First Hawaiian Inc
NASDAQ:FHB
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First Hawaiian Inc
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Good day and thank you for standing by. Welcome to the First Hawaiian Incorporated Q1 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]
Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Kevin Haseyama. Please go ahead.
Thank you, Tanya. And thank you everyone for joining us as we review our financial results for the first quarter of 2023. With me today are Bob Harrison, Chairman, President and CEO; Jamie Moses, Chief Financial Officer; 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.
During today’s call, we will be making forward-looking statements, so please refer to slide one 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 will turn the call over to Bob.
Good morning, everyone. And before I start our normal presentation, I’d like to recognize the efforts of our team members and the loyalty of our customers. The steady performance through the recent disruption in the banking industry really highlighted the strength of our balance sheet and the value of our relationship strategy.
Moving on to an overview of the local economy. the Hawaii economy continues to do well. Statewide unemployment rate in March was 3.5%, the same as the national rate. Total visitor arrivals were 900,000 in March, only 3% below March 2019 arrivals.
Our Japanese visitor arrival to 40,000 or $0.70 -- 70% below the March 2019 arrivals and we continue to expect a gradual return to more normalized levels. Most importantly, the visitor spend in March was $1.8 billion, 23% higher than March 2019.
The housing market has remained stable. In March a median single-family home price was about $1.1 million, which is about 5.8% below March of last year. The median sales price for condos on Oahu was $536,000, 4% higher than 2019 -- 2022.
Turning to slide two. I will give an overview of our first quarter results. We started the year with a very good quarter. Net income of $66.8 million or $0.52 per share, as loans grew, we grew capital and credit quality remained excellent.
Our return on tangible assets was 1.15% and return on average tangible common equity was 20.78%. We continue to maintain strong capital levels with a CET1 ratio of 11.97% and a total capital ratio of 13.09%. The Board maintained a quarterly dividend at $0.26.
Turning to slide three. Our balance sheet remains solid. In response to the recent volatility in the banking industry, we decided to increase our liquidity position using long-term FHLB borrowings and ended the quarter with about $866 million of cash and cash equivalents. The FHB borrowing was for a term of 18 months and gives us flexibility in managing the liability side of the balance sheet.
We continue to have a strong liquidity position, with a loan-to-deposit ratio of 67%, a stable core deposit base, steady cash flows from the investment portfolio and ample access to additional funding from the FHLB and the various Fed lending programs. The investment portfolio duration remained stable at 5.6 years and cash flows from the portfolio round about $65 million a month as we expected.
Turning to slide four. Period-end loans and leases were $14.2 billion, an increase of $129 million or 0.9% from the end of Q4. Loan growth was modest in the first quarter and we plan to focus our resources on supporting our relationship with customers.
We expect loan growth to slow for the rest of the year and be in the low-to-mid single-digit range. Draws on existing lines such as construction, dealer flooring and home equity will contribute to our growth.
Now I will turn it over to Jamie.
Thanks, Bob. Turning to slide five. Deposit balances decreased by $408 million or 1.9% to $21.3 billion at quarter end, continuing the trend we have seen for the past three quarters. The outflow of retail and commercial deposits slowed to $300 million, compared to $668 million in the linked-quarter.
Commercial deposits declined by about $130 million, while retail balances declined by about $170 million. The retail and commercial deposits remain fairly evenly split at around 45% to 46% of total deposits.
Our total cost of deposits was 82 basis points in the first quarter, an increase of 30 basis points from the prior quarter due to higher rates paid and the continued shift in mix to higher rate deposit accounts.
On slide six, we provide a little deeper dive into the deposit portfolio. Starting in the upper left, deposit levels remained stable following the financial events in early March through the end of the quarter.
50% of our deposits are covered by FDIC insurance. Considering that our public deposits are 100% collateralized and consists of Hawaiian Municipality accounts, we expect that 58% of our deposits would behave as if they were insured.
The retail deposit portfolio has an average balance of about $22,000 and commercial deposits are well diversified by industry type and have an average balance of just under $148,000.
Finally, as the table on the lower right shows, we have cash and borrowing capacity equal to 94% of uninsured, uncollateralized deposits.
