First Hawaiian Inc
NASDAQ:FHB
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First Hawaiian Inc
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Good day, and thank you for standing by. Welcome to the First Hawaiian Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [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, Kevin Haseyama, Investor Relations Manager. Please go ahead.
Thank you, Shannon, and thank you everyone, for joining us as we review our financial results for the fourth quarter of 2022. With me today are Bob Harrison, Chairman, President, and CEO; Jamie Moses, Chief Financial Officer; and Ralph Mesick, Chief Risk Officer.
We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the Investor Relations section.
During today's call, we will be making forward-looking statements. So, please refer to Slide 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 measurements to the most directly comparable GAAP measurements.
And now, I'll turn the call over to Bob.
Good morning, everyone. And I'd like to start by welcoming our new CFO, Jamie Moses. He brings us wealth of banking experience and proven track record in financial management. We're excited to welcome Jamie to the bank. I also wanted to extend a special thanks to Ralph Mesick for his contributions as acting CFO over the last year until Jamie joined us.
Now, a brief update on local economy. The Hawaii economy continues to do well. In December, the statewide unemployment rate fell to 3.2%, slightly below the national unemployment rate of 3.5%. Total visitor arrival grew 735,000 in November of last year, 9.1% below the November 2019 arrivals. Japanese visitor arrivals remained below historical levels at 3.8% of the total, compared to 16.3% in November of 2019.
We continue to expect a gradual return of Japanese visitors to more normalized levels. Despite the lower number of overall arrivals, visitors tend in November was $1.5 billion, up 13.7% over November 2019. The housing market has remained stable. In December, the median sales price for a single family home on Oahu was just over $1 million, unchanged from the year before. Median sales price for condos on Oahu was 503,000, 3.6% higher than the previous year.
Turning to Slide 2. Comment on our fourth quarter results. We ended the year with a very good quarter as net income grew to 79.6 million or $0.62 per share. Loans grew, net interest income continued to increase while non-interest income returned to normalized levels and non-interest expenses was stabilized. Our return on average tangible assets was 1.34%, and return on average tangible common equity was 25.93%.
We continue to maintain strong capital levels with the CET1 ratio of 11.82% and total capital of 12.92%. The Board maintained a quarterly dividend of $0.26, and adopted a $40 million share repurchase program for 2023.
Turning to Slide 3, the balance sheet continues to perform very well. It remains moderately asset sensitive with about 5.6 billion or 41% of the loan portfolio repricing within 90 days. We continue to use excess cash and the investment portfolio funded loan growth and deposit runoff. We ended the year with cash and cash equivalents at about $527 million, compared to where we started the year at $1.2 billion.
The investment portfolio duration remained stable at 5.6 years for the quarter and cash flows from the portfolio was about 75 million per month. Our liquidity position remains very strong with a 65% loan-to-deposit ratio, a strong core deposit base, and steady cash flows from the investment portfolio.
Turning to Slide 4, period end loans to leases were 14.1 billion, an increase of $392 million or 2.9% from the end of Q3. About half of the growth was due to a $201 million increase in C&I loans, which was primarily due to $120 million increase in dealer flooring and $38 million increase in other dealer related loans.
For all of 2022, total loans and leases were up 1.1 billion or 8.7%. Excluding PPP loans, total loans and leases were up $1.3 billion or 10.4%. We expect loan growth to be in the mid-single-digit range for full-year 2023.
Now, I'll turn it over to Jamie.
Thanks, Bob, and good morning, everyone. Turning to Slide 5, deposit balances decreased by $403 million or 1.8% to $21.7 billion at quarter-end. Retail and commercial deposits declined $668 million with most of that decrease coming from commercial deposit accounts. Commercial deposits declined by about $611 million, while retail balances were relatively stable declining by only $57 million.
The five largest outflows from commercial accounts accounted for over $290 million, almost half of the total decline and were all part of normal business operations. Our total cost of deposits was 52 basis points in the fourth quarter, an increase of 28 basis points from the prior quarter and consistent with our expectations. RAC rates on checking and savings accounts continue to remain stable.
Turning to Slide 6, net interest income increased by $9.1 million or 5.6% over the prior quarter to $171.8 million. The increase was primarily due to higher yields and balances on loans, partially offset by higher deposit costs. The net interest margin increased 22 basis points to 3.15%, driven by higher yields on loans, cash and investment securities and was partially offset by higher rates on deposits.
