First Hawaiian Inc (FHB) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Hawaiian, Inc. Q1 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you, Valerie. And thank you, everyone, for joining us as we review our financial results for the first quarter of 2019. With me today are Bob Harrison, Chairman and CEO; Eric Yeaman, President and COO; Ravi Mallela, CFO; and Ralph M. Mesick, Chief Risk Officer.

We've prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the Investor Relations section.

During today's call we'll be making forward-looking statements, so please refer to Slide 1 for our safe harbor statement. We will 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, who'll provide you with the first quarter highlights, starting on Slide 2.

Thank you, Kevin. Aloha, everyone, and thank you for joining us today as we review our first quarter results. I'm pleased to report that we started 2019 with a solid quarter as our key profitability drivers performed in line with our expectations. We had good loan growth, the net interest margin benefited from the portfolio restructuring, noninterest income was solid, expenses were well-managed and asset quality remained excellent.

Our profitability measures remained strong, with a core return on average tangible assets of 1.5% and a core return on average tangible common equity of 18.9%. Yesterday, our Board of Directors declared a $0.26 per share dividend, representing an attractive annualized dividend yield of 3.88% based on today's closing price.

The first quarter also marked our return to being a fully independent local bank as BNP Paribas fully exited their remaining position in First Hawaiian on February 1. I'd like to take this opportunity to thank our friends at BNPP for their collaboration over the years. Shortly after the BNPP sale, we received the necessary approvals for repurchase program for up to $100 million of our common stock during 2019.

Now I'll turn it over to Eric to go over the balance sheet.

Thanks, Bob. Turning to Slide 3, we saw good loan production during the quarter, with loan balances ending the quarter at $13.2 billion, up $121.3 million or approximately 1% versus the prior quarter-end and up over $730 million or 5.9% versus the prior year. CRE loans increased by approximately $157 million or 5.2% during the quarter, with $137 million of that growth here in Hawaii. The residential loan portfolio grew by $17 million or 0.5%, while home equity loan balances declined slightly. Both were impacted by seasonality during the quarter.

Construction loan balances fell by about $31 million due to the completion of several projects during the quarter, and C&I ended the quarter relatively flat. Production was strong, but was offset by pay downs and payoffs. The decline in consumer loan balances was primarily due to lower credit card balances from seasonality, partially offset by growth in our indirect auto portfolio. Looking forward, while the environment remains competitive, our pipeline looks good, and we continue to expect full year loan growth to be in the mid-single-digit range.

Turning to Slide 4, deposit balances ended the quarter at $16.8 billion, down about $355 million or 2% versus the prior quarter and down $567 million or 3.3% compared to the prior year. As we mentioned on our last call, we saw over $400 million of temporary deposits come in late in the fourth quarter. About $305 million of those temporary deposits were withdrawn in the first quarter, and we also reduced our public time deposits by $175 million. Excluding these items, deposits grew by about $124 million or 0.7% during the quarter, within our expected 2% to 3% full year growth expectations.

With that, I'll turn the call over to Ravi to cover the income statement.

Thank you, Eric. Turning to Slide 5, net interest income in the first quarter was $145.1 million, an increase of $1.1 million versus the fourth quarter and an increase of $5.4 million versus the first quarter of 2018.

Net interest income in the first quarter included a $1.8 million negative premium adjustment due to lower interest rates, while net interest income in the prior quarter included a $1.1 million positive premium adjustment. The increase in net interest income versus the prior quarter was due to higher loan and cash balances and yields, partially offset by higher deposit costs, lower investment portfolio balances and higher balances on borrowings.

Beginning with this quarter, we modified how we annualized the quarterly NIM, so that the reported NIM will no longer be sensitive to the number of days in the quarter. The quarter-over-quarter reported net interest margin was 3.23%, unchanged from the reported net fourth quarter NIM.

