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. Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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, Investor of Relations Manager, Kevin Haseyama, Sir, please go ahead.
Thank you [indiscernible] and thank you, everyone, for joining us, as we review our financial results for the fourth quarter of 2019. With me today are Bob Harrison, Chairman, President and CEO; Ravi Mallela, CFO; 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 in the Investor Relations section of our website at fhb.com.
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 fourth quarter highlights starting on Slide 2.
Thank you, Kevin. Aloha, everyone, and thank you for joining us today as we review our fourth quarter results. I am pleased to report that we ended 2019 with a great quarter driven by strong loan growth and improved deposit mix, prudent expense management and excellent credit quality.
Our profitability measures remains strong with the core return on average tangible assets of 1.48% and a core return on average tangible common equity of 17.22%. During the quarter we executed an additional $37 million of share repurchases bringing the 2019 year-to-date total repurchases to $136 million. The board of directors also declared $0.26 per share dividend and looking forward to the [stellar plant] to maintain the dividend payout ratio around 50% of earnings. The board also approved a share repurchase program for up to $80 million of common stock.
As we distribute dividend and execute repurchases we will be targeting a common equity tier one ratio of about 12%.
Turning to slide 3, I want to take a quick look back and touch on a couple of items before handing the call over to Ravi. 2019 was our first year bank as fully independent bank. The team did a great job managing the bank through the transition, absorbing the additional cost and improving the quality of our balance sheet, while continuing to deliver outstanding financial performance.
We also worked hard on improving the customer experience during the transition. Our Net Promoter Score most recently at 59.6% has significantly improved since we began measuring it over three years ago.
Going forward we are continuing to invest in technology to enhance the customer experience and increase automation. We are in the process of implementing a new core system and modernizing our digital architecture. These improvements will make us more agile on working with technology partners and in developing our own products. And now I will turn it over to Ravi for the financials.
Thank you Bob. Turning to slide 4 we had very good strong loan growth in the quarter. Period end loans and leases were $13.2 billion, up $368 million or 2.9% versus the prior quarter. For the full year loans grew a $135 million excluding the sale of $409 million of snick loans in the third quarter full year loan growth was $544 million or 4.2%. We had good growth in most areas with the largest growth coming in CRE, residential and CNI loans.
CRE loans grew by $155 million with growth coming from Hawaii and the mainland. Residential mortgages grew by $98 million as production continued to benefit from low mortgage rates. CNI loans grew by $89 million. Looking forward we expect loan growth in 2020 to be in the 3% to 4% range.
Turning to slide 5, our cost of deposits decreased by 10 basis points to 44 basis points in the fourth quarter and interest bearing deposit costs fell 15 basis points to 68 basis points. Total deposit balances ended the quarter at $16.4 billion, down $412 million from the prior quarter.
Consumer and commercial deposits grew by $253 million after adjusting for the withdrawal of a $400 million temporary commercial deposit at the start of the quarter. In addition to the commercial deposit withdrawal a $266 million decrease in public deposits also contributed to the overall decline in total deposits for the quarter.
Turning to slide 6, net interest margin in the fourth quarter was 3.15% a 4 basis points decrease from the reported third quarter NIM of 3.19%. We were able to partially offset the impact of lower yields on loans through improved deposit pricing. Net interest income in the fourth quarter was $139.6 million a slight decrease versus the prior quarter. The lower average loan balances in the fourth quarter was primarily due to the sale of loans in the third quarter.
Looking forward assuming no Fed rate moves this year and no significant changes in the shape of the yield curve we expect the NIM to be relatively stable in the 3.15% range.
Turning to slide 7, non-interest income was $46.7 million, $3.3 million lower than the prior quarter. BOLI income was $3.2 million lower in the fourth quarter due to lower interest income and the $1.7 million in death benefits recognized in the third quarter.
Other income in the fourth quarter included a $4.5 million charge on the mark-to-market swap for the visa Class B shares sold in 2016. Non-interest expenses were $91.1 million, $2.4 million lower than the prior quarter. Non-interest expenses in the third quarter included $2.2 million of non-recurring expenses.
Looking forward to 2020 we anticipate that expenses will increase approximately 6% over 2019 core non-interest expenses. The drivers behind the growth can be broken down as follows. First there will be a $6.5 million step-up in expenses because reimbursements from BNPP ended in 2019. This contributes about 1.8% to the 2020 increase.
