First Hawaiian Inc (FHB) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Hawaiian Inc. fourth-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Kevin Haseyama, Manager of Investor Relations. Please go ahead.

Thank you, Jonathan, and thank you to everyone for joining us as we review our financial results for the fourth quarter 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 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 direct you to slide two 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 8-K 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 reconciliations of these non-GAAP financial measures to comparable GAAP measures.

And now I'll turn the call over to Bob, who will provide you with fourth-quarter highlights, starting on Slide 3.

Thank you, Kevin. Aloha, everyone, and thanks for joining us today.

2016 was a milestone year for First Hawaiian. I'm pleased that we ended our year with a strong fourth quarter. We had strong earnings and we maintained our disciplined and strategic approach to growing our loan portfolio and our credit quality remained excellent.

Mike will go through the details of our financial results, so I'll just touch on a few highlights. Net income for the quarter was $56.6 million or $0.41 per diluted share. Core net income was $56 million or $0.40 per diluted share. I'm also pleased to announce that yesterday our Board of Directors increased the quarterly dividend by 10% to $0.22 a share, payable on March 10 to shareholders of record at the close of business on February 27, 2017.

In the fourth quarter, loans and leases grew $124 million, or 1.1%, to a record $11.5 billion in the quarter, while deposits declined $171 million to $16.8 billion. Eric will go through the details of the changes when he discusses the balance sheet.

Asset quality remained excellent, with a charge-off ratio of 12 basis points, and we remained well capitalized. Our efficiency ratio was 45.8% in the quarter and our profitability measures remained solid. Return on average tangible assets was 1.2% and our core return on average tangible assets was 1.19%. Return on average tangible common equity was 14.88% and core return on average tangible common equity was 14.73%.

Finally, our employees once again demonstrated their extraordinary level of engagement and commitment to the community, as 99% of our employees participated in our annual Kokua Mai giving campaign, donating over $730,000 to support local nonprofit organizations. In addition, we opened our first offering period under our employee stock ownership plan during the quarter and over 30% of our employees chose to participate. We were real pleased to see such a high level of employee interest.

Now I'll turn it over to Mike to walk us through the financials.

Thanks, Bob.

So starting with the summary income statement on slide four, net income for the quarter was $56.6 million or $0.41 per diluted share. After adjusting for $1.5 million of gains on the sale of securities and $600,000 of offering-related expenses, core net income was $56.0 million or $0.40 per diluted share.

Net income for the full year 2016 was $230.2 million or $1.65 per diluted share. After adjusting for $22.7 million of gains from the sale of our Visa Class B shares and $4.6 million of gains on the sale of other securities, as well as $6.2 million of offering-related and other nonrecurring public company transition costs, core net income was $217.4 million or $1.56 per diluted share.

Turning to the next slide, net interest income in the fourth quarter was $131.3 million, an increase of $8.6 million compared to the prior quarter. The increase in net interest income was due to higher average loan and investment balances and higher yields on investments, partially offset by higher average deposit balances. Average loan balances were $270 million higher and average investment balances were $534 million higher than the prior quarter.

As we mentioned on the third-quarter call, most of the increase in investment balances in Q3 took place in September, so the results from the fourth quarter reflect the benefit of a full quarter of income from those higher balances.

Net interest margin for the quarter was 2.99%, an increase of 12 basis points from the prior quarter. The increase was primarily due to higher yields on our investment portfolio, a decline in premium amortization, and loan prepayment fees. Premium amortization was $3.6 million in the fourth quarter, down from $5.1 million in the third quarter, and loan prepayment fees received during the quarter totaled $2.1 million versus $245,000 in the third quarter.

Turning to slide six, noninterest income was $49 million in the fourth quarter, a slight increase of $0.3 million compared to the third quarter. Significant variances compared to the third quarter included higher other noninterest income of $4.8 million and $1.5 million from gains on the sale of investments as we've cleaned up our portfolio. These increases were largely offset by lower BOLI income of $5.4 million. Included in other noninterest income in the fourth quarter was $3.0 million in fees from customer swaps, which was $2.3 million higher than in the prior quarter.

