Prepared remarks
Thank you for standing by, and welcome to the First Hawaiian, Inc. Second Quarter 2026 Earnings Conference Call. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Kevin Haseyama, Senior Vice President, Strategic Planning and Investor Relations. Please go ahead, sir.
Thank you, Jonathan, and thank you, everyone, for joining us as we review our financial results for the second quarter of 2026. 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.
Thank you, everyone, for joining us today. I'd like to focus on our strong second quarter results on today's call. But first, I'd like to start with my excitement about our recently announced deal with TriCo Bancshares and I'm looking forward to working with the TriCo team to build a leading Pacific banking franchise. Starting with the local economy. Statewide employment rate remained relatively stable at 2.5% in May compared to the national unemployment rate of 4.3%. Through May, total visitor arrivals were up 2.9% compared to last year, primarily due to more visitors from U.S. Mainland and Japan. Year-to-date spending through May was $9.7 billion, up 7.5% compared to 2025 levels. The housing market remains stable. Median single-family home sales price on Oahu in June was $1.2 million, up 10.4% from the prior year. And the median condo sales price on Oahu in June was $528,000, up 3.5% from the prior year. Turning to Slide 2. We had a strong start to the year. Loans grew, retail and commercial deposits were down slightly as expected. Credit quality remains solid, and we remain well capitalized. Our profitability measures remained strong with a return on average tangible assets of 1.28% and a return on average tangible equity of 16.34% for the quarter. The effective tax rate in the second quarter was 22.9%. Turning to Slide 3. The balance sheet remains solid. We continue to be well capitalized with ample liquidity. Cash balances were lower in Q2, primarily due to the decline in public deposit balances. Based on our current outlook, we expect to maintain cash balances around this level for the rest of the year. The balance sheet remains asset sensitive and well positioned to benefit from a higher-for-longer rate scenario. During the quarter, we did not purchase any shares. Turning to Slide 4. Total loans grew $137 million in the quarter or about 3.6% on an annualized basis. Growth was led by C&I and CRE loans, partially offset by payoffs in the construction portfolio and lower residential loans as payoffs exceeded production. The $98 million increase in C&I balances was primarily driven by growth in dealer flooring as well as our Hawaii corporate portfolio. Completed construction projects led to the conversion of $95 million of construction loan balances to CRE loans. Now I'll turn it over to Jamie.
Thanks, Bob. Turning to Slide 5. Our total cost of deposits fell by 2 basis points in the second quarter. Total deposits were down $623 million, with most of that decline due to outflows of public deposits. Retail deposits were essentially flat in the second quarter, while commercial deposits were down about $156 million. This decline was consistent with our expectations of seasonal volatility in that segment. Public deposits were down $467 million. The majority of this decline was in the operating accounts, while public time deposits were down by $115 million. That was also expected as we had elevated balances at the end of Q1. The remaining balance of public time deposits is only $9 million. Finally, our noninterest-bearing deposit ratio was 32%. On Slide 6, net interest income was $171 million, $3.5 million more than the prior quarter. The NIM in the second quarter was 3.25%, up 6 basis points from the prior quarter. That was primarily due to deposit mix changes and repricing, higher loan and security yields and lower cash balances. Turning to Slide 7. Noninterest income was $60.3 million, primarily due to higher BOLI income, an excise tax refund and higher swap fees. Noninterest expense in the second quarter was $130.4 million. The quarter included $4.2 million of expenses related to the TriCo transaction. Now we expect to incur more of those expenses in the back half of the year as we move to close and integration. And now I'll turn that over to Lea.
Thank you, Jamie. Moving to Slide 8. The bank continued to maintain its strong credit performance and healthy credit metrics in the second quarter. The reduction in the allowance for credit losses, both on a nominal and coverage basis, was driven primarily by a material decrease in classified assets. And with that, I'll turn it back over to Bob.
Thank you, Lea. Going to Slide 9, we have updated outlook for our key performance drivers. We continue to expect full year loan growth to be in the 3% to 4% range, with the markets now expecting 1 rate increase later this year. We have revised our full year NIM outlook to be in the 3.24% to 3.25% range. We also expect the third quarter NIM to be about 3.27%. Our outlook for noninterest income remains unchanged at about $220 million for the year. And finally, we expect reported expenses to be between $515 million and $520 million, excluding the expenses related to the TriCo transaction. In closing, we had another good quarter. The bank continues to perform well, and credit quality is still strong. We're very excited about our partnership with TriCo Bancshares, which is expected to close near the end of the year. Given that we recently announced a transaction, we don't have any new information at this time besides what we presented on our July 23 investor call. We are focused on the work needed to be done to complete it, and we'll continue to keep investors informed through our public filings and communications. Now we are happy to take your questions.