Inflation related growth will add about 2% to 3% to expenses. Also as Bob had mentioned we have been and will continue to invest in technology projects that will enhance our customer experience and provide operational efficiencies. These expenses are expected to contribute about 1% to 2% to the growth.
With that I'll turn the call over to Ralph to cover asset quality.
Thank You Ravi. If I could turn your attention to slide 8 in the deck you see that we continue to have a high level of asset quality. Credit costs remain low and under our historical average. Non-performing assets were minimal at quarter end. Total non-performing assets were $5.8 million or 4 basis points of total loans and leases and other real estate owned. Net charge offs were $6.7 million for the quarter. On an annualized basis system this amounts to 20 basis points on average loans and leases. For the fourth quarter the provision expense was $4.3 million and the allowance for loan and lease losses decreased by $2.4 million dollars to $130.5 million which is 99 basis points to total loans and leases down 5 basis points versus the prior quarter.
With respect to CECL we have no changes to our previously disclosed estimates. Based on our current portfolio and expected economic conditions we estimate that the adoption would increase our reserve by about 10% to 15% and now let me turn the call back over to Bob.
Thanks Ralph. Turning to slide 9 Hawaii's economy remained steady in the fourth quarter. State unemployment rate was 2.6% December compared to 3.5% nationally. The visitor industry continued to operate at a high level through the first 11 months of the year and year-to-date through November visitor arrivals were 9.5 million, up 5.4% versus the same period last year.
Visitor spending was $16 billion through November a 0.5% higher than the same period last year. The real estate market in Hawaii remains sound. The median single-family home prices on Oahu were relatively flat on a year-over-year basis and the overall market remains stable.
Looking forward while there are some signs of slowing, the economy here in Hawaii continues to operate at a very high level and overall outlook is stable. And with that would be happy to take any of your questions.
[Operator Instructions] Our first question comes from the line of Ebrahim Poonawala of Bank of America. Your line is open.
Good morning guys.
Good morning.
So I guess the first question around loan growth very strong fourth quarter as we look at your guidance for 3% to 4% for 2020 what does it assume? So are you planning for additional exits within the snick book or are you done with that in terms of repositioning of that portfolio and just in terms of strengthening the fourth quarter why do you not see that kind of continuing and leading to probably better than the 3% to 4% guidance you've given.
Yes. A number of questions Ebrahim, let me start with the snick book and we’ve repositioned that as you know at the third quarter last year. We are happy where it's at. We're not anticipating any more repositioning out of hand, out of the normal maintenance there. We do deals come up we look at that and decide if we want to stay in or not. So that's kind of a ongoing portfolio from that standpoint. We're not anticipating any big swings.
[indiscernible] We just had a very strong quarter. We did again last year as well and it's just some of the timing of when deals closed, etc. We're starting to see some good funding on the construction projects and so that's been kind of a wind in our back for the quarter. We see that continuing in a little bit of next year but it's hard to predict the entire year of one strong quarter and so we're very comfortable at the 3% to 4% range is kind of our balance growth continues.
Understood and I guess Ravi tells all the details on the expenses I guess if used at $370 million base for 2019 gets you to about 392 for the full year. I guess two questions one should we expect the, how should we think about the run rate of expense growth in 2020? Is it back half loaded or should we expect the steady increases as we go through the quarters and what's your expectation in terms of how this, what does imply for the efficiency ratio for the full year?
Yes, I think there are two questions there Ebrahim. The first question is I don't know whether we have any specific insight onto when the timing of those expenses would occur. I think if you think about them as a full year we wanted to give a full-year guidance and I think that's kind of where we're landed for the year. You can maybe spread that out over the course of the year. We've been very specific about the guidance on expenses and I think in the past we've given guidance on the efficiency ratio just because of changes in the rate environment and frankly the transition and now there were through the transition and assuming a very stable rate environment with no Fed changes for the year, I think we feel very comfortable with guiding to expenses as opposed to giving a guidance on efficiency ratio.
Got it and if I can just follow up on that in terms of the 1% to 2% tech investment related expense growth you talked about Ravi, is that something that we and I know you're not guiding for ‘21 right now but as we think about on a go-forward basis is that kind of what we should assume in your expenses on rate or is 2020 a little bit unique in terms of things that you're doing?
