Good day, ladies and gentlemen, and welcome to the First Hawaiian, Inc. Q1 2018 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Kevin Haseyama, Investor Relations Manager. Please go ahead.

Thank you, Ayama, and thank you, everyone, for joining us as we review our financial results for the first quarter of 2018. With me today are Bob Harrison, Chairman and CEO; Eric Yeaman, President, COO and acting CFO; and Ralph Mesick, 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. Also, during today's call, we will be making forward-looking statements, so please refer to Slide 2 for our safe harbor statement. We will also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measures to comparable GAAP measures. And now I'll turn the call over to Bob who will provide you with the fourth quarter highlights, starting on Slide 3.

Thank you, Kevin. Aloha, everyone, and thanks for joining us today. I'm pleased to report that we started the year with a solid first quarter. We produced good earnings, generated a higher return on capital and declared a competitive dividend. Core net income was $68.3 million, up $9.1 million or 15% from the previous quarter. Our core return on average tangible assets was 1.43%, and our core return on average tangible common equity was 18.4%. Our Board of Directors declared a $0.24 per share dividend, payable on June 8 to the shareholders of record at the close of business on May 29. Based on today's closing price, that translates into a dividend yield of 3.4%. Our performance was driven by good loan growth, an improving deposit mix, expanded net interest margin, excellent asset quality and a reduction in the effective tax rate. Our team has been very focused on managing expenses, which resulted in an efficiency ratio at the low end of our guidance range. These results were supported by the strong Hawaiian economy. At-quarter-end, we remained well capitalized with a total capital ratio of 13.77% and a leverage ratio of 8.71%. We look to return excess capital to shareholders in the form of share repurchases or special dividends at the appropriate time. Now I'll ask Eric to go through the financial.

Thanks, Bob. Turning to Slide 4. Loan growth was healthy in the quarter growing 6% on an annualized linked-quarter basis, in line with our mid-single-digit guidance. We are pleased to see growth in all major segments of our portfolio. In our C&I portfolio, we're able to drive strong growth of $83.9 million or 2.7% as we took advantage of key financing opportunities on the Mainland. We also grew our residential portfolio by $66 million or 1.6%, building on the momentum we started last year when we transitioned our mortgage business from a branch-based model to a more effective mortgage loan officer model. The CRE and construction portfolio grew by $32.3 million or 1%, slightly lower than our full year outlook primarily due to the completion of a number of construction projects. However, our CRE pipeline for the rest of the year looks very strong. For consumer loans, we experienced the normal first quarter paydowns in our credit card portfolio following the year-end holidays, but this was more than offset by strong growth in our indirect auto portfolio. Looking forward, we are still expecting total loan growth for the full year to be in the mid-single-digit range. Turning to Slide 5. While deposit balance has declined by $250 million, we improved the overall deposit mix. We saw strong growth in our core consumer deposit products as well as a nice shift in our public deposits where we were able to reduce our exposure to public time deposits by $105 million. We also saw some volatility in our commercial deposits mainly driven by 1 large commercial customer that reduced their balance by $266 million. Overall, we were pleased with the changes we saw this quarter and made progress on our long-term goal to reduce our exposure to public deposits while growing core…

Thank you, Eric. Turning to Slide 9. Our asset quality remains excellent. Net charge-offs were $4.6 million for the quarter which, annualized, equates to 15 basis points on average loans and leases. This is 2 basis points lower than the prior quarter and flat to the first quarter of 2017. Total nonperforming assets were $12.1 million or 10 basis points on total loans and leases and other real estate owned. This is up two basis points from the prior quarter and 3 basis points year-over-year. For the quarter, the provision expense was $6 million, and the allowance for loan and lease losses increased by $1.3 million to $138.6 million or 111 basis points of total loans and leases. And looking ahead, we don't foresee any changes in the credit quality. Now I'll turn the call back over to Bob.