Questions and answers
And our first question for today comes from the line of Kelly Motta from KBW.
Maybe to kick it off on what you're seeing on the deposit side. The declines you noted were mostly on the government deposits. I know some of them are CDs and some might be operating accounts. Can you discuss what you saw there? And then otherwise, the core trends of retail and commercial, what those trends were and how you're seeing activity shape up here as we look to the back half of the year?
Yes, Kelly, thanks. It's Jamie. The government deposits were elevated, I'll call it, at the end of Q1 in our operating accounts. And so we kind of expected that decline to happen there. This is not about a loss of relationships or anything. The time deposits related to those were just rolled off our balance sheet. I think our partners on the municipal side found better ways to invest that money off of our balance sheet, which is fine with us as well. When we go towards the retail and commercial side of things, we have this seasonality, where we kind of decline deposits in the first half of the year and then we'll expect those deposits to increase in the back half of the year just from a seasonality perspective. For some reason, we see that a lot on the commercial side where balances kind of build through the third and fourth quarter. So yes, I think from a deposit perspective, we're happy with where we're at. The teams are doing a great job out there, getting involved with their customers and retaining them. None of these declines were losses of customers; I think it was just more flows that we saw than anything else.
Got it. That's helpful. Maybe you could speak to pricing competition on both sides of the balance sheet. Hawaii has historically been a more rational market. So wondering if you could offer any color, both on loan pricing and deposit pricing as to how those are coming in and what you expect here if the Fed stays on hold or potentially hikes?
Yes. We are seeing the same type of competition that we've always seen. I think 'rational' describes it well. There hasn't really been any change in that. But with the Fed on hold and maybe looking higher, there's a decent chance that we're kind of at the bottom in terms of deposit cost in totality on our side of things. I think peers on the Mainland have seen a bit more competitive reaction. For us, maybe we're going to keep deposit costs flat, maybe up a little bit as we go forward. But the competition is basically staying the same here, I would say, on the deposit side.
Got it. That's helpful. Maybe last question for me. You had some loan growth and reiterated the outlook. As you look ahead, how are pipelines and what areas do you see informing back half of the year growth?
Kelly, we still see a very robust pipeline in both the C&I and CRE portfolios. The CRE is, again, mostly construction and some of that converts into permanent. For C&I, we're really seeing strength in the dealer side. Not only are our existing customers growing their balances incrementally, but we're also working on a couple of new customer relationships. So that's where we've really seen growth. The residential side continues to be slow given the rate environment, so we probably won't see much there.
And our next question comes from the line of Anthony Elian from JPMorgan.
On the NIM outlook, Jamie, you lifted the range by a few basis points. I think you said you're now including a hike and 2Q NIM came in better than you guided to. Anything else you point us to for the higher range for the full year?
No, I think that really describes it, Tony. The balance sheet repricing dynamics continue to exist. As we've described a number of times, roughly $400 million a quarter will roll on or off, and the spread in Q2 was about 140 basis points on that roll-on, roll-off. We think somewhere in the neighborhood of $140 million to $150 million is impacted depending on the mix of those cash flows that come off the balance sheet. We think that will continue to play out. So it really is a change in outlook on the macro side of things that's driving an update to our NIM guidance.
Okay. And then on capital, you didn't buy back any shares in 2Q, but your CET1 is still above 13%. How should we think about buybacks as you work through the TriCo deal close?
Tony, we're probably not going to do buybacks throughout the rest of the year. Of course that could change. We have the authorization. But as we go into the transaction and go through the regulatory process, it's unlikely.
And our next question comes from the line of Andrew Terrell from Stephens.
Just one quick one for me. You guys have done a great job on expenses so far this year. If I look at just the midpoint of the full year guide, it kind of implies you step up to a roughly $130-ish, maybe a little more expense run rate in the back half of the year. I just wanted to run that run rate by you. If that is the case, what is driving the expense pickup in the back half of the year?
Yes. A couple of things, Andrew. We're going to continue to hire people. We want to make sure we keep our loan pipelines robust. We want to make sure we have folks out there and investments we're making in people to grow the balance sheet. We also have some projects and initiatives that won't finalize until the back half of the year. Those expenses capitalize and then start to show up when they finish. So you'll see it in salaries, and also in professional services and IT as those projects ramp.
Okay. Great. And while I've got you on margin, can you remind us which meeting you have the hike in the guidance? And are you able to quantify the sensitivity of the balance sheet in terms of what a 25 basis point rate hike does to the margin versus your models with the guide?
