First Hawaiian Inc (FHB) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Hawaiian Q4 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the conference to your host, Mr. Kevin Haseyama. Sir, you may begin.

Thank you, Valerie, and thank you, everyone, for joining us as we review our financial results for the fourth quarter of 2017. 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 direct you to Slide 2 and 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 our Form 10-K for the year ended December 31, 2016.

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'll provide you with the fourth quarter highlights, starting on Slide 3.

Thank you, Kevin, and hello, everyone, and thanks for joining us today. I'm pleased to report that we were able to finish the year with a strong fourth quarter. Core earnings and performance metrics remain solid. We maintained our disciplined and strategic approach to growing our loan portfolio, and credit quality remains excellent. We're also starting to see the initial results from one of our key initiatives, the shift in our residential mortgage lending model.

Net income for the quarter was $11.7 million or $0.08 per diluted share as our results were primarily impacted by a onetime charge to provide for income taxes of $47.6 million due to the reevaluation of certain tax-related assets at the projected lower corporate tax rate due to the passage of the Tax Cuts and Jobs Act. Core net income for the quarter was $59.2 million or $0.42 per diluted share, up $2.1 million or 3.9% from the prior quarter and up $3.2 million or 5.7% from the year-ago quarter.

I'm also pleased to report that yesterday, our Board of Directors, increased our quarterly dividend by 9.1% to $0.24 per share from $0.22 per share, payable on March 9, 2018, to stockholders of record at the close of business on February 26.

Loans and leases grew $128 million during the quarter or 1.1% to $12.3 billion, while deposits remained stable at $17.6 billion. Eric will go into the details of the changes when he discusses the balance sheet.

Asset quality continues to be excellent. We remain well capitalized and our profitability measures are solid. For the quarter, return on average tangible assets was 0.24% and return on average tangible common equity was 2.94%. Excluding non-core items, core return on average tangible assets was 1.22% and core return on average tangible common equity was 14.9%.

I also want to mention a couple of recognitions the bank received that we're particularly proud of. Our efforts in serving the small business community resulted in us being named Hawaii's 2017 SBA Lender of the Year for Category 1 and 2017 SBA 504 Lender of the Year by the Small Business Administration. This was the first time that a bank earned both of these awards outright in the same year, and it's a testament to the hard work of our employees and demonstrates our commitments to the communities we serve. In addition, Forbes Magazine recently ranked us as one of the Top 10 bank -- Top 10 Best Banks in America. And then finally, on December 18 of last year, First Hawaiian was added to the KBW Regional Bank Index.

Going to Slide 4. Before I turn things over to Mike, I'd like to take a moment to go over the impact of the Tax Cuts and Jobs Act. As I mentioned on the previous slide, we recognized the provision to income tax in the fourth quarter due to the revaluation of our deferred tax assets. This charge was $47.6 million and was based on our current projection on effective tax rate of approximately 26% in 2018, down over 11 percentage points from our adjusted Q4 tax rate of 37.1%. We plan to invest approximately 20% of the tax savings into the business, consistent with our recent focus on investing in our people, our digital platforms and our branches.

With respect to our people, we've consistently viewed our team members as a strategic advantage and a key part of our relationship strategy. As such, we recently increased our minimum hourly pay to $15. For our digital platforms, we look to accelerate the implementation of new features and functionality to drive increased adoption and business growth. With regard to our branches, we'll look for opportunities to accelerate investments that will improve efficiency in the customer experience. For shareholders, we increased our quarterly dividend to $0.24 per share, an increase of $0.02 per share. And over time, other than the portion of the tax savings we intend to reinvest in the business, we anticipate that a substantial portion of the remaining tax savings will result in enhanced capital distributions.

With that, I'll turn it over to Mike to go over the financials.

Thanks, Bob. Turning to Slide 5. Net income for the quarter was $11.7 million or $0.08 per diluted share. Bob mentioned net income was impacted by the $47.6 million charge provision for income taxes. After adjusting for the charge and other non-core items, core net income was $59.2 million or $0.42 per diluted share. Net income for the full year 2017 was $183.7 million or $1.32 per diluted share, and core net income for the full year 2017 was $230.4 million or $1.65 per diluted share.

