Q2 2025 First Hawaiian Inc Earnings Call

Unknown Executive: 2nd Quarter 2025 Earnings Conference Call. At this time, all participants are in 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.

Thank you for standing by and welcome to the First Hawaiian Bank Inc. Second quarter 2025 earnings conference call. At this time, all participants are in 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 1, 1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue,

Kevin Haseyama: 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.

Unknown Executive: And thank you everyone for joining us as we review our financial results for the second quarter of 2025.

Speaker Change: Simply press star 1 1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program. Kevin Hema, investor relations manager. Please go ahead, sir.

Unknown Executive: With me today are Bob Harrison, Chairman, President, and CEO, Jamie Moses, Chief Financial Officer, and Lea Nakamura, Chief Risk We have prepared a slide presentation that we will refer to in our remarks. The presentation is available for downloading and viewing on our website at FHB.com in the investor related.

Speaker Change: Thank you. Jonathan, and thank you everyone for joining us. As we review our financial results for the second quarter of 2025.

Unknown Executive: During today's call, we will be making forward-looking So please refer to slide one for our safe harbor. We may also discuss certain non-GAAP financial...

With me today are Bob Harrison, chairman president and CEO, Jamie Moses, Chief Financial Officer and the 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.

Speaker Change: So please refer to slide 1 for our Safe, Harbor statement.

Unknown Executive: The appendix to this presentation contains reconciliations of the non-GAAP financial most recently, to the most directly comparable gap.

Robert Harrison: 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 five months of 2019 to the first five months of 2025, Visitor arrivals are down still 3.9%.

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.

Bob: And now, I'll turn the call over to Bob.

Bob: Thank you for joining us today. I'll start by giving a quick overview of the local economy.

Bob: Statewide seasonally adjusted on employment. Rate continued to drift lower and was 2.8% in June compared to the national unemployment rate of 4.1%.

Bob: Through May total visitor arrivals were up 2.8% compared to last year as the strength in US mail in arrivals, more than offset weakness in the Japanese and Canadian markets.

Bob: year to date spending was 9 billion dollars of 6 and 1.5% compared to 2024

Bob: an interesting to note, we went back and looked, and for the first 5 months of 2019 to the first 5 months of 2025,

Robert Harrison: But the spend is up over 24%. So while there's been a few less visitors, the spend is up substantially.

visit arrivals are down still 3.9%.

Robert Harrison: Turning to slide two, 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 non-interest income, good expense control, and lower provisioning. Our results also include the impact from a change in California tax law that resulted in a net benefit of $5.1 million.

Bob: But the spend is up over 24%. So while there's been a few less visitors, the spend is up substantially.

Bob: Turning decide to. We had a very strong second quarter.

Bob: Our net income increased over 23% compared to the prior quarter.

Bob: The improvements in our results. Compared to the last quarter were broad-based driven by higher net interest and non-interest income. Good expense control and lower provision expense.

James Moses: Turning to slide 3, the balance sheet remains solid, and will 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 have $50 million of remaining authorization under the approved 2025 stock repurchase. We resumed reinvesting the investment portfolio cash flows in the second quarter, and we plan on maintaining the portfolio balance at its current level.

Bob: 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 for stable during the quarter. And we repurchased about 1 million shares at a total cost of 25 million.

Bob: We have 50 million of remaining authorization, under the approved, 2025 stock reports, this plan.

James Moses: Turning to slide four, total loans increased about $59 million or 0.4% from the prior quarter. The largest increase was in the CNI portfolio, which was primarily due to $125 million increase in dealer floor plan balance. This was largely offset by payoffs from several completed construction projects in our commercial real estate portfolio.

We resumed reinvesting the Investment Portfolio of 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.

Bob: The largest increase was in the cni portfolio, which was primarily due to 125 million increase in dealer floor plan balances

James Moses: Looking forward, we expect full year long growth will be in the lowest single digit.

Bob: This was largely offset by payoffs from several completed construction projects in our commercial real estate portfolio.

