First Hawaiian Inc (FHB) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the First Hawaiian, Inc. Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions)

I will now hand the conference over to Kevin Haseyama, Investor Relations Manager. Please go ahead.

Thank you, Carmen, and thank you, everyone, for joining us, as we review our financial results for the fourth quarter of 2021. With me today, are Bob Harrison, Chairman, President and CEO; and Ralph Mesick, Chief Risk Officer and Interim CFO.

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'll 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.

Thank you, Kevin. Good morning, and appreciate you joining us today. We'll start with an update on the local situation on Slide 2. Similar to the rest of the county, we are seeing a surge in new COVID cases.

Fortunately, with over 75% of our residents are fully vaccinated, and about 1/3 of the population having received booster shots, hospitalization remains below the peak levels that we saw in September.

The county mayors are closely watching their case counts and hospitalizations and working with the Governor to determine if additional policy changes are necessary. Speaking with friends in the hospitality industry, anecdotally, the holidays were good, and January is relatively strong. However, they are definitely seeing weaker bookings in February.

We're seeing continued improvement in the economy, with unemployment down to 6% here in Hawaii, most recently. And if you turn to Slide 3, you can see that we had a very productive fourth quarter, and saw strong and broad-based growth in loans, excluding PPP.

We also saw continued growth in consumer and commercial deposits. Earnings, this quarter, were impacted by some balance sheet actions we took, to position us, going into 2022, but our returns continue to be durable, capital level is strong, and credit quality remained excellent.

Net income was $57 million, and our return on tangible equity was 13.47%. Diluted EPS was $0.44, and the Board maintained the dividend at $0.26 per share. During the quarter, we repurchased $21.5 million of our common stock under our current repurchase program, and the Board adopted a $75 million repurchase program for 2022.

Now, I'll turn it over to Ralph to go over the financials.

Thanks, Bob. Turning to Slide 4, and building on Bob's comments. You should note, we took some actions in the fourth quarter to improve the balance sheet position, going into the new year. At December 31, total assets fell 2.2% over the prior quarter, to $24.99 billion, but the changes in the balance sheet were planned and will be accretive to income in 2022.

We worked to move some public deposits off the balance sheet, and deployed excess liquidity into loans and securities. The change in mix improved our interest income for the quarter. We also used some of the cash to prepay $200 million of FHLB advances this quarter, for a total savings of about $12 million in interest expense. The reduction in cash also reduced deposit insurance costs, and improved our capital position.

Turning to Slide 5. Period-end loans and leases were $13 billion, an increase of $128 million from the end of Q3. Excluding the impact of PPP loans, total loans increased by about $414 million or 3.4% for the quarter. The growth in loans was broad-based, with increases in C&I, CRE, residential, home equity and credit card.

Construction balances were down due to scheduled completion and payoff of several large for-sale projects, with continued draws on other projects helped to offset the paydowns. The completion of these projects contributed to residential loan growth in the quarter.

Looking ahead to 2022, we are expecting loan growth ex-PPP to be in the mid- to high single-digit range. The variability is driven by uncertainty around the return of dealer flooring balances.

The low end represents a scenario, where we do not have significant contribution from dealer flooring, while the high end represents a gradual normalization of flooring balances. In the latter scenario, we would expect most of that growth will be back-loaded into the second half of the year.

Turning to Slide 6. Deposit levels fell by 1.4% or $304 million, to $21.8 billion at year-end, but the composition shifted significantly. Public deposits declined by almost $1 billion, while non-interest-bearing deposits grew by about $520 million. Our loan-to-deposit ratio was 59% at year-end, and the cost of deposits was unchanged at 6 basis points.

Turning to Slide 7. Net interest income was up $4.7 million over the prior quarter, to $137.3 million. The improvement was attributed to deployment of cash into securities and loans as well as higher fees from PPP forgiveness. The net interest margin was 2.38%, up 2 basis points from the prior quarter. Higher PPP fees accounted for 6 basis points of the increase.

Excluding PPP fees, the NIM would have declined 4 basis points, in line with our outlook of a 2 to 4 basis point decline in Q4. Beyond Q4, the impact of PPP fees should diminish significantly, since there is only about $5 million remaining.