Turning to Slide 6. Net interest income in the fourth quarter was $134.9 million, an increase of $1.6 million compared to the prior quarter. The increase in net interest income compared to the prior quarter is primarily due to higher average balances of loans and investment securities and higher yields on investment securities, partially offset by higher rates on deposits. Net interest margin for the fourth quarter was 2.99%, an increase of 3 basis points from the prior quarter, primarily due to increased overall yields in our earning assets and offset by higher deposit costs.

Turning to Slide 7. We show noninterest income adjusted for the reclassifications we noted in the earnings release. Noninterest income in Q4 was $54.3 million, an increase of $4.6 million compared to the third quarter of 2017. Other income in the fourth quarter was $6.2 million higher than the third quarter, primarily due to a $4.3 million gain on the sale of a bank property compared to a $2.7 million gain on a sale in the third quarter. Also in the fourth quarter, other noninterest income included $3.7 million related to an increase in an intercompany receivable for taxes, which is fully offset by an increase in tax provision for the same amount.

Noninterest expense on Slide 8 also adjusted for the reclassifications was $89.9 million in the fourth quarter, an increase of $5.1 million from the third quarter. Compared to Q3, significant variances included an increase in salaries and employee benefits of $5.6 million. $3.7 million is due to the special $1,500 employee bonuses and the residual is due to higher mortgage loan officer compensation and the impact of the previously announced teller pay adjustments. In addition, cards rewards expenses were higher by approximately $800,000. These increases were offset by lower advertising and marketing expenses and lower other expenses.

So the efficiency ratio in the fourth quarter of 2017 was 47.5%. And for the full year 2017, the efficiency ratio was 47.3%. As Bob mentioned earlier, we expect to reinvest approximately 20% of the tax savings back into the business during 2018. As a result, our outlook for efficiency ratio in 2018 is now in the 48% to 49% range.

With that, I'll turn the call over to Eric to cover the balance sheet starting on Slide 9.

Thanks, Mike. Total assets at the end of the fourth quarter were $20.5 billion, essentially unchanged from the end of the third quarter. During the quarter, growth in our loan and lease portfolio of $128 million more than offset the decrease in the fair value of our investment securities portfolio. The duration of the investment securities portfolio was 3.6 years at the end of the fourth quarter, up slightly from 3.4 years at the end of the third quarter. The yield on the new investments during the quarter was about 2.83%, while the yield on the runoff was about 1.84%. Premium amortization was $4.3 million in the fourth quarter, down from the prior quarter by $1.3 million.

Total shareholder's equity was $2.5 billion at the end of the fourth quarter, down slightly from the third quarter, primarily due to the onetime charge to income tax provision. We remain well capitalized at the end of the fourth quarter with a leverage ratio of 8.52%, Tier 1 capital ratio of 12.45% and a total capital ratio of 13.5%.

Turning to Slide 10. Total loans and leases grew by $128 million or 1.1% to $12.3 billion in the fourth quarter. During the quarter, we continue to experience growth in all segments of the loan portfolio with the exception of C&I loans. Residential real estate loans grew by $88 million or 2.2% during the quarter as we started to see the benefits from the change in our mortgage lending model from a branch-based to a mortgage loan officer model. We feel this change positions us well with anticipated shift in the mortgage market as industry groups are forecasting that the percentage of purchase loans will increase while the percentage of refis will decrease.

During the quarter, the commercial real estate portfolio grew by $42 million or 1.6%. Construction loans increased by $34 million or 5.7%, and consumer loans grew by $24 million or 1.6%. C&I loan balance has decreased by about $55 million, primarily driven by paydowns in the SNC portfolio as high-quality borrowers paid down loans with internally generated funds or refinance those loans in the bond market.

For the full year, total loans and leases were up $757 million or 6.6%. Looking forward, while the outlook for the local economy is still good and we have a healthy pipeline, we're seeing certain sectors starting to level off so we expect our loan growth for 2018 to be in the mid-single-digit range.

Turning to Slide 11. You can see that total deposits were unchanged in the fourth quarter at $17.6 billion. However, we did see a shift in the mix as we reduced our public deposit balances by $466 million due primarily to growth in commercial deposits. On a year-to-date basis, deposit balances were up $818 million or 4.9%.