The acceleration in deposit costs can be seen in the fourth quarter beta, which is about 38% on interest bearing deposits. Our cumulative beta on interest bearing deposits to date of about 19% was within our expectations and we continue to expect that the full cycle beta will be about 30% on interest bearing deposits. Looking forward, we expect net interest margin to increase by 4 basis points to 5 basis points in the first quarter.
On to Slide 7, non-interest income was $48.2 million in Q4, a $2.3 million increase over the prior quarter. The improvement was due to the return of BOLI income to a normalized level as market volatility subsided in the fourth quarter. Expenses were $113.9 million, essentially unchanged from the third quarter. Using the fourth quarter non-interest expense as our new baseline, we expect that full-year 2023 expenses will be approximately 4% to 4.5% higher than the annualized fourth quarter number.
If you exclude the impact of the increase of the FDIC assessment fee, which we estimate to be $4 million to $5 million annually, we expect 2023 expenses to be approximately 3% to 3.5% higher than that annualized fourth quarter number.
Now, I'll turn it over to Ralph.
Thank you, Jamie. Moving to Slide 8. The bank enjoyed good credit performance in 2022 and our asset quality metrics were strong year-end. Net charge-offs were down by $1.2 million year-over-year or almost 10%, and our annual net charge-off rate was 8 basis points, 2 basis points lower than in 2021. NPAs in 90-day pass through loans were 11 basis points at the end of Q4, up 1 basis point from the prior quarter.
Criticized assets continue to decline dropping 9 basis points over the quarter to 72 basis points. The bank recorded a $3 million provision for the quarter. And finally, loans 30 to 89 days past due were $57 million or 40 basis points of total loans and leases at the end of Q4, 6 basis points higher than the prior quarter.
Moving to Slide 9, you see a roll forward of the allowance for the quarter by disclosure segments. Reserve needs for loan growth this quarter were again offset by improvements in the portfolio risk profile. The allowance for credit loss decreased $4.3 million to $143.9 million. The level equates to 1.02% of all loans. The reserve for unfunded commitments increased $3.7 million to $33.8 million based on an increase in undrawn exposures.
The allowance anticipates cyclical losses consistent with every session and include a qualitative overlay for potential macroeconomic impacts not captured in our base model.
Let me now turn the call back to Bob for any closing comments.
Thank you, Ralph. Thank you, Jamie. Nothing else to add. Welcome any questions. Kevin?
Thank you. [Operator Instructions] Our first question comes from the line of Steven Alexopoulus with J.P. Morgan. Your line is now open.
Hi, everybody.
Hi, Steve.
Hi, Steve.
I want to start, so I appreciate the loan outlook mid-single-digit, can you talk about the deposit growth outlook for the year? And in terms of the cost of deposits, I appreciate the 30% full cycle beta on interest bearing deposits, but how do you think about by the fourth quarter of 2023?
Yes. Well, that's the question, isn't it Steve? This is Jamie. Good morning. I think that – I think that that's going to be entirely dependent on what we see macro [indiscernible] if they said, it continues to increase, we'll see deposit costs go up probably consistent with that beta that we described. And if they don't, then we'll probably see some stabilization here in rates in the first or second quarter.
So, anything else there Bob?
Yes. No, just from the beginning of the cycle, we stayed very close to our customers and really taking care of them on deposit rates and making sure that we're competitive. That will continue depending on where that goes with rates, but we're comfortable and that we don't see a lot of pressure on the consumer side to where we can still maintain a decent margin throughout the cycle.
And then on the growth side, can you guys talk about that, you know 2022 used cash, right, to fund part of the loan growth? How are you thinking about that obviously have a lot of room because the loan to deposit ratio is still very low?
I think we'll start as we have been funding it with the run off of the investment portfolio at that 75 million a month, that might slow a little bit, but still we're in the 800 million plus range of investment flows for 2023. That's the start and certainly that allows us to not only fund a good amount, if not all of the loan growth, but also if you take care of future deposit run-off should that happen.
Okay. And then on the non-interest bearing outflows, is there a way to quantify what portion could be a risk? We're seeing customers are investing some of that cash or chasing higher rate. Can you size for us? We're trying to get a better sense. I know we keep asking the same question. Where that mix of non-interest bearing could move to?
