First Hawaiian Inc (FHB) 2021 Q3 法說會逐字稿

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

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

Thank you, Ashley, and thank you, everyone, for joining us as we review our financial results for the third quarter of 2021.

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'll 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.

Thank you, Kevin. Good morning, everybody. Thank you for joining us today. I'd like to start with an update on the COVID situation here in Hawaii. If you turn to Slide 2. Like many places, the health of our economy is directly related to our ability to control the virus, and we've done quite a good job on that. With over 70% of the population fully vaccinated and impressive 92% of the population over age 12 has had at least one shot.

We did have a surge in late August and early September related to the Delta variant, as you can see in the lower left there. That has, for the most part, come down and our new case counts are dramatically lower. A lot of capacity in the hospitals, so not a concern about that. And the governor has announced that we're going to be fully welcoming back visitors starting on November 1 and really in talking to all the mayors both here on Oahu and the neighbor islands, all of our elected officials, they're very focused on keeping Hawaii open for tourism, and we expect to see the numbers starting to increase, and we've actually started to see a bit of an increase in daily arrivals starting this month. So as the restrictions start to come off and tourists start to return, we expect more of a normalized economy as we come into the holiday season.

Turning to Slide 3. Total loans grew net of PPP paydowns, and our results were solid in the quarter, despite all the noise of the Delta variant. Deposits continued to grow in all segments, while noninterest income and expenses were stable. Credit quality remained excellent and the diluted earnings per share was $0.50, and the Board maintained the dividend at $0.26 per share. During the quarter, we also repurchased $21.6 million of common stock under our current repurchase program.

And with that, I'll turn it over to Ravi to go over the financials.

Thank you, Bob. Turning to Slide 4. Period-end loans and leases were $12.8 billion, down $269 million from the end of Q2. Excluding the impact of PPP loans, total loans increased by $39 million. We had some good activity in several areas, but dealer flooring remained a headwind, declining another $103 million. Excluding the impacts of PPP repayments and dealer flooring balances, total loans grew about $142 million in the third quarter.

Growth was driven by increases in residential, commercial real estate and home equity. Looking ahead to the fourth quarter, we are expecting net growth in loan balances, but because of the delayed recovery in dealer flooring, we now expect total loan balances ex-PPP to be flat to up 1% for the year.

Turning to Slide 5. Total deposit balances ended the quarter at $22.1 billion, a $1.3 billion increase versus the prior quarter. This increase was driven by a $782 million increase in public deposits and a $503 million increase in consumer and commercial deposits. The increase in public deposits was almost entirely in operating account balances. Our cost of deposits fell 1 basis point to 6 basis points in the quarter.

Turning to Slide 6. Net interest income was $132.6 million, a $1.1 million increase versus the prior quarter. The increase in net interest income was primarily due to higher average balances of investment securities and higher cash balances. Net interest margin was 2.36%, a 10 basis point decrease from the previous quarter. In Q4, excluding the impact of excess liquidity and PPP loan forgiveness, we expect our net interest margin to decline 2 to 4 basis points.

Turning to Slide 7. Noninterest income in Q3 was $50.1 million, a $733,000 increase over the previous quarter. Noninterest income in the third quarter included a $2.3 million BOLI death benefit. Noninterest expenses were $101 million, a $1.6 million increase versus the prior quarter, and the efficiency ratio was 55.1%.

And now I'll turn it over to Ralph to go over asset quality.

Thank you, Ravi. If you could turn to Slide 8, I want to provide a few comments on asset quality. We continue to see good credit performance, realized credit costs remain low, and we released provision again this quarter. Net charge-offs were $602,000 in Q3. Annualized net charge-off rate is at 6 basis points year-to-date, lower than the levels we saw in the prior 2 years.

NPA and 90-day past due loans were marginally down this quarter to 11 basis points, a 1 basis point decrease from the prior quarter. Criticized assets increased during the quarter, moving from 2.51% of total loans in Q2 to 2.98%. Loans 30 to 89 days past due increased 13 basis points to 35 basis points at the end of Q3. The increase was attributed to the delay in the closing of an extension of a single CRE loan.

Moving to Slide 9. You see a roll forward of the allowance with the quarter by disclosure segments. The allowance for credit loss decreased by about $7.9 million to $161.2 million at the end of the quarter. This level equates to about 1.26% of all loans and 1.31% net of PPP loans. Our reserve for unfunded commitments increased by $3.3 million to $32.5 million. In Q3, we recorded a $7.3 million release against the allowance due to balance changes and some improvement in consumer FICOs.

