Participants

Kevin Haseyama; Strategic Planning and Investor Relations Manager; First Hawaiian Inc

Bob Harrison; Chairman of the Board, President, Chief Executive Officer; First Hawaiian Inc

Jamie M. Moses; Vice Chairman, Chief Financial Officer, Finance Group; First Hawaiian Inc

Lea Nakamura; Executive Vice President, Chief Risk Officer; First Hawaiian Inc

Andrew Liesch; Analyst; Piper Sandler Co.

David Feaster; Analyst; Raymond James

Jared Shaw; Analyst; Barclays

Kelly Motta; Analyst; Keefe, Bruyette & Woods

Anthony Elian; Analyst; JPMorgan

Andrew Terrell; Analyst; Stephens

Presentation

Operator

Thank you for standing by, and welcome to First Hawaiian Bank's fourth-quarter 2024 earnings conference call. (Operator Instructions) As a reminder, today's program is being recorded.
And now I would like to introduce your host for today's program, Kevin Haseyama, Investor Relations Manager. Please go ahead, sir.

Kevin Haseyama

Thank you, Jonathan, and thank you, everyone, for joining us as we review our financial results for the fourth quarter of 2024. 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 directly comparable GAAP measurements.
And now, I'll turn the call over to Bob.

Bob Harrison

Thank you, Kevin. I'll start by giving a quick overview of the local economy. Our Hawaii economy continue to expand at a slow pace. The statewide seasonally adjusted unemployment rate remains stable in December at 3% compared to the national average of 4.1%. Through November, total visitor arrivals were down slightly at 0.2%, and spending was down 0.8% compared to 2023 levels for the same period.
The housing market remained stable in December. Median sales price for single-family home on Oahu was $1.1 million, 5.8% higher than December of 2023. Median sales price for condominiums on Oahu was $540,000, 5.9% higher than last year.
Also, I want to mention that our hearts go out to all those who were impacted by the wildfires in Los Angeles. We have a lot of customers, employees, and friends in Los Angeles area, and those are all very important relationships to us. Fortunately, all of our employees are based in Pasadena, and their homes are safe.
Turning to slide 2, we have highlights of our fourth-quarter results. We finished the year with a strong quarter driven by growth in loans and deposits, an increase in net interest income, excellent credit quality, solid non-interest income, and well-controlled expenses. One of our biggest drivers for our strong performance was 8 basis points in NIM expansion driven by favorable deposit mix changes and rate outperformance. During the quarter, we also continued to support our communities with a $1 million contribution to the First Hawaiian Foundation.
Turning to slide 3, I'll go over some balance sheet highlights. In the fourth quarter, we executed an investment portfolio restructuring by selling $290 million of securities and using the proceeds to reinvest in a similar amount of securities. That provided a 309-basis-point increase in yield. This transaction is expected to increase net interest income by $8.6 million and net interest margin by 4 basis points in 2025. We recognized a $26.2 million pretax loss as a result of the transaction, and the estimated impact on the fourth quarter were about $0.5 million to net interest income and 1 basis point to NIM.
We anticipate that we will continue to use portfolio runoff to fund loan growth. The balance sheet remains well capitalized, and we repurchased about 1.5 million shares in the quarter using our entire $40 million stock authorization for 2024. Our stock purchase authorization for 2025 is %$100 million.
Now turning to slide 4. Loans grew $167 million or 1.2% from the prior quarter. Loan growth was driven by large increases in CRE and C&I. Over 90% of the CRE growth in the quarter was loans collateralized by Hawaii properties. Also, the C&I growth was primarily driven by Hawaii companies.
Increases in dealer flooring balances added about $33 million to the C&I growth. The strong growth was partially offset by payoffs in the construction loan portfolio as a result of completed projects and early refinancing. Looking forward, we believe that we will have good origination activity in 2025, but expected payoffs in the CRE and construction portfolios will continue to be somewhat of a headwind. As a result, we expect full-year loan growth to be in the low- to mid-single-digit range.
Now I'll turn it over to Jamie.