Turning to Slide 10. Hawaii's economy continued to perform well in the first quarter led by the strong tourism real estate sectors and one of the lowest unemployment rates in the country. The state unemployment rate remained at 2.1% in March compared to 4.1% nationally. The visitor industry remained robust through the first two months of the year. Year-to-date through February, visitor arrivals were up 1.6 million, 7.7% versus the same period last year. And visitor spending was $3.2 billion, an increase of 8.5% versus the same period last year. The real estate market remains sound. Sales volume for single-family homes were down slightly versus the prior year, primarily due to lower inventory levels. But with the high demand, prices increased at a measured pace. First quarter condominium sales prices were impacted by the resales of 20 luxury units in March, so that spiked up just a bit more than you would have thought. Looking forward, the overall outlook for the economy remains positive. But before we wrap up, I thought I'd provide a short update on our CFO search. We have engaged Korn Ferry to assist us, and we are making good progress. With that, we'd be happy to answer any of your questions.

[Operator Instructions]. And our first question is from Steven Alexopoulos with JPMorgan.

I wanted to start first on the margin. I want to make sure I understand the slide where you say you're calling for a few basis point increase. Is that from the reported margin of 3.13%? Or is that from the 3.03% that you're calling out after adjustments?

Yes, it's from the 3.03%.

Okay, that's helpful. And then, the deposit costs were higher, but it's actually not as bad as what we're seeing many regionals report on the Mainland. Can you talk about the competitive environment? And did you see it intensify in the first quarter?

We did see one of the large local banks in town increase their rates late in the quarter. Prior to that, most of the rate activity has been around time deposits and really more on a targeted basis to try to attract new money. And the magnitude of their increases are pretty measured, so we're monitoring the situation and evaluating our options.

Okay. And on the money market, I'm really shocked that you still have $2.7 billion of money market deposits paying 26 basis points. Is there pressure that will raise rates more broadly in that category?

So I think as the Fed continues to increase rates, definitely, there'll be increased pressure to do so. We're keeping a close pulse on what's going on, Steve. And ultimately, we feel the market's been pretty rational.

Steve, this is Bob. Just to add to Eric's comments, clearly, as rate increases continue throughout the year as the Fed is anticipating, there will continue to be some pressure on deposit pricing.

Okay. And then if I could ask just a few questions on the loan growth. The C&I loan growth was really strong in the quarter. Give some color about what drove that underlying utilization change, and do you think it will continue at this pace in 2Q?

Yes, it was stronger than we expected. As you know, our guidance was that we thought that C&I would come in, in the low single-digit for the year. And that's still -- we still stand by that guidance. We just had a strong quarter, and the paydowns were not as significant. As you know, it's a pretty volatile portfolio. And so I think that given the deal flow and the fact that we can't predict prepayments, we're still looking at sort of low some single digits for the year on the C&I side.

Our next question is from Dave Rochester with Deutsche Bank.

On your NIM outlook, I know in your guidance last quarter you talked about how you're assuming a March and June hike. So I was just wondering what your outlook assumes now for hikes and for a longer-term interest rate as well.

Yes, we are still looking at June and then another hike late in the fourth quarter.

Past 2018, it's harder to see, Dave, so we don't have outlook on that on the long term.

Yes. And just in terms of like the 10-year, does that stay over 3%? How are you guys thinking about that?

Yes, it's hard to tell. It's been interesting to just see the dynamics, but it's hard for us to predict. But we're still probably assuming relatively stable from where it's at.

Okay. And switching to the efficiency ratio. I mean, it sounds like you're feeling better about the lower end of that range you talked about last quarter. Was just wondering how you're thinking about that beyond 2018. Given the contracts that kicked in later this year, are you thinking that directionally it should be higher next year? Or would the rate hikes help offset some of that increased cost? Any color there would be great.

Sure, Dave. This is Bob. We're going to work very hard to keep it within that range. We've onboarded a fair amount of those costs already, not all of it just a fair amount of it, and we're really looking to balance future costs coming onboard with the rate hike, as you said, and, of course, trying to grow the whole business overall.

