First Hawaiian Inc
NASDAQ:FHB
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First Hawaiian Inc
Earnings Call Analysis
Q3-2023 Analysis
First Hawaiian Inc
In the aftermath of the devastating fires in Maui on August 8th, First Hawaiian, Inc. held its Q3 earnings conference call where the president, Bob Harrison, expressed sadness over the loss and destruction. The company conveyed its commitment to helping the community recover from this tragedy, reassuring that all employees and retirees were safe despite some losing their homes. The Lahaina branch was destroyed, yet the staff successfully recovered all customer safe deposit boxes. This act reinforced the bank's dedication to its customers and its employees in a difficult time, giving hope for a rebuild that the community can take pride in.
Despite the challenges posed by the Maui fires and the economic implications, First Hawaiian, Inc. reported a robust expansion in its deposit base during Q3 with an overall increase of $433 million, marking a 2.1% growth. The bank saw an appreciable rise in both retail and commercial deposits, with a notable $238 million increase in commercial deposits and $94 million in retail. The proportion of noninterest-bearing deposits slightly improved to 36.7%, getting back to the pre-pandemic level. This rise, however, came with a higher cost of deposits as a result of the increase in interest rates, now at 140 basis points, which is 29 basis points higher than in the previous quarter.
A slight contraction was observed in the bank's net interest income, which decreased by $2.8 million to $157.1 million due to higher funding costs, though partially alleviated by higher asset yields. Net interest margin (NIM) dipped by five basis points to 2.86% but was more favorable than anticipated. Predictions suggest the NIM may trough in the mid-270s range in the fourth quarter. Cumulative betas, which track deposit sensitivity to interest rates, were at 40.7% for interest-bearing deposits and 25.5% on total deposits by quarter-end.
First Hawaiian, Inc. upheld its credit quality this quarter with only a small uptick in commercial criticized assets, attributed mainly to the downgrade of a single credit account. Classified assets experienced a decrease due to the payoff of a loan, and the bank recorded a modest annualized net charge-off rate of six basis points, underscoring the bank's ability to mitigate losses effectively. A $7.5 million provision was made for the quarter to accommodate potential credit risks. Both nonperforming assets and 90-day past due loans exhibited a minor rise to 13 basis points, but these figures remain within a healthy range.
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Good day, and thank you for standing by. Welcome to the First Hawaiian, Inc. Q3 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Haseyama, Investor Relations Manager. Please go ahead.
Thank you, Kevin, and thank you, everyone, for joining us as we review our financial results for the third quarter of 2023.
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 measures to the most directly comparable GAAP measurements.
And now I'll turn the call over to Bob.
[indiscernible] everybody. Thank you, Kevin.
Before we get started, I just want to say a few words about what happened in Maui and the tragedy of the fires there on August saddens all of us to see the loss of life and just the destruction that happened. I want to say thank you to our employees, who were out there to support our customers and the community and everybody there, it is a very difficult situation. It is something we'll have to work through as a community over the next several years. But the good news is our employees and retirees are safe. A number of them did lose their homes, and certainly, we're outreaching to them to see how we can help.
Our Lahinabrax was destroyed in the fire. We were able to recover without any damage, all of our customers safe deposit boxes, and we're able to return them to them. And going out there a few times to meet with our customers and the community and most importantly, our employees, it really gives me a lot of hope that we can do this and do this in a way that builds -- we'll hand it back in a way that we're all comfortable with and proud of. So -- and finally, on that note, I just wanted to say thank you to all of our friends and family and vendors, investors around the world literally that reached out to express their condolences and see how they could help if there is anything they could do. Thank you for that.
Also to start with an overview of the local economy. Hawaii economy actually remains strong. It is too early to really determine the impact of the fires on the economy of value or the State of Hawaii, but we do expect over time the rebuilding activity will spur economic stimulus for that area and along with an eventual return of visitors. The mayor has declared that Maui will be fully open on November 1. We don't think that will happen overnight. We think there will be a slower return of tourists to Maui over time.
Statewide seasonally adjusted unemployment rate in September was 2.8% compared to the national unemployment rate of 3.8%. So some good news there. The visitor industry performed well on a year-to-date basis. Through August, total visitor arrivals were up 8% over the previous year, and total spend was 10% higher. Even more encouraging is the increase in arrivals from Japan with year-to-date arrivals of 331,000 visitors, significantly higher than the prior year. However, we did see a downturn in arrivals after the Maui fires on August 8. The total visitor arrivals in August were 7% below August of 2022, and visitor spend was 9% below August of 2022.