And looking into Q1, the balance sheet actions we took in Q4, should add 4 to 6 basis points to the NIM, but we're also expecting a significant drop in PPP fee income, which could negatively impact NIM in the 10 to 12 basis point range. So net-net, the reported NIM could decline around 6 to 8 basis points from the 2.38% reported in Q4.

Looking forward, we feel that the asset sensitivity of the balance sheet provides good upside potential for NIM and net interest income heading into 2022. About $4.8 billion of the loan portfolio reprices every 90 days or less, and another $3.3 billion in fixed-rate loans and securities repriced in 12 months.

On the funding side, rates paid on deposits in our market, have historically been less sensitive to rising rates than in mainland markets, and this will help hold funding costs down.

Turning to Slide 8. Both non-interest income and expense were impacted by nonrecurring items in the fourth quarter. Non-interest income was $41.6 million this quarter, which was $8.5 million lower than Q3. We took a $6 million charge on the funding swap for the Visa Class B shares sold in 2016 and realized $2 million less in BOLI income.

The normalized run rate is about $48 million per quarter. We remain focused on growing non-interest income, and feel there is good potential upside in 2022, as economic activity picks up and interest rates increase.

Non-interest expense rose $7.7 million, to $108.7 million. About $9 million of that increase was the termination fee for the FHLB advances, previously discussed. Going forward, we expect 2022 expenses to increase 6.5% to 7% over 2021, with about 1/3 of the growth coming from inflationary impacts and increasing levels of business activity, 1/3 coming from expenses related to the new core platform and 1/3 from additional tech investments.

Moving to Slide 9. Asset quality at year-end was strong, realized credit costs in the quarter were low and the level of NPAs, criticized credits and past due decreased over the prior quarter. We did not record a provision expense this quarter. Net charge-offs were $6.2 million for the quarter and $12.5 million for the full year or 10 basis points, 13 basis points better than the rate for 2020.

NPAs and 90-day past due loans are flat this quarter, and the level is 4 basis points lower than the prior year. Criticized assets continued to decline, dropping from 2.98% of total loans in Q3 to 1.6% in Q4. This level is 263 basis points lower than year-end 2020. Past due loans decreased from the prior quarter. Loans 30 to 89 days past due declined 12 basis points, to 23 basis points at the end of Q4.

Moving to Slide 10. You see a rollforward of the allowance for the quarter by disclosure segments. The allowance for credit loss decreased $4 million, to $157.3 million. The level equates to 1.21% of all loans or 1.23% net of PPP loans. The decrease in the ACL level is due to improvements in commercial credit quality.

The reserve for unfunded commitments decreased $2.2 million, to $30.3 million. Our economic outlook was unchanged in Q4, primarily due to the renewed uncertainty related to the Omicron variant that could impact (inaudible) recovery and credit losses.

Let me now turn the call back to Bob for any closing comments.

Thank you, Ralph, and we really appreciate Ralph stepping up to be our interim CFO, and really appreciate his effort on that. To recap, we had a good 2021 and are well positioned for 2022. The local economy should continue its recovery, when we get past the current COVID surge.

As we saw last summer, demand for travel is high, and Hawaii remains a favorite destination. The loan pipeline looks good, as we start the year, and our balance sheet is well positioned to fund the loan growth and benefit from rising interest rates.

Capital levels remain high, and we have sufficient capital to support our balance sheet growth while maintaining our key capital ratios at our desired targets. We're also continuing to work on building out our digital infrastructure and are on track to complete our core conversion in the second quarter.

The new platform is designed to give us flexibility to integrate new and different applications quickly, as well as enable us to scale via partners. The outcome we hope to achieve is simple. We want to provide customers with better tools to manage their finances and to be more convenient to do business with us at any time, from anywhere.

Early indications are encouraging. Customers, who are signing up on our platforms, are more engaged and doing more with us. We need to continue to build out this experience and work on increasing adoption with the existing clients and make this part of our broader value proposition to bring in new relationships.

The future will be different, but our business is still about gathering deposits, making loans and providing complementary financial services. And now, we'd be happy to take your questions.

