Ladies and gentlemen, welcome to the First Hawaiian Q2 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Investor Relations Manager, Mr. Kevin Haseyama. You may begin.

Thank you, Laura, and thank you everyone for joining us, as we review our financial results for the second quarter in 2019. With me today are Bob Harrison, Chairman and CEO; Eric Yeaman, President and COO; Ravi Mallela, CFO; and Ralph Mesick, Chief Risk Officer. We have 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 will 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, who will provide you with the second quarter highlights starting on slide 2.

Thank you, Kevin. Hello. Hi, everyone and thanks for joining us today, as we review our second quarter results. I'm pleased to report that we had a solid quarter, driven by excellent credit quality, higher net interest margin and continued prudent expense management. Our profitability measures remained strong with a core return on average tangible assets of 1.5% and a core return on average tangible common equity of just over 18%. We also began executing our share repurchase program, returning about $40 million to shareholders in the second quarter. Yesterday our Board of Directors declared a $0.26 per share dividend, representing an attractive annualized dividend yield of 3.99% based on today's closing price. Now I'll turn it over to Eric to go over the balance sheet.

Thanks, Bob. Turning to slide 3. We saw good loan production during the quarter with loan balances ending the quarter at $13.3 billion, up $67 million or 0.5% versus the prior quarter end. Strong production drove a $74.5 million, or 2.1% increase in residential loan balances during the quarter. CRE loans increased by approximately $47 million, or 1.5% during the quarter. Construction loan balances decreased by about $46 million or 7.7% due to the completion of several projects as we had anticipated. C&I balances declined by $26 million, or 0.8% due to the net payoffs and pay downs in the Mainland Shared National Credit portfolio and this was partially offset by growth in Hawaii C&I and dealer flooring portfolios. Looking forward our CRE and residential real estate pipeline looks good, and as a result we are maintaining our outlook for full year loan growth to be in the mid single-digit range. Turning to slide 4. Deposit balances ended the quarter at $16.8 billion unchanged from the prior quarter. We saw a couple of commercial accounts continue to draw down the temporary deposits that flowed in at the end of 2018. This amounted to about $260 million. Excluding these outflows consumer and commercial deposits grew by about $110 million or 0.7% during the quarter within our expected 2% to 3% full year growth expectations. We saw upward pressure on deposit costs taper-off in Q2. As a result our total cost of deposits increased by only 1 basis points -- basis point versus the prior quarter. With that I'll turn the call over to Ravi to cover the income statement.

Thanks Eric. Turning to slide 5, net interest income in the second quarter was $145.6 million, an increase of $0.5 million versus the first quarter and an increase of $4.2 million versus the second quarter of 2018. Net interest income in both the first and second quarters included a $1.8 million negative premium amortization adjustment due to lower interest rates. The reported net interest margin was 3.25%, a 2 basis point increase from the reported first quarter NIM of 3.23%. The increase was driven by the shift in asset mix as loan growth was funded by a reduction in cash balances. The NIM impact of the premium adjustments was the same in both the first and second quarters about 4 basis points. Turning to slide 6, non-interest income was $48.8 million, $1.7 million higher than the prior quarter. The first quarter included a $2.6 million loss from the investment portfolio restructuring. Non-interest expenses were $93.3 million about $700,000 higher than the prior quarter, primarily due to nonrecurring items, partially offset by lower salaries and benefits expenses. Our efficiency ratio in the second quarter was 48%. In the first half of 2019 we were able to manage expenses below our original outlook. While, we will still see increases in the second half of the year, we now expect full year expenses to be lower than our original outlook. We anticipate that expenses in the second half of 2019 will be 1% to 2% higher than the expenses in the first half of the year. With that, I'll turn the call over to Ralph to cover asset quality.

Thank you, Ravi. We'd like to turn your attention to slide 7 in the deck. We continue to enjoy a high level of asset quality. Credit costs remain below our historical average and our nonperforming assets were minimal at quarter end. Net charge-offs were $6.9 million for the quarter. On an annualized basis this amounts to 21 basis points on average loans and leases. This is 3 basis points higher than the prior quarter and 8 basis points higher than the same quarter last year. Total nonperforming assets were $3.9 million or 3 basis points of total loans and leases and other real estate owned. This is flat to the prior quarter and down eight basis points from the year earlier. Provision expense was $3.9 million for the second quarter. And the allowance for loan and lease losses decreased $3 million to $138.5 million which is a 104 basis points of total loans and leases down 3 basis points versus the prior quarter. The decrease in the provision from the prior quarter was due to lower reserve requirements on our residential mortgage portfolio. And now I'll turn the call back over to Bob.