Well, let me start with that Ebrahim. This is Bob and we don't give expense guidance past the one-year but we will continue to invest in the technology. We're expecting to see some process improvements and benefits from the core conversion. We're going to take those efficiencies into both the front office in the back office and kind of reposition that spend into other things in the digital world to help us better serve our customers and be more efficient. So we're going to very closely watch that number. We've never gotten too far ahead of ourselves on the expenses. So we're going to continue to manage that closely.
Got it. Thanks for taking my questions.
Thank you. Our next question comes from Jacquelynne Bohlen of KBW. Your question please
Hi, good afternoon everyone.
Hi Jacquelynne.
The first loan origination did that have any impact on the compensation line in the quarter in preferred loan origination fees, sorry.
A - Ravi Mallela
A small bit not anything significant.
Okay and understanding that there was a large step up delta between 2Q and 3Q was there anything non-core that positively benefited compensation in the fourth quarter or it just looked like it with a little bit low compared to the rest of the year?
A - Ravi Mallela
Yes I believe we had some one-time expenses on the salaries and benefits line Jacquelynne in Q3.
Okay. So going forward just in light of the overall expense guide that you gave and thank you for the breakout on that. I would expect an uptick from seasonal payroll in 1Q but it doesn't sound like there's anything else that would drive that line higher outside of normal inflation. Is that accurate?
Well, the only thing to add to that I think that is accurate, this is Bob Jackie is we are moving our minimum wage up to $16 an hour from $15 an hour and that will be in Q1 that is embedded into the guidance that Ravi gave you but so if there's any waiting that I think Ebrahim's earlier question there might be a little bit less than Q1, a little bit more later in the years that kind of rolls through during the quarter but not significantly on the quarter -- on the year basis we're still very comfortable with the guidance we gave.
Okay. Thank you. That's helpful. Just one last one for me and then I'll step back. In terms of public deposit balances was there anything that drove the additional reduction in the quarter and might we see more of that next year?
A - Ravi Mallela
Yes, I mean I think we saw some good growth on consumer and commercial during the quarter. We saw about 253 million in growth there and you'll see it in the DBA line which we like its core and we like that a lot and I think that just gave us an opportunity to be able to reduce public time by about 158 million in the quarter. Now we feel very comfortable with where we are right now. It's at 499 million in public time and we feel that gives us one of the lever well lever to be able to pull if we see outside loan growth in the quarter but we were very happy with the way deposits played out this quarter.
Okay. And is that with the uptick and I know the average loan to deposit ratio was pretty flat at [indiscernible] 79% but is that 80% limited deposit ratio a level that you're comfortable is or would we see that trend higher if you saw there are opportunities in the future like that?
A - Ravi Mallela
I mean I think we see it sort of move with the way we think about the balance sheet in totality. So depending on where we see from the securities book standpoint any payoffs in our abilities to go into the market and replenish those and loan growth overall whether it's outside quarter-to-quarter we feel relatively comfortable with the level it's at right now.
Okay. Great. Thank you.
Thank you. Our next question comes from Steven Alexopoulus of JPMorgan. Please go ahead.
Hi everybody.
Hi Steve.
To start, so if you look at the 6.5 million increase in expenses tied to the separation from BMP. Ravi how are you thinking about the timing of that?
I mean I think will be sort of it's in the run rate now. We won't be, we typically got it quarter-over-quarter-over-quarter so it was spread out over the course of the year. So beyond that we don't see any major changes. It's going to be spread out over the year.
Yes, the reimbursement last year as Ravi said those by quarter so it shouldn't, you shouldn't see any volatility or cyclicality within the year because of that Steve.
And then just to follow up on the new core what's the timing of that and when should we anticipate seeing some of the costs related to that?
We're looking to have that completed by mid-next year, mid 2021 and so we're starting to capitalize some of those cost now as appropriate. And then post conversion that would enter the expense line as just amortization of the expenses as you would expect.
Okay. And then Bob I thought I heard you say you're targeting CET1 at 12% ? is that right?
That's correct. And we’ve guided last year about 11.75% and we just looked at it and decided that where we're at now and what we see going forward we're going to set up a little bit to 12%.
Okay. What was the thought behind that because I think most would assume you might have brought it down a little bit just given how conservative the balance sheet is? What's the thought on holding even more capital here?
Well, as we looked at the loan growth going forward a little less certainty regarding CECL and what's going to happen on provisioning with that and we just like the fact that a little bit more capital until we kind of get into a run rate going forward and that over to predict what's going to happen with that. It's a fairly large change. It's a little bit harder to predict based on the modeling and the economic scenarios you put into that. So that's where we're coming out of.