(Operator Instructions)

First question comes from Steven Alexopoulos with JPMorgan.

So I first want to follow up on the loan outlook, mid- to high single digits, pretty good. On the Dealer business, is it fair to say -- we saw Huntington report this morning, too, their Dealer business was up a little bit, that at least that's bottomed here?

And then, within that range, moving to the high end and the low end, is it all about just the change in line utilization? Or are you guys also growing dealers, still? Or is it purely whatever utilization is, that will dictate where you are in the range?

Yes. Great question, Steve. And maybe just -- we have seen signs of a bottom in that portfolio. Every month during the quarter, we saw an increase in flooring balances. So while we ended the quarter up $50 million, it finally seemed to have bottomed out for us, as the manufacturers get their production lines back in sync.

As you -- we look to the outlook for 2022, it really is dependent on the production levels and the consumer. We have added some more customers. We've seen some flux during the last year that some customers have sold. We've been fortunate to retain the relationship with the buyer, but there has also been an addition of some customers.

So it's going to be a mix, but it's really hard to predict the flooring balances for this year. And that's why we gave that range on the outlook.

Okay. But Bob, even if you're at the low end of the range, mid-single digit is a pretty big improvement over 2021. Could you give us a little more color what's driving that? Is it just core C&I? Is commercial real estate picking up?

Yes. We're seeing a number of things. I think, C&I ex-flooring would probably be towards the bottom of the list, but we are definitely seeing CRE, residential, home equity has been strong, as well as a bit on the consumer.

And as I've mentioned in previous calls, we are seeing the mainland comeback first. And Hawaii, we think, we'll come back soon after that, but we're definitely seeing the strength in the mainland first.

Okay. So you have -- is it safe to say you have a fairly high degree of confidence that at least you'll be at the low end, based on these other drivers. And then, the variability will come on dealer, right?

That's correct. That's our outlook.

Okay. Got you. So -- and final question on expenses. Ralph, I appreciate the breakout on the 6.5% to 7% range, to 1/3 from inflation, 1/3 [core] and then 1/3 additional tech investments.

So is the right way for us to think about the company, is will it take -- moving forward, like long term, just what's the cost inflation of First Hawaiian? Maybe, the inflation is not the same, but those other 2/3, right, just continued investment. I don't know if tech investments ever going to stop. That's about a good run rate for the company beyond 2022?

No. I would say that in terms of the core platform conversion, probably add another basis -- another 1% on a normalized basis. And then, I think, the tech spend is going to be, kind of, a function of what we see. We're trying to size this tech spend so that we can grow into the spend. But I think, going into the 2023, probably more along 4% to 5% would be, sort of, what we would think in the high end.

As more normal -- okay. Got you.

Our next question is from Ebrahim Poonawala with Bank of America.

I guess, just one, Ralph, for you on the margin. You said you gave pretty good guidance around net-net, 6 to 8 basis points decline, relative to the fourth quarter.

Just remind us about the rate sensitivity, what we should expect, in terms of the margin benefit, from each Fed rate hike, assuming Fed moves in March? What does that mean for the margin for the second quarter, and then for subsequent rate hikes?

Yes. I think the best way to think about that is just to look at the composition of the portfolio, how much assets reprice. We do model rate shocks under different scenarios, and we tend to run those more from a risk management standpoint to understand our interest rate risk.

And I think, forecasting the NIM out beyond a certain period of time, there's a lot of challenges to that. So I think, really, sort of, looking at that $4.8 billion, that is basically floating rate, and reprices within every 90 days. And then about $3.3 billion that would be running off on, kind of, normal amortization, over the course of the year.

And then on the deposit side, I think we have about $12 billion that is, sort of, interest-rate sensitive. And as we've, sort of, seen historically in our marketplace, we tend to lag the mainland, in terms of increases in deposit costs, and that tends to happen a little bit slower over a couple of quarters.

Understood. And within that $12 billion in deposits, do you have any index deposits that would reprice immediately with the Fed hike?

No. No.

No. Right. Okay. Got it. And just one separate question, Bob. So you mentioned -- you've talked about mainland leading the charge for a few quarters now. When we think about the split, like if you had to guess, 5% to 6% loan growth, how much of that, do you think, comes from mainland versus Hawaii? And are you doing anything different in the mainland today versus pre-pandemic?

