First Hawaiian Inc
NASDAQ:FHB
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First Hawaiian Inc
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Ladies and gentlemen, thank you for standing by, and welcome to the First Hawaiian Inc. Q3 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Mr. Kevin Haseyama, Investor Relations Manager. Sir, you may begin.
Thank you, Valerie, and thank you, everyone, for joining us, as we review our financial results for the third quarter of 2019. With me today are Bob Harrison, CEO; 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’ll provide you with the third quarter highlights starting on Slide 2.
Thank you, Kevin. Aloha, everyone, and thanks for joining us today as we review our third quarter results. Pleased to report, we had a solid quarter, driven by excellent credit quality, growth in noninterest income and continued prudent expense management. Profitability measures remained strong with a core return on average tangible assets of 1.56% and a core return on average tangible common equity of 18.21%.
We continued to optimize our balance sheet with the sale of $409 million of Shared National Credits. And at the same time, $334 million reduction of public time deposits. These actions enabled us to increase our 2019 stock repurchase program by $50 million to a total of $150 million. During the quarter, we executed an additional $59 million of share repurchases, bringing the year-to-date total repurchases to $99 million.
Yesterday, our Board of Directors declared a $0.26 per share dividend, representing an attractive annualized dividend yield of 3.73% based on today’s closing price.
Now, I’ll turn it over to Ravi to go over the financials.
Thanks, Bob. Turning to Slide 3. Period-end loans were down $421 million versus the prior quarter. This was primarily due to the $450 million reduction in SNC loans, which included the $409 million of loans sold, plus an additional $40 million of SNC loans that matured.
CRE loans grew by $115 million. Almost $100 million of that growth was in Hawaii and Guam and included $50 million related to the conversion of construction loans to permanent financing. This conversion of construction loans to permanent financing represented $50 million of the $63 million decline in construction loan balances that we saw in the quarter.
Residential mortgages grew by about $53 million, as production benefited from low mortgage rates. C&I loans declined by about $524 million, primarily due to the previously mentioned sale and runoff of about $450 million of SNC loans. Dealer flooring loans declined by about $37 million. Consumer loan balances were down $13 million, primarily due to indirect auto loans.
Looking forward, our CRE and residential real estate pipeline looks good, but because of uncertainty in C&I demand, we are reducing our full-year loan growth outlook slightly to be in the low to mid single-digit range, excluding the impact of the SNC loan sales.
Turning to Slide 4. Deposit balances ended the quarter at $16.9 billion, up $65 million from the prior quarter. Public time deposit balances declined by $334 million. Balances and consumer deposit products increased by about $70 million, and balances in commercial deposit products increased by about $347 million.
The increase in commercial deposits was due to $400 million of temporary deposits that were withdrawn early in the fourth quarter. Our cost of deposits decreased by 3 basis points versus the prior quarter, primarily the result of the reduction in public time deposits.
Turning to Slide 5. Net interest income in the third quarter was $143.1 million, a decrease of $2.5 million versus the second quarter and an increase of $1.8 million versus the third quarter of 2018. The decline in net interest income in the third quarter was primarily due to lower loan balances and lower loan yields.
Net interest income in the third quarter included a $1.7 million negative premium adjustment, close to the $1.8 million negative premium adjustment experienced in the second quarter.
The reported net interest margin was 3.19%, a 6 basis points decrease from the reported second quarter NIM of 3.25%. The decrease was primarily due to lower loan yields and balances and higher cash balances, partially offset by lower deposit costs. The NIM impact of the premium adjustments was the same in both the second and third quarters about 4 basis points.
Turning to Slide 6. Noninterest income was $50 million, $1.2 million higher than the prior quarter. Nonrecurring items in the third quarter included $1.7 million in BOLI death benefits, as well as a $1.2 million loss from the sale of the SNC loans in the quarter. Noninterest expenses were $93.5 million, about $176,000 higher than the prior quarter. Our efficiency ratio in the third quarter was 48.4%, and our core efficiency ratio was 47.3%.
With that, I’ll turn the call over to Ralph to cover asset quality.