Yes, we're going through that same analysis, to be totally honest with you Steve, we don't have precise answer for you. We have seen some of that money that had been on balance sheet, moved in the money markets that we offer to the customers. So, it hasn't “left a bank in that sense.” We haven't seen customer relationships leave, but we had a lot of money parked on our balance sheet in addition to the normal title companies or construction project deposits, that sort of thing. So, there's a lot of moving parts of that without seeing a big change in customer relationships. But Jaime or Ralph, anything you would add to that?
No, I think you've nailed it, Bob. I think we will – are likely to see some migration continue to go from non-interest bearing to interest bearing accounts. And I mean, I suppose if you look back at the history, we were, kind of just under 40% or so, non-interest bearing deposits to total deposits. So, I mean, I think if you think about that, sort of migration, I think that is maybe what we could see or maybe slightly better than that. I mean, it really depends on how long this cycle lasts.
Okay. Jamie, congrats on the position. Ralph did a great job while they're waiting for you. And thanks for taking my questions.
Thanks Steve.
Thanks Steve.
Thank you. Our next question comes from the line of Andrew Liesch with Piper Sandler. Your line is now open.
Hey, good morning, everyone. Hi, Jamie.
Hi, Andrew.
Question on the margin here sounds like little bit more expansion this quarter, but then do you think it's going to top out there or is there still some benefit that could come from rate hikes, depending on what we get here in the next few months?
Yes, I think the guidance is pretty good in terms of where we expect Q1 to be, if there are some more rate hikes, we could see a little bit more accretion to the NIM. And if there aren't, then maybe we're sort of at that range on the guidance there. So, again, right, this is all forecasting what we think the Fed is going to do and how our balance sheet, sort of catches up on those things. So, I think we feel good about 4% to 5%, but I think there is room for improvement if we see some more Fed rate hikes.
Got it. That’s helpful.
We do [indiscernible] where deposit rates are now relative to interest rates. So, we don't feel there is a catch up. We've been saying pretty close to our customers on this and making sure that they see the value in their relationship with the bank and as we take care of that.
Got you. And then on the cadence of the loan growth mid-single-digits, how is that going to transpire throughout the year? I guess, how is the pipeline looking for this quarter? How much is – what are the dealer flooring customers telling you?
Yes. As you saw, we ended up the year with a strong fourth quarter in dealer flooring, higher than it had been going to about $25 million a month increase for fourth quarter, it was above that right at [$120] [ph], but that still left us at just about 450 million versus December 2019 at 860, so I don't think there's any way we're going to go up $400 million in 2023, but I think there will continue to be accretion and increase in that dealer flooring book as supply lines become unstuck and we see a little bit slowdown in buying activity by the consumer.
So, I think there will be, kind of a tailwind for us in dealer flooring. That's up against certainly a headwind in residential. The refinance market has essentially ended. As we all know, we are seeing a little bit slower activity in home equity lines as far as new loans, but we are seeing growth in that based on existing relationships we have with customers. So, I think those are some of the puts and takes. The one that we have more control over and we're still in that market is commercial real estate and that still remains active, but probably not at the same level we saw in 2022.
Got it. That's great color. Thanks so much guys. I'll step back.
Thank you. Our next question comes from the line of Kelly Motta with KBW. Your line is now open.
Hi, good morning. And Jamie, it's nice to have you on the call. I thought I would follow-up on the loan growth side. If you could provide any further outlook on what your mid-single-digit loan growth guidance incorporates in terms of growth in Hawaii versus on the mainland?
Yes. As we've talked about, we have seen the Hawaii activity increase, but then 2022 is more heavily weighted towards the mainland. So, I think it will still continue to be a mix between the two. On the dealer floor plan, most of that growth in Q4 was in the mainland. We have more of our lines in the mainland now as we've talked about on previous calls. So, as far as a ratio of dealer floor plan growth, it will be a little bit more heavily weighted towards mainland versus Hawaii, but primarily because there's a large amount of lines to our mainland customers and our Hawaii customers. So, I think that will happen.
On commercial real estate, we are still seeing transactions here in Hawaii, but we still look at them on the mainland as well. So, I think the mix might continue to go up a little bit, as far as the mainland portfolio, but not dramatically so.
Thanks. That's helpful. I would like to turn back to the expense guidance. I think what you said implies about 118 million to maybe 120 million quarterly run rate, which is certainly a step-up from this quarter. Part of that was the FDIC, which you called out, which you don’t control of, but can we just walk through some of the other parts and kind of pressures you're seeing? And conversely, is there any areas where, you know if you look into the next year and beyond where you can find areas of improvement on efficiencies?