No. We're not doing anything different. I don't have at my fingertips the breakdown of what the 5% to 6% would be mainland versus Hawaii because of that mix of consumer and residential home equity lines, that's all Hawaii-based. We're not doing any of that in the mainland.

But we do have -- kind of, our guide has been percentage of our loans on the mainland. I believe, the end of last quarter, we were at 18% in the end of this quarter...

About 19%.

About 19%. We were as high as 23%, I think, 23%, almost 24% in the past. So there's still a lot of room to grow there without, we think, being overweight on the mainland. And we haven't changed anything we're doing out there. It's the same lines of business, the same people, mostly the same customers, but we have been successful in bringing over some new dealer customers over the last year.

I think the growth (inaudible). It's around 18%, quarter-over-quarter, on the mainland and about 13% in Hawaii. So we're seeing growth in both markets, right now.

That's annual.

On an annualized basis, yes. And that's with respect to the commercial portfolio.

And that's pretty strong. Got it. And just one last follow-up around the dealer floor plan. Can you remind us where those balances were in the fourth quarter, either period end or average versus pre-pandemic?

Total, I believe, was about $639 million at the end of the fourth quarter, last year.

Yes. And...

What about back in 2019?

2019 end, I want to say, 859, 860 right in there. So we're down, still, pretty substantially.

Yes. We're about 227. Yes.

Got it. So it's 339 versus the [8 59] pre-pandemic. Got it.

Our next question comes from Andrew Liesch with Piper Sandler.

Thanks for clarification around the loan growth there in dealer flooring. My question revolves around the expense guide.

And I'm sorry, if I missed this, but what base should we be using? Should it be the full-year $405 million and go about that? Or should we be backing out some of the nonrecurring items that took place over the year?

I think, I would start with the $405 million, Andrew.

Got it. Okay. So I guess, that's pretty high. Are there other nonrecurring items that might contribute to that, that may -- that you see on the horizon?

Nothing really, sort of, out of the ordinary. There's always like -- every year, there's things that come in and out.

Okay. All right. You've covered all my other questions.

Our next question comes from David Feaster with Raymond James.

I just wanted to follow up on the loan growth side. The resi mortgage growth from the takedown mortgages on the time -- the construction projects has been a nice tailwind. I'm just curious, kind of, where we are in that and how much more embedded growth there might be from those projects?

And then just the C&I, excluding the dealer floor plan, I'm curious, what you're seeing on that front? That was great growth to see, whether it was increased utilization or new commitments, and just what you're hearing from your non-floor plan C&I clients?

Yes. Maybe I'll start. This is Bob. David, I turn it over to Ralph afterwards. For the C&I side, we are starting to see, finally, some, we hope, bottoming out in the corporate area, but we haven't seen the sustained growth in that area, yet. So really, the C&I growth, I think, we're going to see -- near term will probably be in the dealer flooring side.

For the residential real estate, as we've talked about before, we had 3 large projects complete during the quarter, 2 of which we did the construction financing on. We don't have any big projects completing in the first quarter of this year. We do later in the year. So I think that, that will not be as much of a factor for the first quarter or 2. But we are still seeing continued activity. Prices are still very strong here. Given with the -- given the rise in interest rates, it seems likely we'll see less refinance activity, and it will change more to a purchase market. But Ralph, anything you would add to that?

The only thing I would add is, we will probably have less turnover of the portfolio, as rates rise. So I think, in terms of our ability to grow balances, that will be -- that will help, sort of, offset maybe some of the benefit you get from the refi market.

Yes. And then, maybe lastly, we are seeing more activity in the home equity side, as rates have gone up. So people are pretty quick to pivot over there.

That's a good point. And then just -- you saw a pretty nice improvement in the criticized and past due balances. Just curious, your thoughts on overall asset quality, what you're seeing out there? Maybe just some competitive dynamics on how loan pricing and structure is holding up, and just whether you're seeing anything that's causing any concern?

Maybe I'll start and turn it over to Ralph. The pricing is competitive, very competitive. The -- we have not seen it as much in the structure, but we're definitely seeing pricing competition. Ralph?