Our outlook for the economy was unchanged. We anticipate the recovery started midyear will continue, but still maintain a COVID-related overlay given uncertainties that could result in higher credit losses. These uncertainties include the effects of the new virus mutations on travel and leisure activities as well as the impacts of monetary and fiscal actions. Let me now turn the call back to Bob.

Thank you, Ralph. This is another solid quarter. Credit quality remained excellent. We are continuing our investment in technology to improve our digital capabilities and our customer experience, and our balance sheet is well positioned for rising rates.

And with that, I'd like to open it up and take your questions.

(Operator Instructions) Your first question comes from the line of Ebrahim Poonawala with Bank of America.

I guess just on loan growth. So you mentioned the full year update ex-PPP. Just give us a sense of, one, Bob, do you think the dealer finance book has bottomed out here? And just the pace of where you see it going back to next year, understanding that all the supply chain issues may not be resolved? What was this book at the peak of prepandemic? So just to guess -- get a reference point of how large this can go back again. Maybe if you could start there.

Sure. Thanks, EB. Good question. In fact, I saw some good news today on automotive news that our dealer team shared with us. The Head of GM's North America business said, they're making good progress on shipping pickups. So they're going to start with their high-margin vehicles and work their way from there. But these are very big companies, and they're certainly working nonstop, day and night to straighten out the supply chain.

Our peak, I'm not sure about, but kind of the latest normal number would be the end of 2019, and our dealer flooring balances were $860 million plus a little bit. And now we're substantially less, $176 million. So there's quite a bit of room. Just this year, we're down $460 million in balances, year-to-date. You can't really pick the bottom on this. We had thought it would have already started to increase a bit.

Obviously, supply chain issues didn't allow that to happen. So we'll be watching this along with everybody else, but hopefully, the car manufacturers will start to be able to produce in volume. And there's still going to be a backlog as they work through that with people that have purchased cars in advance. So it will take a little bit longer to see the balances and the flooring line to start to increase.

You are seeing even in this article today how the Head of GM was saying that they would like to see their inventory in their dealer network increase. So all those signs point to increased production, and we'll just see how -- we'll have to wait and see how that plays out in timing. More broadly in loan activity, we're seeing mainland activity being fairly strong.

Our C&I usage for revolving lines has stabilized over the last few months. So that doesn't seem to be pulling this down anymore, and residential has been strong. Kind of just an anecdote for this quarter that we're in now, there's a couple of large projects here on Oahu that we'll finish. And so we'll see commercial real estate construction balances decline, but those will be more than made up for by the takeout loans we're doing on the residential side on those same projects.

So there'll be some moving around as we see during the quarter, but it seems like we're at a bottom with some potential upside, but we'll just have to wait and see -- primarily on the flooring business and see how soon that comes back.

And just in terms of economic activity, you provide some color on Slide 2 around COVID and the restrictions. Give us a sense of just how -- where you think we are in terms of normalcy, hospitality sector, when you think about the holiday season going into the winter? Are we all there? Are we going to be at 80% capacity in terms of how many of the hotels would have been fully opened. Just give us some perspective around that.

Yes. I certainly can't predict what the holidays will bring, but the normal shoulder season, which is what we're in right now, September into October, we always see a drop-off in tourist arrivals from summer into the fall. And then typically, it builds back in the holidays as people take their vacations. I can't think of any hotels that are still closed. I think everybody has trying to open.

Certainly, the major ones, and they're adjusting their staffing depending on what occupancy is. So everybody is ready, and we'll just have to wait and see. As we've talked about in previous conversations, many, many families come to Hawaii every holiday season, and we'll just have to wait and see if they come this year and choose to travel. But I think the hotel rooms are booked, they just have to see if people show up.

Got it. And just one last question, if I can sneak one for Ravi. What's the -- what was the end of period balance on PPP at the end of 3Q? And how much in fees is left to be recognized?

Yes. We have about a little over $500 million in terms of remaining balances. And sorry, Ebrahim, I missed out the second part of the question there.

What are the fees tied to PPP that are left tied to that $500 million balance?

It's $14.4 million.

14.4. And safe to assume that you expect the next 2, 3 quarters, most of that gets forgiven?

Yes. I think if we look at next quarter, I think the last couple of quarters is a good reflection of the pace we've been moving at. So I think over the next 2 quarters, we should be through the majority of it.

