First Hawaiian Inc
NASDAQ:FHB
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First Hawaiian Inc
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Good day, ladies and gentlemen and welcome to the First Hawaiian Q4 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the conference over to your host, Mr. Kevin Haseyama. Sir you may begin.
Thank you, Valerie and thank you everyone for joining us as we review our financial results for the fourth quarter of 2017. With me today are Bob Harrison, Chairman and CEO; Eric Yeaman, President and COO; Mike Ching, CFO and Treasurer; 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.
Before I turn things over to Bob, I would like to direct you to Slide 2 and remind you that we may make forward-looking statements during today’s call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see our SEC filings, including our Form 10-K for the year ended December 31, 2016. We will also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measures to comparable GAAP measures.
And now I will turn the call over to Bob who will provide you with the fourth quarter highlights starting on Slide 3.
Thank you, Kevin and aloha everyone and thanks for joining us today. I am pleased to report that we were able to finish the year with the strong fourth quarter. Core earnings and performance metrics remains solid. We maintained our disciplined and strategy approach to growing our loan portfolio and credit quality remains excellent. We are also starting to see the initial results from one of our key initiatives the shift in our residential mortgage lending model.
Net income for the quarter was $11.7 million or $0.08 per diluted share as our results were primarily impacted by a one-time charge provided for income taxes of $47.6 million due to the revaluation of certain tax related assets at the projected lower corporate tax rate due to the passage of the Tax Cuts and Jobs Act. Core net income for the quarter was $59.2 million or $0.42 per diluted share, up $2.1 million or 3.9% from the prior quarter and up $3.2 million or up 5.7% from the year ago quarter.
I am also pleased to report that yesterday our Board of Directors increased our quarterly dividend by 9.1% to $0.24 per share from $0.22 per share payable on March 9, 2018 to stockholders of record at the close of business on February 26. Loans and leases grew $128 million during the quarter or 1.1% to $12.3 billion, while deposits remain stable at $17.6 billion. Eric will go into the details with the changes when he discusses the balance sheet. Asset quality continues to be excellent. We remained well capitalized and our profitability measures are solid.
For the quarter, return on average tangible assets was 0.24% and return on average tangible common equity was 2.94%. Excluding non-core items, core return on average tangible assets was 1.22% and core return on average tangible common equity was 14.9%. I also want to mention a couple of recognitions the bank received that we are particularly proud of. Our efforts in serving the small business community resulted in us being named Hawaii’s 2017 SBA Lender of the Year for Category 1 and 2017 SBA 504 Lender of the Year by the Small Business Administration. This was the first time that a bank earned both of these awards outright in the same year and it’s a testament to the hard work of our employees and demonstrates our commitments to the communities we serve. In addition, Forbes Magazine recently ranked us as one of the top 10 best banks in America. And then finally on December 18 of last year, First Hawaiian was added to the KBW Regional Bank Index.
Going to Slide 4 before I turn things over to Mike, I would like to take a moment to go over the impact of the Tax Cuts and Jobs Act. As I mentioned on the previous slide, we recognized a provision to income tax in the fourth quarter due to the revaluation of our deferred tax assets. This charge was $47.6 million and was based on our current projection of an effective tax rate of approximately 26% in 2018, down over 11 percentage points from our adjusted Q4 tax rate of 37.1%. We plan to invest approximately 20% of the tax savings into the business consistent with our recent focus on investing in our people, our digital platforms and our branches. With respect to our people, we have consistently viewed our team members as a strategic advantage and a key part of our relationship strategy. As such, we recently increased our minimum hourly pay to $15.
For our digital platforms, we will look to accelerate the implementation of new features and functionality to drive increased adoption in business growth. With regard to our branches, we will look for opportunities to accelerate investments that will improve efficiency in the customer experience. For shareholders, we increased our quarterly dividend to $0.24 per share, an increase of $0.02 per share. And over time other than the portion of the tax savings we intend to reinvest in the business, we anticipate that a substantial portion of the remaining tax savings will result in enhanced capital distributions.
With that, I will turn it over to Mike to go over the financials.
Thanks Bob. Turning to Slide 5, net income for the quarter was $11.7 million or $0.08 per diluted share. Bob mentioned net income was impacted by $47.6 million charge provision for income taxes. After adjusting for the charge and other non-core items, core net income was $59.2 million or $0.42 per diluted share. Net income for the full year 2017 was $183.7 million or $1.32 per diluted share and core net income for the full year 2017 was $230.4 million or $1.65 per diluted share.
