First Hawaiian Inc (FHB) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Hawaiian, Inc. third quarter 2016 earnings call. At this time all participants are on a listen-only mode.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Mr. Kevin Haseyama, manager of investor relations. Sir, please go ahead.

Thank you, Liz, and thank you, everyone, for joining us as we review our financial results for the third quarter of 2016. With me today are Bob Harrison, Chairman and CEO; Eric Yeaman, President and COO; Mike Ching, CFO and Treasurer; and Ralph Mesick, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the investor relations section.

Before I turn things over to Bob, I'd like to remind you that we may make forward-looking statements during today's call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see our SEC filings, including the Form 8K filed today; all of which are available on our website. We will also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliation of those non-GAAP financial measures to comparable GAAP measures. And now I'll turn the call over to Bob who will provide you with third quarter highlights starting on slide 3.

Thank you, Kevin. Aloha, everyone, and thanks for joining us today. The third quarter was an exciting time here at First Hawaiian as we returned to being a public Company following our IPO in early August. We were very pleased with how well received the IPO was and none of it would have been possible without the contributions of everyone at the bank as well as our external partners who worked tirelessly for months on the necessary preparations and ultimately helping us share our story with the investment community.

The deal priced at $22.00 per share, the high end of the range. Following the IPO, the public ownership was 17.4% while BNP Paribas retained 82.6% ownership. As previously disclosed, BNP Paribas' intention is to sell its remaining interest in First Hawaiian over time. Since then, the stock performed well, closing at $26.93 on October 26, an increase of 17.1% since issuance. This translates to a market cap of approximately $3.8 billion, making First Hawaiian the largest publicly traded Company based in Hawaii. Finally, First Hawaiian was added to the Russell 1000, 3000, and global indices at the close of business on September 30.

Mike will go through the details of our financial results, so I'll touch on a few highlights on slide 4. I'm pleased to report that the third quarter was another good quarter. We had solid earnings, good organic balance sheet growth, and our credit quality remained excellent. Net income for the quarter was $53.2 million, or $0.38 per diluted share. Core net income was $55.2 million or $0.40 per diluted share.

Yesterday our board of directors declared a quarterly cash dividend of $0.20 per share payable on December 9, 2016, to the shareholders of record at close of business on November 28. We experienced good growth in the balance sheet during the quarter, loans and leases grew $209 million or 1.9%, and deposits grew $843 million or 5.2%. Our asset quality remained excellent with a net charge off ratio of 12 basis points and we remain well capitalized.

We maintained our expense discipline, reporting an efficiency ratio of 48.3%, and our profitability measures remain solid. Our return on assets was 1.1%, and core return on assets was 1.14%. Return on tangible equity was 14%, and core return on tangible equity was 14.53%.

Finally, I wanted to share something we are very proud of. During the quarter, we were informed that the bank received a CRA rating of outstanding by the FDIC for its most recent evaluation period of 2013 to 2015. This was the 8th consecutive evaluation beginning in 1995 that the bank has received an overall rating of outstanding. Now I'll turn it over to Mike who will take you through our finances.

Thanks, Bob. Starting with the summary income statement on slide 5, net income for the quarter was $53.2 million or $0.38 per diluted share, as compared to $54.9 million or $0.39 per diluted share for the second quarter. After adjusting for $3.1 million of IPO related expenses, core net income for the quarter was $55.2 million or $0.40 per diluted share, as compared to core net income in second quarter of $54.9 million or $0.39 per diluted share. There were no non-core items during the second quarter.

Turning to the next slide. Net interest income in the third quarter was $122.7 million, an increase of $2.3 million compared to the prior quarter. The increase in net interest income was due to higher average balances on investments and loans, partially offset by lower yields. Average loan balances were $187 million higher and average investor balances were $538 million higher than the prior quarter. Net interest margin for the quarter was 2.87%, down 1 basis point from the prior quarter. The premium amortization increased from $2.9 million in the second quarter to $5.1 million in the third quarter. We expect the margin to remain generally in this range, assuming of course the rates stay at the current levels.

Turning to slide 7, non-interest income was $48.7 million in the third quarter, an increase of $2.3 million compared to the second quarter. The higher non-interest income was primarily due to higher BOLI income partially offset by lower swap fee income. During the third quarter, we realized additional BOLI income of $3.5 million from death benefits. The second quarter included $1.7 million in upfront fees for customer swaps, which was nearly $1 million higher than in Q3. The remaining non-interest income items were flat in the aggregate compared to the second quarter.