Jamie M. Moses

Thanks, Bob. And turning to slide 5. We had really good deposit performance from both the balance and rate perspective in the fourth quarter. Total retail and commercial deposits increased by $324 million, with retail deposits up $113 million and commercial deposits up $211 million. Retail and commercial demand deposits increased by $175 million and the ratio of non-interest bearing to total deposits held steady at a robust 34%. Total public deposits declined $230 million, which included $100 million decrease in higher costs public time deposits.
Deposit pricing in the market remained rational, and we were able to manage our rate-sensitive deposit cost to closely track the Fed rate cuts during the quarter. As a result of the growth and favorable shift in mix of deposits and combined with the high deposit beta, our total cost of deposits in the fourth quarter fell by 17 basis points.
On slide 6, we see how the deposit performance benefited net interest income and the margin in the quarter. Net interest income was $158.8 million, a linked-quarter increase of $2.1 million. The margin increased 8 basis points linked quarter to 3.03%. The favorable variance to prior guidance reflects both proactive strategic pricing actions we took during the quarter as well as the good deposit gathering performance, particularly in demand deposits.
Given the current outlook for interest rates across the curve, we expect the margin to continue to expand throughout 2025. As we've discussed on previous calls, margin expansion will be driven by the underlying fundamentals of the balance sheet. Fixed rate paydowns and maturities in the loan book will be replaced with newly originated loans at higher rates. Additionally, cash flows from the securities portfolio will be used to either fund that loan growth or allow us to let higher cost funding to exit the balance sheet. As a result, we expect NIM to be 3.06% in the first quarter and, if current expectations hold, continue to expand at that pace throughout the year.
Moving to non-interest income and expense on slide 7. Non-interest income was $29.4 million, which includes the $26.2 million pretax loss on the sale of securities from the portfolio restructuring. Excluding that loss, total non-interest income would have been $55.6 million. We expect the run rate for non-interest income to average around $51 million per quarter in 2025. Expense management is a priority for us, and non-interest expenses in the fourth quarter were $124.1 million, down about $2 million versus the prior quarter. We expect expenses in 2025 to increase about 2% to around $510 million.
And now I'll turn it over to Lea.

Lea Nakamura

Thank you, Jamie. Moving to slide 8, the bank maintained its strong credit performance and healthy credit metrics in the fourth quarter. Credit risk remains low, stable, and well within our expectations. We do not see any broad signs of weakness across either as the consumer or commercial books. As Bob mentioned, we do have customers in the Los Angeles area. We've done a review, and none of the properties securing loans in our portfolio were damaged by the wildfires.
Classified assets decreased by $7.5 million due to paydowns, and year-to-date net charge-offs were $13.6 million. Our annual year-to-date net charge-off rate was 10 basis points, mostly unchanged from the third quarter. Nonperforming assets and 90-day past due loans were 19 basis points of total loans and leases at the end of the fourth quarter, up 3 basis points from the prior quarter.
Moving to slide 9, we show our third-quarter allowance for credit losses broken out by disclosures to segment. The asset ACL decreased by $3.3 million to $164 million, with coverage decreasing 4 basis points to 111 basis points of total loans and leases. We recorded an $800,000 provision release in the fourth quarter. This was primarily driven by better credit performance in the Maui portfolio. We remain very comfortable with our loan loss coverage levels.
Turning to slide 10, we've provided an updated snapshot of our CRE exposure. CRE represents approximately 31% of total loans and leases. Credit quality remained strong with LTVs manageable and criticized loans continuing to comprise a very small small portion of the portfolio.
Let me now turn the call back over to Bob for closing remarks.

Bob Harrison

Thank you, Lea. Thank you, Jamie. Now, we'd be happy to take any of your questions.

Question and Answer Session

Operator

(Operator Instructions) Andrew Liesch, Piper Sandler.

Andrew Liesch

Bob, just a question on the long pipeline and the cadence of the growth. How does it look going into the first quarter, and how do you think that will trend throughout the year?

Bob Harrison

Yeah, it's a little hard to predict quarter by quarter, but certainly, we have a lot of things we're working on both here in Hawaii and in the West Coast. So the pretty optimistic dealer businesses, we saw some growth. And again, that has kind of stabilized at a higher level than we were last year, which is good. Not sure if that's the high point that we'll reach post COVID, but certainly good to see that growth continuing.
I guess, lastly, for the consumer residential portfolios, we don't see a lot of growth there. And probably given the dynamics of that business, still a little bit of a runoff in that portfolio.

Andrew Liesch

Got it. Yeah, that makes sense. The C&I growth that you had locally, is there anything specific you can point you to that as far as business development or more willingness to borrow? Or was it just related to a few one-off benefits from individual companies?

Bob Harrison

It's really spread over a lot of our companies. Certainly, the larger companies turn in -- have bigger dollars associated with them, but it was pretty broad-based. So pretty happy with that.

Andrew Liesch

Got it. And then just a question on the buyback, obviously very active here in the fourth quarter and $100 million for this year. How would you expect that to play out? I mean, I would imagine there might be a little bit of price sensitivity, but how would you expect the pace of buybacks to be throughout 2025?