James Moses: And now I'll turn it over to James. Thanks, Bob. Turning to slide five, total deposits increased slightly in the second quarter as growth in public deposits more than offset the decline in commercial and retail. 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. There was no change in the balance of public time. Total deposit costs fell by four basis points in the quarter, and our non-interest-bearing deposit ratio remained at 34%.

Bob: Looking forward. We expect full year. Long growth will be in the low single digits, and now I'll turn it over to Jamie.

Thanks Bob, turning to slide 5.

Jamie: 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.

Jamie: The decline in commercial deposits was due to the normal operational fluctuations that we see in that book.

Jamie: Total public deposits increased by 166 million. All in operating accounts, there was no change in the balance of public time, deposits.

James Moses: On slide six, we see that net interest income was $163.6 million, $3.1 million higher than the prior quarter, and the NIM was $3.11, up three basis points compared to the prior The increase in the margin was driven entirely by lower deposit costs, primarily due to C.D. 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 non-interest income was $54 million in the quarter and benefited from a few items that went our way.

Jamie: total deposit costs fell by 4 basis points in the quarter and our non-interest-bearing deposit ratio remained at 34%

Jamie: 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 311 Up, 3 basis points compared to the prior quarter.

Jamie: The increase in the margin was driven entirely by lower deposit costs, primarily due to CD, Uber pricing.

Jamie: 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%.

James Moses: We continue to expect that recurring piece of non-interest 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 $500.

Jamie: On this slide 7 where non-interest income was 54 million in the quarter and benefited from a few items that went our way.

Jamie: We continue to expect that recurring piece of non-interest 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.

Lea Nakamura: And now I'll turn it over to Lea. Thank you, Jamie. Moving to slide eight, 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 portfolio. Classified assets increased by $31.6 million on the quarter. These loans are well secured, and we continue to work closely with the borrower. Quarter-to-date net charge-offs were $3.3 million or nine basis Year-to-date net charge-offs were $7.1 million. Our annual year-to-date net charge-off rate was 10 basis points, one basis point lower than in the first quarter.

We think expenses in the third quarter will be up around 2% on a lynx quarter basis. And that full year, expenses will be better than originally originally expected at around 506 million.

Jamie: 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.

Lea Nakamura: Non-performing assets and loans 90 days or more past due comprised 23 basis points of total loans and leases at the end of the second quarter, up six basis points from the prior quarter, resulting from an uptick in non-accruals. Most of these were residential loans with low loan-to-value ratios, so we feel that the lost content in these loans is very low.

Jamie: Accorded to date. Net charge offs were 3.3 million or 9 basis points your to date. Net charge offs or 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.

Lea Nakamura: Moving to slide nine, we show our second quarter allowance for credit losses broken out by disclosure segment. 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 others.

Non-performing assets and Loans, 90 days or more past due comprised 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 non-accruals. 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.

Jamie: moving to slide 9, we show our second quarter allowance for credit losses, Broken Out by Disclosure segments,

Robert Harrison: Let me now turn the call back to Bob for any closing Thank you, Jamie and Leigh. And I'll be happy to take your questions. Thank you.

the bank recorded a 4 and a half million dollar 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.

Liam Coonhill: And our first question for today comes from the line of Liam Coonhill from Raymond James, your question, please. Hi, guys, Liam on for David. Thanks for taking my question. Just wanted to start out with C&I driving growth in the quarter. And, you know, 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 call you might have. Thank you.

Jamie: Let me now turn the call back to Bob for any closing remarks. Thank you. Jamie, and Lee, and I'll be happy to take your questions.

Speaker Change: Thank you. And our first question for today comes from the line of Liam coonhill from

Speaker Change: Raymond, James your question, please.

Speaker Change: Liam on for David. Thanks taking my question. Um, just wanted to start out with uh cni driving the growth in the quarter. Um and you know taking into account below single digit Outlook, moving forward. How is the pipeline in terms of cni and is that the largest contributor? And I'm also curious on the CRA side, you know, are we seeing increasing demand from those Borrowers?

Robert Harrison: Sure. No, good. Good question. You know, most of the C&I growth came in our dealer floor plan. And we have seen that, you know, 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 yeah, 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 there'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.

Speaker Change: Appreciate any call, you might have, thank you.