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

Thanks, Eric. On Slide 12, we provide an overview of our asset quality. It continues to be strong at quarter-end. Credit costs were low and in line with our expectation for the full year. Nonperforming assets remain well within our risk limits and the level of reserves provides good coverage for future losses.

Net charge-offs were $5.2 million for the quarter. On an annualized basis, this amounts to 17 basis points on average loans and leases. This is 4 basis points higher than the prior quarter and 5 basis points higher than the fourth quarter of 2016. Total nonperforming assets were $10.2 million or 8 basis points of total loans and leases and other real estate owned. This up 1 basis point from the prior quarter and unchanged year-over-year. In the fourth quarter, the provision was $5.1 million. The allowance for loan and lease losses was $137.3 million at December 31, and the ratio of this reserve relative to total loans and leases was 112 basis points.

And now I'll turn the call back over to Bob.

Thank you, Ralph. Turning to Slide 13, you can see that Hawaii's economy continues to perform well. The state unemployment rate was 2% in December compared to 4.1% nationally. The visitor industry remained robust through the first 11 months of the year, with year-to-date visitor arrivals through November of 8.5 million, up 4.9% over the same period last year. More importantly, visitor spending was $15.1 billion, an increase of 6.6% versus same the period last year.

The real estate market remains sound as sales volumes continued to increase and prices improved at a measured rate.

One more thing before I open it up to questions, you've all seen the news that Mike Ching will be leaving us at the end of the month. I want to take this opportunity to thank Mike for his contribution to our company and wish him the best in the future.

With that, we'll be happy to answer your questions.

(Operator Instructions) Our first question comes from Dave Rochester, Deutsche Bank.

Dave? Are we having technical issue difficulties, Valerie?

One moment, please. Laurie Hunsicker, your line is open.

Yes, I just wanted to start back with your tax windfall reinvestment. You said 20% of tax saves back into the business, so that's roughly $9 million to $10 million. Am I doing the math, right?

That's correct, yes. This is Bob. And that's correct and about -- as Mike mentioned, about $5.7 million of that will be for the -- raising the minimum wage to $15 and the follow-on compression effects of that.

Okay, great. And then can you just update us where we would stand in terms of thinking about your public company spend for 2018?

Laurie, this is Mike. So it's still consistent with the prior guidance that we've given. And again, this is comparative to prior to when we went public in 2015. It's still in that $16 million range, and that still included -- that's all included in that 48%, 49% efficiency.

Okay. I mean, I guess just to ask a different way, in terms -- because a lot of those costs are already fully baked and you've been renegotiating your contracts, including -- I think I recall the FIS contract was the biggest one. And so if we were to think about just incrementally from where we are currently, I think you've thrown out another number in the past, recently a $500,000 per quarter increase. Is it still there? Or is it maybe even slightly less?

Well, it's -- the reason we're continuing to give the guidance on the efficiency ratio, Laurie, is because while we renegotiated some of the contracts, not all of them would become effective yet. And so as we kind of look out for the rest of -- for 2018, that's how we gave the guidance at the 48%, 49%. Mike, do you have anything to add to that?

No, that's accurate, Bob.

Okay, okay. And then you mentioned the premium amortization was 4.3. Did I get that correctly?

Correct.

That's correct, Laurie.

So your core margin is 2.89, so you actually had a 4 basis point widening in your core margin linked quarter?

We were at 2.99 for our NIM.

Right. But just stripping that out...

And that's up 3 basis points quarter-over-quarter.

Right, right, your reported margin. If I'm just taking out the premium amortization impact, so round numbers, 10 basis points. And you're sitting at a core NIM ex that of 2.89. I guess how should we be thinking about -- or you know what, let me ask a different question. Going over to your public funds, you mentioned that you had a drop there. What was the drop? And then what's the split there between the time and the checking?

Yes. So the drop was about $466 million.

And was that in the time or the checking or was that split?

That was in the time.

Okay. So that's now down to about 1.9?

Correct.

Okay. And do you the have cost on that?

We haven't been sharing that, Laurie.