Now if we were to move the collateral to the BTFP, we would gain another $700 million of borrowing capacity and our cash plus borrowing capacity would be over 100% of uninsured, uncollateralized deposits. To be clear, we don’t think we will need this type of liquidity capacity, but it is there in the event we do.
Turning to slide seven. Net interest income declined by $4.5 million from the prior quarter to $167.2 million. The decrease was primarily due to higher interest expenses on deposits and the additional borrowings in the quarter.
Similarly, the net interest margin declined 4 basis points to 3.11%, primarily due to the impact of borrowings added in March. Excluding the impact of the borrowings, we estimate that the NIM would have been flat to up 1 basis point as the benefit of asset repricing and mix shift were largely offset by increases in deposit costs that were faster than anticipated.
Through the end of the first quarter, the cumulative betas were 27% on interest-bearing deposits and 16% on total deposits. Looking forward, we anticipate that the NIM will decline by 10 basis points to 14 basis points in the second quarter, of which about 8 basis points is from the full quarter impact of the term borrowings taken out in the first quarter.
Our guidance is based on the forward curve, which predicts a rate hike next week and then no further rate hikes in the quarter. Of course, this guidance is also predicated on balance sheet dynamics that could differ from our current expectations.
Turning to slide eight. Non-interest income was $49 million this quarter, a $900,000 increase over the prior quarter. BOLI income in the first quarter included approximately $2 million of debt benefit, partially offset by lower other income. We continue to expect quarterly non-interest income to be in the $48 million range.
Expenses were $118.6 million, in line with our full year outlook and $4.6 million or 4.1% higher than the prior quarter. The increase in expenses was driven by an increase in salaries and benefits, which included $1 million less of deferred loan costs due to lower levels of loan originations, an additional $1.3 million of the increase was due to the higher FDIC assessment. We expect quarterly expenses for the rest of the year to be relatively flat to the first quarter.
Now I will turn it over to Ralph.
Thank you, Jamie. Moving to slide nine. We are still seeing strong credit performance and the bank’s asset quality metrics reflect that. Year-to-date net charge-offs were $3.2 million. The annualized charge-off rate was 9 basis points, 1 basis point higher than 2022. The bank recorded an $8.8 million provision for the quarter.
NPAs and 90-day past due loans were 13 basis points at the end of Q1, up 2 basis points from the prior quarter. Criticized assets continued to decline, dropping to 49 basis points, 23 basis points lower than Q4. Loans 30 days to 89 days past due were $40 million or 28 basis points of total loans and leases at the end of Q1, 12 basis points lower than the prior quarter.
Moving to slide 10. You see a roll forward of the allowance for quarter via the disclosure segments. The allowance for credit loss increased $3.2 million to $147.1 million. The increase this quarter came from loan growth and an additional overlay for consumer loans. This was offset by improvements in the portfolio risk profile. The level of the allowance equates to 1.03% of all loans.
The reserve for unfunded commitments increased $2.4 million to $36.2 million, an increase -- and the increases on undrawn exposures. The allowance anticipates cyclical losses consistent with the recession and includes a qualitative overlay for macroeconomic impacts not captured in our base model.
I will note that the base model incorporates a forward view of risk based on individual -- the rating of individual loans. We have increased the frequency of our credit reviews this quarter and did a deep dive on all CRE credits over $5 million. Specifically, the review considered the potential impacts of credit events like upcoming maturities, rate resets or tenancy rollover. There were no downgrades as a result of that review.
Turning to slide 11. I wanted to provide a snapshot of the CRE exposure, it represents about 29% of loans. Portfolio monitoring in this segment will be a priority given the implications of higher rates, credit tightening and recessionary headwinds.
As you can see, the book is diversified across property type with a minimal amount of criticized assets. The weighted LTV is just under 60%, providing a good margin to absorb future stress. Note the office book is about 6% of loans. We have been in close contact with each of our borrowers in this book to update our risk ratings.
At the quarter end, the risk profile remained healthy with only $5 million criticized. In the appendix, you will find some additional portfolio information on the construction book and the C&I book.
For the construction portfolio, it’s primarily comprised of multifamily and for-sale housing by property type. Our weighted LTV on the construction book is 57% and criticized assets are about 10 basis points.