Turning to slide seven, noninterest expense was $82.5 million in the fourth quarter, a slight decrease of $0.3 million from the third quarter. Significant quarter-over-quarter variances included lower salaries and benefits in Q4 of $1.6 million, as the third quarter included $2.0 million of expenses related to shares granted in connection with our IPO and contract services and professional fees were $1.8 million higher than the third quarter.

With that, I'll turn the call over to Eric to cover the balance sheet, starting on slide eight.

Thanks, Mike.

Total assets at the end of the fourth quarter were $19.7 billion, a decrease of $231 million compared to the end of the third quarter. The decrease is primarily due to the $171 million net decline in deposit balances, which I'll explain on a subsequent slide. For the year, total assets grew by $309 million, or 1.6%. Excluding the impact of the $300 million special dividend that we paid to BNP Paribas in the first quarter prior to IPO, total assets grew 3.2%.

Turning to slide nine, total loans and leases grew by $124 million, or 1.1%, in the fourth quarter. The majority of the growth was in residential real estate, which increased $109 million, or 3%. This growth was driven by the completion of several large residential construction projects, as our residential lending team financed a number of the purchases of the units by individual buyers.

Consumer loans grew $42 million, or 2.8%, driven primarily by growth in indirect auto loans of $25 million and in the credit card portfolio of $9 million.

Within the CRE and construction portfolio, commercial real estate loans grew by $32 million or 1.4% in the quarter. This growth was partially offset by a $25 million decline in construction loans, primarily a result of scheduled payoffs of two large residential construction projects in the quarter.

Although C&I loan balances were down slightly during the quarter, we had good production, but that production was offset by several large prepayments totaling approximately $100 million in our mainland shared national credit portfolio.

Total loans and leases at the end of 2006 (sic - see Press Release -- "2016") were a record $11.5 billion, an increase of $798 million, or 7.4%, for the year.

Turning to slide 10, you can see that total deposits decreased by $171 million, or 1%, in the third quarter. As I mentioned on the last quarterly call, deposit balances at the end of the third quarter included about $440 million of construction-related escrow deposits, which we expected to flow out in the fourth quarter. As discussed on the previous slide, those projects were completed, resulting in the withdrawal of those deposits. We were able to offset a substantial portion of that outflow with $269 million of organic growth in customer deposits. We ended the year with total deposit balances of $16.8 billion, an increase of $733 million, or 4.6%, for the year.

Now I'll turn the call over to Ralph to cover asset quality.

Thanks, Eric.

Slide 11 provides some perspective on our asset quality measures. Our net charge-offs were $3.4 million for the fourth quarter or about 12 basis points as a percentage of average loans and leases. This is unchanged from a relative basis from the prior quarter and up three basis points on a year-over-year basis.

Nonaccrual loans were $9.4 million or around eight basis points as a percentage of total loans and leases. This level is unchanged from the prior quarter and was down eight basis points on a year-over-year basis.

Delinquencies were $36.7 million or about 32 basis points. This is up five basis points from the prior quarter, but down one basis point year over year. At the quarter end, the delinquency rate for auto indirect loans was 1.73% and the rate for credit cards was 1.07%. The allowance for loan and lease losses was $135.5 million at December 31. The level of the reserve relative to loans and leases was unchanged at 118 basis points.

Finally, the provision expense was $3.9 million for the quarter, about $1.8 million higher than the prior quarter. And now, I'll turn the call back over to Bob.

Thank you, Ralph.

Turning to slide 12, Hawaii's economy performed well during 2016. The state unemployment rate declined for the fifth straight month, to 2.9% in December compared to 4.7% nationally. The visitor industry remains on pace for one of its best years. Year to date through November, visitor arrivals increased 3% to 8.1 million and spending increased 4.1% to $14 billion versus last year.