Your next question comes from Steven Alexopoulos with JPMorgan.

I wanted to start then drill down a little bit on C&I. If we take PPP loans and dealer loans, and we put those aside, can you talk about the change you saw in the C&I pipeline in the quarter? Any notable increase in commitments? And what was line utilization? You said it was stable.

Ralph, do you have the line utilization number?

Yes, it was a shade over 20%. And I think what we saw pre-COVID, it was probably around 30%. We've probably gone down into the mid-teens at the low point. So it started to come back a bit there.

Yes. And we're seeing some activity in the corporate area, not a huge amount, but we're seeing some activity in that area, but it's been muted. We haven't seen -- we've seen a couple of payoffs, just not that we wanted them, but it's just that the transactions have occurred that either they went to capital markets or mergers and acquisitions in that portfolio, but it's been fairly stable.

We haven't seen a huge amount of new growth, a modest amount. But I think that market is there, and we'll see what the next few months bring as deal-making typically starts in the beginning of the year, but we'll just have to wait and see.

Okay. That's helpful. And then maybe for Ravi, you've built a pretty sizable cash position here. And it looks like the guidance, you're expecting more deposit than loan growth over the near term. Now that rates have moved up a bit, has this changed your appetite? Should we expect more of that liquidity to move into the securities book? Or do you anticipate this cash balance building further here?

I know we've -- as you know, just looking at the data, we've grown that securities portfolio about $1 billion this quarter, and it's pretty close to $8 billion. We certainly look at the balance sheet in totality, and we'd love to see loan growth kind of help us with those liquidity levels that we have currently, but we'll have to take it sort of piece by piece, and I think we're probably feeling pretty comfortable with our level of securities at this stage.

So I think as we start to see some of that liquidity get deployed, we'd like to see those balances come down. But at this point, we feel comfortable with our securities level, plus or minus, a little bit, but we're going to have to work through that liquidity over time.

Okay. It is Bob, Steve. The only thing I would add to that is you saw a large increase in the public operating accounts is that the relationship with the various municipalities and the state has been very fluid and just the amount of cash they have coming in and going out is hard to predict.

Got you. Okay. And then, Bob, just a final one. I mean, just about every bank is talking about wage pressure here and have been paying a lot of attention to the situation in Hawaii. But is that a pressure point? And could this impact your expense growth over the next year?

Yes. Great question, Steve. And we're seeing the same -- some of the same issues here. We did see our jobless rate tick down yesterday. So it went from 7% down to 6.6%. So there are still some people looking for jobs, but there's still a lot of activity out there. A lot of people trying to hire. So there is some wage pressure, and we've been going through that quite frankly, over the last year plus in our business. So I'm not going to say that we won't face it, but it's hard to predict exactly what that would be going forward.

Your next question comes from David Feaster with Raymond James.

I just wanted to -- you saw some nice growth in CRE in the quarter. I'm just curious maybe where you're seeing strength? And maybe if you could compare and contrast the U.S., the Mainland and the Hawaiian markets and just -- also just maybe give us a pulse of the competitive dynamics that you're seeing. We hear a lot more competition from a pricing standpoint, but also seeing some on structure and standards as well. Just curious what you're seeing in CRE.

Yes. Maybe -- this is Bob, David. And maybe I'll start and ask Ralph to add some comments. We've continued to see pressure here in Hawaii on pricing. We haven't seen it too much on structure. It's been much more active in the Mainland, primarily at the West Coast, where we have relationships with -- some direct relationships and a lot of relationships with other banks, and it just seems to be quite active that people are doing transactions out there that we've been able to participate in.

I expect we'll see more volume here over time, but there will be some headwinds, as I mentioned earlier, with a couple of large projects here paying off in Q4 on the CRE construction side.

But Ralph, anything you'd add to that?

No. I would say that on the mainland where we've seen pretty good activity right now, most of what we're doing there is sort of institutional quality type real estate, institutional type players. So I think in terms of weakening of terms, it's not as big of an issue as it would be maybe in the smaller loan market.

Okay. That's helpful. And then maybe just touching on fee income and getting some of your thoughts on the puts and takes there just on card fees, which have pretty much recovered back to where we were in the trust department and the trends you're seeing there. And then just I appreciate the color on the BOLI benefit, but have seen several other banks add the BOLI. Just curious your appetite for BOLI here, too.

Please, Ravi, go ahead.