Turning to Slide 6, net interest income in the fourth quarter was $134.9 million, an increase of $1.6 million compared to the prior quarter. The increase in net interest income compared to the prior quarter was primarily due to higher average balances of loans and investment securities and higher yields on investment securities partially offset by higher rates on deposits. Net interest margin for the fourth quarter was 2.99%, an increase of 3 basis points from the prior quarter, primarily due to increased overall yields in our earning assets and offset by higher deposit costs.
Turning to Slide 7, we show non-interest income adjusted for the reclassifications we noted in the earnings release. Non-interest income in Q4 was $54.3 million, an increase of $4.6 million compared to the third quarter of 2017. Other income in the fourth quarter was $6.2 million higher than the third quarter primarily due to a $4.3 million gain on the sale of a bank property compared to a $2.7 million gain on a sale in the third quarter. Also in the fourth quarter, other non-interest income included $3.7 million related to an increase in an intercompany receivable for taxes, which was fully offset by an increase in tax provision for the same amount.
Non-interest expense shown on Slide 8 also adjusted for the reclassifications was $89.9 million in the fourth quarter, an increase of $5.1 million from the third quarter. Compared to Q3, significant variances included an increase in salaries and employee benefits of $5.6 million, $3.7 million is due to the special $1,500 employee bonuses and the residual was due to higher mortgage loan officer compensation and the impact of the previously announced teller pay adjustments. In addition, Priority Rewards expenses were higher by approximately $800,000. These increases were offset by lower advertising and marketing expenses and lower other expenses. So, the efficiency ratio in the fourth quarter of 2017 is 47.5% and for the full year 2017, the efficiency ratio was 47.3%. As Bob mentioned earlier, we expect to reinvest approximately 20% of the tax savings back into the business during 2018. As a result, our outlook for the efficiency ratio in 2018 is now in the 48% to 49% range.
With that, I will turn the call over to Eric to cover the balance sheet starting on Slide 9.
Thanks Mike. Total assets at the end of the fourth quarter were $20.5 billion essentially unchanged from the end of the third quarter. During the quarter, growth in our loan and lease portfolio of $128 million more than offset the decrease in the fair value of our investment securities portfolio. The duration of the investment securities portfolio was 3.6 years at the end of the fourth quarter, up slightly from 3.4 years at the end of the third quarter. The yield on our new investments during the quarter was about 2.83%, while the yield on the run-off was about 1.84%. Premium amortization was $4.3 million in the fourth quarter, down from the prior quarter by $1.3 million. Total shareholder’s equity was $2.5 billion at the end of the fourth quarter, down slightly from the third quarter primarily due to the one-time charge to income tax provision. We remain well capitalized at the end of the fourth quarter with a leverage ratio of 8.52%, Tier 1 capital ratio of 12.45% and a total capital ratio of 13.5%.
Turning to Slide 10, total loans and leases grew by $128 million or 1.1% to $12.3 billion in the fourth quarter. During the quarter, we continued to experience growth in all segments of the loan portfolio with the exception of C&I loans. Residential real estate loans grew by $88 million or 2.2% during the quarter as we started to see the benefits from the change in our mortgage lending model from a branch space to a mortgage loan officer model. We feel this change positions us well, but anticipated shift in the mortgage market as industry groups are forecasting that the percentage of purchase loans will increase while the percentage of refis will decrease.
During the quarter, the commercial real estate portfolio grew by $42 million or 1.6%. Construction loans increased by $34 million or 5.7% and consumer loans grew by $24 million or 1.6%. C&I loan balances decreased by about $55 million, primarily driven by pay downs in the SNC portfolio as high quality borrowers paid down loans with internally generated funds or refinance those loans in the bond market. For the full year, total loans and leases were up $757 million or 6.6%. Looking forward, while the outlook for the local economy is still good and we have a healthy pipeline, we are seeing certain sectors starting to level off so we expect our loan growth for 2018 to be in the mid single-digit range.
Turning to Slide 11, you can see that total deposits were unchanged in the fourth quarter at $17.6 billion. However, we did see a shift in the mix as we reduced our public deposit balances by $466 million due primarily to growth in commercial deposits. On a year-to-date basis deposit balances were up $118 million or 4.9%.
