Q3 2019 Earnings Call
Three 2019 earnings conference call.
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Now with the helicopter, which you speaker today, it's the cabin Akiyama 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 third quarter of 2019th.
With me today are about person CEO , Robbie Mandela theatrical and Ralph music Chief risk Officer.
We are prepared a slide presentation that will refer to in our remarks today. The presentation is available for downloading and viewing on our website at <unk> Dot Com, India Investor Relations section.
During today's call will be making forward looking statements. So please refer to slide one for steep Harper statement.
We will also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measure minutes to the most directly comparable GAAP measurement.
Now I'll turn the call over to Bob will provide you with a third quarter highlights starting on slide two.
Thank you, Kevin Hello, everyone and thanks for joining us today as we review our third quarter results.
Pleased to report, we had a solid quarter driven by excellent credit quality growth in non interest income and continued prudent expense management.
Profitability measures remain strong with a core return on average tangible assets of 1.56%.
And our core return on average tangible common equity of 18.21%.
We continue to optimize our balance sheet with the sale of $409 million a shared national credits.
And at the same time, a 334 million dollar reduction of public time deposits.
These actions enabled us to increase our 2019 stock repurchase program.
$50 million to a total of $150 million.
During the quarter, we executed an additional $59 million of share repurchases.
Bringing the year to date total repurchases to $99 million.
Yesterday, our board of directors declared at 26 cents per share dividend.
Representing an attractive annualized dividend yield.
3.73% based on today's closing price.
Now I'll turn it over to Ravi to go over the financials.
Thanks, Bob turning to slide three carried out loans were down $421 million versus the prior quarter.
This was primarily due to the 450 million dollar reduction in snick loans, which included a $409 billion of loans. So.
Plus an additional $40 million snick loans that matured.
She or he loans grew by $115 million.
Almost $100 million that Bruce.
Was in Hawaii and Guam.
And included $50 million related to the conversion of construction loans to permanent financing.
This conversion of construction loans to permanent financing represented 50 million of the 63 million dollar decline in construction loan balances that we saw in the quarter.
Residential mortgages grew by about $53 million as production benefited from low mortgage rates.
She and I loans declined by about $524 million.
Primarily due to the previously mentioned sale and run off of about $450 million of snacks loans.
Dealer flooring loans declined by about $37 million.
Consumer loan balances were down 13 million, primarily due to indirect auto loans.
Looking forward, our Siri and residential real estate pipeline looks good.
Because of uncertainty in see an IDE demand, we're reducing our full year loan growth outlook slightly.
To be in the low to mid single digit range, excluding the impact of the snake loan sales.
Turning to slide for deposit balances ended the quarter at $16.9 billion.
$65 million from the prior quarter.
Public time deposit balances declined by $334 million.
Balances and consumer deposit products increased by about $70 million and balances in commercial deposit products increased by about $347 million.
The increase in commercial deposits was due to 400 million temporary deposits there were withdrawn early in the fourth quarter.
Our cost of deposits decreased by three basis points versus the prior quarter.
Primarily the result of the reduction in public time deposits.
Turning to slide five net interest income in the third quarter was $143.1 million.
Decrease of $2.5 million versus the second quarter, and an increase of $1.8 million versus the third quarter of 2018.
The decline in net interest income in the third quarter was primarily due to lower loan balances.
And lower loan yields.
Net interest income in the third quarter included a $1.7 million negative premium adjustment.
Close to the $1.8 million negative premium adjustment experienced in the second for.
The reported net interest margin was 3.19% six basis points decrease from the reported second quarter NIM a 3.25%.
The decrease was primarily due to lower loan yields and balances and higher cash balances.
Actually offset by lower deposit costs.
The NIM impact of the premium adjustments was the same in both the second and third quarters about four basis points.
Turning to slide six noninterest income was $50 million $1.2 million higher than the prior quarter.
Nonrecurring items in the third quarter included $1.7 million and bullied death benefits.
As well as a 1.2 million dollar loss from the sale of the stick loans in the quarter.
Noninterest expenses were $93.5 million about $176000 higher than the prior quarter.
Our efficiency ratio in the third quarter was 48.4% and our core efficiency ratio was 47.3%.