Yes. And then I think, in terms of asset quality, the larger customers, I think they've been able to make a pivot to, kind of, what seems to be, kind of, a new normal. So I think, from that perspective, we're feeling fairly good about that.

And then I think, as we go into the new year, obviously, what we were able to do with the pandemic, was get really close to understanding some of the sensitivities that our smaller customers have. So we'll be able to, sort of, keep tabs on that.

So I think, as I said, we're well reserved, going into the new year. And hopefully, we can, sort of, make this shift in the recovery to something that's no less benign than we had anticipated.

Yes. Yes. No kidding. You guys have also been very thoughtful on the tech spend and the build-out over the past couple of years, the conversion is upcoming. I'm just curious, where you think we are with the tech build-out?

Maybe, how conversations are going with the potential partnerships? And maybe, what kind of partnerships you're most interested in? Are you looking at Banking-as-a-Service? Or just -- what kind of partnerships -- are you looking at investments as well? Just any commentary on that front?

Yes. Maybe -- this is Bob, David. Just a couple of comments. We're still early days into that, while we're talking to people, a lot of the work we're doing is pretty foundational, enabling API, infrastructure, redoing our consumer loan platform, which we've done, getting more functionality to our website and being able to make it easier for the customers to interact with us.

So it's really that, for now. And then taking that next step of really engaging the customer more actively in the technology space and really finding out what they need, through their data, and seeing how we can better address those needs with our products and services.

So it's still a little early days to be talking about specific areas, at this point. We hope to be able to do that later this year.

Our next question comes from Kelly Motta with KBW.

Thank you so much for the question. I wanted to ask you a bit about capital. I saw the buyback got renewed. Just wondering about your appetite for share repurchases, and how you're thinking about prioritizing capital return?

Sure, Kelly. Great question. Really, we love to use our capital to fund loan growth. And excess capital, as we define it, we then plan on returning to shareholders. So we are still keeping with our guide of common equity Tier 1, of 12%. We're clearly above that now.

But as you look at our loan outlook, really, some of that capital is a shift from very-low-risk weight securities and into higher-risk weight loans will be used for that. But anything excess of that, we would be using that for share repurchase and also keeping an eye on the leverage ratio at the same time.

Great. And then, I just have a follow-up on the NIM guidance. That 6 to 8 basis points lower from 4Q, is that just for 1Q '22? And then, as a follow-up beyond that, is kind of further NIM expansion, outside of the balance sheet actions you took, mostly a function of rates? Or how should we be thinking about the margin, from there?

Yes. We think we're getting to a point, where it's bottoming out. This is Ralph. And actually, what we're seeing in, say, like the mortgage book, what we're putting on the books today, probably about an eighth of a percent higher than the average portfolio yield, right now.

So we're hopeful that we're, sort of, hitting this bottom point. And then obviously, if we get rate increases, given the composition of the portfolio, we think that's going to be positive to the bank.

And our next question comes from Jared Shaw with Wells Fargo.

Can you just update -- so with the loan growth this quarter, what portion of that was shared national credit growth versus non-shared national credits? .

Yes. Ralph, do we have that number?

Yes. I do. Actually, it was up about $7 million.

$7 million is shared national. Okay.

Yes.

Yes. Not very much.

When you look at that C&I growth that -- separate from the floor plan and separate from the shared national credit, what's really driving that? Is that -- is that the utilization rate? Or is that new customer acquisition, I guess, sort of separate from those two components?

We had a couple of large transactions, this quarter, with existing clients that really, sort of, helped in that area. So that was probably a big part of the C&I growth. And what we're kind of seeing with, kind of, non-real estate customers, is actually a lot of activity in real estate, so owner-occupied real estate and some may be equipment, but not a lot.

I think, on the utilization side, with the large corporates, we saw a little bit of a dip in utilization in the fourth quarter. So that really hasn't, sort of, come back yet.

Okay. And then just looking at the, sort of, cash securities dynamics, with being able to deploy that this quarter, where do you think -- where would you like to see the cash levels trend to with that broader growth backdrop that you've laid out?

