -- that are good structures and have either through collateral features or structured features that sort of give us a tight prepay window. So in that 5 duration area.

Okay. All right. And then this commentary on credit. I know we're talking about low numbers. But when you look at sort of the growth in resi mortgage nonperformers, over the last few quarters, that's been pretty big compared to where you've been before. What's driving that weakness? I know that there's probably not a lot of loss content there. But is that -- what's sort of driving the underlying concern with the consumer on those?

Jared, this is Bob. Maybe I'll start and then Lea can add some comments. The consumer at the, say, the lower end is getting a little stretched. Their savings as they accumulated during COVID have gone away and it's just getting a little bit tougher. Lea, I think you'd mentioned on collateral, but anything you want to add?

No, not really. I mean the portfolio is performing as we expected. So we were pleased for a very long time the performance. And we continue to be very pleased and confident with the portfolio.

Yes. For a very long time, we had 0. So anything above 0 is going to look like a big number. But -- look, we're not concerned about it from a loss perspective, as I think Lea mentioned.

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

Maybe just keeping to the line of commentary on credit, the increase in commercial criticized assets. Can you just help us reconcile kind of that increasing trend versus still really strong level of charge-offs? And how do you see that ultimately playing out? Do you think that is going to somehow correlate to maybe an uptick in charge-off activity again off of a really low base? Or do you think that ultimately, they just end up curing themselves?

For the most part, they will end up curing themselves. We already know of 2 that -- well, one paid off right after the end of the quarter and then there's another one that we expect to pay off. And as you mentioned, right, the base is so low that you just have 1 loan move in and it moves significantly as a percentage. So again, we don't go into these without some expectation that some will have troubles. But when you stay close to the borrower, you can be confident that you'll come out very satisfactorily. So...

And then -- sorry, go ahead.

No. We are confident in our book. The book is strong.

Okay. And maybe following up on the completed construction loans being refi-ed away? I'm just trying to get the magnitude here of what's coming due from a construction completion standpoint? And then similarly on the CRE side for those resets that are approaching, I'm just wondering if you're seeing an increased level of competition from some of those potentially being refi-ed away as well here?

Yes, Tim, I don't have the specific numbers of what's coming up. We had 3 loans pay off in the quarter, which kind of led to that paydown for several, actually. As far as -- we are not seeing additional competition on as far as refinancing. As far as new deals coming forward, pricing had expanded a bit during COVID. It's coming back a little bit more to pre-COVID spreads, but it's still solid and I think appropriate for the risks that we're underwriting.

Okay. And then maybe just tying in some of the payoff activity, the fact that the floor plan book here is reaching a level of stabilization and your comments around the bond book reaching a level of stabilization. Is the expectation here that we start seeing asset growth or just given some of the dynamics, assets likely remain somewhat stagnant here for at least the near term?

Yes. Tim, yes, I think maybe we'll see some balance sheet growth. We're going to keep the bond book stable where it's at, and we should see some loan growth in the back half of the year. So I would expect a larger balance sheet by year-end.

And some of -- just to add to Jim's comments, some of the things that have been a drag over the last several years, our indirect book pre-COVID was well over $1 billion, $1 billion, $1.1 billion, now $600 million. So over the -- whatever it is, 5.5 years gone down by $500-plus million. That's now stabilized. So the market is reasonable. And so we don't have that headwind now. Little bit of a headwind in residential lending as I think, for all the banks here in a way, but just not a lot of new volume as things mature. But on the commercial side, to Jamie's point, we're optimistic there's deals out there, and we're looking at them and feel pretty good about the pipeline.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Kevin Haseyama 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.