Speaker Change: Sure, know, good, good question. You know, most of the cni growth came in our dealer floor plan. And we have seen that, you know, pretty much

continued to normalize back to what we had, uh, thought I 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 yeah, that's moves up and down. There's

Robert Harrison: As relates to commercial real estate, you know, 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, you know, 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.

Car Sales have slowed a little bit, but still, there's uncertainty out there with respect to tariffs. So I think it'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. Um,

Liam Coonhill: So we changed our guidance a bit from low to mid-single digits to low single digits for the full year, just in anticipation. Thank you. I appreciate that.

As relates to commercial real estate, you know, the thing there was that we had thought some of the commercial construction loans were going to extend into many perms, and they did, which is a sign of very good credit quality. But on the other hand, you know, it's a bit of a challenge for balances. So we're we still have a lot of those zones that are funding, that work, is still going on. Uh, 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.

Robert Harrison: And you touched on tariff impasse. 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 two factors? Or has that increased tourism spend kind of outpaced tariff concerns at this stage and softness of concerns versus last quarter? Thank Really no change. And the only impact we really see for tariffs is the uncertainty it gives our car dealers, you know, that's still not exactly sure what those tariffs will be. I don't think it's had much of an impact on tourism.

Thank you, I appreciate that. Um and you touched on tariff impacts. Um how have you been seeing that net out with the Improvement in tourism spend on the islands? Um do you think it's kind of a a wash between the 2 factors or has that increased tourism spend kind of outpaced tariff, concerns to stage and banning softness of concerns versus last quarter? Thank you.

Robert Harrison: You know, Japanese and Canadian tourism is down, I think primarily for the Japanese, it's a little bit slower economy. 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, thank you.

Speaker Change: Uh, really no change in the the only impact we really see for tariffs is the uncertainty. It gives our car dealers. You know, that's still not exactly sure what those tariffs will be. I don't think it's had much of an impact on tourism uh you know 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 uh for them but uh Us West and all of the continental US has been strong. And that's what led to the increase in arrivals and almost certainly the increase in in spend

Robert Harrison: And just last one for me. We see the repurchase 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? Yeah, I mean, I think our the capital priorities remain the same, you know, we'd love to deploy that in organic growth areas, want to make sure our dividends stable. And, you know, the third option there is the share repurchases. And so, you know, I think that's where we're gonna, we're gonna end up deploying more of our repurchase authority in the back half of the year.

Speaker Change: At the stage. As we move into the back half of the year.

Liam Coonhill: And so, you know, I think that's probably where we'll end up. Great. Thanks for the caller. I'll step back. Thank you.

Speaker Change: Yeah, I mean I think our uh the capital priorities remain the same. You know, we'd love to deploy that in or organic growth areas. Want to make sure our dividends stable. Um, and you know the the third option there is the share repurchases. Uh, and so you know, I think that's where we're going to. We're going to end up deploying uh, more of our repurchase Authority in the back half of the year. And um so you know, I think that's probably where we'll end up on that.

Great. Thanks for the caller. I'll step back.

Andrew Terrell: And our next question comes from the line of Andrew Terrell from Stevens. Your question, please. Hey, good morning. Morning.

You. And our next question comes from the line of Andrew Tyrell from Stevens. Your question, please.

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

Speaker Change: Hey, good morning.

Speaker Change: Morning, morning. Morning morning.

Speaker Change: Um, maybe just a piggyback off of the last question around Capital priorities. I mean

Speaker Change: So I'm looking back at your Capital positions stronger than it's been in a while. You've got a lot of a lot of capital. Um you know, the loan growth Outlook is maybe a little bit lower.

Speaker Change: um following this quarter, you know, I'm curious how these things play together into your thought process on m&a and whether

Robert Harrison: Sure.

Robert Harrison: This is Bob. You know, 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.

Speaker Change: You know, m&a makes more sense for you guys at this juncture and maybe if you could just kind of update us on on your thought process there. And and if it if it does or doesn't make sense for you.

Speaker Change: Sure. Uh

Robert Harrison: But you know, we're always out there talking to people as far as 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, you know, that can eat up the capital fairly quickly. So we want to make sure we maintain enough capital for a long Yeah, makes sense.