Now, I will turn the call over to Ralph to cover asset quality.
Thank you, Eric. On Slide 12, we provided an overview of our asset quality. This continued to be strong at quarter end, credit costs were low and in line with our expectations for the full year. Non-performing assets remain well within our risk limits and the level of reserves provides good coverage for future losses. Net charge-offs were $5.2 million for the quarter, on an annualized basis this amounts to 17 basis points on average loans and leases. This is 4 basis points higher than the prior quarter and 5 basis points higher than the fourth quarter of 2016. Total non-performing assets were $10.2 million or 8 basis points of total loans and leases and other real estate loans. This is up 1 basis point from the prior quarter and unchanged year-over-year. In the fourth quarter the provision was $5.1 million, the allowance for loan and lease losses was $137.3 million at December 31 and the ratio of this reserve relative to total loans and leases was 112 basis points.
And now, I will turn the call back over to Bob.
Thank you, Ralph. Turning to Slide 13, you can see the Hawaii’s economy continuous to perform well. The state unemployment rate was 2% in December compared to 4.1% nationally. The visitor industry remained robust through the first 11 months of the year with year-to-date visitor arrivals through November 8.5 million, up 4.9% over the same period last year. More importantly, visitor spending was $15.1 billion, an increase of 6.6% versus same period last year. The real estate market remains sound as sales volume continued to increase and prices improved at a measured rate. And one more thing before I open up to questions, you have all seen the news that Mike Ching will be leaving us at the end of the month, I will take this opportunity to thank Mike for his contribution to our company and wish him the best in the future.
With that, we will be happy to answer your questions. Valerie, do you have the instructions for questions?
Thank you. [Operator Instructions] Our first question comes from Dave Rochester, Deutsche Bank. Your line is open.
Dave? Are we having technical difficulties Valerie?
One moment please. Laurie Hunsicker, your line is open.
Yes. Hi, good afternoon. Can you hear me?
Yes. We can Laurie, go ahead.
Okay, great. Thanks. Yes. I just wanted to just start back with your tax windfall reinvestment, you said 20% of tax saves back into the business, so that’s roughly $9 million to $10 million, am I doing that math right?
Yes. That’s correct. Yes. This is Bob and that’s correct. And about as Mike mentioned about $5.7 million of that will be for the raising the minimum wage to $15 and the follow-on compression effects of that.
Okay, great. And then can you just update us where we would stand in terms of thinking about your public company spend for 2018?
Hi Laurie, this is Mike. So it’s still consistent with the prior guidance that we have given and again this is comparative to prior to when we went public in 2015. Still in that $16 million range, that’s still included – that’s all included in that 49% efficiency.
Okay. I mean I guess just to ask you different way, because a lot of these costs are already fully baked and you have been renegotiating your contracts including I think I recall the FIS contract was the biggest and so if we were to think about just incrementally from where we are currently, I think you have turned out a number in the past, recently $500,000 per quarter increased, is it still there or is that maybe even slightly less?
Well, it’s the reason we are continuing to give the guidance on the efficiency ratio Laurie is because while we renegotiated some of the contracts, not of all of them will become effective yet and so as we kind of look out for the rest of – for 2018 that’s how we gave the guidance with the 48%, 49%. Mike do you have anything to add to that?
No.
Okay. And then you mentioned the premium amortization was $4.3 million, did I get that correctly?
Correct. So it’s correct.
Okay. So your core margin is $289 million, so you actually had a 4 basis point widening in your core margin linked quarter?
We were at $299 million for our NIM and that’s up few basis points quarter-over-quarter.
Right, your reported margin, if I am just taking out the premium amortization impact, so the round number is 10 basis points and you are sitting at a core NIM ex that of $289 million, I guess how should we be thinking about or let me ask you a different question, going over to your public funds, you mentioned that you had a drop there, what was the drop and then what’s the split there between the time and the checking?
Yes. So the drop was $466 million.
And was that in the time as a checking or was that split?
Does in the time?
Okay. So that’s now down to about $1.9 million?
Correct.
Okay. And do you have a cost on that?
We haven’t been sharing that Laurie.