Non-interest expenses shown on slide 8 were $82.8 million in the third quarter, an increase of $4.3 million from the second quarter. Contributing to the increase in the third quarter were higher card rewards expenses, and the expenses in the second quarter benefited from expirational points related to a change in terms. Also, FDIC insurance fees increased due to changes in the assessment rate, and we had certain expenses associated with the conversion to EMB, chip enabled cards, as well as higher professional fees and services. As previously mentioned, total IPO related expenses in the third quarter were $3.1 million. With that, I'll turn the call over to Eric to go cover the balance sheet starting on slide 9.

Thanks, Mike. Aloha, everyone. As you can see on this slide. We had a nice lift in our balance sheet during the quarter driven by loan growth, which was in line with our expectations, but higher than expected growth in deposits. We made good progress on our efforts to deploy our excess liquidity during the quarter. Investment securities increased by $762 million as we continue to invest our excess cash primarily into Ginnie Mae and treasury securities. Most of this increase came in during September, so the net interest income for the quarter was not fully impacted by the higher quarter-end investment securities balance.

Total assets at the end of the quarter were $19.9 billion, an increase of $840 million or up 4.4% compared to June 30. Turning to slide 10, total loans grew by $209 million or 1.9% in the third quarter. The majority of the growth was in commercial real estate, which increased $130 million or 6%. This growth was driven by several large local transactions. Construction loans grew by $51 million or 12% in the quarter, primarily due to construction projects drawing on their lines.

Although C&I loan balances were down slightly, we had good production during the quarter but it was offset by several large paydowns in our shared national credits portfolio. We still expect total loans to grow at a mid- to high single digit rate on an annualized basis. Turning to slide 11, you can see that total deposits increased by $843 million or 5.2% in the third quarter. Having said that, about $440 million of that growth primarily related to escrow deposits on a construction project, which is expected to flow out in the fourth quarter.

We also saw an increase in public deposits of approximately $150 million during the quarter. If we exclude those two items, deposit growth was still strong at 1.6% for the quarter. Now I'll turn the call over to Ralph to cover asset quality.

Thank you, Eric. If you turn to slide 12, you'll see that asset quality measures were strong and stable. Quarterly net chargeoffs were $3.4 million or about 12 basis points on total loans and leases. This compares to $2.7 million or 10 basis points in the prior quarter. Non-accrual loans were $9.4 million at quarter end, roughly 8 basis points, that levels down 4 basis points on a linked quarter and 11 points lower year over year.

Delinquencies were about $30.2 million or 27 basis points. This is up 2 basis points on a linked quarter but lower by 5 basis points year over year. At the quarter end, the delinquency rate for auto and direct loans was 1.36%, and the rate for credit cards was 1.13%. The allowance for loans and lease losses was $135 million, about 118 basis points; and our provision expense was $2.1 million for the quarter, $200,000 higher than the prior quarter. And now I'll turn the call back over to Bob.

Thank you, Ralph. Turning to slide 13. Just want to touch a little bit on the Hawaii economy, which continues to perform well during the first nine months of the year. State unemployment rate was 3.4% in August, compared to 4.9% nationally. The visitor industry is on pace for one of its best years. Year to date through August, visitor arrivals included 2.6% to just over 6 million and spending increased 3% to $10.4 billion versus last year.

The outlook for the rest of the year remains good as the number of conventions and events, such as the 75th anniversary of Pearl Harbor, and the Honolulu marathon should contribute to a strong finish. The housing market remains robust. Year to date through September, Oahu single family home sales are up 4.8% in the same period in 2015, and condominium sales are up 9% for the same period. So in summary, the bank had another good quarter with the IPO being the major milestone. We appreciate you joining us today and welcome your questions.

(Operator Instructions)

Our first question comes from the line of Ebraham with Bank of America. Your line is now open.

Good morning. Just in terms of if we can first touch upon the net interest margin as we look out. One, can you tell us what the yield was on the securities that you purchased and brought on balance sheet towards the end of the quarter? And can you just sort of help us think about as some of the deposit liquidity runs out in the fourth quarter, do you expect some offset to the margin, and just how that interplay should work out in 4Q.

Thanks, Ebrahim. I'll ask Mike to take that question.

Thanks, Ebrahim. Yes, the new production and I think we mentioned that it really came on right at the end of the quarter, but new production was around 1.71%. We did add some treasuries into the book that brought down the average yield on what we put on. We did have a positive differential and the runoff was just about 1.45%. Really, as we look out to Q4, we think the margin will continue to be stable. We'll, if we have the excess liquidity, we'll look to use it in our investment portfolio to the extent that we're not lending it. This is consistent with what we have talked about before in our strategy.