Thank you, Ralph. Turning to slide 8, Hawaii's economy remained healthy in the second quarter. State unemployment rate was 2.8% in June compared to 3.7% nationally. The visitor industry continued to operate at a high level through the first five months of the year. Year-to-date through May visitor arrivals were 4.2 million, up 3.8% from the same period last year, although visitor spending was $7.2 billion 3.1% lower than the same period last year. Real estate market remained sound. Prices in Oahu remained stable. We have seen a slight decline in sales volumes compared to the prior year. Looking forward while there are signs of slowing the economy continues to operate at a very high level and overall outlook for Hawaii's economy remains positive. Before we wrap-up, I would like to thank Eric for his leadership and dedication to First Hawaiian Bank. As you saw in the earnings release, Eric informed us that he is resigning from the bank effective August 12. He's made a lasting impact on the organization formed deep relationships with our teams and customers and will be missed. We wish him continued success in the years ahead. Now we'd be happy to take your questions.

[Operator Instructions] We have your first question coming from Steven Alexopoulos with JPMorgan.

Wanted to start on the NIM. Ravi, what do you see as the starting point for the third quarter NIM? Should we see this premium adjustment again?

So I think what I'd say is that we typically don't forecast that number. But maybe what I'll do is I'll talk a little bit about the NIM outlook here. And if the Fed cuts rates by 25% at the end of July, we anticipate that the third quarter NIM will be -- will decline by about four basis points from the second quarter adjusted NIM of 3.29%. Maybe just provide a little bit of color Steve on that. You know, 25 basis point cut will put downward pressure on our variable rate loan yields. And that's going to be offset by adjusting the rates on our higher deposit -- high beta deposit accounts such as public deposits. And so as a result, we anticipate that we'd probably see 4 to 5 basis points from the 3.29% adjusted following a 25 basis point rate cut in July.

Okay. That's helpful. And then Ravi assuming that the Fed continues on a path to cutting we see 4 to 5 basis points per cut do you think you could maintain the 48% efficiency ratio target?

I mean we're -- I think it's something we're definitely striving for.

Okay.

We're looking for two rate cuts in this year. So that's something we're very focused on Steve. As you saw we're very careful about managing our expenses. But it's hard to look that far ahead on the revenue side as well as the expense side that drives that efficiency ratio.

Right. Okay. And then just finally the decline in comp expense was more than at least I was looking for. Could you give some color on what drove that so much quarter-over-quarter? Thanks.

Yes. That had to do with sort of higher deferred loan origination fees. And Steve that was driven by higher levels of loan production. We saw higher mortgage production in the quarter. If you look at the numbers you saw about a $74 million increase in mortgages for the quarter and so that's what's really driving that number.

Okay. Thanks for taking my question.

Thank you, Steve.

We have your next question from Luke Wooten with KBW.

Hi. How is it going guys?

Hey Luke.

Just wanted to kind of talk about the growth forecast. I know you guys said the mid-single-digit growth for loans. And the deposits kind of coming in a little bit softer this quarter or flat this quarter but then for the rest of the year you're still seeing the 2% to 3% increases -- for full year?

We're talking about - Luke we're talking about deposit growth? Just want to make sure I understand--

Yes. Sorry, sorry. Yes deposit growth for the full year.

Yes. This is Bob. And what we're looking at for that deposit growth as we've talked about in the past is our core growth for our consumer book is that 2% to 3%. We do see some volatility on occasion in the commercial side and we saw that at year-end. And a lot of that's kind of flowed back out. So, absent to anything else, we're comfortable with that 2% to 3% growth in kind of the core consumer book.

Okay, that's helpful. And then Ravi you touched on it briefly. Just kind of on deposit costs this quarter you saw that the pricing was kind of mitigating. Do you see that continuing going forward? Is pricing still kind of being more rational?

Yes. I mean I'd say we saw the upward pressure on high deposit beta accounts such as public time and commercial and money market accounts sort of taper in Q2. The cost of deposits quarter-over-quarter went up one basis points from 56 to 57 and we're very happy with that.

Okay, that's helpful. And then what percentage of the total time deposits was public time at the end of the quarter?

As we see -- look on Slide 4, our public time was right about $99 million. Is that--.

That's helpful. Okay. That's all my questions. Thank you.

We have the next question coming from Jared Shaw with Wells Fargo Securities.

Hi good afternoon.

Just following up on Steve's margin question. You're expecting two 25 basis points cuts. Is the second cut the same magnitude impact to margin do you think? Or would that start to maybe accelerate from the variable rate side of the loan portfolio?