Great. And then just maybe one last one on the securities book. How do you see that trending this year? Can you hold it here? And I guess, that's also a function of what deposit growth is. Maybe if you could just talk about your outlook for deposits. I think last quarter you thought that maybe you could fund all your loan growth with deposit growth. If we can just get an update there, too, that'll be great.

Yes, Dave, that's really our goal, is to fund the loan growth with core deposit growth. And currently, we're looking to try to reduce our exposure to the public time deposits just given the cost of those funds. And so this quarter, you saw that we basically funded our loan growth by a runoff in our investment securities portfolio primarily as well as cash on hand. So it's going to be dynamic, I think, going forward. We're trying to manage our cost of funds as well as try to support the growth in quality loans going forward. So it's really hard to give a real crisp answer other than what I've just sort of articulated, but it's dynamic.

Is the goal to at least hold that securities book stable? Or do you -- are you fine with having that rundown a little bit?

Dave, this is Bob. We're okay with it coming down a little bit as it relates to the mix of our deposit cost. So we're looking to balance those 2. As you know, that runs off with the duration we have. So that's a tool we have to play with.

Our next question is from Jackie Bohlen with KBW.

I wondered if you could provide a little bit of color just as it relates to -- you had mentioned in your prepared remarks special dividends and share repurchases and how you're thinking about those and how they go in with just with CCAR and other capital planning purposes.

Sure, Jackie. We're still CCAR filers. We filed this year in conjunction with the intermediate holding company for BNPP USA, Inc. So that got submitted earlier this month. That will be the driver for any capital actions post July 1. So well, within that, we do have excess capital, as I mentioned, and, over time, that we don't have -- we don't need to support our risk and growth objectives. We plan to employ either a share repurchase or special dividends, and those are the things we're contemplating.

So is that more of a long-term thought then in terms of those 2 items? Or is that an indication of what we might see within the next year or so?

Well, If it's within the next year, we have to submit it as part of our capital plan, and I can't discuss the specifics of that. But certainly, on our minds, so those are things that we've been talking a lot about internally.

Okay. And then just one last one for me and kind of a housekeeping issue. The reclassification that it looks like took place just through salary and then through other expenses, what did that relate to?

That was actually the adoption of a new accounting standard, Jackie, that was effective in the first quarter. That basically took about $2.2 million for the current quarter out of salaries and wages and is sort of in other expenses. And I think we did the comparable thing for our prior quarter, which was about $2.9 million. So it's the adoption of new accounting standard.

Our next question is from Laurie Hunsicker with Compass Point.

Just wondered if we could go back on expenses, and if you can just refresh us, I know the payroll taxes are elevated, and if there was anything in that other, other expense line and then also where there any onetime IPO costs?

Yes, so overall, as you know, there's generally a lot of moving parts in expenses but, overall, a pretty small increase for the quarter. There was nothing really unusual. But when you compare it to the fourth quarter of last year, probably the biggest change is in salaries just because the fourth quarter of last year, we had the bonuses, the onetime bonuses paid. So that's one of the major changes quarter-over-quarter.

And then as we roll into the second quarter, what is the payroll tax savings that we could see linked-quarter?

Payroll tax savings?

Yes.

Yes, I don't have that number handy, Laurie.

Okay. And then did you have any onetime IPO costs that showed up in that $14.4 million?

Yes. We had about $0.5 million of ongoing public company costs flow-through. And of course, embedded in that is the transition services agreement component as well.

And how much is that?

But no onetime item, that's more of an ongoing increase in the cost.

Okay. And where there any other -- I mean, where there any onetime items in that number that would be coming out for next quarter?

The only onetime item, I believe, that was about $400,000, which we backed out of net income to get to core net income in our disclosures.

Okay. I'm sorry, what was that from?

That was some legal and employee costs. I think it was about half legal, half employee costs.

Okay. And then last question on expenses. Your merit increases, have they already been baked in the numbers? Or do they take effect later this year? How do we think about that?

Yes, typically, our merit comes in the second quarter.

And that's for most of our officers. For most of our other staff, it's ratably throughout the year.

Okay. And how should we think about that into next quarter?

I think the best way to look at our costs going into next quarter is really our guidance at the 48% efficiency ratio.