After excluding the impacts of the premium adjustments in the first quarter and the fourth quarter, adjusted NIM increased 7 basis points, with 4 basis points of the increase coming from the investment portfolio restructuring and 3 basis points from balance sheet repricing and changes in mix.

Looking forward to the second quarter, we anticipate that the NIM will be relatively flat as we get a full quarter's benefit of the investment portfolio restructuring offset by modest deposit pricing pressure.

Turning to Slide 6. Noninterest income was $47.1 million, $14 million higher than the prior quarter. Core noninterest income in the first quarter was $49.7 million after excluding the $2.6 million loss incurred in the quarter due to the restructuring. Nonrecurring items in the fourth quarter included a $24.1 million loss from the restructuring, a $7.6 million mark-to-market adjustment related to maturing cash flow hedges and $1.5 million related to an intercompany receivable for taxes. The quarter-over-quarter increase was primarily due to higher BOLI income of $2.7 million offset by lower swap fees of $1.2 million.

Turning to Slide 7. Noninterest expenses were $92.6 million, about $3.3 million higher than the prior quarter. The increase was primarily driven by $3.5 million in higher salaries and benefits due to lower deferred loan costs resulting from lower levels of mortgage originations in the first quarter and higher annual incentive payments, including payroll taxes. This was partially offset by lower regulatory fees, occupancy and card reward expenses. Our efficiency ratio was 48.2% in the first quarter, and our core efficiency ratio was 47.4%, which is in line with the full year guidance.

And now I will turn it over to Ralph to cover asset quality.

Thank you, Ravi. I'd like to turn your attention to Slide 8. We see that our asset quality remains excellent. Net charge-offs were $5.9 million for the quarter. On an annualized basis, this amounts to 18 basis points on average loans and leases. This is 2 basis points higher than the prior quarter and 3 basis point higher than the same quarter last year.

Total nonperforming assets were $4.4 million or 3 basis points of total loans and leases and other real estate owned. The provision was $5.7 million for the first quarter, and the allowance for loan and lease losses decreased by $172,000 to $141.5 million, which is 107 basis points of total loans and leases, down 1 basis point versus the prior quarter.

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

Thanks, Ralph. Turning to Slide 9, Hawaii's economy continued to perform well in the first quarter. State unemployment rate was 2.8% in March compared to 3.8% nationally. The visitor industry remained robust through the first 3 months of the year. And year-to-date, through March, visitor arrivals were 1.6 million, up 1.8% versus the prior year. And visitor spending was $3 billion, 2.4% lower compared to the same period last year. The real estate market remained sound, with prices on Oahu stable. We have seen a slight decline in sales volume compared to the prior year. Looking forward, while there are some signs of slowing, the overall outlook for Hawaii's economy remains very positive.

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

(Operator Instructions) Our first question comes from Jackie Bohlen of KBW.

Ravi, I wonder if you could provide an update on how the annualization factor changed, since it looks like it's not just a straight 360 over 30?

Yes. I can give you a little bit of excerpt. I'd love to, Jackie. So the previous approach was broad and used the same annualization methodology for everything, regardless of the different accrual basis for different income statement items. So we were previously annualizing the quarterly rate and we were dividing the quarterly NIM by the actual number of days in the quarter and then annualizing by multiplying the -- by the actual days in the year. And now what we're doing is we're actually annualizing the daily interest income and expense based on the contractual day count and then calculating the NIM.

Okay. That's helpful. And then looking to premium amortization, obviously, you had a big swing between 4Q and 1Q. What are your expectations for that going forward? And how does that play into your forward NIM guidance?

Well, hard to say. That will depend on a number of factors. Obviously, between Q4 and Q1, we saw rates move around quite a bit, and it's hard to look forward to see what that number is going to be.

And so how does that -- understanding that that's challenging to predict, what are your assumptions that are baked into the expectation for the NIM to be relatively flat?