With that I'll turn the call over to Ralph to cover asset quality.
Thank you Robby because I could turn your attention to slide seven in the deck.
I would call he was higher at quarter end.
At a cost remain low and we had few nonperforming assets net charge offs were $5.6 million for the quarter on an annualized basis. This amounts to about 17 basis points on average loans and leases. This is four basis points lower than the five corridor.
Total nonperforming assets were $4.3 million, where three basis points at whole loans and leases and other real estate home.
This is flat to the prior quarter.
As a result of the reduction in the loan portfolio. Following the cyclone sales no provision was taken in the third quarter and the allowance to loans and leases remained at 104 basis points.
Finally, we continue to prepare for the Cecil implementation next year.
Based on the current portfolio and expected conditions, we estimate the impact to the adoption would increase our reserve by 10% to 15%.
Please note that this estimate is preliminary it's subject to change.
Now, let me turn the call back over to Bob.
Thanks, ROE turning to slide eight Hawaii's economy remained steady in the third quarter state unemployment rate was 2.7 per cent compared to 3.5% nationally.
Visitor industry continue to operate at a high level through the first eight months of the year.
Year to date through August arrivals were up were 7.1 million of 5.2% versus the same period last year.
Visitor spending which was like in the first half of the year began to pick up in the third quarter and was $12.1 billion.
5% lower compared to the same period last year.
The real estate market remains prices on Oahu remained stable, we have seen a slight decline in sales volume compared to the previous year.
Looking forward, while there are some signs of slowing the economy continues to operate at a high level and the overall our outlook for our economy here in Hawaii is stable.
I'd be happy to take your question.
Oh.
Thank you.
Asked the question. Please press Star then one.
Our first question comes from Stephens.
I was populates of JP Morgan Your line is open.
Hi, everybody.
Hi, Steve.
I wanted to start first time do you guys taken down the loan growth guidance that you cited uncertainty on C. and I can you give more color what you're seeing there.
Well you know, we're still seem good volumes, especially in the CR East phase, but see line has been a little flat and.
Part of that as an outlook on dealer flooring, which is yeah with the economy stables car sales have been stable, we aren't seeing the increases we've seen in previous years.
Okay.
That's helpful. Then on deposit costs, it looks like deposit cost came down even without the outflows of public funds can you talk about what you're seeing from local peers. Just in terms of deposit competition and do you think you'll continue to bring deposit costs down then maybe enough to stabilize the NIM here.
There are certainly opportunity obviously, a Steve you know our market has a very rational market and so you know we've you know we've been definitely looking at deposit cost as a way to moderate or the impact on NIM.
Being said I think the market is moving sort of relatively in tandem and I think that will provide us opportunities for the future.
Okay, and then Robbie how are you thinking about the NIM you're in the fourth quarter.
Yeah, So the fourth quarter, where outlook you know our fourth quarter outlook incorporates the impact of to 25 basis point rate cuts. So that cut at the end of September and the expected cut at the end of October .
Yeah, we we probably would see a drop of about 10 to 12 basis points from the adjusted Q3 net.
The impact of that December rate cut in the fourth quarter shot less impact, but that could really depend on how much LIBOR moves in advance of cuts that could happen in December .
Okay and.
And even with the cut of that magnitude you think the efficiency.
Guidance is still intact.
Yes, okay, great. Thanks for taking my questions.
Thank you.
Our next question comes from Ebrahim Poonawala of Bank of America. Your line is open.
Please make sure your phone isn't a mute.
Hello.
Hey, Brad Pitt.
Yeah, I just want to do all Oh follow up on skis question, the board and don't have margin outlook.
And then kind of starting it in from an efficiency standpoint, if we could just look for that out into 2020 Ravi.
I just talked often don't go if they get these data points get coverage the NIM becomes defensible or should we expect that onto the fed continues to own it's back to cutting interest rates even see.
At this level of NIM decline and on the expense side, all the levers to pull that means you obviously have fairly efficient bank all the things that you can do Vodafone.
Pulled back on expenses to defend dog Oh, the efficiency they show.
I mean, I think with respect to 2020, there just a lot of moving parts, we typically only give guidance one order in advance.