Speaker Change: This is Bob, you know, I think that's something we always look at. We're not adverse to considering options, but, uh, we don't have anything we're looking at currently but you know, we're always out there talking to people as far as

Speaker Change: Potentials, uh, for doing things with our capital.

Speaker Change: We're very comfortable with the capital levels. It's a little bit higher than we had guided to in years past that 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, you know that can eat up the capital fairly quickly. So we want to make sure we maintain enough capital for a longer

James Moses: Maybe just one for Jamie, you know, going back to the comments around around the margin, and I appreciate the guidance for 3Q. That's helpful. What impacted, or anything we should be aware of that impacted, you know, low yields in the second quarter and kind of mitigated what I thought would be a little bit better and kind of fixed repricing? Just any color you can provide on the underlying dynamics there will be helpful. Yeah, so I think, Andrew, it was really a mixed issue. So we, you know, you see in the in the materials, we had a, you know, we had sort of large payoffs in the construction book and increases in the C&I book.

Speaker Change: Yeah. Um, makes sense. Um,

And maybe just 1 for Jamie you know going back to the comments around around the margin. Um and I appreciate the guidance for for 3 Q, that's helpful. What, what impact did um or anything? We should be aware of that impacted, you know low yields in in the second quarter and kind of mitigated. What I thought would be a little bit better and and kind of fix free pricing just any color. You can provide on the underlying Dynamics, there will be helpful.

James Moses: And so there was just this timing, I'll call it a timing differential, where we had higher margin loans payoff, and they were replaced by relatively lower margin loans in the book. And so, so it was really a mixed issue there.

James Moses: I think in totality, that story still remains the same that the, you know, the fixed rate cash cash flows coming off the books replaced by higher yielding assets in general will drive the NIM higher over time. Just kind of a just kind of a weird quarter in terms of the mix of those things. Understood.

Speaker Change: Yeah, so I think Andrew it was really a mix issue. Um, so we you know, you see in the in the materials we had a you know we had sort of large payoffs in the construction book and and increases in the cni book. And so there was just this uh 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 um, in the book. And so, um, so it was really a mixed issue there. I think in totality that story Still Remains the Same, um, that the, you know, the fixed rate cash cash flow is coming off the books, uh, replaced by higher yielding, um, assets in general, um, will drive the Nim higher over time. Um, just kind of a just kind of a weird quarter in terms of the mix of those things at the moment.

James Moses: 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 carry forward of strength and kind of the third quarter there as well. So I'm hoping just to clarify any, is that kind of just like a what you view as core longer term? How should we think about third quarter on fee income? Yeah, I think I think fee income in the third quarter somewhere in that 51-52 million range.

Understood. Um, and if I could sneak 1 more in, I think you talked about 51 million of of fee income, as kind of a core number.

Andrew: It seems like the the kind of credit and debit card fees and um, service charges that were both up this quarter. It seems like there's normally a, a carry forward of strength and kind of the third quarter.

There as well. So I'm I'm hoping just to clarify. Any is is that kind of just like a what you view as core longer term? How should we think about third quarter on fee income?

James Moses: I mean, you know, I think that's, I think that's probably where we'll be.

James Moses: You know, we have we have from time to time, we have a lot of things that happen from a, from a, let's call it a markets perspective, where we have to revalue, you know, pension obligations, bully, bully obligations, that kind of thing. So when the market's up quarter over quarter, we have, you know, small pops in these numbers. And so, you know, 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.

Yeah, I think, I think fee income in the third quarter somewhere in that 51.52 million range. I mean, you know I think that's I think that's probably where we'll be. Um, you know, we have we have from time to time. We have a lot of things that happen from a uh from a let's call it a markets perspective where we have to revalue, you know, pension obligations, bully, uh, bully obligations, that kind of thing. So when the markets up quarter over quarter, we have, you know, small pops, um,

James Moses: So, you know, that 51-52 million dollar range, I think is is probably a good number for where we'll be in the third quarter.

Andrew Terrell: Great, I'll step back.