Understood. And when we look at sort of the cash balance at the end of the quarter, is that what you need or is there any excess amount in there, the $850 million?

Yes, we really look at about $0.5 billion, so $500 million is what we like to hold, it's up at $800 million, as I think Eric talked about on some of those escrow deposits that we know are going to go out towards the end of November or early December.

We're expecting for some of those projects to close, and so those escrow deposits would leave us.

And what are those escrow deposits, I missed that number earlier?

It was approximately $440 million.

$440 million, got it.

Total.

Got it. And just separately in terms of expenses when you sort of back out the IPO-related costs and look at the core expense of $79 million, is that the base from which expenses should grow? I know there are some public company expenses that will flow in if you can remind us on how to think about that both for fourth quarter and into 2017.

Sure. Just looking forward, we like to hold the expense growth, the baseline expense growth to about 2.5% or so. The timing of sort of the full expenses that end up incurred based on the IPO and the public company is somewhat spotty and volatile but on a baseline basis, we look at around 2.5%.

So it should grow 2.5% using the $79 million number, and then the other $10 million to $14 million of public company expenses that would be over and above that?

That's correct.

Understood, thanks for taking my questions.

You're welcome.

Our next question comes from the line of Steven Alexopoulos with JPMorgan. Your line is now open.

Hey, everybody, and congrats on your first public earnings call.

Thank you, Steve.

I wanted to start -- just follow up on expenses. The card reward program costs seem to come in about $1 million high. Can you talk about what drove that, and is this a new run rate we should be thinking of?

Thanks, Steven. It was really a factor of what went on in Q2. So in Q2, we had a change in some of our terms, and so expired certain of the points are in the portfolio. It was Q2 that was down from, actually both Q1 and Q3. Where we ended up in Q3, it's hard to say it's based on spend, but we think it's kind of in that range,.

The $4.5 million range, okay. And then on the $3.1 million of the IPO-related expenses, can you give us a break down of where on the P&L those fell into this quarter?

It's primarily in the comp and benefits line, and then professional fees and other.

Okay. Got you. Thank you. And the other income, sorry I'm jumping around a little bit. The other income was a little light in the quarter, can you talk about what happened?

Yes, what you see there is the swap fees differential, so we had about $1.7 million in swap fees in Q2, and about $1 million higher than in Q3.

Okay. That's helpful. And the BOLI, was that just one time unusual amount this quarter, do you increase the investment of BOLI contracts?

No, that wasn't the investment of BOLI contracts. Those are existing contracts for which the death benefit was realized, so that's unpredictable. It's certainly part of the program, certainly part of the investment, but that's not predictable.

Not predictable. Got you, and my final one, tax rate was a little high at 38%. Should that move back down next quarter?

We'll probably see it at right around that level going forward. We have a new allocation agreement between the group and that was effective July 1 of this year, but we expect it to be right around that 38% range, give or take a little bit.

Great, thanks for taking all my questions.

You're welcome.

Our next question comes from the line of Matthew Keating with Barclays. Your line is now open.

Thank you. I was hoping you could just provide some additional color on the shared national credit pay downs you saw on the quarter and how long you expect those might persist for or do you think you'll see stronger C&I growth in the fourth quarter? Thanks.

No. We had expected some pay downs there. But overall, we do anticipate C&I growth to continue. I mean, I think we gave a little bit of guidance overall total loan growth we still think is in the mid to high single digit range. That's where we're tracking and that's what we see going forward. I think if you look at our portfolio overall, you know that we're sort of 50% commercial, 50% consumer. And we see that sort of staying within the same proportion going forward.

Great. That's helpful. And just some comments on the announcement with Vantiv and what the bank is doing on the merchant processing side so we can better understand the changes there? Thanks.

Sure. Yes, basically, our contract came up with our current provider. We were looking at what options we had, and so we ended up just making a change to Vantiv as a merchant processor. We still play an integral part in managing our customer relationship and will handle all of that going forward. So overall it's really just changing the merchant process provider. We felt that they gave us some options and tools that will help us better support our customers in that space.

Great. And finally, anything new as it relates to the CCAR process at this point at this point in terms of how you are thinking about the 2017 CCAR cycle?

Let me take that one. This is Bob. Of course the new NPR came out, and that would have an impact on us. It's really too early in the process to speculate on what the exact impact will be because it's still in the comment stage. So we're studying that, and depending on if that becomes final or not, that would make the process potentially easier from what we went through this year in 2016.