The housing market remains robust. For all of 2016, Oahu single-family home sales were up 6.5% year over year and condominium sales were up 8.4%. The median home sales price on Oahu in 2016 was $735,000, up 5%, and the median condominium sales price in 2016 was $390,000, up 8.3% versus 2015.

Finally, I'd like to note that we've filed a registration statement with the SEC and are now in a quiet period. Consequently, we are not able to answer any questions related to the upcoming offering on this call.

Also at this time, we will not provide any forward-looking guidance and request that you limit your questions to inquiries regarding our year-end results. Thank you in advance for your understanding and cooperation. With that, we'd be happy to take your questions.

(Operator Instructions). Steven Alexopoulos, JPMorgan.

Good morning, everybody. I'd like to start -- a couple of questions on commercial loan growth. I thought you said you saw $100 million of paydowns this quarter and I know you had $75 million last quarter. What's causing these paydowns? Can you give us some perspective on that?

Yes. I mean, I think this is all in the mainland SNC portfolio. We're not doing anything different there. You know, we expect that -- our exposure to remain relatively constant overall to our total portfolio. It's just that sometimes you can't anticipate these prepayments. Some of these folks are financing it in the bond market, given where market conditions were in the fourth quarter, so that's some of the dynamics that's happening there.

Just to add to that, Steve, one of our largest paydowns was -- they just paid it off with cash, so in one sense it speaks to the credit quality of our portfolio.

Okay. Are these concentrated in one industry type?

No, actually, they are really across all different industries. There was probably no paydowns or prepayments in an industry -- there was no more than one in an industry type, so it's across the board.

And then, banks in the mainland US have seen pretty much improved business sentiment across the board. Are you seeing that with your Hawaii customers?

The Hawaii economy is still doing well, as I touched on. You've still got a very robust visitor industry, as we saw with the year-end numbers, and so I think that leads to people to feel better about what's happening.

Okay. And Bob, do you have the floor plan loans? How did that change in the quarter?

Floor plan did bump up a little bit, bumped up about $70 million, approximately, during the quarter. Most of that was on the mainland.

Okay. Thank you, and maybe just a couple on expenses. When I look at the comp line, even considering the $2 million decline from the share gain in the third quarter, comp seems to be running below expectations. Can you comment on what's driving that? And how are we thinking about comp expense going forward?

Some of that is a function as well as to the activities that we're going through with respect to our stress testing with -- of CCAR, our affiliate Bank of the West, so we only saw those activities ramp up in Q4 versus Q3. But having said that, and I think we've mentioned this and disclosed this, but we operate under an expense reimbursement agreement that covers CCAR-related costs, and so there is going to be some volatility based on the activities on a quarter-over-quarter basis.

Okay. This is my last one. Anything in that other expense line? It was down pretty sharply in the quarter.

No, nothing real significant. I think it's a number of items as we kind of clean up right at year-end, but nothing material in one particular line item.

Okay. Thanks for taking my questions.

Ebrahim Poonawala, BofA Merrill Lynch.

I have one follow-up question on expenses. As we look at the expense run rate today, the $82.5 million that you reported for the quarter, about $0.5 million of that was IPO related, which I assume will begin to go away. Are we still sort of expecting or on track to add another $14 million to $15 million of expenses as we separate from Bank of the West? Is that consistent and will be additional, then, to where we were in fourth quarter?

The outlook for that, Ebrahim, has not changed.

Just to add to that, Ebrahim, I mean, the outlook hasn't changed and we're still very much in the middle of the transitional service agreement negotiations with all the various vendors, so it's hard to predict which quarter that will come in at. But our outlook hasn't changed overall.

Understood. And just in terms of going back to in terms of customer outlook, and as you sort of think about the loan categories today versus last year, so I'm not asking you to give forward-looking outlook, but just in terms of what are the loan categories where you're seeing better demand, where internally you feel better from a risk-adjusted standpoint to extend yourself, and if you've already been scaling back in certain areas. We had one of your competitors talk about sort of peeking out in construction lending yesterday. So I just wanted to get any color on that, Bob.