In these numbers. And so, you know, we had a number of like let's call it 1, Z 2, Z's, type, things happen in this quarter in the 2ish range, um, that we know happened, right? These things happen for us from, uh, time to time. It's just hard to predict when they'll happen. Um, so, you know, that 5152 million range I think is is is probably a good number for for where we'll be in the third quarter.

Andrew Terrell: Thank you for taking the questions. Yep.

Kelly Motta: Thank you. And our next question comes from the line of Kelly Motta from KBW. Your question, please. Hi, good morning. Thanks for the question. In regards to the tax rate, I see your DTAF this quarter that you called out and released.

Great. Um, I'll step back. Thank you for taking the questions.

Andrew: Yep.

Thank you. And our next question comes from the line of Kelly Mota from KBW your question, please.

James Moses: Jamie, can you provide an updated outlook on what this passport change does to your Outlook for this year and beyond. Thank you. Yeah, 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.

Andrew: With regards to the tax rate, I see or your um, dpas this quarter that you called out and released.

Um Jamie can you provide um an updated outlook on on what what this tax law change, does to your um tax rate outlook for this year and Beyond? Thank you? Yes, yep. Yeah, you got it Kelly. So um where normally we would say we would Outlook at like 23% for our effective tax rate. Um the the outlook for the rest of the year is 23.2%.

James Moses: Um, and on on the deposit costs, you know, you've done such a great job getting getting your deposit costs down in the first round of rate cuts. Seems like there's there's a declining benefit absence future cuts. But when those do come wondering how you're thinking about deposit data. You are at this time to dance, but that Yeah, 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.

Um and 1 on on the deposit cost. You know, you've done such a great job, um, getting getting your deposit cost down and the the first round of rate cuts um seems like there's there's a declining benefit absence future cuts. Um, but when those do come wondering how how you're thinking about um deposit photos on the next round of cuts URF is sensitive, but yep, that would be a nice night process.

Kelly Motta: 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 two cuts, that may be dropped 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 one or two. Oh, wow. Great. Got it.

Andrew: Yeah, so um, we we we have talked in the past about declining uh bettas related to tax cuts. I don't think we're fully there yet at the moment. Um, I think we probably have a, a few more rounds uh, available to us before that starts to become a real issue. Um, I would say that from from the perspective,

Andrew: Active of, uh, a rate cut if we were a 95 beta or so, um, on our, um, rate sensitive deposits, uh, over the last 2 cuts that maybe drops to 90, or so over the next couple of cuts. So, uh, we we still feel pretty strongly that we'll be able to pass through a large portion, um, of those cuts to, uh, to those rate sensitive customers, um, you know, but you know, you know, after maybe another 1% or so that, you know, the beta will decline. Um, oh, over time on that. So, I think, I think 900 is an okay number. Um, you know, for the next 1 or 2,

Kelly Motta: And then I left for me just a higher, higher pitch for question. Mowgrove, this quarter, really nice T&I, but you had the construction paydowns and seems like The Outlook is a little bit lower than at the start of the year, so still quite good. As you look ahead, kind of broader, more broadly speaking, what what do you think are the main factors that would get to activity among among your client base to really pick up.

Andrew: Oh, wow, great. Um

Got it. And then I left for me, just a, a higher, a higher pitch for question. Um, more growth reporter really nice. He and I, but you had the construction pay Downs. It seems like, um, the Outlook is a little bit lower than, than at the start of the year. I was supposed to still quite good. Um,

Kelly Motta: over the longer term with a more normalized growth rate, you think more mid single digits would be something that would be a key without the hail.

As you look ahead kind of broader more. Broadly speaking what, what do you think are the main factors that would get increased activity among among your client base to to really pick up and um,

Over the longer term with that more normalized growth rate. I think more mid single digits, would be something that could be a key for longer term with these. These, um,

Robert Harrison: Yeah, Kelly, this is Bob. I'm a little reluctant to look out longer term, you know, 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, you know, that does affect that.

Speaker Change: without the payoff at wins. Thank you.

