First Hawaiian Q3 Earnings Call Highlights

Key Points

• Third-quarter net interest income rose to $174.1 million, supported by a 5-basis-point increase in net interest margin to 3.30%, lower deposit costs and approximately $50 million in deposit growth. However, total loans fell $115 million due to commercial real estate payoffs, lower dealer floor-plan balances and residential loan runoff.
• Credit metrics were pressured by a $12.5 million charge-off tied to a downtown Seattle office property and downgrades in four commercial real estate loans. Net charge-offs reached $21.9 million, or 60 basis points of loans, though management characterized the Seattle issue as isolated and overall portfolio quality as healthy.
• First Hawaiian lowered its full-year loan-growth forecast to 1%–2% but raised its net interest margin outlook to 3.26%–3.27%. The company expects to complete its TriCo acquisition in the fourth quarter, pending shareholder and regulatory approvals, with integration planning already underway.

First Hawaiian NASDAQ: FHB said its third-quarter results reflected higher net interest income, lower deposit costs and continued deposit growth, while credit metrics were affected by a charge-off tied to a downtown Seattle office property and several commercial real estate downgrades.

Chairman, President and CEO Bob Harrison said the company continued to make progress toward completing its acquisition of TriCo, with shareholder special meetings scheduled for Oct. 29 and final regulatory approvals still pending. First Hawaiian expects the transaction to close during the fourth quarter and said integration planning is underway.

“Integration planning is going well, and we continue to expect to close this quarter,” Harrison said.

Net Interest Income and Deposits Rise

Chief Financial Officer Jamie Moses said net interest income totaled $174.1 million, up $3.1 million from the prior quarter. The increase reflected a higher net interest margin and higher average loan balances during the quarter.

Third-quarter net interest margin was 3.30%, up 5 basis points sequentially, as asset yields and funding costs both contributed to margin expansion. Moses said September’s spot net interest margin was 3.33%.

Total deposits increased by roughly $50 million during the quarter, while the total cost of deposits declined by 3 basis points. Growth in commercial and public operating deposits was partly offset by lower retail deposits. Noninterest-bearing deposits represented 32% of total deposits.

Moses said commercial deposit growth reflected normal customer flows, while the company historically has experienced deposit inflows in the fourth quarter. He characterized deposit costs as likely near a trough under the current interest-rate outlook, citing muted competitive pressures in Hawaii.

The company’s total loans declined by $115 million in the third quarter, primarily because of unexpected commercial real estate loan payoffs, lower dealer floor-plan balances and continued runoff in residential loans. Harrison said one large commercial real estate loan was refinanced by a mainland lender offering aggressive pricing.

Although loan balances fell, Harrison said First Hawaiian continues to see a solid lending pipeline, particularly in commercial real estate. He added that fourth-quarter dealer floor-plan balances typically increase, though the company reduced its full-year loan-growth guidance to account for third-quarter payoffs.

Credit Results Include Seattle Office Charge-Off

Chief Risk Officer Lea Nakamura said overall portfolio quality remained healthy, though the quarter included “noise” in several credit measures. Net charge-offs totaled $21.9 million, or 60 basis points of total loans and leases.

The result was primarily driven by a $12.5 million partial charge-off on a participated loan secured by an office building in downtown Seattle. Nakamura said the loan originated in 2019 and had performed well through the pandemic, but later encountered challenges from declining office demand in the city and persistently higher interest rates.

Harrison said the property remains 75% occupied by a federal agency that is paying rent, but downtown Seattle’s office market has been under significant pressure. The company views the situation as isolated, according to Nakamura, noting that First Hawaiian has only one other downtown Seattle office loan and that loan continues to perform.

Year-to-date annualized net charge-offs were 29 basis points. Criticized assets increased by 72 basis points, largely because of four non-office commercial real estate loan downgrades. Nakamura said the company believes actual loss content in those downgraded loans is limited.

First Hawaiian recorded a $20.3 million provision for credit losses during the quarter, reflecting the office charge-off and commercial real estate downgrades. Its allowance for credit losses declined by $4 million to $164 million, or 1.14% of total loans and leases.

Nonperforming assets and loans 90 days or more past due were 45 basis points of total loans and leases at quarter-end. Nakamura attributed the increase mainly to operational issues following the outsourcing of residential mortgage servicing, along with the remaining non-charged-off portion of the Seattle office loan being placed on nonaccrual. Since quarter-end, 40% of the affected residential mortgage loans had been brought current, she said.

Outlook Updated for Loan Growth, Margin and Expenses

Harrison said First Hawaiian now expects full-year loan growth of 1% to 2%, down from prior guidance of 3% to 4%. The company expects fourth-quarter net interest margin of 3.34% to 3.35%, raising its full-year margin outlook to 3.26% to 3.27%.

First Hawaiian maintained its full-year noninterest-income outlook of about $220 million. It lowered its forecast for full-year expenses, excluding merger-related costs and the California tax settlement expense, to between $510 million and $515 million.

Third-quarter noninterest expense totaled $160 million, including $6.7 million in merger-related costs and a $24.3 million California tax settlement expense related to tax liabilities arising from the company’s 2016 separation from BNP Paribas. The settlement also generated a $31 million tax benefit during the quarter.

The company expects about $25 million in merger-related costs during the fourth quarter. It did not repurchase shares during the quarter, though Harrison said buybacks could be considered after the TriCo transaction closes and the combined company’s capital position is assessed.

TriCo Integration Focuses on Retention and Market Expansion

Management said it is focused on maintaining TriCo’s customer relationships and operating model after closing. Harrison said the “long-term value” of the transaction depends on allowing TriCo to continue serving its markets while First Hawaiian provides support and both organizations share expertise.

Harrison noted that TriCo has lending capabilities in areas such as oil and gas and agriculture-related finance, while First Hawaiian may bring hospitality expertise to the combined organization. Moses said there is no branch overlap between the banks, which should limit customer disruption, and the companies expect a systems conversion in the second half of the following year.

“The execution risk is what we are completely focused on,” Harrison said, citing visits and collaboration between employees from both companies as preparations continue.

About First Hawaiian (NASDAQ:FHB)

First Hawaiian, Inc is the parent company of First Hawaiian Bank, a regional financial institution headquartered in Honolulu, Hawaii. Founded in 1858, First Hawaiian Bank is the oldest bank in Hawaii and serves consumers, businesses, and government entities across the Pacific.

The bank provides a broad range of financial products and services, including checking and savings accounts, consumer and residential loans, commercial lending, credit cards, treasury management, investment and wealth management services, and online and mobile banking.

This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.