The housing market has remained stable in spite of higher interest rates and reduced activity. Median sales price for a single-family home on Oahu in September was $1.1 million, 4.5% below last September. The median sales price for condominiums on Oahu was $533,000, 6% higher than the previous year.
Turning to Slide 2, I'll provide some highlights of our solid third quarter financial performance. Net income was $58.2 million, $0.46 per share as we [indiscernible] through retail and commercial deposits. We continue to grow capital and credit quality remained excellent. Our return on average assets was 0.97% and return on average tangible common equity was 16.84%. We continue to maintain strong capital levels with a CET1 ratio of 12.2%, and total capital ratio of 13.38% at quarter end.
Turning to Slide 3. Our balance sheet remains solid. Cash and cash equivalents were slightly elevated at the end of the quarter as we had anticipated an outflow from our public deposit accounts. The average balance of cash and cash equivalents in the quarter was $885 million. The $500 million of short-term borrowings at the end of the quarter was not new, but it was a transition and classification of the existing borrowing as a move to less than 12 months maturity. We continue to have strong liquidity. As of September 30, our total available liquidity was $8.3 billion, which was 100% of uninsured nonpublic deposits. The investment portfolio continued to perform consistently through the volatile interest rate environment. The duration remains stable at 5.5 years and cash flows from the portfolio around about $69 million per month as expected.
Turning to Slide 4. Period-end loans and leases were $14.4 billion, about $30 million lower than Q2. We had good growth in CRE loans, primarily driven by $150 million of completed construction loans that converted to CRE. And then the paydowns in the construction loans were largely offset by draws on ongoing projects. The decline in C&I balances was due to a combination of a decrease in dealer floor plan balances, seasonal line payoffs and other loan payoffs. Looking forward, additional paydowns from completed construction projects will cause loan balances to be relatively flat in the fourth quarter. As a result, full year loan growth will be about 1%.
Now I'll turn it over to Jamie.
Thank you, Bob, and good morning, everyone. Turning to Slide 5. Our deposit base continues to show its strength as we grew balances in the third quarter. Deposits totaled $21.5 billion, which was a linked quarter increase of $433 million or 2.1%. The increase was driven by increases in retail, commercial and public operating deposits. Retail and commercial deposits increased by $332 million, with commercial deposits up $238 million and retail increasing by $94 million.
Public deposit balances increased by $102 million in the quarter, with operating balances growing by $129 million, which was partially offset by a $28 million decline in higher-cost public time deposits. The ratio of noninterest-bearing deposits to total deposits was 36.7%, which gets us back to roughly the 36% level we were at pre-COVID. Our total cost of deposits was 140 basis points in the third quarter, a 29 basis-point increase from the prior quarter due to higher rates paid and the continued shift in mix to higher rate deposit accounts.
Turning to Slide 6. Net interest income declined by $2.8 million from the prior quarter to $157.1 million. The decrease was primarily due to higher funding costs partially offset by higher asset yields. The net interest margin declined by 5 basis points to 2.86%. The decline in margin was much less than the forecast we shared last quarter and was a direct result of the stabilization in deposit balances in the third quarter, enabling us to pay down higher cost public time deposits and relieve some of the deposit cost pressure.
We anticipate that the NIM will trough in the mid-270 range sometime in the fourth quarter. Through the end of the third quarter, the cumulative betas were 40.7% on interest-bearing deposits and 25.5% on total deposits.
Turning to Slide 7. Noninterest income was $46.1 million this quarter, a $1.3 million decline from the prior quarter. This decline was primarily due to lower BOLI income due to the higher interest rates. Expenses were $119.4 million, $1.5 million lower than the prior quarter. The third quarter included approximately $600,000 of expenses related to the Maui wildfires and typhoon that struck Guam as well as $250,000 donation to the Maui Strong fund.
Now I'll turn it over to Lea.
Thank you, Jamie. Moving to Slide 8. The bank maintained its strong credit performance and healthy credit metrics in the third quarter. Commercial criticized assets ticked up to 1.07% of total loans and leases driven primarily by a single credit downgraded to special mention. Classified assets fell 20 basis points to 0.21% of total loans and leases, primarily due to the payoff of a single loan. Year-to-date net charge-offs were $6.5 million. Our annualized year-to-date net charge-off rate was 6 basis points, 4 basis points lower than in the second quarter.