Speaker Change: Yeah, Kelly this is Bob I'm a little reluctant to look out. Longer term, you know, just is is is most banks were following the economies of the the areas were in. So that's kind of making a bigger forecast that I'm comfortable with. But, uh, just to talk maybe a little more specifically about what happened. This quarter 1 of the reasons we lowered our guidance.

uh, just a tad was that um,

Robert Harrison: How much will Duluth Floral Plant continue to grow? Hard to tell, but you know, we had pre-COVID, I think we're at $859 in total and you know, now we're $786. 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 two. The teams are out there. They're calling on people. You know, 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 past year-end.

Speaker Change: We had thought some of these construction loans were going to go into mini farm. And if the takeout Market is as strong as it is, and they're getting paid off, you know, that does affect that. How much will dealer floor, plan continue to grow hard to tell? But, you know, we preco, I think we're at 8:59 in total and, you know, now we're 786. So we're getting close to what?

Robert Harrison: 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? Oh, no, this is yeah, this is the end of construction where normally, you know, pre COVID, you get taken out right away. And then sometimes Post COVID, you know, it hangs around in a mini firm 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.

Preco numbers were so, the amount of increase will likely slow down. So it's it's really the interplay between those 2. The teams are out there, they're calling on people. You know, there's there's good uh, pipelines developing but it's just hard to at this point. Put that into a number before between now and your end other than what we've done in past year and I don't think we'd be comfortable commenting.

Speaker Change: Got it. Um, maybe just last follow up on on those construction loans getting taken out. Um what where are you seeing the most competition coming in? Is are is it from the local banks in Hawaii? Getting more aggressive on pricing larger, insurance companies, large Banks. Um, oh no, this is, yeah, this is the end of construction where normally, you know, preco you get taken out right away and then sometimes,

Postco, uh, you know, hangs around and many parts for a little while which is always a feature of those loans.

Robert Harrison: It was never really designed to be a permanent loan for us. So it's not other local banks. Got it.

Uh 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.

Kelly Motta: Awesome. Thank you so much. I'll cut back. Yep. Thank you.

Speaker Change: Never really designed to be a permanent loan for us so it's not other local banks.

Speaker Change: Awesome. Thank you so much.

Jared Shaw: And our next question comes to the line of Jared Shaw from Barclays. Your question, please. Hey there, thanks. Maybe just on the on the on the commercial loan growth that you're putting on, what are what are you seeing for spreads on on CNI right now? Is that is that staying stable? Or are you seeing some some compression with competition?

Speaker Change: Our next question comes from the line of Jared. Shaw from barklay is your question, please?

Jared Shaw: Hey there. Thanks.

Speaker Change: um,

James Moses: Now, Jared, this is Jamie, they're staying pretty stable. I think in totality, we have the weighted average, you know, roll on is in, you know, mid, mid to upper sixes, in totality in the books. So but most mostly stable, I would say the spread.

Speaker Change: Maybe just on the, on the, on the commercial loan growth that you're putting on. What are um, what are you seeing for spreads on on cni right now? Is that, is that staying stable? Or are you seeing some, some compression with competition?

James Moses: 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, 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 You know, have either through collateral features or structure features that sort of give us a tight prepay window. So, you know, in that, you know, that five duration. Okay, all right. Thanks.

Speaker Change: Now, uh, Jared, this is Jamie. There they're staying pretty stable. I think in totality, um uh, we have uh, the the weighted average, you know, roll on is in, you know, mid mid, mid to Upper sixes, um, in totality in, in the books. Um, so, but most mostly stable, I would say the 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, and you you talked about sort of reinvesting, some of those cash flows. What, um, what do you purchasing, uh, in terms of yield and duration? And should we expect to see, uh, some recovery in in the Securities yield or is it, um,

Speaker Change: Staying lower here.

Speaker Change: Yeah, no. Uh, you should expect maybe, uh, 2 and a quarter percent pickup, um, uh, in the, uh, on the things that we're putting back on, um, versus the the roll off. So, um, what's rolling off is about 2%, uh, in that book and we're going to be putting on, you know, maybe somewhere between 4 and 4 and a quarter. Um, and so that keeping the duration, um, a little bit, um, keeping the duration sort of same flat in in the book. And we're replacing, we're replacing cash flows that roll off with, um, same type of assets that we, uh, that are rolling off. So, um, mortgage Securities with a, you know, with, uh, you know that are good. Good structures. Um, and

Jared Shaw: And then, just finally, for me on credit, you know, I know we're, we're talking about low numbers, but when you look at sort of the the growth in resume mortgage, non performers, You know, over the last few quarters, that's been pretty big compared to where you've been before.