Within the C&I book, exposure to higher volatility industries is modest. Auto dealers represent our highest industry-related exposure with about $601 million outstanding, about 76% of that amount relates to asset-based vehicle flooring.
Let me now turn the call back over to Bob.
Thank you, Ralph. We don’t have any closing comments, so we look forward to your questions. Kevin? Tanya? Sorry.
Certainly. [Operator Instructions] And one moment for our next question. And our first question will come from Steven Alexopoulos of JPMorgan. Your line is open.
Hi, everybody.
Hi, Steve.
Hi, Steve.
So I wanted to start on the deposit side. We know deposits came down and, Bob, you start off by thinking your loyal customers. But what exactly happened at the bank in the immediate aftermath of Silicon Valley Bank? Did you see any of the uninsured deposits leave the bank, did you require much handholding or customers panicked? It seems like things were more to a business usual, but I’d love to hear the color on that?
Yeah. No. Great question, Steve. We really kind of mobilized all the troops, and first of all, just a reminder, all of our -- the vast majority of our deposits are within the footprint of Hawaii mono type. So in those markets, we have really deep relationships with the customers. They trust us.
We -- first thing we did was contact our bankers, walk them through the events of what happened, asked them to reach out to their customers, which they did. They had a lot of good conversations about that.
We had a couple of accounts that drew down balances, but as you could see, what happened during the quarter, very, very little. This crisis is different than all the ones before it based on the speed of deposit flight, but we really didn’t see much from the date of the crisis to the end of the quarter.
I think that had a lot to do with it. Important that the large depositors just didn’t seem as worried about it when we talk them through it. And again, minor changes, a couple of second order changes of owners instructing a management team or a property manager to move very low dollars of deposits, but really nominal impact as we saw overall.
Okay. And Bob, following up on that, so it was pretty steady on the deposit base and hearing that I am surprised how much liquidity you built in the quarter or is that just because it’s a very conservative bank, abundance of caution and how long do you plan to hold this liquidity down?
Well, you are correct, we are a very conservative bank and we just -- there is a concern there that we want to make sure, should something happen, that we were ready for. We are looking at that, Jamie, maybe turn it over to you to better answer Steve’s question.
Yeah. Yeah. Steve, I think, we are going to continue to monitor that. We took that 18-month borrowing Monday morning after the weekend of signature. There was uncertainty in the marketplace. We wanted to ensure certainty for us and so that’s why we did that.
And we are going to just -- we will keep monitoring how things flow, how things go over the next -- however long it takes to kind of get through this period and eventually I would imagine that we do start to manage some of that down. When that happens is kind of dependent on market forces and what we see in our balance sheet.
And a bit of a regulatory response. I know we are all kind of…
Yeah.
… waiting to see what happens next week and what market response will be to that. So for some near-term, medium-term period of time, we are going to just be a little more cautious.
Yeah. You are obviously sitting on a ton of capital. So how do you think about that, do you be more conservative there and pause buybacks for the time being?
Well, we didn’t repurchase any shares during the quarter and we are still below our target of the 12% common equity Tier 1. So until we get there, we are really on pause. It seems like a good time to retain a bit more capital as well.
I don’t know if I could just ask one last one. I appreciate all the color on the office market, the office exposure. How does that break out, but is that all in Hawaii or is some of that on the mainland and what are the dynamics of the Hawaiian office market?
Maybe I will start and turn it over to Ralph. It’s really interesting. The dynamics of the Hawaiian office market are unique. We moved into this building over 26 years ago and this is the last new building built in the central business district in Honolulu.
So there has not been any new construction. We have had one building by a large REIT get taken out and it’s getting repurposed into apartment and the second one is under consideration for that. So very little overcapacity here, but Ralph, maybe you can answer the broader question.
Yeah. And I would say that the Hawaii market actually vacancies have come down, because of those buildings going on and there’s actually a third building that’s being converted to a hotel. So it’s a pretty healthy market.
I think we have a mainland property owner that has property here and in the mainland. He says, this is the healthiest market he’s in. We have about 43% of the mainland, I mean, office portfolio in the mainland, Steve.