Nonperforming assets and 90-day past due loans were 13 basis points at the end of the third quarter, up 2 basis points from the prior quarter. And lastly, the bank recorded a $7.5 million provision for the quarter.
Moving to Slide 9. We show our third quarter allowance for credit losses broken out by disclosure segments. The asset ACL increased by $6.2 million to $154.8 million, with coverage rising 5 basis points to 1.08% of total loans and leases. The increase this quarter is due primarily to the estimated potential impact of the Maui wildfires. We've included a slide in the appendix that summarizes our Maui lending exposure. While it's too soon to assess the long-term economic impact that the fires will have on Maui, our preliminary estimate of the potential loss related to the fires is $9.1 million. This estimate includes the potential impact to borrowers located both inside and outside of the fire zones as well as any insurance coverage.
Turning to Slide 10. We provide an updated snapshot of our commercial real estate exposure. CRE represents approximately 30% of total loans and leases. Credit quality remains strong with LTVs manageable and criticized loans comprising -- excuse me, continuing to comprise a very small portion of the portfolio. Criticized office CRE fell from 5.8% last quarter to 1.7% at the end of the third quarter. This decrease was due primarily to the previously mentioned loan payoff. This loan was our only office property in Downtown Los Angeles.
Let me now turn the call back to Bob for any closing remarks.
Thank you, Jamie and Lea. That concludes our prepared remarks. We'd be happy to take any of your questions.
[Operator Instructions] Our first question comes from Andrew Liesch with Piper Sandler.
On the margin guide, mid-270s. So it looks like that the pace of compression is going to pick up here in the fourth quarter. I guess, what's driving that?
Well, we still have some deposit mix shift that's happening. And we're still just kind of thinking through all of the -- all the dynamics of the balance sheet that are going to drive the NIM guide. So I think we have that continued mix shift from noninterest-bearing to interest-bearing. And we have some things happen in the third quarter that went our way that we're not expecting that they're going to continue to go our way in terms of the NIM for the fourth quarter. And just to give more color on that, Andrew, the September spot NIM was $2.79.
Okay. All right. That's helpful then. So good jump on NIM. Just a question on the criticized loans. It sounds like just 1 new 1 that came in this quarter. But if you look at the entire book of criticized, is there anything consistent, any themes amongst all of the loans that are in that portfolio?
Andrew, maybe I'll start. This is Bob and hand it off to Lea. We've just had results of that is that there's 1 or 2 loans that go 1 way or the other. It moves the needle on the percentages. So there's nothing out there that we're concerned about. We have talked in last quarter on the call about a couple of office loans. One of those was paid off. And that was a nice result for us, paid off in full, but nothing that I'm seeing. Lea?
No, I don't really have anything to add other than that particular loan. As with the other loans we've talked about before, they are really strong sponsors, and we're very comfortable and they continue to perform actually. So we're actually quite comfortable.
[Operator Instructions] Our next question comes from Kelly Motta with KBW.
I was hoping to dig a little bit more into the moving pieces of margin. It looks like your loan yields still went up really nicely. Just wondering, provided that the Fed is done hiking here, and I know that's a big assumption, what -- how much of your loans still continue to reprice kind of like on a quarter-over-quarter basis, assuming no rate changes, because I know a lot of your loans are floating rate?
Right. So thanks, Kelly. Good morning to you as well. So we have about $5.2 billion in loans that are floating rate, so we'll kind of reprice pretty consistently. And then you add into that, our fixed rate cash flows kind of over a 12-month period, you can think about that as like another $1.5 billion on average that would reprice throughout the year. So -- assuming balances were flat. So I think it's a pretty big number in terms of our balances on the balance sheet that will reprice. Again, right, assuming rates stay flat, those will all reprice to the higher market rates today.
And then adding to that, in the securities portfolio, that's another $700 million really on a 12-month look forward. about $2.2 billion of assets over the next 12 months repricing, Kelly. Repricing and turning into cash.
Got it. And then on the deposit front, I was just wondering maybe a 2-quarter one, with your margin guidance expecting you to trough now in the fourth quarter, as we look ahead to 2024, assuming the fourth quarter is at trough. What are you assuming for deposit stability thereafter? Do you think fourth quarter is they level off from here, the noninterest-bearing? Or does that outlook still assume some headwinds out there, but maybe a little less than what we've been seeing in the last 2 quarters?