Speaker Change: You know, have either through, uh, collateral features or, uh, structure features that sort of give us, um, a tight, uh, prepaid window. So, you know, in in that, you know, in that 5 durability.

Speaker Change: Okay, all right, thanks and then just dialing for me on, on credit, you know. I know we're, we're we're talking about

Low numbers. But when you look at sort of the, the growth in resi mortgage non-performers, um

Speaker Change: You know, over the last few quarters. That's that's

Bob Harrison: What's driving that weakness? I know that there's probably not a lot of lost content there, but what's sort of driving the underlying concern with the consumer on those?

Bob Harrison: Jared, this is Bob.

Bob Harrison: 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 their savings as they accumulated during COVID have gone away and it's just getting a little bit tougher.

Speaker Change: Been pretty big compared to where you've been before. What's, what's driving? That that weakness. I know that there's probably not a lot of lost content there but is that, you know, what, sort of driving the underlying concern with with, uh, with the consumer on on those

Speaker Change: Jared. This Bob, maybe I'll start and then leaking. Add some comments, you know? The

Lea Nakamura: Leave I think you'd mentioned on a collateral but anything you want to No, not really. I mean, the portfolio is performing as we expected. So we were We were pleased for a very long time with the performance and we continue to be very pleased and confident with it. For a very long time, we had zero, you know, so anything above zero is going to look like a big number. But we're not concerned about it from a loss perspective, as I think Lea mentioned. Yep. Okay.

Speaker Change: The consumer at the say, the lower end is getting a little stretched. They're they're savings as they accumulated during Co or have gone away. And it's just getting a little bit tougher, uh, leave. I think you'd mentioned on a collateral, but anything you want to add

Speaker Change: Uh, no, not really. I mean, the portfolio is performing as we expected. So we were

Jared Shaw: Thank you very much. Thank you.

Speaker Change: We were pleased for a very long time with the performance and, you know, we continue to be very pleased and confident with the portfolio. Yeah. For for a very long time, we had zero, you know. So anything above zero is going to look like a big number but yeah, we're not concerned about it from a loss perspective. I think Lee mentioned

Timur Braziler: And our next question comes from the line of Timur Braziler from Wells Fargo. Your question, please. Yes, hi, good morning. Maybe just keeping to the line of commentary on credit, the the increase in commercial criticized assets. Can you just help us reconcile kind of that increasing trend versus the 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'll just end up carrying themselves?

Yep. Okay. Thank you very much.

Speaker Change: Thank you. And our next question comes from the line of Tomorrow. Brothers from Wells, Fargo your question please?

Yes. Hi. Good morning.

Lea Nakamura: For the most part, they will end up curing themselves. We already know of two 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 one loan move in and it moves significantly at the percentage. So again, you know, 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. So, okay, thanks for that.

Speaker Change: Maybe um just keeping to the line of commentary uh on credit the the increase in commercial criticize assets, can you just help us reconcile kind of that increasing Trend versus the still really strong, um, 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 of activity? Again off of a really low base? Or do you think that ultimately, they'll just end up carrying themselves?

Speaker Change: Uh, for the most part, they will end up curing themselves. We already know of 2 that what? Well, 1 paid off right after the end of the quarter. And then there's another 1 that we expect to pay off. And um, as you mentioned right, the base is so low that you just have 1 loan move in and it moves significantly as a percentage.

Without some expectation that some will have trouble, but when you stay close to the borrower, you can be confident that you'll come out.

Speaker Change: Very satisfactorily.

Lea Nakamura: And then, sorry, go ahead. No, um, you know, I read We are confident in our book. The book is...

Speaker Change: so okay, thanks for that and then

Speaker Change: Sorry, go ahead.