Okay. And so I mean I guess as we are looking I mean overall your cost of deposits is incredibly low ex CD. You are sitting at 7 basis points. So, again I guess just going back over to margin directionally how should we be thinking about margin here? Go ahead.
Looking at the Fed rate increase in December and we think that will certainly make an impact for Q1 and any future rate increases as I said continues to consider increases given that we are still about 30% of our loan book is tied to LIBOR primarily 1-month LIBOR. We see that pretty quickly in the NIM. And we have been able to control our deposit costs. That’s one of the reasons we were taking down a bit the public deposits, because as we talked about in the previous calls and the conferences, it got to be an expensive cost of funding over the last 12 months to 18 months.
Sure, it’s okay. And then just one other income statement question here, within the other line the $11.5 million, I know you have the gain on sales of the bank property of $4.2 million, but if we strip it out that’s still elevated, was there something else one-time in that number?
Yes. Laurie, this is Mike. There is a – I mentioned that there is a $3.7 million other non-income items that relates to the increase of an intercompany receivable. However, there is a one-for-one offset to that in our income tax provision line. So there is really no impact to the bottom line on that.
Thank you. Our next comes from Dave Rochester of Deutsche Bank. Your line is open.
Alright. I checked my mute button about 10 times now, can you hear me?
Yes, we can Dave.
Yes, Dave.
Right. Good morning everybody. Glad to be here. Okay. So, just on the deposit pricing front, I was wondering if you can just talk about the competitive environment and then if you can give some color on what you are expecting for the NIM going forward given the December hike, I think you had mentioned previously getting maybe 5 basis points to 6 basis points of expansion with the next hike, so any color there would be great?
Dave, I will cover the deposit pricing and then Mike can cover the NIM. Overall, we are still seeing a pretty rational market relative to deposits except for the public deposit side. We talked about it the last quarter, that being said, we are starting to see that moderate and stabilize still go at elevated levels.
Yes. Dave, on NIM and Bob alluded to this, but we are looking for NIM expansion in Q1, we think by a few basis points. We did see now about 1 year ago, we did see our NIM improved from Q4 of ‘16 to Q1 of ‘17 by almost 6 basis points. But we have a slightly different environment with respect to our public deposit costs than 1 year ago. And so we wouldn’t expect that same rate of expansion.
Okay. And then as it relates to your efficiency ratio guidance, how many hikes are you factoring into 2018 and what’s the timing on those?
We have got two hikes, Dave. I think March and June.
Perfect. And then on capital you guys had mentioned enhanced capital distributions, can you just give any additional color on what you are thinking beside the dividend increase we just saw, which was a nice increase?
Sure, yes. Dave this is Bob. Certainly, as we have talked about in the past we looked to be high return bank and we know that our steady performance leads us to that. We are still a CCAR filer, so we still have to work within the constraints of that for our top-tier holding company. But we look to see that over time we would return capital via either a special dividend or potentially share repurchase, but that would be something that we would add to through over time as we look to say within the regulatory constraints that we are working under.
Yes. And in terms of prioritizing that, would it be buyback over the special dividend?
I think certainly, we would start with the buyback would be the first thing we would be looking at.
Great. And then just one last one for me, you guys have mentioned mid single-digit loan growth for this year, which I think you had also given on the last call, can you just update us on what areas you think will drive the bulk of that growth and do you think tax reform could help actually boosts activating any particular areas?
Sure. Dave, this is Eric. I think we continue to see growth opportunities across all aspects of the portfolio, probably the CRE and the residential real estate we are looking probably in the higher end of that range. And then on the consumer side sort of in the middle of the range and then the C&I probably on the lower end of the range. With regards to the impact of the tax reform, I think is – is too early to really tell, what the impact would be at this stage. We are not too concerned, but we will obviously continue to monitor the situation.
I think some out there have sort of put forth a thesis that tax reform and the boosting of GDP growth could help accelerate C&I growth, what are your thoughts on that and what are you seeing to suggest that maybe you will have the slower C&I growth this year?
This is Bob, Dave. I understand the logic, I don’t disagree with it, but I just can’t point anything this early that would say that’s going to happen, but certainly we have taken the step to increase wages, many of our competitors have not only in the financial services industry, but in other industries, which if you put give more money to people oftentimes that leads to a greater spend and hopefully that will lead to an increase in confidence where businesses feel comfortable expanding, but we just haven’t seen any tangible things happen yet, but that logic certainly holds together.