Yes. So if there are no other further rate changes, we expect that NIM will be relatively flat in the second quarter. We communicated that we expect a couple of basis point of benefit from the portfolio restructuring, but we faced some headwinds from rising deposit costs. We've talked about this before, but deposit costs remain really well-behaved. But we're seeing some pressure on that side.

And Jackie, this is Bob, maybe I can just add a comment on that. The deposit pricing pressure seems to be moderating. And we also -- for our NIM, we did see a 10 basis point plus increase in loans yields for the quarter compared to Q4. So we feel good about the outlook, but certainly it's something we're going to look at very closely.

Okay. And in terms of that moderating pressure, are you seeing that in any one category or is it fairly across the board?

It's kind of all over the place. I think with our larger customers, we tend to see continuing asks for rates. We saw that in Q1, and we see that sort of moderating now a little bit.

We've addressed a lot of it, Jackie, and so we're not seeing as many customers coming forward to talk to. But this is something we have to stay close to our customers and see where the market is -- how the market is behaving.

Our next question comes from Steven Alexopoulos of JPMorgan.

I just want to follow up first on the conversation about interest-bearing deposit costs picking up, because when I look at time and money market, they were up more than I was expecting in the quarter. Was this you guys just responding to the environment? Were you active with promotions in the quarter?

So we were active in promotions. We had a couple of promotions that we ran associated with the opening of a new branch and the redesign of one of our branches. But I think we've -- we really take these conversations about deposits sort of with our large customers as they come to us and ask for more rate.

And just add to that, Steve, so as Ravi mentioned, so we had a couple of branches reopenings, so we did some campaigns around that. We're not anticipating -- we're not going to have any this quarter or next quarter. So -- but it is something we just continue to monitor.

Okay. So when we look at money market, we shouldn't expect this pace of increase moving forward? Is that what you're saying?

Yes. I think that's fair to say.

Okay. And then the public time deposits around $1.5 billion, do you guys see that continuing to decline through the rest of this year? How do you feel those balances moving forward?

Yes. I think at the end of Q1, Steve, our public time deposits were $826 million. We don't have a specific target in mind, so I think we'll continue to watch and see what those rates are relative to other things and incorporate it into our funding needs, if at all. But we think that's a pretty good number where we are right now.

Yes. As you'll recall, we're down substantially, Steve, so we're down to a level we're much more comfortable with and now it's just going to be part of the overall funding mix.

Yes. Okay. And then just one other question on the lending side, when I look at the change in average loans, it looks like most of the growth was in resi mortgage. Do you have color on what you added into the portfolio this quarter? And do you plan to keep adding it about that pace?

Steve, just to clarify, are you talking about on the residential side or just overall?

It looks like resi mortgage drove most of the average loan growth in the quarter.

Yes. I think we did see overall growth, as I mentioned, of about 1% quarter-over-quarter. The biggest piece being CRE, which did come in primarily in March. Resi started off slow and then ramped up in March, and has continued to be strong in our outlook. Going forward there is good. Our overall guidance, as you know, is mid-single-digit range. We feel good about that because of the seasonality we saw in the first quarter and the pipeline that we have in our commercial book. We feel pretty good. And then top of that, the overall economy still continues to be positive and strong. So there are a lot of factors in play that still give us a lot of confidence that our outlook is pretty solid.

Steve, this is Bob. To your point, there is lumpiness in that. And so, especially in the commercial side, the CRE, to Eric's point, it came in late in the quarter. It's hard to predict and then there's some of the construction funding, exactly when that's going to land. But for the full year we're still very comfortable with the number.

Our next question comes from Dave Rochester of Deutsche Bank.

I just wanted to clarify, is that flat off of the 3.23% or 3.27% level?

It's going to be flat off the 3.27% level because we not really in control of the premium amortization.

Sure. I just -- I wanted to make sure I had that right. And then are new loans yields coming in at accretive levels to the portfolio at this point?

Yes, they are.

