FIRST HAWAIIAN, INC. Q3 FY2026 earnings call

• Acquisition Progress: The acquisition of Trico is on track for closure in Q4 2026, pending shareholder meetings on Oct 29 and final regulatory approvals. Integration planning is active, with Jamie Moses leading the integration management office.
• Local Economy: Hawaii’s economy faces headwinds from high energy costs and storm activity but remains resilient. Unemployment is stable at 2.8% (vs. 4.2% national). Visitor arrivals are up 1.8%, and spending is up 4.1% year-to-date.
• Balance Sheet & Liquidity: The bank is well-capitalized and asset-sensitive. Total loans declined by $115 million due to unexpected CRE payoffs and residential runoff. No share repurchases occurred this quarter.
• Credit Quality: Overall portfolio health is strong despite 'noise' in metrics. A $12.5 million charge-off occurred on a Seattle office loan. Criticized assets rose due to four non-office CRE downgrades. Non-performing assets increased slightly due to operational issues in outsourced mortgage servicing, though 40% of affected loans have been brought current.
• Operational Highlights: Deposit costs fell 3 basis points, and the non-interest-bearing deposit ratio stood at 32%. The bank successfully settled a California tax liability issue, resulting in a net tax benefit.

The provided transcript does not break down financial performance by specific product segments (e.g., Retail vs. Commercial). However, it highlights that Net Interest Income was $174.1 million (up $3.1 million sequentially) and Non-Interest Income was $56.1 million. Total Non-Interest Expense was $160 million, which included $6.7 million in merger-related costs and a $24.3 million tax settlement expense (offset by a $31 million tax benefit). Excluding these items, operating expenses were below expectations.

• Loan Growth: Reduced full-year outlook to 1%-2% growth (previously 3%-4%) due to unexpected CRE payoffs and residential runoff.
• Net Interest Margin (NIM): Q4 NIM expected to be 3.34%-3.35%; Full-Year NIM outlook raised to 3.26%-3.27%.
• Non-Interest Income: Full-year outlook maintained at approximately $220 million.
• Expenses: Full-year operating expenses (excluding merger costs and tax settlement) revised downward to $510-$515 million.
• Merger Costs: Approximately $25 million in merger-related costs expected in Q4.
• Tax Rate: Effective tax rate expected to remain unchanged.

• CRE Concentration Risk: Significant exposure to downtown Seattle office real estate led to a $12.5 million charge-off; other non-office CRE loans were downgraded due to shifting economic conditions and interest rates.
• Operational Execution Risk: Integration of Trico poses execution risks, particularly regarding core system conversion and cultural alignment; however, management emphasizes minimizing disruption to customers.
• Mortgage Servicing Issues: Recent outsourcing of residential mortgage servicing caused temporary increases in non-performing assets, though resolution is underway.
• Regulatory Capital Impact: Basel III rules are expected to reduce CET1 capital ratios by approximately 100 basis points upon implementation.

Q: Analyst asked about the loan growth pipeline and why guidance was lowered despite a solid pipeline. / A: Management clarified that while the pipeline remains solid, unexpected large CRE payoffs (refinanced by mainland lenders) and residential runoff offset new originations. They expect dealer floor plan balances to rise seasonally in Q4, but adjusted guidance to reflect Q3's negative momentum.

Q: Analyst inquired about funding cost leverage and if deposit betas have bottomed out. / A: CFO stated deposit costs are likely at a trough given the rate outlook. With muted competition in Hawaii, they estimate interest-bearing deposit betas around 40% and total deposit betas around 30%. Any future rate hikes would drive slight CD repricing higher.

Q: Analyst sought details on the Trico integration strategy, specifically regarding allowing Trico to operate independently ('letting them be Trico'). / A: CEO emphasized that letting Trico operate autonomously in its markets while providing support is a top priority to preserve long-term value. Both management teams are collaborating closely via an Integration Management Office to ensure smooth post-closing operations without unnecessary disruption to customer relationships.

Q: Analyst asked about the credit quality of other office loans and if the Seattle charge-off was an isolated incident. / A: Management described the Seattle loan as a one-off due to severe local market contraction, noting it remains 75% occupied by a federal tenant. They conducted deep dives into the entire portfolio, finding other core portfolios strong. Mainland office exposure is minimal, and they are comfortable with remaining assets despite higher-for-longer rates.

Q: Analyst asked about the strategic direction of the combined book, specifically regarding reducing the mainland participation (credit-only) book. / A: CEO indicated they plan to convert some lending-only relationships into broader banking relationships using combined liquidity and capital. Additionally, they aim to grow in sectors where Trico excels, such as oil/gas and agriculture, while leveraging First Hawaiian’s strength in hospitality.