It's hard to say. I think even though there's quite a few moving parts, obviously, that will depend on what we see from a loan growth perspective going into the end of the year and what our funding needs would be. I think what we've seen this quarter is a very nice tapering of costs. But I think going out to the second rate cut, I think it will depend on a lot of different factors.

Okay. And then on the securities portfolio what are you -- what's the new purchase yield right now? And are you buying with premium here?

This quarter we really didn't do any major purchases. We might have I think swapped out of some very small queue ups and rolled ups. So, for the future, I don't -- there isn't really too much material information there to give you. It's kind of where it is.

Okay. And then finally from me just looking at the trends with the Shared National Credit portfolio, should we expect to see that continue to become less of a part of the overall growth rate? Or was that really more just opportunistic moves this quarter?

The quarter -- this is Bob. The quarter just ended. We saw we're down about $100 million, really was just the kind of the normal ebb and flow of that business. We have over on the Mainland messaged many times in the past that about 20% of our loan book is in Mainland. And this quarter, we ended up I think just about 20.5%. So we're still right in that range.

Okay. Great. Thanks very much.

[Operator Instructions] We have your next question coming from Laurie Hunsicker with Compass Point.

Hi. Good morning. Just wondered if we could go back to the public funds, can you talk a little bit about directionally why you've decided to grow the public time? And what your thought is there where that line is going?

Yeah. I would just say this is -- it's probably a combination of things. We look to manage sort of flows in and out. I think what you look -- what you see in the quarter was -- Bob mentioned this a little bit in one of his earlier comments was that we had some outflows from some commercial accounts and that included some of the surge deposits that we mentioned I think in the Q4 call. And some of those went out, and I think part of what we did with the public deposits was to fill some of that gap. The other piece is just when we look at cash management we tend to fill in maturities, so it doesn't become too lumpy the maturities of our public deposits. And so, part of the sort of increases is just sort of filling out our maturity schedule on that.

Okay. Great. And then just, I mean your core deposits stripping out all your CDs. Linked quarter your cost was down a basis point you're at 34 basis point. I mean you've got an unusual trend that seemingly nobody else has at the moment. Can you just talk a little bit about what you're doing directionally? Your money market came down, your savings came down. I mean do we continue to see that happen?

Laurie, this is Bob. As we've talked about in the past, we have a fairly rational deposit market and we're really just reacting to the market forces. I think what we've seen is the rate expectations in the general market have gone down, and now everyone is expecting rate cuts coming up as soon as next week when the Fed meets. I think that has tempered people's expectations. And so, we're just really responding to the local market here.

Okay. That's great. Just quickly on the income statement just two quick questions. The BOLI looked outsized again this quarter. Was there anything else in that number the 3.39%?

Yeah. Laurie, this is Ravi. It was down about $400,000 quarter-over-quarter, and it was just really due to rates moving around and nothing specific.

Okay. Because I know there was a debt benefit last quarter, but then it was also elevated. I just didn't know if there was anything. And then you mentioned in the press release and I apologize if I'd somehow missed this, but there was round number $700,000 of non-recurring items in the non-interest expense line. Can you just help me understand what that is?

Yes, it came from sort of a lot of different areas. Maybe I'll touch on a few of them small items. In Q1, we had some airline excise tax settlements that came in that we had in Q1 that didn't show up in Q2. And you know a little bit of lower ForEx piece, a little bit of lower recoveries just a lot of little bits and pieces.

And so it looks like a lot of that came into your contract service and professional fees line. Is that the majority of the...

Are you -- you're talking about expenses?

Correct.

Yes. So in the contracted piece, yes, we had a maybe a couple of consulting projects that came in, in the quarter.

Okay. And then tax rate, how should we be thinking about that?

I would continue to use 25.5% as our effective tax rate.

Okay. Great. And then just the last question. Your buyback. You were super active this quarter, which was great, but you just did in one full swoop 40% of your buyback. Can you just refresh us on how you're thinking about buybacks and a potential buyback reload? Thank you.

Yes Laurie, this is Bob. As we talked about earlier, we have the $100 million approval from the Board for this year and we got started a little late, we got started after Q1. And so we're just trying to kind of get on track for the year, so we don't have to rush it. Pricing has been good we feel for our stock given the market out there, so we just took advantage of it and accelerated a little bit.

Great. Thank you.

[Operator Instructions] I am showing no further questions at this time. I would now like to turn the conference back to Mr. Kevin Haseyama.

Thank you, Laura. We appreciate your interest in First Hawaiian and please feel free to contact me if you have any additional questions. Thanks again for joining us and enjoy the rest of your day.

Ladies and gentlemen, this concludes today's conference. Thank you for participation and have a wonderful day. You may all disconnect.