Okay. And so I mean, I guess as we're looking -- I mean, overall, your cost of deposits is incredibly low ex CD. You're sitting at 7 basis points. So again, I guess just going back over to margin directionally, how should we be thinking about margin here? In other words, whether I'm strip -- go ahead.

Looking at the Fed rate increase in December, we think that'll certainly make an impact for Q1 and then future rate increases as the Fed continues to consider increases, given that still about 30% of our loan book is tied to LIBOR, primarily 1 month LIBOR, we see that pretty quickly in the NIM. And we've been able to control our deposit costs. That's one of the reasons we were taking down a bit the public deposits because as we talked about previous calls and conferences, it got to be an expensive cost of funding over the last 12, 18 months.

Sure, okay. And then just one other income statement question here. Within the other, other line, the $11.5 million, I know you have the gain on sale of a bank property of $4.2 million. But if we strip it out, that's still elevated. Was there something else onetime in that number?

Laurie, this is Mike, there is. There's a -- I mentioned that there's a $3.7 million other non-income item that relates to the increase of an intercompany receivable. However, there's a 1 for 1 offset to that in our income tax provision line. So there's really no impact to the bottom line on that.

Our next question comes from Dave Rochester, Deutsche Bank.

All right. I checked my mute button about 10 times now. Can you hear me?

Yes, we can, Dave.

Okay. So just on the deposit pricing front, was wondering if you could just talk about the competitive environment and then if you could give some color on what you're expecting for the NIM going forward given the December hike. I think you've mentioned previously getting maybe 5 to 6 basis points of expansion with the next hike. So any color there will be great.

Dave, I'll cover the deposit pricing and then Mike can cover the NIM. Overall, we're still seeing a pretty rational market relative to deposits except for the public deposit side. We talked about it the last quarter. That being said, we're starting to see that moderate and stabilize, still though at the elevated levels.

Mike?

Dave, on NIM, and Bob alluded to this, we are looking for NIM expansion in Q1, we think, by a few basis points. We did see -- about 1 year ago, we did see our NIM improvement in Q4 of '16 to Q1 of '17 by about 6 basis points. But we have a slightly different environment with respect to our public deposit costs than 1 year ago, and so we wouldn't expect that same rate of expansion.

Okay. And then as it relates to your efficiency ratio guidance, how many hikes are you factoring in to 2018? And what's the timing on those?

We've got 2 hikes, Dave. I think March and June.

Perfect. And then on capital, you guys have mentioned enhanced capital distributions. Can you just give us any additional color on what you're thinking besides the dividend increase we just saw, which is a nice increase?

Sure, yes, Dave. This is Bob. Certainly, as we talked about in the past, we look to be a high-return bank and we know that our steady performance leads us to that. We are still a CCAR filer, so we still have to work within the constraints of that for our top-tier holding company. But we look to see that over time, we would return capital via either a special dividend or potentially share repurchase. But that would be something that we'd have to do over time as we look to stay within the regulatory constraints that we're working under.

Yes. And in terms of prioritizing that, would it be buy back over the special dividend?

I think certainly, we'd start with the buyback, would be the first thing we'd be looking at.

Great. And then just one last one for me. You guys have mentioned mid-single-digit loan growth for this year, which I think you have also given on the last call. Can you just update us on what areas you think will drive the bulk of that growth? And do you think tax reform can help actually boost activity in any particular areas?

Sure, Dave. This is Eric. I think we continue to see growth opportunities across all aspects of the portfolio. Probably the CRE and the residential real estate, we're looking probably in the higher end of that range. And then on the consumer side, sort of in the middle of the range. And then in the C&I, probably on the lower end of the range. As to the impact on the tax reform, I think it's too early to really tell what the impact would be at this stage. We're not too concerned but we'll obviously continue to monitor the situation.

I think someone out there have sort of put forth a thesis that tax reform and the boost to GDP growth can help accelerate C&I growth. What are your thoughts on that? And what are you seeing that suggest that maybe you'll have slower C&I growth this year?