You know what I would say is that not only our you know what the expectations are for fed rate cuts in 2020 impacting what we would project, but also just the shape of the yield curve itself.
So you know not without going out any further I think you know we would we would be impacted by cuts if they were to occur in 2020.
Maybe just on the expense side, you know I think we've given guidance.
Guidance or you know the first half on the the year on expenses were about $186 million and I think you know we came in at 93, a little bit over 93 in the third quarter.
I think that you know given that we're running at a very pretty lean efficiency ratio. I think you know we gave guidance of a second half of that 1% to 2% higher a you know where that being said, we're always looking at opportunities to manage our expenses and our cost structure.
Quoted and are there any additional balance sheet action that we should look allpoint domes or is there more to go in terms of sort of running also to make loans or was this a one time and we shouldn't expect more of this.
I mean, I think Oh, sorry, Robby this Bob TV.
Yeah, that's certainly something we're going to continue to look at we took advantage of an opportunity that we saw in the market to kind of a pull back a bit on the credit only shared national credits and then the same time look to reduce our funding costs and increased the share repurchase and well we'll continue to consider if we don't have any curved glass.
Well thank you.
Thank you. Our next question comes from Jackie Bohlen of KBW. Your line is open.
Hi, good afternoon, everyone.
I was.
One of.
Looking at one of the charts in the back that calls out some onetime costs of five it's roughly 2.2 million a is that all executive comp.
From the footnote or was there something else in there.
Yeah actually there was you know I.
I think that's a good catch Jackie there was one other you know sort of significant item.
It really had to do with an accrual that we took a to true up a mark to market or you know.
Impact of the conversion rate of Debbie said be.
Shares and the swap associated with that than we had to true up at the end of the order that <unk> visa had a announced a plan to deposit some additional money into the escrow account and as a result, they took their conversion factor down and we trued up to a to.
Mark to market that that's wall.
It was about 300000.
Okay.
So I think about those two expense as yeah, a little over 2 million and then you know I I extract those out of what you have from Twoq versus Threeq you. It's a pretty low number for Threeq you on how does that play into your prior growth guidance you gave for the latter half of the year.
Yeah, I mean, I think you know we I think we were not really changing that much I was definitely a one off items, but I think our guidance continues to be the safe.
And one of the issues on that Jack is it's just difficult to find people. We have a number of positions open and we'd love to fill them. We've had some success.
But.
The factor, we chat really control.
Okay. So to the extent you're able to sell some of those positions them. We would see you know outside of adjusting for changes in it that comp I would see that line tick up.
Correct.
Okay.
And then just one last one for me and then I'll step back if even if I normalize for the BOLI gain in the quarter. It looks like that income line item was still up a bit from where it's been earlier in the year is that normal fluctuation or is there anything else unusual on there.
Yes, sorry, Jack isn't a bully line item.
Or just or or or non yen the bully line item.
Oh, Yeah, we you know in the boldly line item. This quarter I think we had you know sort of a larger gain there just because we had some death benefits of about 1.7 million in the quarter.
And that you know typically.
Sort of an outsized number for the quarter.
Yeah, Yeah, no and understood on that I, just if I.
Normalized for that.
Hey, Matt I, you know, it's still looks a little bit elevated ways or anything else unusual in there or is it just a normal fluctuation.
And there was nothing really unusual in there just normal fluctuations.
Okay. Thanks for the color I'll step back.
Thank you again, if you like to ask a question. Please press Star then one when you touched on telephone.
Our next question comes from Tomorrow, Brazil, or a wells Fargo. Your line is open.
Hi, good afternoon.
I'm looking at the $40 million shared national credits.
Run off was that it was that one of the credit only or were those credit only loans that ran off.
Actually is a mix of both tumor so before we had our mamet's mix was about 50 50.
It is only relationship and Thats moved to about 70% relationship and 30%.
Credit only but that that extra runoff was a mix of both.
Okay.
But in regard to the credit only snacks that remain should the expectation be a as those come do that you're just going to let them run off or is there a willingness to keep a portfolio of credit only mainland snacks.
There's a willingness to keep the portfolio there were constantly looking at it and being very choosy as you can tell by the credit quality of what we've sold given the pricing.