Yes. I think the right way to think about that is we have about $6 billion or so of assets that will reprice immediately upon an increase based on SOFR roughly. And then we have $3.5 billion to $4 billion of liabilities that we would expect would reprice somewhat immediately around that. So from an NII perspective, that's probably the right way to think about it for a 25 basis point increase. I'm sorry, Andrew, I can't remember the other part of your question.
Yes, I think that covers it. I was just trying to confirm which Fed meeting you had in the guide.
I think it was the fourth quarter—early in the fourth quarter is when we had it.
And our next question comes from the line of Jared Shaw from Barclays.
I guess, actually, just one comment. Bob, at the beginning, you said you saw an increase in tourism from Japan. With the exchange rate being so low, that's encouraging. What's driving the increased traffic from there? And then on BOLI, you called out the BOLI increase. Is that a market benefit or just a result of higher deployed capital in the BOLI? Finally, as you're doing more work on the deal, have you given any thought to how your management structure may change to reflect the bigger presence on the Mainland? And going forward, how much time do you think you'll be spending off-island versus on-island in Q4?
Yes. I don't have a precise answer on the Japan piece, but just talking to people in the industry, you're seeing more enthusiasm for travel. There are still people that have means to travel and they have decided to stop waiting and start traveling. It's incremental off of a lower base, so we're not anywhere near pre-COVID numbers, but we're up from the bottom we hit, and every additional traveler from Japan is welcome because they're very good visitors and they enjoy Hawaii. The 160-plus exchange rate is not easy for them, of course.
Thanks, Jared. On the BOLI, we still have a component of our BOLI product that is sensitive to actual markets. We mark that component up and down depending on how markets perform. So the increase this quarter was a market impact on our BOLI.
People accuse me of not being here enough already. We have three members of their team joining our senior management team: Rick Smith, Dan Bailey and a third executive. As far as my time, I've been on the Federal Advisory Council for several years and will be rolling off, so the four to six trips a year I currently take to the Mainland will likely be redirected to California. So I don't expect my overall travel to change materially; it will be pretty much the same as it is now.
And our next question comes from the line of Tim Mitchell from Raymond James.
This is Tim on for David. One question on the deal: how has reception been from the TriCo bankers and clients since you announced the deal? What has your messaging been to them? And similar to Jared's question, was your plan to let that team operate more independently than we see in most bank mergers, given the unique nature of the transaction?
Thanks for the question. Some of this will be in the proxy, but to summarize what we discussed last week: one of the reasons we like TriCo is they have a strong management team, and we're planning on keeping most of them there. We're there to support them and to learn from each other. They have a great bank and they run it well, so that's where we're leveraging.
Okay, great. And then just on the earlier point, reception from conversations with bankers and clients since the deal was announced—any update to that?
We're still doing outreach, and we can discuss that more at a later date. I'll be up there in a few weeks to meet many of their employees I haven't met yet, and I'm looking forward to doing that.
And our next question comes from the line of Andrew Liesch from StoneX Group.
Just to put a fine point on the fee income guide. Is this some kind of step down toward like $54 million or $53 million for the next two quarters?
I think we always struggle with this because we have items that show up unpredictably. It's hard to forecast the timing of those items. When you look at what we had in Q1 and Q2, you come pretty close to our full year guide of $220 million. I wouldn't categorize it as a step down. We generally think of it as about $55 million a quarter, with the caveat there will be quarters where one-off items push it up or down.
Got it. All right. That makes sense. Just on the size of average earning assets going forward— you started the quarter with less interest-bearing cash than the prior quarter. Does that start to rebuild with deposits coming back? Just trying to get a sense of what average earning assets should shake out for the third quarter.
No, I think we're probably going to run cash at about where we were at the end of the second quarter. In general, what you'll see is just a slightly smaller asset size because of cash, but we still expect to see some pretty good loan growth in the back half of the year. So expect to run cash balances around the roughly $1 billion level.
And our next question comes from the line of Matthew Clark from Piper Sandler.
I heard your commentary on deposit costs, but what was the spot deposit rate at the end of June?
It was 1.21.
Okay. And then on the merger, any update on the 25% cost savings target? I assume you're still working through that, but where do you expect a bulk of that to come from?
We covered that on the deal announcement call and there's no real update. The 25% target remains the target, and we feel comfortable we'll be able to get there through a variety of ways. We're excited to get working with our partners at TriCo.
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.
We appreciate your interest in First Hawaiian. Please feel free to contact me if you have any additional questions. Thanks again for joining us, and have a good weekend.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.