Yes. Hi, Kelly. This is Jamie. I think we'll always be looking at that and trying to improve some efficiencies wherever we can. I think the 3% to 3.5% guidance is, sort of reflective of inflation and inflationary pressure that we're seeing, which I think is pretty normalized in this environment. And I think we want to make sure that we're continuing to invest in the business. Continuing with the digital transformation that we're undergoing. Core is, kind of behind us for the most part now.
Now, we're really looking to take advantage of all the options that that is going to bring us. So, I think the guide is a good number. Of course, we'll always be looking, but I don't see much difference off of the 4% to 4.5% inclusive of FDIC at this point.
Got it. Thanks so much for the help. I'll step back.
Thank you. [Operator Instructions] Our next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is now open.
Hey, good morning. Jamie, congratulations. Hope you enjoy the weather there better than New England, it's a little colder here today.
Thanks, Jared.
Maybe just looking at the – on the loan production side, what are you seeing in terms of new loan production rates? And then when you look at the construction pipeline funding up, is that funding up at rates or at lower rates from a, sort of prior rate environment or what is the construction funding looking like specifically to?
Jared, maybe I'll start. This is Bob and ask Ralph to have some comments on it. We have seen the increase in margin in construction loans. And also an increase in rate because I think pretty much 100% of those are floating rate. So, we have seen an increase in both absolute rate and margin on that. So, that's been a nice tailwind. We have seen quarter-over-quarter nice increase in our weighted average coupon across the entire loan portfolio. And so, maybe was there anything else Ralph you would add to that?
No, not really. I mean, I think we're at a point in the cycle where we would anticipate some improvement in the margins.
Did that answer your question, Jared?
Yes, yes, that was good. We just – I wanted to make sure that we weren't going to just see it drag on maybe that incremental loan yield from funding of construction loans in a prior, you know earlier construction loans, but all floating is good. Yes…
[Indiscernible] margin, but they're coming in at higher rates just because of rate increases.
Yes. And then on the allowance, with the decline this quarter in the ratio, can you just give a little more color behind what you're looking at to drive that lower? I think that's a little counterintuitive to what we're seeing from some other banks that are still growing the ACL and the Moody's baseline model continues to be more heavily weighted to a downside scenario? I guess just some color driving that ratio move?
Yes, I would say, this is Ralph. Jared, I think when you look at our model, our base model, actually it really is reflective of current conditions and current risk rating of the portfolio that actually improved this quarter. As far as the economic outlook, our economic modifier is based pretty heavily on unemployment – in anticipation of an unemployment rate here in Hawaii, that's a little bit lower than the U.S. mainland.
In fact, I think this quarter, we did put a little bit more stress on the qualitative side, still ending up with a slight reduction in the portfolio. Now having said that, I think we are provisioned for what would be our recession. I think when we calculate our one-year expected loss against the portfolio, it's probably a little bit higher than our peak loss, which I think during the [GXT] [ph] was about 72 basis points.
Okay. And then just finally for me on the buyback authorization, is that something that we should think you're fairly active with earlier in the year or how should we be thinking about the timing and pace of 5x?
Yes, maybe I'll start and turn over to Jamie. This is Bob, Jared. And really we're still looking at that CET1 guide of 12%. We had some very good loan growth in Q4 and is that mix changes out of lower risk weighted securities into obviously much higher risk weighted loans. That's more of a capital drag. So, that's what – we didn't increase CET1 to our target in Q4, but we're still working on that. I think with the increased profitability based on the margin expansion along with a little bit slower loan growth that we're forecasting into the year that we will be at some point looking to use that authorization, which is really hard to peg a date on when that would be. But Jamie, anything to add to that?
Yes. No, I think you got it, Bob. I mean, I think it sort of boils down, it's like a combination of opportunism and dependent upon where our capital ratios go. So, yes, I wouldn't expect it to be even throughout the year.
Okay. Thank you.
Thank you. Our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is now open.
Hi. Thanks, good morning. And Jamie, I just want to stay welcome.
Thank you.
So, circling back to dealer floor plan, can you help us think about how big that portfolio is going to go to? You've added a lot. And then what's the split on the 456 million in terms of what's in California? And can you just remind us what are the terms of the new loans coming on the coupon?