Got it. Okay. Terrific color. Thanks for taking my questions.
Yeah.
One moment for our next question. And our next question will come from David Feaster of Raymond James. Your line is open.
Hey. Good morning, everybody.
Good morning.
Good morning, David.
Maybe more specifically going back to the deposit side, just specifically on the NIB front, it seems like the turmoil that we have had is really just a wake into a lot of clients and the rates that were being offered and really accelerated migration. I am just curious whether you have seen NIB balances start to stabilize here early in the second quarter or do you expect to see continued migration? And then just how do you think about that composition over time, I mean, do you think we can hold here kind of around 40% where we are or do you think we kind of regress back to maybe where we were in pre-pandemic?
Yeah. Thanks, David. So it’s a good question. We don’t know for sure. We have so far held up pretty tightly with 41% of the balances as you noted being non-interest-bearing. We think that’s a pretty good number.
Pre-pandemic, that number was 3%. So there’s obviously a chance that it could go back there. I think there are some reasons to believe that maybe we can do better than that overall through time, but it’s really kind of anyone’s guess around that.
We are close with our customers. We have done a good amount of segmenting work trying to figure out which customers truly are rate dependent and which customers value the -- have a different sort of value prop with us. So it’s a good number for now, could go down in the future, but we are pretty pleased with the performance overall in the first quarter for sure.
Okay. That’s helpful. Maybe just at a high level to the Hawaiian market has always kind of been viewed as a relatively insulated deposit market, right? And it seems like that’s holding up so far, just the betas that you have seen were -- you are doing really well, as well as some of the others on the island. I just want to get a sense of the competitive dynamics maybe from your standpoint, has technology expansion kind of impacted that installation at all as we kind of look at this maybe going forward and are you starting to -- are you seeing any more competition from outsiders at all? I am just curious about the competitive landscape in that relative insulation of the local market?
Yeah. A really good question. As we look at it, first of all, the competition is always there and as we saw in the most recent events in early March that, money can move very, very quickly. So we have to stay close to our customers, to Jamie’s point and I think we have done that certainly with our large deposit customers, our corporate customers not having any non-Hawaii headquartered banks here helps candidly, because all of us have fairly low loan-to-deposit ratio.
So the need to compete for deposits to fund outsized loan growth, as we have talked about in the past doesn’t exist. So it’s a little more measured in that respect. But you have to be taking care of your customers. You have to understand, to Jamie’s point, what the value proposition is.
There are people that have decided to move certainly within our bank. We saw about $110 million move to our money market accounts that we provide over the quarter. So, clearly, customers have decided to make some of that movement.
And that’s the right thing to do, right? We need to work with them and see what the right answer is for them. It has continued to be relatively well behaved in the medium and smaller dollar based, although we are starting to see some migration into CDs, as we expected, which is kind of where it was in a higher interest rate environment several years ago. Jamie or Ralph, anything you would add to that?
No. I think you covered it well, Bob.
Okay. No. That’s good color. And then maybe just touching on the growth side. Just kind of hearing the categories that you brought up with construction, dealer flooring and home equity. Is it safe to say that Hawaii is primarily going to be -- Hawaii is going to primarily be the driver of growth? Is there still an appetite for West Coast CRE participations at all, are there any good risk adjusted returns on that space? And then just kind of an update maybe on the housing side and mortgages and kind of what you are seeing on the housing market and your portfolio in Hawaii?
Sure. Maybe just, yeah. So to start with the CRE piece, much of the growth we expect to see in CRE that draws is certainly partially Hawaii and a good chunk of it is in the West Coast, because we are in construction deals, mostly multifamily in both places. So that is based in Hawaii and West Coast draws we are expecting.
I am not sure how many new deals will be out there and that’s why we are guiding towards really seeing more activity in our existing credits to borrow. We saw virtually no growth, as you can see in the deck, in our dealer floor plan in the first quarter.
My expectation is that will change over the course of the year and we will start to see some growth in that as factory production increases. There’s still demand out there, but I think that will be tempered as people are concerned about recession. So that should lead to an increase in dealer floor plan balances. Anything else you would add to that, Ralph?
Not really, Bob.
All right.