Thank you, Ravi. I would like to turn your attention to Slide 7 in the deck. Asset quality was high at quarter-end. Credit costs remained low and we had few nonperforming assets.
Net charge-offs were $5.6 million for the quarter. On an annualized basis, this amounts to about 17 basis points on average loans and leases. This is 4 basis points lower than the prior quarter.
Total nonperforming assets were $4.3 million, or 3 basis points of total loans and leases and other real estate owned. This is flat to the prior quarter. As a result of the reduction in the loan portfolio following the SNC loan sales, no provision was taken in the third quarter and the allowance to loans and leases remained at 104 basis points.
Finally, we continue to prepare for the CECL implementation next year. Based on the current portfolio and expected conditions, we estimate the impact of the adoption would increase our reserve by 10% to 15%. Please note that this estimate is preliminary and subject to change.
And now, let me turn the call back over to Bob.
Thanks, Ralph. Turning to Slide 8, Hawaii’s economy remained steady in the third quarter. State unemployment rate was 2.7%, compared to 3.5% nationally. Visitor industry continued to operate at a high level through the first for eight months for the year.
Year-to-date through August, arrivals were up 7.1 million, up 5.2% versus the same period of last year. Visitor spending, which was lagging in the first-half of the year, began to pick up in the third quarter and was $12.1 billion, a 0.5% lower compared to the same period last year. Real estate market remained sound, prices on Oahu remained stable, but we have seen a slight decline in sales volume compared to the previous year.
Looking forward, while there are some signs of slowing, the economy continues to operate at a high level and the overall outlook for our economy here in Hawaii is stable.
Now we would be happy to take your questions.
Thank you. [Operator Instructions] Our first question comes from Steven Alexopoulus of JPMorgan. Your line is open.
Hi, everybody.
Hi, Steve.
Hi, Steve.
I wanted to start, first, you guys have taken down the loan growth guidance a bit. You cited uncertainty on C&I, can you give more color on what you’re seeing there?
Well, we’re still seeing good volumes, especially in the CRE space, but C&I has been a little flat. And part of that is an outlook on dealer flooring, which is – with the economy stable, car sales have been stable, we aren’t seeing the increases we’ve seen in previous years.
Okay. That’s helpful. And then on deposit costs, it looks like deposit costs came down even without the outflows of public funds. Can you talk about what you’re seeing from local peers just in terms of the deposit competition? And do you think you’ll continue to bring deposit costs down and maybe enough to stabilize the NIM here?
There’s certainly opportunity, obviously, Steve. Our market is a very rational market. And so, we’ve been definitely looking at deposit costs as a way to moderate the impact on NIM. That being said, I think, the market is moving sort of relatively in tandem, and I think that will provide us opportunities for the future.
Okay. And then, Ravi, how are you thinking about the NIM here in the fourth quarter?
Yes. So the fourth quarter outlook – our fourth quarter outlook incorporates the impact of 225 basis point rate cuts. So the cut at the end of September and the expected cut at the end of October. We probably would see a drop of about 10 to 12 basis points from the adjusted Q3 NIM. The impact of the December rate cut in the fourth quarter should have less impact, but that could really depend on how much LIBOR moves in advance of the cut that could happen in December.
Okay. And even with a cut of that magnitude, you think the efficiency guidance is still intact?
Yes.
Okay, great. Thanks for taking my questions.
Thanks, Steve.
Our next question come from Ebrahim Poonawala of Bank of America. Your line is open. Please make sure your phone is in a mute.
Hello? Hello?
Hey, Ebrahim. Hi, Ebrahim.
Yes. Just wanted to follow-up on Steve’s question, both in terms of margin outlook and sort of tying it in from an efficiency standpoint. If we could just look further out into 2020, Ravi, just talk to us in terms of, like is there a point at which the NIM becomes defensible, or should we expect that until the Fed continues to – on its path to cutting rates, we will see this level of NIM declines? And on the expense side, are there levers to pull? I mean, you’re obviously a fairly efficient bank. Are there things that you can do to sort of pullback on expenses to defend the efficiency ratio?