Jamie M. Moses

Yeah. Andrew, it's Jamie. I think that with the way we're thinking about it, it's just sort of opportunistically around that and probably spread throughout the year. But I think it's going to depend on just a lot of factors, what we think as we enter the year a little bit further, how much loan growth we're going to have, and whether or not -- whether or not we can deploy capital in that regard, first. So I think it's going to be opportunistic and no real guidance on when and how that might be deployed.

Operator

David Feaster, Raymond James.

David Feaster

I wanted to just start on the deposit side. I mean, your deposit trends were really good. I was just hoping you could give some color on where you're having success, what drove some of that growth? And just the competitive landscape for deposits on the island and just kind of curious what you're seeing on that front?

Jamie M. Moses

Yeah. I mean, the growth trends, particularly in DDA, were just -- were really, really good. We're really pleased with it. I think it's a lot of hard work and dedication from the teams in all of our areas. They've done a really great job meeting new customers, being out in the community, and just doing a great job of developing and fostering relationships, number one.
Number two, I think you're starting to see a little bit of the technology investments that we've made in the past start to bear some fruit there. I can't promise $175 million of DDA every quarter. But I think it's -- I think just a lot of the things that we've been doing, right, just being focused on taking care of our customers, being focused on being out in the community and being great stewards for our communities really helps with all of that. So from a growth perspective, I think the teams really have just done a really great job on that, and so we're really proud of that.

Bob Harrison

And Dave, the only thing I would add is it wasn't just a handful of large accounts. It really was very broad based from the consumer all across the rest of our customer base. Some new customers (inaudible)

David Feaster

That's great. And how do you think about deposit growth as we look at the new year, you talked about loan growth in the low single -- low to mid-single digits. How do you think about deposit growth? Or to the extent that you get core deposit growth, maybe we deploy cash flows from the securities book and optimize the deposit base and use securities to fund loan? I'm just kind of curious how you think about some of those dynamics?

Bob Harrison

Yeah. Maybe I'll start and hand it off to Jamie. Certainly, we're out there working every day to take care of our customers, and that has turned into, as Jamie mentioned, very robust deposit growth in the fourth quarter. Hard to predict a recurrence of that quarter by quarter, but the teams are out there, and it's really dependent on the economy here in Hawaii. So I think we're optimistic about that.
What we do with that, first of all, would be deploy it in the loan portfolio. And again, we saw some solid growth in that as we talked about earlier on the call in our remarks and with Andrew, depending on what happens there, and then we give the rest to Jamie, and I'll turn it over to him.

Jamie M. Moses

Thanks, Bob. Yeah, I think -- yeah, so if we continue to see this type of deposit growth, I would imagine that some of that will then eventually get redeployed back into the securities portfolio. Of course, we're going to be very, very careful thinking through from an asset liability perspective, where exactly that goes into, what types of durations and things like that. So I would imagine if it comes to that, it would be relatively short on the curve, but we'll see.
And then I would also expect it to be -- continue to be in the same types of securities that we currently have, which are overwhelmingly Fannie, Ginnie securities and that type of thing. So hopefully, I've got a big problem for my treasurer on his hands in the back half of the year about deploying some of that capital for them.

David Feaster

Yeah. That's a high-quality problem. I wanted to touch on the pulse of your clients. You alluded to kind of like a sense of optimism, but I'm curious how demand is trending?
It sounds like demand is fairly steady, and the payoffs are kind of the wild card and the potential headwind to a material acceleration in loan growth. I'm just kind of curious from your perspective, how demand is trending? Obviously, the market's kind of -- there's a lot of hope that demand kind of accelerates over the course of the year. But curious what you're seeing from that perspective and how new origination yields are trending?

Bob Harrison

We're seeing a lot of people come off the sidelines. We were just talking about this a few days ago. And so there's a lot of equity money coming in to look at real estate deals now. Pricing is getting a little bit tighter, but not -- still very appropriate given the risk parameters. So that's encouraging to see.
One of the headwinds is that there wasn't a lot of construction loan origination in 2023 for obvious reasons. And so that's kind of where we're at now. As the 2022 deals pay off is we're starting to see some of them early and some of them just as appropriate when the project is completed. There isn't as much right behind it.
So that's the headwind we spoke to in the remarks. And the good news is we're seeing a lot of activity out there. The challenge is what's on the construction side. Once you book it, it does take some time to begin funding. So that's really the nuance to our earlier comments.