Great. Thanks very much.

Our next question comes from the line of Chris Larmoyeux with Goldman Sachs. Your line is now open.

Hi. Thanks for the comments on a relatively stable NIM next quarter. Can you walk us through the puts and takes of your net interest margin, if we get a rate hike in December, can we expect something similarly to last year of around 6 basis points quarter over quarter? Thanks.

Yes, I think that's about right. We are positioned if we do see a rate hike to increase on the net interest income. We do have a commercial book of loans that is obviously variable and so that helps drive some of the increase with the rate hike.

Okay. Great. Thank you.

Our next question comes from the line of Dave Rochester with Deutsche Bank. Your line is open.

Good morning. Congrats on the IPO.

Thanks Dave.

On the loan growth this quarter, you highlight some large local transactions in CRE. I was just wondering what segments you're growing within that bucket and if you see more opportunities there to grow that book more meaningfully over time.

Yes, I mean, we did see strong growth in the quarter. We do anticipate CRE to continue to be strong for us. You also saw that construction continued to be strong for us during the quarter. So in the commercial space, we really see all segments performing well.

The office, industrial, retail as well in all of those?

Yes, pretty broad based Dave, there's a number of larger deals that came through in the quarter and then as Eric touched on, excuse me, we're seeing the end of a number of these projects coming up and towards the end is where you see your funding under the commercial side, so those are primarily the high-rise residential condos.

Okay. And then just bigger picture, I was just wondering if you can comment on the loan pipeline, and how the core key production was shaping up. It sounds like it's probably shaping up pretty well, given your loan growth guidance. Trying to get a sense for strength going into 4Q versus 3Q.

We're continuing to see a lot of projects and a lot of transactions coming through, so we think it will be a solid fourth quarter. The aberration a little bit with some of the large pay downs in the shared national credit portfolio in the third quarter, you can never predict that, so we're not expecting that in the fourth quarter, but we see continued good volume through the fourth quarter.

Great, and then one last one on the NIM, was just curious what the impact was from the uptick in LIBOR of your loan yield this quarter.

It wasn't all that significant. Most of our variable rate loans are more one month LIBOR based.

Great, thanks.

(Operator Instructions)

Our next question comes from the line of Jackie Bohlen with KBW. Your line is now open.

Hey, guys, good afternoon.

Hi, Jackie.

I wondered if you could provide an update on a normalized view for swap income given that it's fluctuated quite a bit over the last two quarters.

We probably, we're probably good at about maybe a $1.5 million, $2 million a quarter, and it depends on the size of the deal, it creates some lumpiness.

Okay. And then looking at your NIM outlook for it to be relatively flat, how do your thoughts on premium amortization play into that?

Well, it's always hard to tell. Obviously with the pace of the cash flows, we did see that uptick in Q3 from Q2. It had a, obviously a bigger impact during the quarter, it will continue to be spotty based on just the pace of the cash flows, really.

Okay. And do you have an indication what pay downs have been like in October so far?

No, not quite yet.

Okay. All right. Thank you. Everything else I had was already asked.

Thank you, Jackie.

Our next question comes from the line of Jared Shaw with Wells Fargo. Your line is now open.

Good morning, this is actually Timur Braziler filling in for Jared. Just a couple more from me. Can you provide the level of pay downs within that SNC portfolio during the third quarter, just so we get a sense of C&I growth outside of that?

We don't have that right in front of us, but I think it was in the neighborhood, Ralph?

About $75 million.

I'm sorry, what was that?

About $75 million.

$75 million. Okay and then looking more broadly kind of at the floor plan portfolio, maybe just talk about what type of growth you saw in that portfolio during the quarter and then some broader trends within the auto space.

Yes, the dealer flooring portfolio is relatively flat during the quarter. And then what was the second part of your question, Jared?

Just some broader thoughts on the overall auto space. There has been some commentary about potential weakness or emergence of weakness in some credits, I'm just wondering if you're getting any insight to that or what you're seeing in the overall health of that auto space.

Sure, Jared, this is Bob. The space is still good in Hawaii, and the dealers we work with in California, very solid dealer group. And so while there might be some, I'm sorry, Timur not Jared, but some issues overall, we're not seeing any weakness in our portfolio on that. There are certain car lines that are more challenging right now, going through various issues within the factories, but as far as our dealer network, we're still seeing very strong performance. Now, the number of cars seems to be flattening a bit as far as car sales nationally; and also in Hawaii, so that will be a factor affecting how big the portfolio is for us going forward, but we're not seeing any weakness within the portfolio itself.