I mean, I think, with respect to 2020, there’s just a lot of moving parts. We typically only give guidance one quarter in advance. What I would say is that, not only are – what the expectations are for Fed rate cuts in 2020 impacting what we would project, but also just the shape of the yield curve itself. And so, not without going out any further, I think, we would be impacted by cuts that would occur in 2020.
Maybe just on the expense side, I think, we’ve given guidance – the first-half on the – of the year on expenses were about $186 million. And I think, we came in at $93 million – a little bit over $93 million in the third quarter. I think that, given that we’re running at a very – pretty lean efficiency ratio, I think, we gave a guidance of second-half of about 1% to 2% higher. We’re – that being said, we’re always looking at opportunities to manage our expenses and our cost structure.
Got it. And are there any additional balance sheet action that we should look out for in terms of is there more to go in terms of running off certain SNC loans or was this a one-time and we shouldn’t expect more of this?
I mean I think…
Oh, sorry, Ravi. This is Bob. Certainly, something we’re kind of continue to look at. We took advantage of an opportunity that we saw in the market to kind of pullback a bit on the credit only Shared National Credits and then at the same time look to reduce our funding cost and increase the share repurchase. And while we’ll continue to consider it, we don’t have any current plans.
Got it. Thank you.
Thank you. Our next question come from Jackie Bohlen of KBW. Your line is open.
Hi. Good afternoon, everyone. Looking to one of the charts in the back that calls out some one-time cost of – it was roughly $2.2 million. Is that all executive comp from the footnotes or was there something else in there?
Yes. Actually, there was, I think, that’s a good catch, Jackie. There was one other sort of significant item. It really had to do with an accrual that we took just true up mark-to-market impact of the conversion rate of the Visa B shares and the swap associated with that, that we had to true up at the end of the quarter that Visa had announced a plan to deposit some additional money into the Escrow account. And as a result, they took their conversion factor down and we trued up to mark-to-market that swap. It was about $300,000.
Okay. So if I think about those two expenses, a little over $2 million, and then I extract those out of what you have from 2Q versus 3Q, it’s a pretty low number for 3Q. How does that play into your prior growth guidance you gave for the latter half of the year?
Yes. I mean, I think, we – I think we’re not really changing that much. That was definitely a one-off item. But I think our guidance continues to be the same.
And one of the issues on it, Jackie, is it’s just difficult to find people. We have a number of positions opened and we’d love to fill in. We’ve had some success, but that’s the factor we can’t really control.
Okay. So to the extent you’re able to fill some of those positions then we would see outside of adjusting for changes in exec comp, we’d see that line pick up?
Correct.
Okay. And just one last one for me and then I’ll step back. If – even if I normalize for the BOLI gain in the quarter, it looks like that income line item was still up a bit from where it’s been earlier in the year. Is that normal fluctuation, or is there anything else unusual there?
Sorry, Jackie, in the BOLI line item or just…
…or noninterest income?
Yes, in the BOLI line item?
Yes. We – in the BOLI line item this quarter, I think, we had sort of a larger gain there just there just because we had some debt benefits of about $1.7 million in the quarter. And that’s typically sort of an outsize number for the quarter.
Yes, yes. No, understood on that. I just – if I normalize for that payment, it still looks a little bit elevated. Was there anything else unusual in there, or is just a normal fluctuation?
Yes. There’s nothing really unusual in there, just normal fluctuations.
Okay. Thanks for the color. I’ll step back.
Thank you. [Operator Instructions] Our next question come from Timur Braziler of Wells Fargo. Your line is open.
Hi, good afternoon. Looking at the $40 million Shared National Credit runoff, was that one of the credit only – were those credit-only loans that ran off?
Actually, it was a mix of both, Timur. So, before we had our Mainland SNCs, it was about 50-50 credit-only relationship and that’s moved to about 70% relationship and 30% credit only. But that extra runoff was a mix of both.
Okay. But in regard to the credit only, SNCs that remain, should the expectation be as those come due that you’re just going to let them runoff, or is there a willingness to keep portfolio of credit-only Mainland SNCs?