Yes. Maybe I'll start-off with that and ask Ralph to jump in and help me out [indiscernible] on some of dollar details, but the dealer floor plan, we don't have a huge difference and I go back to 2019. I don't think it's a real significant difference in the amount of lines available to our customers. There's been some ins and outs increases decline. Some customers actually selling their business to other of our customers or outside of our network, but there hasn't been a big change in the total of commitments.
The mix in Hawaii stayed – the amount in Hawaii stayed pretty constant over the years, while the growth has been in California. So, as I mentioned earlier, the higher percentage of our lines are in California relative to Hawaii. I don't have that percentage. I'll ask Ralph to comment on that in a second, but when you look at the growth in the fourth quarter, much of it was from California. It was [117 million and 120 million] [ph] were draws under the California lines. So, the [cars] [ph] that are getting delivered in Hawaii [Technical Difficulty] more of a backlog and that sort of thing, hard to tell.
What I think you'll see is, as we go into 2023, we will see [Technical Difficulty] outstanding’s relative to the total. To the greater question on what the total is completely is I might have mentioned earlier, we're about $400 million less in outstanding than we were at the end of 2019. I really don't think we get $400 million increase in 2023, but I think we could see some substantial growth off of where we are today.
Clearly the manufacturers are figuring out production issues and chips are more available, demand is down slightly, although we still have a pretty good backlog to a lot of our dealers that are people that have ordered cars that have not yet been delivered. So, it's really hard to pick when supply lines unlock and cars get delivered and do people follow us around the reservation commitments they've made or give that car up to somebody else. All that's going to be the flex, but I think we're going to see healthy growth in 2023, just based on our existing customers. But Ralph, do you have any specifics you could add?
Yes. I’ll just to give you the numbers. The mainland portfolio, is about 310 million, Hawaii and Guam about 146 million. So, most of that growth, as Bob had mentioned, came in the mainland.
Got it. Perfect. And then can you just remind us what the coupons are right now? Any loans coming on there?
Generally, we're LIBOR plus, SOFR plus, a 1% plus margin and it varies by customer, but everything is over…
About [641] [ph] today.
Perfect. Thank you. Thank you. Okay. And then just going back to the funding side for a moment, you obviously had some increase there in the public funds, the 1.9 billion, how much of that is time versus your second transaction? And how are you thinking about where that book goes?
Yes. So, on the public side, just under a billion was time and the rest was demand and savings accounts. I think – it's hard to say, Laurie. I think that we will use the public markets there to, kind of plug any holes that we fill or that we need to fill in terms of on balance sheet loan growth that aren't quite filled by the securities portfolio run-off. So, that sort of number is going to be entirely dependent on our loan growth and our ability to gather other deposits. So, that's kind of how we're thinking about it right now.
Okay, perfect. And then Jamie or Ralph, can you share with us where is your spot margin for December, if you’ve got that?
So, for December, it was – December it was [319] [ph].
[319] [ph]m okay, perfect. And then just two last questions on the income statement. How should we think about forward looking tax rate, and then secondly, can you comment a little bit , you had an upsized BOLI in the quarter and I know that line item is lumpy, but was there any [death benefit] [ph] there or was that, sort of the market moving? Can you help us think about that 2.9 million in the BOLI line?
Yes, sure. So, in the BOLI line, we see that as, kind of normalized back to where we think it will run on a go forward and that was no [death benefit] [ph] in there, that was market driven. And then your other question, Laurie was tax rate, yes, sorry. So, we think a good guidance is 25%. We had some tax credits come through in the fourth quarter that sort of reduced our tax rate here to that lower level, but we're expecting 25% for 2023.
Great. Perfect. Thanks for taking my question.
Thanks, Laurie.
Thank you. Our next question is a follow-up from Kelly Motta with KBW. Your line is now open.
Hi. Thanks for letting me jump back in. Just a real quick one. Can you just – was the expense guide 4% to 4.5% or 4% to 5%. We have different things and I don't trust a live transcript, so I just want to make sure I have the number correctly.
Well, we definitely appreciate you following up here versus trusting a transcript. So, about 4% to 4.5%.
Perfect. Thanks so much. Appreciate it.
All right, Kelly.
Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Kevin Haseyama for closing remarks.
Thank you, Shannon. We appreciate your interest in First Hawaiian. Please feel free to contact me if you have any additional questions. Thanks again for joining us and enjoy the rest of your day.
This concludes today's conference call. Thank you for participating. You may now disconnect.