Any sense for... magnitude?

Well, as I mentioned a little earlier, we're up a little over 10 basis point quarter-over-quarter for loan yields, Dave.

And so that's new loans yields versus booked yield?

Good question. I might have to defer on that. We might need to get back to you on that. There must have been some of that, otherwise it wouldn't have been moving up. But I can't speak for the exact category.

Yes. It does include the adjustment that came from the rate hike.

Great. And then just switching to expenses, sorry if you covered this earlier, but last time you said your guidance was something along the lines of 6% growth off the 4Q expense figure annualized. Is that a -- still a good way to think about expense growth this year? And then as you think about 2020, I know it's way off, but you've got some of the -- the $6.5 million in reimbursed expenses this year. Can you talk about what you're actually expecting will drop into the expense line in 2020 from that $6.5 million and if there are some offsets there?

Maybe I'll just start with 2019. I think at this point it's a little early for us to change our outlook. Most of the expense increases don't take place on January 1. They build up throughout the year, including things like volume-related and inflation-related expenses. I think we will continue to manage with that 47.5% to 48% efficiency ratio range in 2019.

And Dave, this is Bob, maybe I can touch on the 2020. It's early. We're not anticipating taking out any of the expenses that you saw that are now being reimbursed by BNP. We're comfortable with the numbers that we have. That's not to say that we don't constantly look at this. It's very important to us to keep a sharp eye on our expenses relative to what we see is our volumes and our revenues. So there's nothing in particular today that we're looking at in 2020 that we're going to cut out, but we're going to keep monitoring it pretty closely.

So that $6.5 million should effectively come, in its entirety, to the 2020? Is that fair?

Yes.

Yes. That's correct, Dave.

And in terms of how you're thinking about the efficiency ratio, I mean, is it the range for this year still hold do you think for next year? I know, again, it's far off.

A little early to have that conversation.

Our next question comes from Laurie Hunsicker of Compass Point.

I was hoping that you could give a little color around the BOLI, the $3.8 million. What was nonrecurring in there?

Yes. About $2.3 million of that was just due to market conditions, and we had about somewhere close to $0.5 million related to a debt benefit, so the change quarter-over-quarter that we mentioned, those are sort of the 2 driving factors there, Laurie.

Okay. Great. All right. And I just wanted to go back, back over to deposits for a moment. What are your total public funds?

Total public was $1.5 billion, just under that. And then the public time was $824 million.

Right. Okay. And so the -- and I know your -- so your public -- some of your public money is in that money market category. And I know that Steven touched on this, but can you just take us back through the promotions you ran with the new branch or the refurbished branch, those were primarily money markets?

One -- the first one we did was actually a CD special, and the second one was actually a money market special.

Okay. And so just looking here, because your money market costs increased 18 basis points linked quarter, the new money that's coming on now, where are you running that? But that special is over. I guess, how should we be thinking about that line item cost when you said, okay, we ran the special. Going forward, it inches higher, it sits kind of right at this 1% level? How should we be thinking about the cost of the money market?

So I think you have to take it in totality. Not only are the specials sort of impacting that rate, but also sort of the one-off conversation we're having with our large customers. And so when you take that all in totality, that's what you see in that number.

Yes. I think Laurie I was just referring to...

Sorry to ask this one more time. But in other words, is -- we're just looking forward just to this next quarter, roughly, where are you thinking that line item goes? Does it go a few basis points up or it's 10 basis points (inaudible)

Laurie, I'm not sure we can answer the question...

Like, if there's an unknown factor.

Laurie, I'm not sure I'm going to answer the question specifically around that line item just looking at deposit costs as a whole. I think as Bob mentioned, we've seen that moderate. There might be some lag effect trickle into the second quarter because of one-off items. But just overall deposit cost, we see it sort of stabilizing, given where the Fed's outlook is, except for some trickle in effect.