I think, we're kind of around the level that we want to be today, plus or minus. And we -- I think, from a liquidity standpoint, right now, we have, I think, a lot of sources to tap.

So -- but I think, just given the composition of the balance sheet, expectation of rising rates, probably the level that we're at today, and we took a lot of actions to, sort of, reduce our cash levels in the fourth quarter. So I think, we're probably going to stay around that level, we would anticipate.

Okay. And then just finally for me, any update on the CFO search, in terms of timing or thoughts of -- any update you can give us?

Sure. Jared, This is Bob. I'll take that question. We have engaged with Korn Ferry, and the search is ongoing. This is team we worked with before. So we're launching right into it.

(Operator Instructions)

We have a question from the line of Laurie Hunsicker with Compass Point.

Just wanted to go back to Shared National Credits here. What is your balance? And then, what's the split, Hawaii versus mainland?

So Shared National Credit in mainland is about $873 million. In Hawaii, it's about $262 million.

Great. And then your C&I charge-offs were pretty outsized. I mean, obviously, your credit is practically impeccable. But can you help us think about what happened there with the $4.1 million of C&I charge-offs? And were any of those SNCs? And if so, can you help us think about what was mainland versus Hawaii?

It was a local credit. Actually, it was a single credit. And the -- I think the circumstances around that is -- we took a write-down on the credit and pretty much, kind of, an idiosyncratic-type situation, not really related to economy or even business stresses. It's, sort of, a litigation-related issue.

Okay. Great. That's helpful. And then, just going back to your margin comments, I appreciate all the color there. Can you just help us think about, with all of your balance sheet actions, maybe a refreshed look on your interest rate sensitivity, as it pertains to rate shocks?

In other words, in an up 100 basis point as of September 30, your impact on NII was positive 14%. Can you just help us think about what that looks like, with all your balance sheet actions factored in?

Yes. I would go back again to just -- sort of, just taking a look at the asset repricing. I find it really difficult to take the model and take it out more than a quarter and say, "Well, this is what's going to happen to rates" because there's so many factors that go into that. .

And what we disclose, really, is more of a static type of a situation, which is probably not representative of what we'll see.

And we'll be updating that with our 10-K, obviously.

Right. Okay. And then, when in the quarter did you actually prepay your $200 million of FHLB-costing 2.73%?

Around November.

Yes, early to mid-November, Laurie.

Okay. Halfway through. Okay. Great. And then, how should we be thinking about tax rate? It was, obviously, low this quarter, at 19%. Assuming it's going to be back to what we saw, can you help us think about that a little bit?

Yes. We had a couple of true-up items that we took in the fourth quarter, that took the rate down. So we'll probably -- I think it's -- 25% is probably where you should, sort of, target the tax rate to be, over time.

Okay. Great. And then just last question for me. I just want to make sure that I got this right on expenses. The guide that you gave was 6.5% to 7.5% increase over 2021. Is that correct?

6.5% to 7%.

In 2022.

Yes. 2022.

In 2022, Okay, great. And so 6.5% to 7%. Okay. And so just looking at the base here of $405 million, I mean, if I adjust out just even the 2 big items, right, your FHLB prepays in your litigation, you're at $394 million, so your year-over-year increase of 9% to 10% for 2022. Can you help us think about -- I mean, I think, most of us on the sell side or price targets are derived off in 2023.

Can you help us think about when you look out to 2023, what sort of percentage increase -- I assume we're not going to be using that same sort of core 9% to 10% increase. Can you help us think a little bit about more forward-looking expenses?

Yes. Laurie, this is Bob. We're not giving guidance for 2023. Ralph had talked earlier about -- it's going to be -- we think it's going to be less, maybe in the 4% to 5% range, but that's not guidance. This is just -- that's just a talking point, kind of a directional type of thing.

We think that last year, 2021, this year, 2022, with a number of expense items coming on board that -- that shouldn't be the same, going forward, I guess, is the best way to say it. Ralph, anything you'd add to that?

No, Bob.

And I'm not showing any further questions. I will pass the call back to Kevin Haseyama.

Thank you. 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 have a good weekend.

And this concludes today's conference call. Thank you for participating, and you may now disconnect. .