Okay, okay. Good, fair enough. And then, Ralph, this is a question for you on loan loss provision. Given that loan growth is going to track in the mid-single-digits and charge-offs are just negligible, how should we be thinking about that? In other words, are you going to be managing to that 1.11% reserves to loans? I know last quarter you guys said you probably wouldn't really go below the 1.12%, which is basically where you are. How should we be thinking about that?

So right now, I think we're going to assess the reserves each quarter. And credit costs are really low, and we think the provision on the reserve levels are probably going to remain stable, barring any unique events.

Okay, great. And then just last question. Assets under management, do you have a number on that?

Yes, it's $13.42 billion, slightly down from last quarter.

Okay. And I'm sorry, what was last quarter's number?

$13.49 billion.

Our next question is from Arren Cyganovich with Citi.

With the strong C&I growth, can you just give us any additional color on kind of where you're seeing that? Is it across multiple customers, different industries? I know you said it's kind of -- it can be somewhat lumpy but just curious to what you're seeing there.

Arren, this is Bob. It is a number of different things. We had good balance in the dealer side that kind of dipped a little early in the quarter and then came back and came up a bit. We also saw it in the local and the national market. So a lot of it was in the Mainland. Having said that, we kept our balance at just about 20 -- just over 20% for the Mainland and 80% for loans in Hawaii, Guam and Saipan.

Okay. And then residential growth is also fairly strong, and we're seeing rates rise on the mortgage market to some extent. What are you seeing in there? I know you changed the business model? Is that something that you would continue to expect to see that growing kind of at a similar pace?

Right. As we mentioned previously, we have a dedicated team of mortgage loan officers, and that new model is building momentum. And even as rates increase, we believe that we can continue to grow at our guided range by growing market share.

Okay, great. And then just lastly, the premium amortization adjustment that you mentioned was 4 basis points for the quarter, could you just remind me what that was related to?

Yes, the increase in rates and lower prepayment speeds on our investment securities portfolio, so just revaluing the portfolio.

[Operator Instructions]. And our next question is from Jared Shaw with Wells Fargo.

This is actually Timur Braziler filling in for Jared. Most of the questions have been asked and answered, just one more on the public deposits. The pace of reduction there slowed a little bit in the first quarter relative to fourth quarter. Is that really going to fluctuate based on kind of quarterly loan growth? Or is there a targeted amount that you guys are looking to kind of roll off the books through the remainder of the year?

Timur, good to hear you, this is Bob. No, it's not targeted for the investment public book. We're really looking at loan growth and looking at the mix of the overall funding of the bank when we do that. And through that mix of funding for the bank, we know we can certainly go back to the public book, but that's not our preference.

Okay. And then maybe just to ask the C&I question a little bit differently. The pickup in yield this quarter was pretty impressive, especially compared to some of the prior quarters in 2017 after a Fed hike. I'm just wondering, is there any new industry targeted there? Or what really drove that strong yield pickup outside the, call it, December hike?

I'll start it off, and Eric can add any comments if he has. We aren't targeting any new industries, but we have seen a nice increase in the percentage of loans tied to LIBOR. So that does give us a nice, pretty much immediate pop. Over 1/3 of our loans, as we've talked about before, are tied to 1-month LIBOR. And so we're starting to see that kick in. Anything you'd like to add, Eric?

No.

And we have a follow-up question from Steven Alexopoulos with JPMorgan.

I just had one follow-up. It looks like the Crapo Bill made nice progress today, it looks more promising to get through the house. If that happens, how should we think about the expense savings for you guys?

Yes, and that's something we have been following closely, but it's pretty hard to predict, Steve, because it's not the same for everybody. And there has been some discussion about slightly different rules depending on where the situs of the organization is. So we really have to wait and see what happens with the legislation. Once it's finalized, we'll have a view on that.

And I am showing no further questions. I would now like to turn the call back to Kevin Haseyama for any further remarks.

Right. Thank you for your interest in First Hawaiian and joining us on today's call. Have a good day.

Thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone, have a great day.