Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the first Hawaiian fourth quarter 2019 earnings Conference call.
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I would now like to hand, the conference over to your Speaker today Investor Relations manager Kevin.
Sir Please go ahead.
Thank you Keith and thank you everyone for joining us as we review our financial results for the fourth quarter of 2019.
With me today are about Harrison, Chairman, President and CEO , Robbie Madella, CFO and rock music Chief risk Officer.
We are prepared upright a slide presentation that we were referred to in our remarks to the presentation is available for downloading in viewing India Investor Relations section of our website at <unk> Dot com.
During today's call, we will be making forward looking statements for please refer to slide one for our safe Harbor statement.
We'll also discuss certain non-GAAP financial measures.
And next 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 would've Bob will provide you with the fourth quarter highlights starting on slide two.
Thank you Kevin law, everyone and thank you for joining us today as we review our fourth quarter results.
Please to report that we ended 2019 with a great quarter driven by strong loan growth.
The improved deposit mix prudent expense management and excellent credit quality.
Our profitability measures remain strong with the core return on average tangible assets.
The 1.48% and a core return on average tangible common equity of 17.22%.
During the quarter, we executed an additional $37 million of share repurchases.
Bringing the 2019 year to date total.
Repurchases to $136 million.
The board of Directors also declared a 26 cents per share dividend.
And looking for it it is still our plan to maintain a dividend payout ratio around 50% of earnings.
The board also approved the share repurchase program for up to $80 million of common stock.
As we distribute dividends and execute repurchases.
We will be targeting a common equity tier one ratio of about 12%.
Turning to slide three I want to take a quick look back and touch on a couple of items before handing the call over Robby.
2019 was our first year back as a fully independent bank.
The team did a great job managing the bank through the transition absorbing the additional costs and improving the quality of our balance sheet, while continuing to deliver outstanding financial performance.
We also worked hard on improving the customer experience during the transition.
Our net promoter score most recently at 59.6% has significantly improved since we began measuring it over three years ago.
Going forward, we're continuing to invest in technology to enhance the customer experience and increased automation.
We are in the process of implementing a new core system and modernizing our did did architecture.
These improvements will make us more agile and working with technology partners and then developing our own products.
And now I'll turn it over to Ravi for the financial.
Thank you Bob.
Turning to slide four we had very strong loan growth in the corner.
Period end loans, and leases were $13.2 billion up 368 million or 2.9% versus the prior quarter.
For the full year loans grew $135 million.
Excluding the sale of 409 million of snick loans in the third quarter full year loan growth was 544 million or 4.2%.
We had good growth in most areas with the largest growth coming in see Ari residential and see an eye loans.
CRT loans grew by 155 million.
Growth coming from Hawaii, and the mainland.
Residential mortgages grew by $98 million as production continued to benefit from low mortgage rates.
See an eye loans grew by $89 million.
Looking forward, we expect loan growth in 2020 to be in the 3% to 4% range.
Turning to slide five our cost of deposits decreased by 10 basis points to 44 basis points in the fourth quarter and interest bearing deposit cost fell 15 basis points to 68 basis points.
Total deposit balances ended the quarter at $16.4 billion.
Down 412 million from the prior quarter.
Consumer and commercial deposits grew by 253 million.
After adjusting for the withdrawal of a 400 million dollar temporary commercial deposit at the started the quarter.
In addition to the commercial deposit withdrawal HM $266 million decrease in public deposits also contributed to the overall decline in total deposits for the quarter.
Uh huh.
Turning to slide six net interest margin in the fourth quarter was 3.15% a four basis points decrease from the reported third quarter NIM of 3.19%.
We were able to partially offset the impact of lower yields on loans through improved deposit pricing.
Net interest income in the fourth quarter was $139.6 million.
A slight decrease versus the prior quarter.
The lower average loan balances in the fourth quarter was primarily due the sale of loans in the third quarter.
Looking forward, assuming no fed rate moves this year and no significant changes in the shape of the yield curve, we expect the NIM to be relatively stable in the 3.15% range.
Turning to slide seven noninterest income was 40 $746.7 million 3.3 million lower than the prior quarter.
BOLI income was $3.2 million lower in the fourth quarter due to lower interest income and the $1.7 million in death benefits recognized in the third quarter.
Other income into fourth quarter included a 4.5 million dollar charge on the mark to market swap for the visa class B shares sold in 2016.
Noninterest expenses were $91.1 million.
2.4 million lower than the prior quarter.
Noninterest expenses in the third quarter included $2.2 million of nonrecurring expenses.
Looking forward to 2020, we anticipate that expenses will increase approximately 6% over 2019 core non interest expenses.
The drivers behind the growth can be broken down as follows.
First there will be a $6.5 million step up in expenses because reimbursements from Bnpp ended in 2019.
This contributes about 1.8% to the 2020 increased.
Inflation related growth will add about 2% to 3% to expenses.
Also as Bob had mentioned, we have been and we'll continue to invest in technology projects that will enhance our customer experience and provide operational efficiencies.
These expenses are expected to contribute about 1% to 2% to the gross.
With that I'll turn the call over to Ralph to cover asset quality.
Thank you Ravi if I could turn your attention to slide eight in the deck you see that we continue to have the high level of asset quality.