And…
That’s helpful.
Sorry, I didn’t cover off on residential. The trends here are very similar to what you are seeing in the mainland, very -- virtually no refinancing given the rate environment, sales have slowed that you are getting the time to make me multiple offers and the time to close is more than a few days where it was in the heyday is not that long ago. So that part is more normal. So we are expecting lower residential volumes here in Hawaii for some period of time.
But no change in kind of the health of your borrowers, I mean, just looking at your NPAs and everything is pretty steady. I am just curious, as you look at your borrowers, no change or anything from that?
No. We haven’t seen that. No. We haven’t seen that.
Okay. That’s great. Thanks everybody.
And one moment for our next question. Our next question will come from Andrew Liesch of Piper Sandler. Your line is open.
Hey. Good morning, guys. Thanks for taking the questions.
Good morning.
Just keeping on the credit theme, I was kind of surprised the provision came in nearly $9 million. I was curious if you can talk to some of the ins and outs there because just the metrics all look pretty solid.
Yeah. Andrew, this is Ralph. We had basically three things happened. I think the primary reason it went up was loan growth. We did do a little bit of additional overlay in the consumer book. Nothing specific there, just kind of a general sort of, I think, kind of concern about what we are going to be looking at over the next 12 months.
And then that was a little bit offset by the overall risk rating in the portfolio actually improved in the quarter. So I think it was pretty much in line with what we would have anticipated just on growth, to be honest.
Got it. All right. That’s helpful. And then on the securities portfolio, would it be safe to assume that it’s kind of in a runoff mode right now, you are not going to be looking to add too much to it?
That’s exactly the right way to think about it, Andrew.
Got it. You have covered all my other questions. I will get back. Thank you.
One moment for our next question. And our next question will come from Kelly Motta, KBW. Your line is open.
Hi. Thank you so much for the question. I think kind of carrying on with the last line of questioning. Can you provide us with what the outlook is for cash flows off the securities portfolio for the remainder of the year and if...
Yeah.
Yes.
Sorry, Kelly, was there extra -- any more question?
No. If it’s -- if that -- if -- I assume that’s how you intend to fund loan growth looking ahead.
Yeah.
But just any color on that as well?
Yeah. No. That’s right. Yeah. Thanks, Kelly. So, in the first quarter, it was about $65 million a month in cash flow that came off. We expect that it’s going to be about that much for the rest of the year.
There are seasonal things that happen. Now there’s not a ton of mortgage activity, obviously, in the world, but Q1 is sort of like a seasonal low in terms of people moving and things like that. So there’s a reason to expect maybe there’s a little bit more cash flow from the portfolio, but $65 million a month seems like a pretty decent number. to think about.
Got it. Thank you. And I appreciate the guidance for next quarter with the margin. Assuming that the Fed pauses after next week, what’s kind of the outlook for margin ahead from that more broadly as deposit cost catch-up? Should we be anticipating additional pressure or do you think the greatest kind of headwinds are this upcoming quarter or two and can level off thereafter? Thank you.
Yeah. So, again, right, the biggest driver is going to be changes in sort of Fed policy and where short-term rates go for sure. But I think sort of the next biggest driver there is likely to be what happens on our balance sheet and particular needs that we may have or don’t have depending on loan growth and things like that.
So I think we talked about a 27% cumulative beta at the moment. We have thought about -- we have said in the past 30% as a cumulative beta through the cycle. I think there’s probably reasons to expect that, that will be higher.
But we don’t -- it’s hard to tell without like a firm grasp of sort of how things flow in and out of the balance sheet in terms of loan growth, securities flows and that sort of thing. So it’s tough to really say, Kelly, but I think those are the two things that will be the determinants really of where the margin goes.
Thanks so much, Jamie.
Yeah.
All my questions have been asked and answered, so I will get back. Thanks again.
Thanks, Kelly.
One moment for our next question. And our next question will come from Jared Shaw of Wells Fargo. Your line is open.
Hey, everybody. Good morning. Thanks…
Hi, Jared.
…for the questions. Maybe just circling back on the office side, when you look at that 43% that’s on mainland, I am assuming that’s shared national credits. Any geographic concentration and can you give us some stats on average size of those properties or average size of that total loan and maybe some of the bigger cities that they are in?