There’s a willingness to keep the portfolio there. We’re constantly looking at it and being very choosy. As you can tell by the credit quality of what we saw given the pricing, that’s something that is foremost to us is really the credit quality and getting into good deals. So we haven’t closed that option out.
Okay. And then just – in regard to the total loan growth, I appreciate the color on the dealer floorplan. But as we look out, is there anything that gives you confidence that loan growth will accelerate kind of back to that mid single-digit level, or as we look out in the near-term, it’s going to trend in the low to mid single-digit range?
We’re not giving guidance past really the fourth quarter, but we’re still seeing good economy here and a strong growth and it just finding those right opportunities. So we’re not looking past the fourth quarter, but there’s nothing structurally wrong with the economy here in Hawaii, it’s still doing quite well.
Okay. And then one last one for me. Looking at the public funds that remain, what’s a good number that we should kind of model in for where public funds will shake out? And then those that were exited during the third quarter, if we can just have an update on the timing of when those left the bank?
Yes. I think, Timur, this is Ravi. I think those left over the course of the quarter, we had about $334 million in public time of reduction during the quarter. And typically, we see about $350 million or so mature during the course of a quarter, so think about it sort of staggering in from the quarter.
Where we are right now in terms of levels, public time, I think, we feel pretty good about it. There will be a conversation about the whole balance sheet in totality, where we see loan growth, where we see deposit growth and opportunities on the investment securities side. So, given where we are, we feel pretty comfortable, but it’s really looked at in totality on the balance sheet.
Understood. Thank you.
Thank you. Our next question comes from Laurie Hunsicker of Compass Point. Your line is open.
Yes. Hi, good morning.
Good morning.
Just wondered a couple of things. Just going back to SNC, I know that you reduced your balances around $450 million, but I just wanted to make sure I have the actual number. So the actual number, as of September 30, is right around $1 billion, or do you have a better actual figure? And then how much of that is Hawaii versus Mainland? Can you guys hear me?
Yes. We can.
Oh, okay. I didn’t know if there was feedback coming from. Okay, yes. Go ahead.
So the total SNCs at the end of the third quarter, both Mainland and Hawaii was right at $1 billion. Of that, $700 million was Mainland…
Okay.
…about $300 million was Hawaii.
Okay. That’s great. And then – and I know you’ve talked about this. But can you just take us through as just generally as we look forward in 2020, how you’re feeling about where that SNC book goes, just specifically the SNC book?
Well, as I mentioned, we’re comfortable where it’s at now. We’re, of course, very committed to the Hawaii-based SNCs and as well as the Hawaii – the relationships SNCs have had some type of tie here to Hawaii, so certainly that. And one of the things we continue to evaluate are the credit-only SNCs, which is roughly 30% of that $700 million.
Okay. Okay, and then the dealer floorplan loans, do you have a balance on that?
Sure. We ended the quarter at $838 million, so down $60 million from second quarter.
Okay. And then how much of that is in California?
$545 million.
$545 million. Okay, great. And then just wanted to back over to Jackie’s question around expenses. In other words, when we’re taking out that $2.2 million of one-time items, your noninterest expenses are sitting at $91 million and it looks like your professional fees are a little bit outsized, too. And so, theoretically that could almost be a lower number directional. I mean, you’re almost pushing close to $90 million a quarter and yet your efficiency guide suggest a whole lot higher. So can you help us think about that a little bit? Thanks.
Yes. Hi, Laurie, this is Ravi. I mean, I think, obviously, I think Bob mentioned to the fact that one of the factors that we’re always challenged and that could vary from quarter to quarter is just our ability to retain and aggressively recruit talent. The other is thing is that, there’s obviously at the end of the year, there can be seasonality impacts on the expenses. So we could see changes relative to end of year expenses that might come up.
Okay. And then just one last question around expenses. Are there any big or unusual items that you’re planning to spend in 2020 different than what you currently have in your infrastructure?
We don’t have any plans for anything different in our – on the business plan.
Okay, perfect. Thanks. I’ll leave it there.
Thank you. I’m showing no further questions at this time. I would like to turn the conference back over to Kevin Haseyama for any closing remarks.
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.
Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.