So I think maybe I'll just take them in pieces, David. This is Ravi. I think it's been nice to see the credit card and debit card fee income pick up as we've seen quite a bit of activity here over the summer. We saw -- I just characterize it as a small dip as a result of, as Bob mentioned, sort of going into the shoulder season and maybe a little bit of impact of the Delta virus and activity.

But again, strong numbers there, and we expect that's a trend pretty consistently with what we'll hopefully see in the rest of the year in the vacation season. I'd say, with trust and investment income, it's been very strong and very stable. And I'd say, the core pieces of income coming from the trust and investment income side has been really from recurring revenue sources, which has been a good sort of solid, consistent place of growth for us for, I'd say, the last year, 1.5 years.

Just talking a little bit about BOLI. From our perspective, we're probably from a capital perspective, sort of at the top end for the amount of BOLI that we can have in our portfolio. So we don't expect to add to the BOLI portfolio itself, but we expect it to perform pretty well over time and pretty consistently, at least in this environment.

Okay. That's helpful. That's great color. And then just last one from me. Asset quality has been phenomenal. You guys do a great job there. Just wanted to touch on the modest uptick. I mean it's small, but just the uptick in criticized and past due balances and your just thoughts on overall asset quality here.

Dave, this is Ralph. The increase in the criticized loans [up] $62 million. And really, that was around, I think, about 5 credits -- shared national credits that got downgraded during the exams that are conducted at the agent banks. Now when we look at those credits, we don't see much loss potential there. These companies have really good financial flexibility, sound businesses, and I think it's really sort of a different perspective maybe that the regulators have from the banks.

So nothing I don't think really happening there. I think the trends that we've seen kind of continue to improve. And then on the past due side, that was really kind of an administrative delinquency on one loan, and we're at 35 basis points. So just one loan could create quite a bit of a change in that in the statistic.

Was there anything within those 5 credits that was a -- trends or a similar industries? Or was it just kind of one-offs?

No, they're kind of in those high-risk areas. Actually, the trends are probably improving. So it was -- but the regulators come in annually and they look at those deals. And they were downgraded to special mention, which essentially means there's potential weakness, and I think not necessarily a well-defined weakness. And again, we downgraded those credits. We have reserved for those credits. So we're pretty comfortable with the asset quality picture right now.

Your next question comes from Andrew Liesch with Piper Sandler.

I just want to touch on expenses here. They're pretty well controlled, and I know you pushed off the timing of the conversion into next year. And it sounds like there might be some inflationary pressures, but how should we be looking at the expense base and expense growth for next year? I think you're guiding to 7% for '21, which all seems reasonable. But how should we look at it going into next year?

Andrew, this is Ravi. I'll comment a little bit on that. Typically, we don't provide 2022 guidance yet, but I'll make some comments about sort of what we -- how we see the future in terms of our expense profile. Bob alluded to sort of inflationary pressure that we've seen, particularly in wages, in particular in some very specific categories that are high in demand. So that's one area. I think we've talked about this in the past, our continuing investment in technology.

It's a big part of our goals for the future, and we continue -- we're going to continue to invest in technology to be competitive. Another area just to talk about is just the core. I think we'll see -- as we get closer and closer to the implementation of core, we're going to see training costs that will continue on. And when we eventually go live, we'll see that the capitalization of the development costs start to roll into the expense line in the form of amortization of the core itself.

So that's some guidance or -- not guidance, but just some color on where we think things are going to the future.

Got it. Makes sense. Is there any timing that you can provide on the conversion?

Andrew, this is Bob. We're looking at the first half of next year still and trying to pull that in. We're feeling very good about where we're at. But since we've delayed it, we don't want to jinx ourselves by being too specific, but we're feeling very good about where we're at and the progress we've made. And we didn't want to do it in the fourth quarter, candidly, because it just didn't seem like a good idea relative to year-end.

Understandable. Makes sense there. And then just with the ramp in deposit growth, some of it's obviously public funds that may go the other direction at some point, but that put some pressure on capital ratios. How should we be looking at the buyback? I know you guys have wanted to be consistent with share repurchases, but how should we be looking at that asset growth versus the buyback right now?

Yes. Maybe I can start on -- this is Bob, and then ask Ravi, if he has any comments as well. It's something we're looking at in our budgeting process. Clearly, we're hopeful that we'll see loan growth in -- come back in next year with just some of the lines of credit that we have, both to our corporate customers and certainly, our flooring line customers and that, that amount of capital that we're holding above our target will kind of get absorbed into the loans portfolio through risk-weighted assets.