That's something that is foremost to us is really the credit quality and getting into good deals.
So we're not we haven't closed.
Optionality.
Okay.
And then just in regard to total loan growth appreciate the color on the dealer floor plan, but as we look out is there anything that gives you confidence that loan growth will accelerate kinda back to that mid single digit level or as we look out in the near term. It's gonna, it's kind of trend in the low to mid single digit range.
We're not giving guidance pass really the fourth quarter, but.
We're still seeing we're still seeing good economy here and the strong growth in Ms. Just finding those right opportunities.
So we're not looking past the fourth quarter, but theres nothing structurally wrong with the economy here in Hawaii is still doing quite well.
Okay, and then one last one from me looking at the public funds that remain what's a good number that we should kind of model in for for where public funds wells will shake out and then those that were exited during the third quarter. If we can just have an update on the timing of when those left the bank.
Yeah. They you know Tim or this is Ravi I think you know those left over the course of a of the quarter or you know we had about 334 million in public time, a reduction during the quarter and typically we see about 350 million or so mature during the course of a quarter.
So think about it sort of staggering in from the border where we are right now in terms of levels or you know public time, I think you know we feel pretty good about it.
Albeit conversation about the whole balance sheet, and totality, where we see loan growth, where we see a deposit growth and a you know opportunities on the investment security side. So you know given where we are we feel pretty comfortable but you know it's really looked at in totality on the balance sheet.
Understood. Thank you.
Thank you next question comes from Laurie Hunsicker.
Compass point your line is okay.
Yeah, Hi, good morning.
I just wondered a a couple things I'm just going back to snack I know that you reduced your bounces around 450 million, but I just wanted to make sure I had the actual number.
The actual number as of September 30 is right around the billion or do you have a better actual figure.
Barry.
And then how much of that as Hawaii versus Malin can you guys hear me.
Yes, we can okay I didn't know I didn't know if there was seen back Kevin from Okay. Yeah go ahead, though the total snicks at the end of third quarter, both mainland and Hawaii was one right at 1 billion.
Of the.
700 million was mainland.
Okay. So 300 million was Hawaii.
Okay, that's great.
And then.
And I know you've you've talked about this but can you just take us through is it's just generally as we look forward and 2020, how you're feeling about where that snack <unk> Dallas, just specifically the snack bar.
Well as I mentioned or.
Comfortable where it's at now we're of course very committed to the Hawaii based mix as well as the.
Hawaii the relationships mix should have some type of ties here to Hawaii. So certainly that is one of the things we continue to evaluate or the credit is only snacks, which is roughly 30% of that 700 million.
Okay.
Okay, and then the dealer floor plan loans do you have a a balance on that.
Sure. We ended the quarter 838 million, so down 60 million from second quarter.
Okay, and then how much of that is in California.
545 million.
Okay, Great and then just wanted to go back back over to Jackie's question around expenses in other words from or when we're taking out that.
2.2 of of onetime items.
Your non interest expenses are sitting at 91 million and it looks like your professional fees are a little bit outsize too and so theoretically that could I must be on lower number.
Actually I mean, you're you're almost pushing close to 90 million a corridor.
And yet your efficiency tied suggest a whole lot higher so can you help us think about that a little bit.
Thanks.
Yeah I've already this as Ravi I mean, I think you know obviously I think Bob mentioned to the fact that you know one of the factors that we you know we're always challenged and that could vary from quarter to quarter is just.
Our ability to.
Retain and aggressively you know recruit talent. The other thing is that there's always Lee at the end of the year there can be seasonality impacts on the expenses. So we could see changes relative to end of year expenses that that might come up.
Okay and then just one last question around expenses are there any big or unusual items that you're planning.
<unk> spend in 2020 different than what you currently having your infrastructure.
We don't have any.
Plans for anything different in our business plan, Okay perfect. Thanks, I'll leave it there.
Thank you.
I'm showing no further questions at this time I like to turn the conference back over to Kevin half Jamo for any closing remarks.
We appreciate your interest it first unwind and feel free to contact me. If you have any additional questions. Thanks again for joining us and enjoy the rest of your day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
All right.