Yeah. I will just give you some -- this is Ralph, Jared. And I don’t have specifics around sort of average size, but these are basically multi-tenant office properties. We are primarily in California or West Coast, Pacific Northwest, a couple of properties.
The ones in the Pacific Northwest, we have a couple of credit tenant deals that the tenants -- credit tenant deal basically to amortize over the term of the lease, strong -- pretty strong counterparties there.
And then on the -- one in California, primarily in West L.A. and so what we have seen is actually a lot of -- actually what we have seen is a lot of people moving out of downtown L.A. into West L.A. So the office properties that we have financed actually, they saw good absorption through probably the fourth quarter of last year. So I think we are in pretty good shape there.
The sponsors that we have there, pretty low levered. We have talked to each of the sponsors, try to understand what they are seeing. So, as I said, we did a pretty deep dive on the CRE book this past quarter and so we are feeling pretty good about where we are at with regard to the office portfolio.
So the feeling is that those sponsors as those come for renewal have access to equity to be able to supplement if needed versus selling or looking at some other type of a workout?
Yeah. In fact, one of our larger customers, they had actually delevered right ahead of the pandemic. It was just kind of a coincidence, but they are in pretty good shape. They actually will be looking for properties, I think, over the next year.
Okay. And then in terms of the beta, deposit beta performance has been really good. Any -- what’s the expectation for terminal beta, any thoughts on that if it’s crept higher at all?
Yeah. I think, Jared, we talked a little bit about what we think the drivers of that change might be on the balance sheet. I think we would -- just generally we should expect it to be higher, but we don’t know what that terminal beta would be for sure.
And again, I think, it’s really going to be driven by the need for funding based on our loan growth and impacts like that. So I wish I had a good number for you, but we just have -- what we have is just sort of we don’t know and it’s going to be dependent on what we see on the balance sheet, so.
Okay. Thanks. And then just finally for me, what was the rate on the FHLB advance?
That was 4.7%.
Great. Thank you.
[Operator Instructions] And our next question will come from Christian DeGrasse of Goldman Sachs. Your line is open, Christian.
Hey. Good morning. Thanks for the question.
Hey, Christian.
Hi, Christian.
So following up on the March, including rate cuts later towards the end of the year, can you talk about how the balance sheet is positioned for lower rates and how you see maybe both deposit pricing, as well as the margin relative to how they have performed in this rising rates?
I think it’s going to be pretty similar. We would expect, if we have rate cuts, 40% of our loan portfolio within 90 days will reprice right down with those rate cuts. But then we also have a decent amount of balances that we have on the balance sheet that we have some customers who are rate sensitive that we moved into similar type rates of like that you would see and from a government money market perspective, then those would come down as well.
I think my guess would be that the NIM would probably compress slightly in a down rate scenario. But, again, it -- those -- it will be sort of dependent on what happens in terms of the balance sheet and loan growth. But I’d expect a slight compression in a rates down scenario.
And then just following up, I mean, can you share how you guys think about adding hedges, whether there are swaps or floors and whether that would be potentially be your strategy at all?
We are continuing to look at that and think about that. At the moment, with uncertainty really around where rates are going and uncertainty around capital and requirements, but those requirements might be in the future. We are really trying to balance the net interest income risk versus sort of what I will call AOCI capital risk.
So, again, I wouldn’t expect lots of large movements in that area. It’s something that we are considering and something that we are looking at and talking about consistently. But we don’t have a real strong view at the moment on what it is actually that we would be trying to protect in the first order of business.
And maybe just to add to Jamie’s comments. The other thing, we were very proactive in passing through deposit, I am sorry, rate increases to our depositors certainly are high net worth and corporate depositors and we wouldn’t be shy about moving those down should rates start to come down as well.
We think that’s just part of that relationship that we just be in those conversations with our customers and given the benefit, but also work with them as rates temper should they go down later this year.
Understood. Thank you.
And I am showing no further questions. I would now like to turn the conference back to Kevin for closing remarks.
Thank you. 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.
This concludes today’s conference call. Thank you for participating. You may now disconnect.