And in that planning process, we're going to look at our profitability. We know that we've been a very steady capital return bank, and that's something that's very important to us. Certainly, the dividend is critically important to us, and we're not seeing any changes in that, and we'll just have to decide how much capital we'll have left after we're investing in our technology and look to maintain the share repurchase program.

But we don't have any idea at this point that what the level would be or what we're looking at on that. Ravi?

I didn't have anything to add.

(Operator Instructions)

Your next question comes from Jared Shaw with Wells Fargo.

Maybe shifting -- looking at loan growth to hit that target for the 1% ex-PPP growth this year, it seems like we'd be seeing a ramp-up in fourth quarter. How should we be thinking about resi mortgages as part of that certainly growing as a percentage of the overall portfolio? Is that going to be a bigger part of the lending story going forward?

Jared, this is Bob. Certainly, for fourth quarter, we're going to see a bump in residential for no other reason other than those -- there's actually 3 large projects completing that are in the -- actually, a couple of them in escrow now. As far as the residential loans we've approved for customers, it will be closing in the next several weeks as those projects are completed.

And so that by itself will be a pretty significant boost on top of the normal volume that goes through. So like many places, we're seeing a little bit of a slowdown in refinance and pick up, other than these projects completing, in new purchases. But in addition to that, we have this kind of special one-off situation with these 3 projects completed. So residential should be quite strong in Q4.

Okay. And then shifting to the reopening of the state, you touched on a little bit of the labor market, but is there enough labor capacity in state to sort of handle a full reopening? Or will that require maybe some return of people that have left the state at the beginning of COVID?

Yes. To be honest, I don't have a great answer for you on that. To be determined. We had our unemployment rate, Kevin, was it 2% or something before at the low point, and now we're at 6.6%, 2%, 2.5% -- below 3%, and now we're at 6.6%. So there's still quite a few workers out there that are looking for jobs. And will that be sufficient to absorb the demand of the return to tourism? I don't know to be candid with you.

Okay. And then just finally for me, when you're looking at the NIM guidance, Ravi and you're saying, excluding the excess liquidity. What is the excess liquidity that we should be thinking of at this point? In the dollar value...

It's hard to say. I think last quarter, it was about 8 basis points impact of excess liquidity. If we start to see some of those, as Bob mentioned, those public deposits move off, certainly, the impact of excess liquidity coming from that part of the deposit base will decline. But we've also seen pretty good strong growth in commercial and consumer deposits. So it will really depend on what happens in the next quarter or two.

Your next question comes from Laurie Hunsicker with Compass Point.

I wondered if you could just give us a little color, the $2.1 million in litigation costs, what that was?

Yes. I can touch on that. This is Bob, Laurie. And that's just a commercial dispute we had with a vendor, and we didn't feel they were performing to our expectations. And so unfortunately, it got into litigation, but we should have that resolved, we're hopeful, very soon.

Okay. And then when I look at that other, other expense line, the $16.2 million, even netting out that $2.1 million, it's still looks high. Was there any other onetime items in that bucket to think about?

Nothing specific, Laurie. I mean a lot of small little things. In particular, a couple of catch-up items that we have, but nothing specific.

Okay. And then I guess if we were to think about where that line would run, is it going to run closer to sort of $13 million a quarter give or take? Or how should we think about that?

P It's hard to say. There's a lot of sort of small items that are in that line. I think $13 million isn't such a bad number in terms of what we expect it to be, but it will just depend on sort of onetime items that might show up in the quarter itself.

Okay. Great. That's helpful. And then tax rate, how should we be thinking about that for next year?

I think barring anything else that happens out there with respect to policy, I think, relatively consistent with where we are, maybe trending a little bit downward. We continue to engage in low-income housing tax credits as an opportunity to manage our effective tax rate. And so as we sort of roll into new opportunities there, we'll start to see that tick down a little bit, but that takes time as we build that portfolio.

Okay. Great. And then last question for me. Deferrals, I didn't see a deferral update in your deck or in your press release. I'm hoping you can give us a number. I know it was incredibly low last quarter at $35 million. Just wondered if you had an updated number on that.

Yes. I think what's left now, Laurie -- this is Ralph. It's about $16 million.

$16 million. Okay. And do you by chance have a split in terms of what's commercial versus what's consumer?

Yes. I don't, but it's almost exclusively residential mortgage.

There are no further questions at this time. I will now turn it over to Kevin Haseyama.

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.

This concludes today's conference call. You may now disconnect.