Speaker Change: No. Um, you know, every

We are confident in our book. The book is strong.

Timur Braziler: Okay, thanks for that.

Timur Braziler: Maybe following up on the completed construction loans being refied 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 refied away as well here. Yeah, Timur, I don't have the specific numbers of what's coming up. We had three loans pay off in the quarter, which, you know, kind of led to that pay down for several, actually, you know, as far as We're not seeing additional competition on as far as refinancing as far as new deals coming forward, you know, pricing had expanded a bit during COVID is 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 under right now.

Speaker Change: Okay. Um, thanks for that. Maybe following up on the, um, completed construction loans, being raphide away. I'm just trying to get the, the magnitude here of of what's coming due from a construction, completion standpoint. And then similarly on the cra cra side, for those resets that are approaching, I'm just wondering if you're seeing and increased level of competition from some of those potentially being recycled away as well here.

Speaker Change: Yeah team I don't have a specific numbers of of what's coming up. The uh, we had 3 Loans pay off on the quarter which you know kind of led to that pay down for several actually um you know as far as we are not seeing additional competition on as far as refinancing. As far as new deals coming forward, you know, pricing had expanded a bit during Co is coming back a little bit more to preco spreads but it's still.

Speaker Change: Solid. And and I think appropriate for the risk that we're underwriting,

Timur Braziler: Okay, and then maybe just tying in some of the 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? Yeah, Timur, yeah, I think maybe we'll see some balance sheet growth. You know, we're going to keep the bond book stable where it's at. And we should see some we should see some loan growth in the back half of the year.

Speaker Change: Okay, and then maybe just signing in some of the the payoff activity. Uh the fact that the floor plan book here is 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 giving some of the Dynamics assets. Like the remains somewhat stagnant here for at least the near term.

Robert Harrison: So I would expect a, you know, a larger balance sheet by year end. And some of just to add to Jamie's comments, some of the things that have been a drag and over the last several years, you know, our indirect book pre COVID was well over a billion billion billion one. Now it's 600 million. So with the whatever it is, five and a half years gone down by 500 plus million. That's now stabilized. So, you know, the market's reasonable. And so we don't have that headwind now. A little bit of a headwind in, you know, residential lending as I think, for all the banks here in Hawaii, but just not a lot of new volume as things mature.

Speaker Change: Yeah, uh, Timber. Yeah, I think maybe we'll see some balance sheet growth. Um, you know, we're going to keep the, the bond book, um, stable where it's at. Um, and, and we should see some, we should see some loan growth, um, in the back half of the year. So I, I would expect, uh, you know, a a larger balance sheet by year end. And and some of those just to add to Jamie's comments. Some of the things that have been a drag and over the last several years, you know, our indirect book preco was well over a billion billion billion 1, now, 600 million. So over the whatever it is 5 and a half years gone down by 500 plus million. Um,

James Moses: But on the commercial side, to Jamie's point, so you know, we're optimistic there's deals out there and we're looking at them and I feel pretty good about the five. Got it.

Speaker Change: That's now stabilized. So you know, the Market's reasonable and so we don't have that headwind. Now a little bit of a headwind and you know residential lending is I think uh for all the banks here in Hawaii but just not a lot of new volume is things mature but uh on the commercial side to Jamie's point. So you know we're optimistic there's deals out there and we're looking at them.

Speaker Change: Uh, feel pretty good about the pipeline.

Timur Braziler: Thank you for the questions.

Unknown Executive: Thank you.

Kevin Haseyama: This does conclude the question and answer session of today's program.

Got it. Thank you for the questions.

Kevin Haseyama: I'd like to hand the program back to Kevin Haseyama for any further remarks. 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 week.

Kevin Hema: It does include the question and answer session of today's program. I'd like to hand the program back to Kevin Hema for any further remarks.

Thank you.

Speaker Change: We appreciate your interest in First Hawaiian and please feel free to contact me if you have any

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

Speaker Change: Thanks again for joining us and have a good weekend.

Speaker Change: Thank you, ladies and gentlemen for your participation. In today's conference, this does include the program. You may now disconnect good day.

Unknown Executive: Thank you for watching!