Okay. Great. Thank you for that color, and one last one for me as it relates to the allowance level, it's been running down as a percentage of loans for a few quarters here. I'm just wondering if that's going to remain purely formulaic with the low level of charge-offs or is that something you would cap once it reaches a certain level?

Well, I think we tend to look at it with a forward view, and if you look at it relative to loans, I think it's appropriate right now, given the pointed cycle.

Okay. Great. Thank you very much.

Our next question comes from the line of David Eads with UBS, your line is now open.

Hello. Maybe on the credit side, there was another nice downtick in nonperforming or NPLs primarily on the RESI side, and I was curious whether there was anything in particular going on there or just improvement in the portfolio.

No, no, nothing really happening there to be honest.

It's just a low number and as we work through the individual loans, it dropped down fairly significantly on a percentage basis but on a dollar basis, a moderate amount.

All right. Cool. And I heard your color, or your guidance earlier that the tax rate flattish in 4Q, and I was curious in a longer term horizon, if there are opportunities you were looking at to potentially invest in tax credits or other strategies that could maybe bring the tax rate down, and that you would kind of benefit now differently as a public company.

Yes, David, certainly we have an opportunity. As we talked about before, we do participate in a number of tax sharing and tax allocation agreements with the group, and so we have kind of a longer view on when we'll be able to, implement any of these strategies, whether it's tax credits or muni bond income. But certainly, that's a longer term view for us.

So basically it wouldn't really benefit you until you deconsolidate from the group?

That's correct.

Okay. Thank you.

Our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is now open.

Thanks. Hi. Good morning. I wondered if we could circle back to expenses, because I just want to make sure I'm thinking about this the right away obviously as we look at your $82.8 million and we strip out the IPO costs, we're down to $79.7 million, which is a $1.2 million increase from the prior quarter. Did that already start to include some of your guidance in terms of being a public company of the $14.5 million to $17 million run rate or should we be thinking about that $14.5 million to $17 million annual guidance being on top of your core number? Can you help us think about that a little bit?

That's in that $79 million number that you mentioned.

So that's fully baked now?

Well, it's the -- the guidance that we put out in the S1 is not fully baked, but we have some of those public company expenses in that $79 million. The $3.1 million that we refer to are IPO specific costs.

So excluding those one-time costs, if we think about just the ongoing costs of being a public company.

It's included in that $79 million.

Okay. And so okay, and so as we think about looking forward to 2017, then, if I'm just going with your sort of baseline guidance here; and again, this is just round numbers of 2.5%, then we're sitting there thinking maybe $326 million, $327 million would be a good run rate next year for noninterest expense?

For -- is that, are you referring to the baseline expenses? I don't think that includes the -- we have an estimate of $14.5 million to $17 million annual for IPO, or offering I should say and public company related costs. That would be on top of that number.

That would be on top of that. Okay. And so with maybe you can just help me a little bit. Within that $14.5 million to $17 million, how much of that is ongoing versus just one time?

I'm sorry, I missed that.

How much of that is ongoing of the $14.5 million to $17 million versus one time costs?

It's ongoing. The mix is going to shift. If you think about offering related expenses and public company related expenses as the two buckets, we think by the end of perhaps 2018, it will be baked within our baseline expenses.

Okay. So maybe just looking at this a different way, if I'm thinking about what a next year run rate looks like, round numbers, $340 million give or take is a good number?

It's in that range.

It's in that range. Okay. Good. And then I just wanted to go back to what Timur was asking, do you have an actual breakdown as of September of both the dealer floor plan loans and then what piece is in California as well as the snick and then what piece is Hawaii versus mainland?

So basically in terms of a dealer flooring, the total -- let me just pull my numbers here. Total dealer was about just under $1 billion. Well, flooring was about $800 million. Total dealer was just about $1 billion because there's some facility loans that we have also with them. Of that, $0.5 billion was on the mainland, most of which is flooring.

Okay. And that's California.

Correct.

Okay. Okay. And then what about on the SNC side, do you have that?

Yes, on the SNC side, the portfolio basically for the mainland stayed at about $1.1 billion of which the mainland piece stayed $1.1 billion, total of $1.4 billion.

Total of $1.4 billion. Okay. So Hawaii was $300 million. Perfect. Thank you. That's all I have.

Thanks.

That concludes today's question-and-answer session. I would like to turn the call back to Mr. Haseyama for any further remarks.

Thank you for joining us on today's call. We appreciate your interest in First Hawaiian. Please feel free to call or e-mail me if you have any further questions. Have a good evening.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.