David Feaster

Okay. And just one point of clarification. The margin guide you gave, what rate assumptions are you including in that?

Jamie M. Moses

Yeah, that's the forward curve. So there's two rate cuts, one in the middle of the year and one towards the back half of the year.

Operator

Jared Shaw, Barclays.

Jared Shaw

Maybe on the deposit side, what can we expect for interest-bearing deposit betas as we move through the year? And where are you expecting the year to end from an IV deposit beta side?

Bob Harrison

That's a good question, Jared. I think one of the things about the performance that we've had so far on those deposit betas is that from such a low level of deposit cost, cutting rates as much as we have, it means there's less room to cut as we go forward potentially. And so we're cautious about how we think about the overall level of rates and then compare that to those rate-sensitive deposits that we have. I would expect the beta -- the absolute beta to decline for newer rate cuts that we have just as a function of the math, right? You're just -- you can only cut rates so far, kind of independent of what the Fed does on that.
So maybe a little bit less for each subsequent decline in rates, Jared, just sort of scale the beta back and down from that.

Jared Shaw

Okay. And then I'm not sure if actually you may have given at the recap of the securities restructuring, but what was the portfolio yield at year-end versus the average of what you purchased?

Jamie M. Moses

As part of the restructure, we picked up about 310 basis points on the restructured piece. So about 2% coming off and about 5% coming on. And so our yield on the portfolio is 210 in the quarter, and maybe that was just maybe just 3, 4 basis points higher in December.

Jared Shaw

Okay. Okay. So right around there. Great. And then just finally for me, just on the deposit growth and the DDA growth. How much -- is that -- I mean I'm guessing that's market share gain for the most part of that. Is there a change in the competitive dynamic on the islands with any of the recent competitive news change? Or I guess, what's the sustainability of some of that maybe market share pickup?

Bob Harrison

Yeah. Hard to say for sure. There could have been a little bit of that in there, but we haven't seen too much, I'll call it, outflows from anywhere else in here. I think it has been, again, just for the most part, just good ground game with the teams. They're just out in the community.
They're just doing a lot for us. And they're taking care of their customers. So I wouldn't read too much into that in terms of market competitiveness or dynamics.

Operator

Kelly Motta, KBW.

Kelly Motta

I would like to -- a great margin -- I would like to get some clarification about what you're considering for the overall size of the balance sheet? Jamie, it sounds like that's going to be dictated with what you see with deposits. But your outlook for continued expansion from here, could you help us out with how you guys are thinking about the overall size of the balance sheet and the potential to take down additional borrowings or higher cost funding and replace it with this core funding? That would be helpful.

Jamie M. Moses

Yeah. So there's -- I don't know, we have about $150 million or so of what we would call higher cost public time deposits that are still on the books, and we have rate-sensitive deposits that stay with us from a customer perspective. I think we -- it will really depend upon just what kind of core deposit growth we're going to get. That will be -- that will probably be the determiner of the size of the balance sheet. We think the investment portfolio is probably going to run down. We've got cash flows about $550 million this year, we expect. So -- and those are coming off at 2%.
So to the extent that we can find better opportunities for that, we'll look to deploy that. But again, that's dependent on deposit growth. And so it's hard to judge at the moment. It's hard to see the investment portfolio materially growing from where we're at because of the payoffs and cash flows coming off of that. But again, it will depend on what deposits do from an organic perspective.

Kelly Motta

Okay. That's helpful. And then, Jamie, can you please -- I think you said 306 margin in the first quarter with a similar expansion, I think that would imply about 3 basis points of expansion in Q1. If -- is that a good run rate a quarter, about 3 basis points of expansion? Is that -- what you implied by your guidance?
I'm just trying to put the pieces together here.

Jamie M. Moses

Yeah. I think that's about right. I mean, obviously, the further we get out into the year, the tougher it is to sort of know what -- where the rate cuts happen and what type of growth in deposits we're seeing, that kind of thing. But as of right now, I think a 3-basis-point expansion kind of throughout the year, 3 basis points per quarter, that seems about right to me.

Kelly Motta

Okay. All right. And I'm assuming your -- when you're talking about the size of the balance sheet, your -- any sort of incremental deposit growth would be incremental to NII, but that's not necessarily baked into your outlook here. Is that the right way to think about it?

Jamie M. Moses

Yeah, that's right. You got it.

