First Hawaiian (FHB) Q3 2026 earnings call transcript

Thank you, Jonathan. And thank you, everyone, for joining us as we review our financial results for the third quarter of 2026. With me today are Bob Harrison, Chairman, President, and CEO, Jamie Moses, Chief Financial Officer, and Lee Nakamura, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at FHB. com in the Investor Relations section.

During today's call, we will be making forward-looking statements, so please refer to slide one for our Safe Harbor Statement. We may also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements. And now I'll turn the call over to Bob.

Thank you, Kevin. Appreciate everybody joining us today. Turning to slide two, I'll start by providing an update on the acquisition. As you can see from the slide, we're making good progress obtaining the necessary regulatory and shareholder approvals. The next major milestones are the shareholders special meetings on October 29th and obtaining final regulatory approvals. Integration planning is going well and we continue to expect to close this quarter. We'll provide updates throughout the process. Now a quick overview of the local economy. It's been a challenging year as the state deals with dual headwinds of both higher energy costs and unusually active storm season. In spite of that, the economy continues to grow, albeit at a slower pace.

Statewide unemployment rate was relatively stable at 2.8% for September compared to the Nash unemployment rate of 4.2% for the same month. Visitor industry continues to be resilient. Total visitor arrivals were up 1.8% compared to last year, primarily due to visitors from the mainland U. S. and Japan. Year-to-date spending through August was $15.2 billion, up 4.1% for the comparable period in 2025. The housing market remained stable. Median single-family home price on Oahu was $1.1 million in September, down 3.9% from last year. But condo prices remained stable at $523,000, up 2.8% from 2025.

Turning to slide three, our results for the quarter reflect the continued solid performance by the team. Net interest income increased, deposit costs declined while deposit balances grew, and the margin increased five basis points. Net interest income was in line with expectations, and non-interest expenses came in below expectations, excluding merger-related costs and a tax settlement expense. The $2.43 million tax settlement expense stemmed from a settlement with the state of California on tax liabilities resulting from our 2016 separation from BNP Paribas.

The aforementioned tax settlement also resulted in a $31 million tax benefit in the third quarter. Overall, credit quality remains good, but we did have some noise in our credit metrics this quarter and Lee will provide more details and she goes over that later.

Turning to slide four, the balance sheet remains solid. We continue to be well capitalized with ample liquidity. Balance sheet remains asset sensitive and well positioned to benefit from a higher for longer rate scenario. During the quarter, we did not repurchase any shares.

Turning to slide five, total loans declined 115 million in the quarter. Decline was primarily due to unexpected CRE loan payoffs, a slight decline in dealer floor plan balances, and runoff in the residential loan portfolio.

As an example, we did have one large CRE loan that was paid off unexpectedly, being refinanced by a mainland lender that offered very aggressive pricing. I think that's a reflection of the credit quality of the portfolio as well as demand. Payoffs were more heavily weighted towards the end of the quarter as average balances in Q3 were slightly higher than the previous quarter.

Now I'll turn it over to Jamie.

Thanks, Bob. Turning to slide 6, total deposits were up about $50 million while our total cost of deposits fell by three basis points in the third quarter. Increased commercial and public operating deposit balances were partially offset by decline in retail deposits and our non interest bearing deposit ratio was 32 percent on slide 7 net interest income was 174.1 million 3.1 million dollars more than the prior quarter the increase in NII was driven by the increase in the margin along with the higher average loan balances in the quarter the NIM in the third quarter was 3.30 percent up five basis points link quarter with both with both asset yields and funding costs helping to drive that in immigration.

Turning to slide 8, non-interest income was $56.1 million in line with our outlook. Non-interest expense in the third quarter was $160 million. The quarter included $6.7 million of merger related costs and as Bob mentioned also included $24.3 million expense related to a California tax settlement agreement related to our 2016 IPO. This expense was more than offset by the $31 million tax benefit that we recognized as part of that settlement. Excluding these items, operating expenses were well within our expectations. And now I'll turn it over to Lee.

Thank you, Jamie. Moving to slide nine, while we have some noise in the third quarter, the overall loan portfolio remains healthy as the quality remains strong and the portfolios continue to perform within our expectations. Our risk appetite has not changed. We continue to manage our portfolio such that asset quality remains within our risk appetite as demonstrated by historical norms. This slide summarizes some of the drivers behind the changes in some of the key credit measures this quarter. Third quarter net charge-offs were $21.9 million or 60 basis points of total loans and leases. This was primarily driven by a $12.5 million partial charge-off of our participated loan on an office building located in downtown Seattle. This loan was originated in 2019 and performed well through COVID but has struggled due to the shifting economics associated with the city's contraction in office demand and higher for longer interest rates.

We believe that this is an isolated situation. Our downtown Seattle office portfolio consists of only one other loan which continues to perform and is backed by a very strong sponsor with whom we have partnered for many years. Our year-to-date annualized net charge-off rate is 29 basis points. Criticized assets increased by 72 basis points in the third quarter. This increase was primarily the result of four non-office commercial real estate loan downgrades. It is important to note that while the credit review process resulted in these downgrades, we believe that the actual loss content is limited. The bank recorded a $20.3 million provision in the third quarter. The increased provision expense was driven by the office charge-off and the CRA loan downgrades.