Ebrahim, this is Eric. I think our expectations are relatively consistent with what we stated in our prior earnings call in terms of growth, mid to high single-digit growth, really maintaining a very disciplined approach to our lending, given where things are in the cycle, as well as maintaining our mix within commercial and consumer book. There may be some shifts within the commercial book and within the consumer book, but overall we sort of see that proportion at the 50-50 split level to sort of continue.

And just to add to your -- specifically answer your question on construction lending, we are seeing the tail end, as we've been talking about for some time, of the high-rise residential construction projects. There are still one or two out there that we're working with the customer now and there's one or two in the pipeline, but for a while there we had quite a few and that is slowing down.

Yes. I would just also add to what Bob said is that, as he indicated earlier, the economy is still growing moderately, and when you sort of look at the Hawaii residential housing market, it's still relatively robust, and so that's a little bit of color there on the resi market and we feel we are getting our share of that market as well.

And just one last question, on fee income, you had a pretty good quarter for swap fees in the fourth quarter, about $3 million. Would you consider that as a one-off and an uptick and it goes back closer to where we were in the third quarter, or have you seen a pickup in activity because of rising rates and we should see a reset higher in what the swap fees will be as we think about it going forward?

No. Really, it's a challenge to predict what the swap fee income will be on a quarter-over-quarter basis. It's based on the size of the deal, it's based on the number of deals, and so it is volatile on a quarter-over-quarter basis, as you saw between Q3 and Q4.

Having said that, we are talking to all of our customers and it's a product we think that suits many of them, so as we talk to them, depending on what the uptake is -- again, from Mike's point, it's hard to predict, but it is a product that we think timing is right to be talking to customers about it.

Thanks for taking my questions.

Jacque Bohlen, KBW.

Good morning, everyone. Just one quick clarification question, so of the expense build that's going to happen as you become a more independent company, so none of that was in 4Q? That's all going to happen in the future?

We have minimal expenses or, I would say, minimal, less significant expenses that have been in Q3 and Q4 that's running into the base, but we see the greater transition occurring in the months and years ahead.

Okay. That's helpful. Thank you. And then, just looking over to the securities yield increase in the quarter, I know a portion of that was driven by the lower premium amortization. But were there any securities purchases, in addition to the sales, that took place in the quarter?

We did; we reinvest the runoff. So we had about a -- new production yields were at 2.17% versus runoff of 1.47%.

You answered my question. And then, I guess, just lastly, I know that it's a very small period of time that's passed since the rate increase that we saw in December, but did it have any impact on any of your deposit costs?

No, really. We're monitoring the market situation on a customer segment by customer segment basis and we haven't really seen much happen thus far.

Okay. And do you think you have any additional -- I know that last quarter had a bit of elevated cash just because of the escrow-related temporary deposit, but do you have any additional cash you think that you could see that trend lower?

No.

Okay. Great. Thank you very much.

Dave Rochester, Deutsche Bank.

Good morning, guys. Can you just talk about the loan pipeline overall, how that looked at the end of the quarter versus maybe last quarter or this time last year?

No, Dave, this is Bob, we still feel the same as we've been talking about for a while. We still see the pipeline as being strong and balanced. We're still comfortable with the medium to high single-digit growth number that we've been talking about for some time. So the mix will always change, as Eric talked about a few minutes ago that we had some unexpected payoffs in Q4 in the shared national credit portfolio, but we still see that balanced approach going forward in that medium to high single-digit guidance.

Great. And then just on the NIM, if you could talk about how much loan production rates have increased for you guys post the hike overall, that would be great.

Loan yields have remained stable quarter over quarter, in fact maybe a slight decline by a basis point or so.

So is that spreads that have declined as the loan yields are up because LIBOR is up?

Not significantly.