This is Bob, Dave. I understand the logic. I don't disagree with it, but I just can't point to anything this early that would say that's going to happen. But certainly, we've taken the step to increase wages. Many of our competitors have, not only in the financial services industry but in other industries, which if you give more money to people, oftentimes that leads to a greater spend. And hopefully, that will lead to an increase in confidence where businesses feel comfortable expanding. But we just haven't seen any tangible things happen yet. But that logic certainly (inaudible).

(Operator Instructions) We have a question from Jared Shaw with Wells Fargo Securities.

This is actually Timur Braziler filling in for Jared. Maybe just one follow-up on the lending side. In your prepared remarks, you had said that some asset classes are starting to cool off a little bit. Can you maybe talk about which verticals you're starting to see some relative weakness in?

Yes, I think we've been talking about over the last couple of quarters the slowdown on the C&I side just because of significant paydowns primarily because of the high-quality loans we have in that portfolio and the excess funds that companies have. So we expect that, that's going to continue. We've seen very strong growth in the indirect portfolio. We still see growth but it's probably going to moderate slightly into 2018. That will be offset by strong growth on the real estate side, both in commercial and residential.

Okay, that's helpful. And then what was the Shared National Credit balance at the end of the year? And what did that do on a quarter-over-quarter basis?

Yes. So total SNC actually went down to $1.4 billion from $1.49 billion in the third quarter.

Okay. So about $50 million of non-SNC related C&I growth? Is it about right? $45 million or something? Okay. All my other questions are answered.

Our next question comes from Jackie Bohlen of KBW.

I know that you don't want to discuss the rate on the public deposits, but just speaking generally about them, when we talked last quarter, you had talked about the magnitude of what the rate increase has been in the third quarter in an effort to mitigate future rate increases. Was that strategy effective?

It was effective, and actually, we have seen an increase in the overall public deposits. I think we've mentioned that before. It was 99 basis points in Q3 and we're up to 115 in Q4. That's for all of our public deposits.

Okay, I must have missed that. Sorry about that. And then the bank property sales, you have them 2 quarters in a row now. If you could just provide a little bit of background on those and if you expect to see more in 2018.

Yes, no, this is Bob, Jackie. Don't expect to see that. Those are unusual. One was a condemnation sale related to a property that was in the way of a rail line, and the second was just something that we have gotten approach on for a property that was no longer used by the bank. And so we just took advantage of the interest and went ahead and sold it. But we don't have anything currently that we're working on that would lead to that happening again.

Okay. And then just one last one, kind of housekeeping question. The intercompany receivable that you spoke about with the tax offset, is that something that will be ongoing? Or was it just a fourth quarter event?

Well, we're still -- we're carrying certain liabilities that we assumed as part of the reorganization back in 2016. And so we still carry the liability to the extent that if there's any changes in the level or the amount of liability, and again, that's offset against the receivable. But you can see that change period-over-period.

Okay. But it would be likely not much of an impact in that income because it would be offset through other line items?

There would be no impact to P&L.

Our next question comes from Matthew Keating of Barclays.

I just have a question around expenses. Previously as we move into the first quarter, I know typically, there's some seasonality there with annual merit increases, overtime expenses and maybe higher -- or higher payroll taxes rather in the first quarter. Given the other employee investments you're making, what's a good base to be thinking about for expenses in the first quarter?

I don't know if we'll give out sort of base indicator, but you are correct that we do have seasonal increases, especially in the comp area. Some of the payroll taxes, as mentioned, are elevated and so we would expect that again for this quarter.

Okay. And then sorry if I missed this, but maybe you can just provide the dealer floor plan balances as of the end of the year.

Yes. So the dealer floor plan was $912 million, split between the Mainland and then Hawaii, Guam, $565 million on the Mainland and $347 million for Hawaii and Guam.

Our next question comes from Laurie Hunsicker, Compass Point.

Just very quick follow-up, what is the impact of the Tax Act on your margins?

Very minimal. I think as you're aware, we hardly have any municipals in our book. We have some loans from housing but not by significant volume. So very minimal impact.

Okay. So 1 basis point, 2 basis points or...

I'd say not even that.

Not even that. Perfect.

I'm showing no further questions from the phone lines. I will turn the conference back over to Kevin Haseyama for any closing remarks.

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

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.