The allowance for credit losses decreased by $4 million to $164 million with a coverage ratio of 1.14% of total loans and leases. Non-performing assets and loans 90 days or more past due were 45 basis points of total loans and leases at the end of the third quarter. This increase was primarily related to operational issues arising out of the recent outsourcing of our residential mortgage servicing, as well as the previously mentioned charged-off office loan, as the portion that was not charged off is placed on non-accrual.

Since the end of the quarter, 40% of these residential mortgage loans have been brought current, and we are confident that we will be able to resolve the remaining population in good order.

Turning to slide 10, you can see a summary of our key credit metrics. And now I'll turn it back over to Bob.

Thank you, Lee. On slide 11, we have our updated outlook for key performance drivers. We obviously didn't get the loan growth we expected in the third quarter, so we reducing our full loan outlook to 1 to 2 growth down from 3 to 4 growth Our asset balance sheet continues to benefit from the higher interest rate environment so we expect NIM in the fourth quarter to be between 3.34% to 3.35%, which increases our full year NIM outlook to 3.26% to 3.27%. Our outlook for non-interest income remains about $220 million for the full year. Expenses, excluding merger-related costs and tax expense in the third quarter related to that settlement, is expected to come in lower than we previously thought, and our full year outlook is now in the $510 to $515 million range.

The effective tax rate should remain unchanged, and we're expecting approximately $25 million in merger-related costs in the fourth quarter. Now we'd be happy to take your questions.

Yeah, Andrew, Bob, answer your question. Yeah, no, the pipeline is still there. We still have quite a bit of loans in process. It's really the continuing battle of things getting paid off. So it's really that's the balance between a solid pipeline and looking over our shoulder a little bit for things that are unexpected.

Hey, Andrew, it's Jamie. I appreciate the question. I understand why you'd ask it. That's kind of hard for me to answer at the moment for sure. I can speak to our margin.

We continue to see the effects of fixed rate cash flow repricing on our balance sheet. It's about $400 million or so a quarter. And spread in this past quarter was about $170 million. So we think the spread is maybe $160 million to $170 million going forward on that. And, of course, that depends on Fed rate increases or not.

And just a reminder, we expect, generally speaking, if there's a Fed rate increase in a prior quarter, we would expect a couple basis points of margin accretion based on that. And then with the fixed rate cash flow repricing and then just general repricing on the balance sheet, we would expect another couple basis points or so just if rates remain flat. So, yeah, that's what I got for you today.

And, Andrea, this is Bob again. Just a little more color on the loan side. You know, we are seeing a still solid pipeline for CRE. Just to break it down a little bit, the residentials continue to run off. Given the rate outlook, you know, it's going to be difficult to see residential activity really picking up. But we are seeing CRE still being strong. And typically, we don't know if it's going to come true, but typically at the end of the year, you do see an increase in dealer floor plan balances. So if we follow the usual norm, this should be an okay fourth quarter, but we did adjust our guidance to take into account what happened in the third quarter.

Good morning, Dave. I just wanted to start on the funding side. You know, you've got a huge advantage being in Hawaii and the kind of the closed loop nature of that market. You know, funding costs have continued to come down. I'm just kind of curious, the competitive landscape here as, you know, rates are going higher. Do you have more funding cost leverage left or do you think we're kind of at a trough here?

Hey, David, Jamie. I think we're kind of at a trough. in this quarter I think this is probably as low as it's going to be especially given the rate outlook that we've seen of course that that can change competitive pressures here in Hawaii continue to be you know muted let's call it you know we all the the large four banks here are you know we're all in the same boat in terms of loans to deposit ratio and things like that so you know the comp the competition is about kind of what it always has been so rates up I think will kind of drive you know sort of let's call it CD repricing slightly higher because of that and then we have our normal competition and you know where we're you know competitive with each other around around client acquisition so we're probably at a trough now I guess the best way to describe it is you You know, we think maybe interest-bearing deposit betas somewhere in the 40% ratio in totality, where in total deposit betas will be like 30 or so, some 30 basis points or something like that.

Sure, Davis, Bob. Happy to answer that question. And, yes, we're very focused on that. We're working very closely with them. Jamie is actually heading our integration management office. Peter Weiss, their CFO, is heading it on their side. They're working closely on organizing the teams to get ready for post-closing, whenever that happens. It should be fourth quarter, as we've talked about. So that's happening.

We've reached out to a number of their people. The vast majority are staying on with us. There are one, maybe two that are not, and that's not unexpected, but really we're excited to be working with them and so far really working closely together to see how we can get that done. We totally agree with you. The execution risk is what we're completely focused on, and that's what matters, and that's what we're spending a lot of time on it. exchanging visits between, you know, Trico to First Hawaiian and First Hawaiian employees going up to Trico, everybody getting to know each other, really spending the time so that when we do close, we can really hit the ground running to, you know, make this work.