Okay. And then one more question on deposits. At one point you had mentioned taking your public time down to $500 million. And this time it seems like you backed off those comments a little bit. Are you thinking differently about that money? That money sits at the $800 million level, you're comfortable here at 5%. How do you think about that?

I think we'll -- Yes, I mean, I think we -- we don't -- I think we mentioned we really don't at this point have a specific target in mind. But the amount that we'll reduce it by will depend on a lot of factors, our funding needs, what we see those being priced at and just our general overall cost of funding.

And certainly, Laurie, we prefer to have core deposits, and we work very hard on that day in day out. But this is one of the tools that Ravi and the team have to fund the bank. And so we're not going to tie our hands depending on that.

And I think the good news on that is that those rates are starting to moderate and come down. So as Bob said, it is a tool that we use in our arsenal to manage overall funding cost.

Great. And just one last question here, unrelated, on the buyback, were there any shares done between when you announced at the beginning of March and March 31?

No, they were not, Laurie. We're still standing up to program, but we're ready to go on now.

Our next question comes from Jared Shaw of Wells Fargo Securities.

It's actually Timur Braziler filling in for Jared. Starting off maybe -- starting off on Shared National Credit portfolio, we saw another bank have a couple of downgrades within their SNC book. Anything that you're seeing in that portfolio that's tempering your appetite there? Any kind of color around your Shared National Credit portfolio would be great.

This is Ralph, Timur. We haven't really seen any changes in sort of the composition, credit quality. As you can see, the overall portfolio is -- we're probably at the lowest level we've seen in terms of our metrics.

Kind of lifetime lows. We keep saying it can't go lower, but it has. So one of these times we'll be right. But at 3 basis point NPAs and to Ralph's point, this spot, Timur, we haven't seen any change in the complexion of the Shared National Credit portfolio.

And Timur, I'll just add, as we stated previously, this is a high-quality portfolio. That's why sometimes you see the pay downs occur. It's just -- our focus is on things that we understand well in high-quality credits.

Understood. And then just one more for me, looking at commercial real estate, yields gapped up nicely this quarter. Any fees in that line item this quarter? Anything that's more onetime in nature? Is that a pretty good starting point as we head into the second quarter?

It was really nothing in terms of fees. Yes, so pretty much where we're at right now.

Okay. So was there something structurally different about the commercial real estate book during the quarter that drove the yield higher? I guess, maybe help us understand why...

It's just the new loans coming on at higher yields.

Just -- yes, we've got -- we've had disbursements coming on at higher yields.

(Operator Instructions) Our next question comes from Arren Cyganovich of Citi.

Just following up on the capital return. You have $100 million now authorized, can you just remind me of how you intend to use that, if at all, this year?

No. It's just something we'll look at throughout the year. As I say, we're ready to go when the blackout period comes off. That doesn't mean we're going to start as soon as the blackout period comes off. But we're just -- we had it stood up just before the window closed and got the necessary approvals. And so now we're ready when we think it's an appropriate time.

So are you using it just more opportunistically, if market tends to weaken, that kind of thing? Or you intend to use certain portion each quarter?

I think we'll be completing the repurchases between Q2 and Q4 and doing it in sort of a very methodical, thoughtful way.

Okay. And then on the deposits, the core deposits grew but you did have a reduction, you had some temporary deposit outflows and public time deposits outflows. How do we think about the total, the 2%, 3% -- the 2% to 3% growth expectations? What is that based off of? Is it based off of the 17.2?

Timur (sic) [Arren], this is Eric. The 2% to 3% growth is really off of the year-end base excluding approximately $400 million temporary deposits and sort of the reduction to our public time, which was $175 million.

(Operator Instructions) I'm showing no further questions at this time. I'd like to turn the conference back over to Kevin Haseyama for any closing remarks.

We appreciate your interest in First Hawaiian, and please feel free to contact me if you have any additional question. Thanks, again, for joining us, and enjoy the rest of your day.

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