The LIBOR being up, as we've talked about in the past, the shared national credit portfolio, much of it is LIBOR based so of course you see that, but it's a mix overall between construction lending being paid down and other type of loans coming on. So when you have the diversity we do, the mix changes fairly -- a fair amount.

Okay, great. Thanks, guys.

Jared Shaw, Wells Fargo.

Good morning. Actually maybe just following up on David's question, have we seen -- what's the auto rate specifically done since the rate move? Have you been able to see new auto production moving up commensurate with the rate hike?

No. Too soon to see any bump there. In terms of auto indirect lending, we did see some growth in the quarter. I mentioned in my prepared remarks about a $25 million increase in that portfolio for the quarter. And from a credit standpoint, we still feel really good about that portfolio and the quality of the assets that we're putting on our books there.

(multiple speakers). In terms of the yield on that, how long will that take to start to see a benefit from higher rates to the yields there?

Hard to tell, Jared. This is something we're in the market with, all the national local players every single day, trying to grow the book, and we've been very successful at doing that at very credit effective ways. So, to be honest, I don't know where the yields are over the last few weeks since the interest rates popped up at the beginning of December. But we can get back to you on that. If we come across something, we'll look into it and have Kevin get back to you on that.

Okay. Thanks. And then on the securities portfolio, could you just -- was there a restructuring that happened? I'm just looking at the move in period-end balances versus average balances, which were actually up, and then the pretty significant decline in AOCI. Was that just sort of normal repricing of the portfolio or was there something more going on during the quarter?

No, the AOCI change, you hit the nail on the head, is really just a function of the rate movement in Q4. So, no perceived credit impairment, rather just interest rate fluctuations, and I think you touched upon it when you asked about the clean up of the portfolio, and so, yes, we just did a portfolio cleanup. We're looking at securities that were either almost fully amortized or near the end of the contractual maturities, and we look to reinvest the amounts that we sold off.

Okay. And what did the duration of the portfolio do quarter over quarter?

A slight uptick, 3.6 years average portfolio duration. I think we were just about 3.3 in Q3.

Okay. Thank you.

Matthew Keating, Barclays.

Thank you. I'm sorry if I missed this, but did you explain what drove the effective tax rates a bit higher in the fourth quarter? It looks like it's been creeping up now for the past two quarters and I'm just wondering if there's anything unusual there. Thanks.

No, nothing unusual. It did increase from Q3 to Q4. If you recall, though, in Q3 we had a significant amount of BOLI income, about $5.4 million higher, which obviously has an impact on the tax rate, and so we saw significantly less BOLI income in Q4, which had the effect of driving up the tax rate a bit.

Got you. That's helpful. And then maybe just a broader question, I know it's very early into the Trump administration, but what are you hearing from maybe your contacts in the US military around efforts to kind of rebuild the US military and what impact that could potentially have down the road on the Hawaiian economy? Thanks.

Thanks for your question. I mean, a little too soon to tell. We haven't seen much coming out of the administration. We do know that, despite over the last several years a lot of changes within the military are forcing staffing levels, that Hawaii and Guam have maintained their staffing levels, just because of the location where we're at in the middle of the Pacific or, in the case of Guam, even more forward deployed to areas of concern. So, we haven't really seen any drop, and it's too soon to hear what the Trump administration is going to do, but we're not anticipating any drop, given the world we live in.

Got you. Thanks.

Ryan Nash, Goldman Sachs.

Good morning, guys. Just a couple of quick questions from me, you referenced that loan fees were $2.1 million this quarter. What was the average quarterly loan fee for 2016? I'm just trying to get a sense for the base level.

So the total prepayment fees were actually $2.8 million for the year.

So $2.8 million for the year. Got it. And then on the premium amortization, the decline in the quarter, are you using actual CPRs versus projected? I'm just trying to get a sense for how that could trend over the next couple of quarters.

Projected.

You use projected, okay. And then, lastly, do you still feel comfortable with the impact you had highlighted for the December rate hike of roughly 6 basis points?