Yeah, Rick and I have spent a lot of time talking about that. It is the most important thing to get right, so to speak. Of course, you need to do the core conversion, you need to do all those other things, but the really long-term value comes from letting Trico be Trico and us supporting them with their customers and in their markets. and if there's things we can learn from them, we will. If there's things they can learn from us, I'm sure they're open to that. I know they are, because we've talked about it. So execution will prove that, and we just need to get through that but that is a top priority for both Rick and myself and both sets of management teams as well It not just the two folks at the top It really both sets of management teams thinking and working the same way Terrific.

Hey, Tony, it's Jamie. So I would call that sort of normal flows that we saw in the quarter on the commercial side. Same kind of thing on the retail side, you know, some sort of what I'll call like normal outflows. typically what we have in the fourth quarter is inflows across most across both retail and commercial for sure sometimes we see that in public but that's a little you know more event driven I would say you know if you look to our past fourth quarter growth guides those are kind of like where we usually come in in the fourth quarter you know I hesitate I kind of always say this we We hesitate to call it seasonal because we're not sure what really drives it.

It just seems to happen for us in the fourth quarter every year. So, you know, we would expect some deposit growth in the quarter.

Tony, this is Bob. Maybe I'll start and then hand it off to Lee. You know, I think maybe it's worth taking a second on the office building in Seattle. That's a key market that we've known for a long time. It was a two-bank deal with a very strong agent, very strong sponsor at the time.

It's still 75% occupied by a federal agency that's paying its rent. It's just, you know, downtown Seattle, if you haven't been there, is challenged right now. And the office market is severely impacted on that. So that's why we consider that one really a one-off. Having said that, we like to tell all the information we can as soon as we can. So just like we did during COVID, we've been doing deep dives throughout the whole portfolio. And that's what led to some of the regrades. But maybe I'll turn it over to Lee for any other comments she has.

No, I think we all understand that the high interest rates have stayed around a lot longer than we thought. And, you know, a lot of these loans were put on in a different interest rate environment. So we've been watching very carefully what's been happening to these properties. And by and large, we're very comfortable, we remain comfortable. When we enter these deals, we know that potentially there could be some downside. And that's why we have to be very careful about who we choose to participate with, who we choose as our sponsors. You know we don't have very much in mainland office. It's not one of the portfolios that we are actively expanding. I think the other portions of our portfolios that we advertise as our core, those are still very strong.

So, yeah.

Does that answer your question, Tony?

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

Yeah, so roughly, you know, let's call it $250 million on the loan side and $150 million on the security side.

In the, you know, let's call it 110 basis points spread on the loans and maybe 200 basis points or so on the securities at this moment.

So three of the downgrades came out of the national SNCC exam. Two are portfolio loans, which are multi-family properties in multiple areas. They were entered into several years in 2020, again in a different rate environment. And again, not an area that we are not a type of asset that we have actively grown in many, many years. We went into it because we were looking for a little more diversification.

We don't really have many of those assets left. But we look closely at the lost content and we think whatever provisions we've made are appropriate for that map.

So CNI SNCC is the credit only pieces, so the pieces that we bought on the secondary, 275 million in outstanding and everything's pass rated except for we have an 11.6 million dollar unfunded commitment and that's special mention but everything else is passed.

So we have CRE SNICs. I don't... We might have to get back to you with that number.

Well, Jana, this is Bob. I think that part of that is much of our CNI historically, the volatility is driven by a dealer floor plan, and that comes and goes depending on what's happening in the market. Obviously, rates being up, dealers are going to do their best to manage their inventory. A little slower economy should lead to higher floor plan balances as cars don't move as quick. So those are both kind of offsetting, so it's not an easy answer one way or the other. The balances typically do go up in the fourth quarter. We have been onboarding a new client or two every quarter or so, so you have some natural growth in the portfolio as well.

but it really is hard to predict exactly the rate of flow of what the balances are going to be. The only thing we do control is getting out there and working with new customers, potential prospects, and converting those. And so that's how we take charge of that portfolio. Broadly in the market for our CNI and unfunded lines you know the utilization has been within a few basis points about the same throughout the year So there might be bumps up or down, but we really haven't seen a sustained growth in working capital borrowings as an example.

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

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

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

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

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

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

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

Yes, it was 333 in September.

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

Well, you know, we will be looking at all of that stuff over time. You know, I think maybe the right way to think about it is there's no branch overlap, so no branch closures. If you're a California customer of Trico, you're going to continue to walk into the same branch you always walked into with the same people and your same favorite teller that you always got to talk to. So that sort of disruption would be very much minimized.

And the disruption will come around the time of, say, probably conversion. So, you know, we've got some time to think about that, but we will be very, very focused on retaining customers to the best of our abilities, obviously, in California and here in Hawaii, like we always do. You know, I think, you know, customer retention is something we always think about, and we'll continue to think about that, you know, in the next phase here.

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.