Okay, alright great. Thanks guys. Appreciate it.
Thank you. [Operator Instructions] We have a question from Jared Shaw of Wells Fargo Securities. Your line is open.
Hi, good afternoon. This is actually Timur Braziler filling in for Jared. Maybe just one follow-up on the lending side in your prepared remarks you had said that some asset classes are starting to crew off a little bit, can you maybe talk about which verticals you are starting to see some relative weakness in?
Yes. I think we have been talking about over the last couple of quarters the slowdown on the C&I side just because of significant pay-downs primarily because of the high-quality loans we have in that portfolio and excess funds that companies have. So we expect that, that’s going to continue. We have seen very strong growth in the indirect portfolio. We still see growth, but it’s probably going to moderate slightly into 2018. That will be offset by strong growth on the real estate side both in commercial and residential.
Okay, that’s helpful. And then what was the shared national credits balance at the end of the year and what would that do on a quarter-over-quarter basis?
Yes. So, total SNCs actually went down to $1.4 billion from $1.49 billion in the third quarter.
Okay. So, about $50 million of non-SNC related C&I growth $45 million or something, okay, thank you. All my other questions were answered.
Thanks.
Thank you. Our next question comes from Jackie Bohlen of KBW. Your line is open.
Hi, everyone. I know that you don’t want to discuss the rate on the public deposits, but just speaking generally about them, when we talked last quarter, you had talked about the magnitude of what the rate increase had been in the third quarter in an effort to mitigate future rate increases, was that strategy effective?
It was effective. And actually, we have seen an increase in the overall public deposits. I think we have mentioned that before it was at 99 basis points in Q3 and were up to 115 in Q4. That’s for all of our public deposits.
Okay. I must have missed that. Sorry about that. And then the bank property sales, you have them two quarters in a row now, if you could just provide a little bit of background on those and if you expect to see more in 2018?
No, this is Bob, Jackie. We don’t expect to see that those are unusual. One was a condemnation sale related to a property that was in the way of the rail line and the second was just something that we have gotten approached on for a property that was no longer used by the bank. And so we just took advantage of the interest and went ahead and sold it, but we don’t have anything currently that we are working on that would lead to that happening again.
Okay. And then just one last one kind of a housekeeping question, the intercompany receivables that you spoke about with the tax offset, is that something that will be ongoing or was it just a fourth quarter event?
Well, we are still – we are counting certain liabilities that we assumed as part of the reorganization back in 2016 and so we still carry the liabilities to the extent that is there any changes in the level or the amount of liability and again that’s offset against the receivable. So, you could see that change period-over-period.
Okay, but it would be likely not much of an impact to net income, because it would be offset through other line items?
There would be no impact to P&L.
Okay, alright. Thank you.
Thank you. Our next question comes from Matthew Keating of Barclays. Your line is open.
Yes, thank you. I just have a question around expenses as we move into the first quarter, I know typically there is some seasonality there with annual merit increases over time expenses and maybe higher payroll taxes rather in the first quarter given the other employee investments you are making what’s a good base to be thinking about for expenses in the first quarter? Thanks.
I don’t know we will give out sort of the base indicator, but you are correct that we do have seasonal increases, especially in the comp area, some of the payroll taxes as mentioned are elevated and so we would expect that again for this quarter.
Okay. And then sorry if I ever missed this, but maybe you could just provide the dealer floor plant balances as of the end of the year? Thanks.
Yes, sure. The dealer floor plant was $912 million split between the Mainland and then Hawaii and Guam, $565 million on the Mainland and $347 million for Hawaii and Guam.
Thank you.
Thank you. Our next question comes from Laurie Hunsicker of Compass Point. Your line is open.
Yes. Hi, thanks gentlemen. Just very quick follow-up, what is the impact of the Tax Act on your margins?
Very minimal. I think as you are aware, we hardly have any municipals in our book. We had some loans from housing, but not by significant volume, so very minimal impact.
Okay. So, 1 basis point, 2 basis points or….
I would say not even that.
Not even that. Perfect, thank you very much.
Thank you. I am showing no further questions from the phone lines. I will turn the conference back over to Kevin Haseyama for any closing remarks.
Thank you, everyone for joining us on today’s call and we appreciate your interest in First Hawaiian. Have a good day.
Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.