I think what I highlighted last quarter was that the last time we had the Fed rate hike was that we saw a six basis point increase, so that -- nearly one year ago. It's really hard to tell what we're going to see in this current quarter that we're in today. There's obviously a lot of factors that drive that NIM.

Got it. Thanks for taking my questions.

David Eads, UBS.

I think probably just one real quick follow-up to Ryan's question there. I estimate if you kind of take away the two -- the premium amortization and the prepayment fees more normalized levels, that represents about half the increase in NIM for the quarter. Is that the right way to think about the baseline heading into 2017 where you kind of reduce that by a bit and then you have, obviously, the higher outlook due to the benefit from the rate hike?

That would explain, I think, the Q3 to Q4 change of about half you mentioned. As far as the Q4, though, that's hard -- again, on the premium amortization, it's just hard to say that we're going to see that same level or something different going forward. But certainly from Q3 to Q4, if you back out the premium as well as loan prepayment fees, you back that down by about half of the variance.

Okay. Thanks for clarifying that.

Laurie Hunsicker, Compass Point.

Hi, good morning. Just wanted to go back to what Ebrahim was asking on expenses, and I think [Catherine], too. If I'm looking at your noninterest expenses, your core run rate for this quarter was about 82, just excluding the one-time IPO, and then for the September, it was 79.7, so we had close to a $2 million increase or, call it, an $8 million annualized increase, and you're saying that very little of that is going to be reflective of your indication of $14.5 million to $17 million annual increase from being a public company, or did I get that incorrect? Maybe you could just help clarify that for me.

Sure. If you recall maybe from the discussion last quarter, the $14.5 million to $17 million includes offering-related nonrecurring costs, as well as new public company costs, as well as the expenses related to the TSA. And so, not all of that makes its way -- not all of those specific expenses make its way into the base.

Looking forward out a number of years, we expect that to eventually make its way into the full base. As to the timing when the contracts are negotiated and by how much, there's a bit of variability to that. So it's hard to give you a better forecast, even if I could, about the increase in the baseline expenses.

Okay. Well, if we think about just the core excluding the one-time IPO costs, just the linked-quarter $2 million (multiple speakers) that's virtually all related to ongoing public company costs, so that's safe to assume that, round numbers, $8 million is already baked in. Am I thinking about that the right way?

I don't know if I necessarily followed all the math on that, per se, but the way you kind of look at the increase outside of the core, the increase was about 2.8%. I think we talked in our last call that we expect baseline expenses to increase by 2.5%.

Okay. Perfect. That's helpful. And then, just going back to the dealer floor plan loans, do you have an actual period-end balance? You said it was up $70 million or thereabouts. Do you have an actual?

Yes, it was $879 million in flooring.

Okay. So that's the California piece, and then the total would be about $1.1 billion?

No, the total flooring is $879 million.

$879 million, okay, and then how much is the dealer floor plan in just California?

$541 million.

Okay. And then the same thing with the SNC, obviously you mentioned paydown. Do you have an actual total and then the breakdown between Hawaii and mainland?

Yes. Our total was about $1.3 billion and mainland was $1 billion. So mainland came down about $100 million during the quarter.

Okay. Great. And then, just on your assets under management, do you have a number for that?

I actually don't have the number off (multiple speakers)

We'll look into that and get back to you. We don't have that number right here in front of us.

Okay. And then, just lastly, to follow up on Matt's question of tax rate, just going back through my notes, I know you guys had indicated that probably a 38% run rate would be a good number, and I understand what you were saying, obviously, on the BOLI. As we think about that going forward, is 38% a good number or should we be thinking about 40%?

We really haven't seen any reasons to change on our outlook.

Okay. Perfect. Thank you very much for taking my questions.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Kevin Haseyama for any further remarks.

Thank you for joining us on today's call. We appreciate your interest in First Hawaiian. Have a good day.

Thank you, everyone.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.