Kelly Motta

Awesome. Thanks for the clarification. Just on a high level, too, there was a notable -- one of your competitors is out of the electric company. Just wondering if you've seen any kind of change in the competitive dynamics in Hawaii. And I think everybody is very impressed with your ability to get deposit costs down, so I'm just wondering from a high level what you guys are seeing?

Bob Harrison

Kelly, this is Bob. It's early days, obviously, but it hasn't even been a month yet. Just right out of a month, and we haven't seen any changes currently.

Kelly Motta

And then I guess, lastly, NPAs remain incredibly low. It seems like a lot of the growth you're seeing too is in Hawaii. If you could just provide an update on the outlook from here for asset quality if there's anything you're watching more carefully everything looks really good from an outsider's perspective?

Bob Harrison

Yeah. I'll maybe make a comment and ask Lea if she has anything to add. We're closely monitoring certainly all of our CRE and everything else, and we're not seeing anything on the horizon that is coming up. It seems stable. Lea, anything you would add to that?

Lea Nakamura

No. The only thing I would add maybe is we're actually very pleased with the performance of the Maui portfolio. And so credit is performing within our expectations. And so we're very -- I don't know.

Bob Harrison

Yeah, we're glad they're doing well and that's what, in part, helped us on the lower provision actually a small release in Q4. That was a big part of it.

Operator

Anthony Elian, JPMorgan.

Anthony Elian

Jamie, if we had no rate cuts this year, could you just talk about the impact that would have to the NIM outlook you provided for expansion over the course of this year?

Jamie M. Moses

Yeah. So I would say you should probably add another basis point or two per quarter to that general guide.

Anthony Elian

Okay. Clear. And then my follow-up, the fee income guidance of $51 million per quarter. I think that's a little bit of a -- it would imply a little bit of a slowdown than what you've seen in the past couple of quarters. Can you just talk about what areas do you expect to slow down? Or is there just a level of conservatism baked into that?

Jamie M. Moses

Sure. Yeah. I mean, we had a number of things throughout the back half of the year this year that sort of worked in our favor from a fee income perspective. We had some insurance proceeds kind of kicked in. We had a little bit extra BOLI income from a debt benefit perspective in the back half of the year.
And so there's just kind of a lot of fees kind of went our way, I'll call it, over the past six months. And so it's a little bit of a normalization of that. And maybe there is a touch of conservatism built into that as well. So just kind of -- we'll be updating that, obviously, as we do every quarter, we'll let you guys know what we see and how we think about it.

Operator

Andrew Terrell, Stephens.

Andrew Terrell

Just -- most of mine were addressed already. I did have a quick question around just the securities restructuring in the quarter and really going forward, you've got quite a lot of cash flow coming up over the next year off of the bond book. Your kind of loan growth is accelerating. Any need or kind of interest or appetite in any further repositioning transactions? And then how do you compare that from an earn-back standpoint relative to the buyback?

Jamie M. Moses

Yeah. Good question, Andrew. We will always be considering things, I guess, right? I wouldn't say no, but it will be something that is in the consideration set as we go forward. And we will -- the way that we'll look at it is in some ways comparable to the buyback.
But then in other ways, it's not really apples-to-apples in our mind around those things. So I wouldn't say we're -- we would not do a securities reposition, but it seems unlikely in the short term for sure. And we'll see how it goes. And of course, we'll keep sort of opportunistically looking at share buybacks throughout the year. And we'll just kind of -- it's tough to give a guide on it.
It's we're always looking at ways to sort of give our shareholders a return, and we continue to evaluate what the best opportunities for that are.

Andrew Terrell

Understood. I appreciate it. And then if I could just ask one more. Bob, I think you mentioned maybe some heavier payoffs weighing on what is otherwise it sounds like pretty solid origination efforts. I'm just curious if you could provide maybe some color on, do you have line of sight into that payoff pressure and whether it's more front-end loaded?
I'm just trying to get a sense of whether your loan growth guidance for that low to mid-single includes an assumption for an acceleration in the back half of the year if it's pretty kind of tempered loan growth throughout?

Bob Harrison

Great question. I think that's good call out. It will probably be more in the back half of the year. It's hard to predict. Some of the construction loans have been paying off early just because while we love the credit metrics that, that speaks to, from a balance perspective that makes a little bit more challenging.
But you can't really predict those. But we do think there will be a little bit more refinance and payoff activity in the front half versus the back half, which would then favor the back half for loan growth.

Operator

(Operator Instructions) And 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.

Kevin Haseyama

Thank you. Thanks, everyone, for joining us. We appreciate your interest in First Hawaiian, and please feel free to contact me if you have any additional questions. Have a good weekend.

Operator

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