Okay. And then final one Ravi just to follow up on the guidance for a relatively stable NIM. So loan yields were down quite a bit this quarter which not a surprise right just given what happened with LIBOR. Where do you see loan yield stabilizing?
I mean I think we're, I think if we start to see a stabilization in the shape of the yield curve and we start to see now we have much more clarity on the fact that the Fed won't move this year. It's probably later in the year that we'll see sort of stability around bond yields. I think what we did this quarter with respect to deposit cost was bring deposit costs down 10 basis points on a 54 basis points average prior quarter. We feel we moved the deposit number quite well and we think we'll be able to offset some of the yield changes on the loan side until yields on the long side stabilized in the second half of the year.
Okay. Terrific. Thanks for all the color.
Thank you. Our next question comes from Aaron Deer of Piper Sandler. Your line is open.
Good afternoon everyone.
Hi Aaron.
Actually most of my questions have been addressed. I'm just curious though you wonder even touch on was non-interest income items and I'm just wondering if there's any areas within your kind of fee based businesses where you see opportunities to grow or invest in over the course of this year for some expansion on along those line items?
Maybe I'll start and Bob can jump in here. I think the area that we've seen some nice growth and frankly the composition of the growth has been in the trust and investment sides. We're seeing sort of solid recurring revenue growth in that area and it's been solid and consistent across the year and if we look at that line specifically I think that's a place where we continue to invest in the business and it's starting into a very solid source of non-interest income for us.
And just add to that to Ravi's comments our assets under administration are just over 15 billion, now 15.1 billion and we've also been successful on repositioning that business from more transactional to ongoing fee basis which takes out some of the volatility and so we're very pleased that we've been able to do that over the last nearly 18 months.
That's great and then a credit obviously is extremely good here. Just curious we're starting to see periodic kind of one-off items pop up in banks elsewhere in the country. I’m just curious if there is anything that you're seeing across the portfolio that you're starting to keep the closer eye on or in areas and what's most of greater concern at this point?
Now, this is Ralph, Aaron. And actually right now the outlook's pretty stable and we haven’t really had a lot of change in the composition of our assets. In fact, our criticized assets have popped, the levels have come down a little bit over the past year.
Okay great, thanks for taking my questions.
Thank you. [Operator Instructions] Our next question comes from the line of Laurie Hunsicker of Compass Point. Your question, please.
Yes hi, thanks, good afternoon. I was hoping we could just go back to deposits because your point that came down dramatically the cost in the quarter both the cost of total and the cost of core. And just wondered if we're going to continue to see that come down and then about how much of that was early in the quarter versus later in the quarter?
Hi Laurie, this is Ravi.
Hi, Ravi.
I'll take the question here. We certainly acted quickly on moving our deposit cost down. I think it's a really a reflection of the fact that deposit pricing in our consumer accounts are -- is really rational in our marketplace. And so, we certainly did take deposit costs down. I think if you look quarter-over-quarter, that was close to a 19% decline and deposit costs quarter-over-quarter. And so, we certainly see there is more room but it's certainly starting at that 44 basis point level, it's -- it doesn't give us a whole lot of room to move further down.
Okay. And again just directionally because it wasn’t just your total -- in other words your core deposits went from 34 basis points down to 27 basis points. So, I'm just wondering, as you took those down, was it early in the quarter or was it later in the quarter?
I think we did it a couple of times during the quarter, so sort of throughout the quarter we did it.
Okay, okay great. And then I just wanted to go back to the income statement. Within the other-other of noninterest income, the 958, that's obviously where the 4.5 million was. Do you have a number for what is total swap income?
I don’t have that number with me but we were down about a million quarter-over-quarter.
Okay. I can follow-up with you offline. And then just wondered if you've got the numbers for where the snick actually finished at fourth quarter, the snick loan and also the dealer for plans to mix?
Yes, we do. Do you have that Ravi?
Yes, the snick loans ended up about 700 million and dealer loans were about now that's the main and in fact that’s the Mainland right there.
Total.
Total was about a billion, billion one and dealer flooring was 862.
Okay. And then, just last one here. How should we be thinking about tax rate for this next year?
Yes. We are projecting our 2020 tax rate to stay at 25.5%.
Okay great, thanks.
There appear to be no further questions in queue. At this time I like to turn the call back over to Mr. Haseyama for closing remarks. Sir?
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.
Thank you, everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.