Yes. No, I think there's a lot less headwinds than we've seen. We're seeing the pace of change slow down dramatically. We would expect that first quarter again, right, in flat rates, we're expecting a trough here in Q4. And then we would actually expect to start to see the NIM grind 2, 3 basis points higher, again, right, given flat interest rates at this point in time. So we're encouraged by the stability of the deposit base, and we're encouraged with the dynamics that we see, but more recently relative to earlier in the year.
So I think it's a generally pretty stable and good story for us heading into the end of this year and into next year.
Got it. I guess just asking a little bit in a little different way. Does that assume -- I guess, do you need the noninterest-bearing stability in order to get that margin improvement ahead? Or does that guidance of inflection of Q4 still assume a modest downtick in noninterest-bearing deposits?
Yes. No, good question, Kelly. I mean I think we would still have an ability to have the margin go higher even with slight downticks in the noninterest-bearing deposits. Again, we're right at the level where we were pre-COVID. I don't want to declare victory on that yet, but I don't think we're thinking too much lower from this point. But we also have the phenomenon of all those cash flows repricing over time as well, right? Those fixed rate loans that are coming off, but then repricing to higher levels as we go forward. So it's not entirely dependent on the deposit forecast, I would say.
Last kind of question for me and then I'll step back. Again, I'm so sorry about the Maui wildfires. My heart goes out to all those people and your employees and customers there. I'm wondering, have you seen cash flows related to insurance payments and relief funds impact your deposit flows at all? And how should we be thinking about that, if at all, at this point?
Kelly, this is Bob. That's a great question. And we have started to see the insurance payouts happen, which is great. I mean the insurers have been very proactive being out in the field and trying to help their customers, both individuals and businesses. We haven't seen a significant amount on our balance sheet as yet, but that could happen over time.
Our next question comes from David Feaster with Raymond James.
Maybe just kind of following up on that. At the outset, you talked a bit about the -- maybe tourism doesn't come back as quickly as end of November, like we were talking about or early November. And ultimately, kind of a stimulating impact from an economic perspective over time. I'm just kind of curious how -- like how do you think this plays out? And maybe the time line into some of the broader economic backdrop from your perspective, given all that's going on?
Dave, I'll -- let me start. There's a number of things going on. This is obviously very complicated. I think what -- by the mayor setting November 1 open date. What that does, it allows people to plan. It's not to plan to start coming back on November 1, but it's the plan, oh, I can come back to Maui. And the key -- 1 of the key periods for tourism here in the island is the holidays. And so that gives people, do I want to come back over the Thanksgiving the holidays or make plans over the Christmas and New Year's holidays. It opens up that planning window.
So I do believe you will start to see activity start to come back over the holidays, maybe not as soon as Thanksgiving, but probably over the Christmas and New Year's holidays. That's an estimate on my part. That's not an official forecast by Eero, but that just gives people individuals time to think about that. The pace of recovery and taking care of things on the ground in Lahina. Everybody would like it to move faster, but there is a pace that this goes at.
The EPA is there. They've made a tremendous amount of progress. I saw an article yesterday, they're at about 85% removal of hazardous materials. FEMA has been on the ground, been very proactive. I was talking to a friend of mine, who has boat operations in Maui, and Lahina, yesterday. He said that the Coast Guard has taken out 90 vessels of -- I'm sorry, 80% of the vessels of about 100 that are out there that have been removed. So the federal authorities are on the ground, doing good work, doing stuff, but it will take time. And I think that's the thing that is really hard to forecast.
So when insurance money will come in, when work will get done. But on the tourism side, we have started to see that not only people redirecting out of Maui to other Hawaii islands, but also hopefully making plans to go back to Maui in the near future.
Yes. Okay. That makes sense. I appreciate that. And maybe just touching on the loan side. I appreciate the commentary, loans going to be relatively flattish. I'm just curious how much of this you talked about the construction paying off. We had some headwinds from the dealer floor plan. I'm just curious, how is demand from your perspective? And how much of the slowdown in loan growth is push versus pull, right? I mean, a weaker demand versus maybe you're having less appetite for loan growth at this point in the cycle? I'm just curious, some of the puts and takes on that side.
Sure. Great question. We're still very interested in doing loans that we feel makes sense for us, and we can support our customers. So it's not us slowing down for sure, but we have seen a softening in demand. And so I think that's what it is. We had thought that there would be higher floor plan balances and they were down marginally, but the strike has created uncertainty as well. Hopefully, that's been resolved. But those -- the loan demand does seem to be softer. Certainly, in the consumer side with residential down dramatically. HELOC has softened a bit. So it's much more demand driven than supply driven for us.
Okay. That makes sense. And I guess last 1 for me, just on the capital front. I mean, regulatory capital is pretty strong. TCE kind of held steady here. I'm just curious how you think about capital priorities at this point in the cycle? Is capital preservation still paramount or just curious whether there's any opportunities that you see for capital deployment?
I mean I think we're kind of in the same boat that we have been in over the past couple of quarters, Dave. TCE is still probably a little lower than we'd like it to be in uncertain rate environment, see how that sort of plays out. We feel good about the regulatory ratios, clearly, but no new plans in terms of executing on the buyback at the moment. We continue to feel good about the dividend and the way that we've been thinking about our capital over the past couple of quarters. So no real changes in that regard.
Is there any change in the thoughts on rate sensitivity management or hedging? I mean, the impacts from higher rates was better than I think some had feared on the AOCI front. I'm just curious, as you think about managing rate sensitivity, has there been any change in your thoughts just assuming we're in tire environment?
Right. I wouldn't say that there's been necessarily a change. I mean we're aware of some of the actions that folks have been taking over the past quarter. We're continuing to monitor those sorts of things. I think as time goes by, it seems like maybe we get more and more open, some changes, but nothing imminent from that perspective. We're aware of what's going on out there. We see what people are doing. We understand why they're doing those things. And every balance sheet is different, and ours is different than others as well. So we're aware of what's going on, and we're continuing to look at it.
Our next question comes from Christian DeGrasse with Goldman Sachs.
So correct me if I'm wrong, but just looking at the slides and comparing it with last quarter. It looks like that 1 credit that went into the criticized bucket was in multifamily. We've heard some other banks kind of be getting to point to some signs of really early of stress and multifamily just given rising interest rates and pretty expensive funding costs there. Can you maybe just talk about what you're seeing broadly in your multifamily book as well as, if I'm correct, what is happening and what you're seeing with that specific credit?
Well, great question, Christian. This is Bob Harrison. We don't comment on specific credits, but I think more broadly on multifamily, we're very comfortable with the underwriting we've had over the last any number of years as we've kind of pursued that strategy. There was a credit that I think Lea was talking about a very strong sponsorship that she can speak to, I'll turn it over to her. But I think more broadly, we're very comfortable with the underwriting we've done. In fact, 1 of the things pressuring our loan balances in Q4 is a number of our multifamily projects are coming to completion, and they're getting paid off either through refinance or other ways. So that's, to me, the ultimate judgment on our underwriting as they are performing exactly as we expected them to. Lea, anything to add?
No, I don't really have anything to add other than we had a strategy going in, right, that we would stick to gateway cities, we would always seek out strong sponsors that we knew very well or if it was a syndicated deal where we knew the bank that was the agent. And so we've actually benefited from all that. While we have recognized that in the industry, there are some concerns, we are actually still very comfortable with our position.
Our next question is a follow-up question from Andrew Liesch with Piper Sandler.
Do you have the balance of shared national credits that are outstanding right now?
We do. Give us just a minute, Andrew. I think it's $1.73 billion. That's actually for the quarter. The Hawaii portion of that went up and the Mainland portion of that went down.
Our next question is a follow-up question from Kelly Motta with KBW.
I was just hoping to get a bit more color on the expense front backing out some of the natural disaster-related expenses you called out. They were relatively flat. Just wondering as you look ahead, anything we should be keeping in mind in terms of investment that could elevate that? And maybe if you could comment on any inflationary pressures you may or may not be seeing? And how that kind of feeds into how we should be looking at expenses as we close out the year and into 2024?
Sure. Yes, so we're not ready to give guidance on '24 yet, Kelly. But I would say, Q4, we would expect our expenses to be to down flat or so from Q3. So we feel pretty good about the expense run rate as it exists today from Q3 to Q4.
And this is a high season for our budget process. So we we're not looking to 2024 just yet, but thank you for the question.
And I'm not showing any further questions at this time. I'd like to turn the call back over to Kevin for any closing remarks.
Thanks. 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 have a good weekend.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.