Got it costs remain low and under our historical average nonperforming assets were minimal at quarter end.
Total nonperforming assets were $5.8 million or four basis points of total loans and leases and other real estate on.
Net charge offs were $6.7 million for the quarter on an annualized basis. This amounts to 20 basis points on average loans and leases.
For the fourth quarter, the provision expense was $4.3 million and the allowance for loan and lease losses decreased by $2.4 million to $130.5 million, which is 99 basis points to total loans and leases down five basis points.
Versus the prior quarter.
With respect to see so we have no changes to our previously disclosed estimates based on our current portfolio unexpected economic conditions, we estimate that the adoption would increase our reserve by about 10% to 15%.
Now, let me turn the call back over to Bob.
Thanks, Ralph turning to slide nine Hawaii's economy remained steady in the fourth quarter.
State unemployment rate was 2.6% December compared to 3.5% nationally.
The visitor industry continued to operate at a high level for through the first 11 months of the year and year to date through November visitor arrivals were 9.5 million.
5.4% versus the same period last year.
Visitor spending was $16 billion through November half percent higher than those same period last year.
The real estate market in Hawaii remains sound. The median single family home prices on a walk who were relatively flat on a year over year basis, and the overall market remained stable.
Looking forward, while there's some signs of slowing in the economy here in Hawaii continues to operate is very high level and overall outlook is stable.
And with that would be having to take any of your question.
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Oh first question comes from alignment of Ebrahim Poonawala of Bank of America.
Your line is open.
Good morning, good morning, guys.
Good morning room.
I guess just first question not all known good surveys show fourth quarter, and we look at your guidance, what 3% to 4% for 2020 .
What does it assume should call are you.
Planning for additional.
Exists within the Snake book or.
Oh, you're done with that in terms of any positioning of that portfolio and just in builds off the strength in the fourth quarter, why do not see that kind of continuing and leading to probably better than the painful but some guidance you've given.
Yeah.
A number questions you Barry let me start with the stick book and.
We reposition that as you know in third quarter last year were happy where it's at.
We're not anticipating anymore repositioning out of hand out of the normal maintenance. There. We do deals come up we look at that and decide if we want to stay at or not so that's kind of ongoing portfolio from that standpoint, we're not anticipating any big swings.
Q4, we just had a very strong quarter, we did again last year as well and it just as some of the timing of when deals closed et cetera, we're starting to see some good funding on the construction projects and so that's been kind of a wind at our back for the quarter, we see that continuing into little bit of next year, but it's hard to predict the entire.
Our year off one strong quarter and so we're very comfortable at that 3% to 4% range is kind of.
Our balance growth continue.
Understood and Oh, I guess, so are we talking for all the details on the expenses I guess.
We use the 370 million dollar base for 2019 gets you to about 92 for the full year I guess two questions. One should we expect Doug how should we think about the mandate of expense growth and 2020 .
Is it back half loaded or should we expect just a steady increase as we go through the quarters and what's your expectation in terms of how this.
What does imply for the efficiency ratio for the full year.
Yeah, I think there are two questions. There ebrahim. The first question as you know I don't know, whether we have any specific insight onto when the timing of those expenses would occur I think if you think about them as a full year. We wanted to give a full year guidance and I think that's kind of words landed for for the year.
You can maybe spread that out over the course of the year.
We've been very specific about the guidance on expenses and I think in the past we've given guidance on the efficiency ratio just because of.
Changes in the rate environment, and frankly are the transition and now that were through the transition and.
Assuming a very stable rate environment with you know no fed changes for the year I think we feel very comfortable with guiding to expenses as opposed to giving guidance on efficiency ratio.
Got it and if I could just follow up on that in terms of the 1% to 2% deck investment related expense growth you talked about Ravi is that something to be and I know you're guiding for 21 late so whatever you think about on a go forward basis is that kind of walk me through the show many on expense run rate or is 2020 , a little bit unique and.
In terms of things that you're doing.
Well, let me start with Ebrahim this Bob.
We don't give expense guidance passed the one year, but we will continue to invest in the technology, we're expecting to see some process improvements and benefits from the core conversion.
We're going to take those efficiencies into both the front office in the back office and kind of reposition that spend and too.
Other things in the digital world to help us better serve our customers and be more efficient. So we're going to very closely watch on number we've never.
Gotten too far ahead of ourselves on the expenses. So we're going to continue to manage that closely.
Hi, Thanks for taking my questions.
Thank you. Our next question comes from Jackie Bohlen of KBW. Your question. Please.
Hi, good afternoon, everyone.
Exactly.
Oh.
First loan origination didn't have any impact on the compensation line in the quarter.
Congratulations Steve sorry.
US a small bit not not anything significant.
Okay and understanding that there was a large step up delta between QQ entering Q was there anything non core that positively benefited compensation in the fourth quarter I just looked like it was a little bit low compared with the rest of the year.
Yeah, I believe we had some onetime expenses on the salaries and benefits line Jackie in Q3.
Okay. So going forward and you know just in light of the on the overall expense guide you gave and thank you for the breakout on back Yeah, I would expect an uptick from seasonal payroll and one Q, but it doesn't sound like there was anything else that wed.
Drive that line higher outside of normal inflation is that accurate.
The only the only thing to add to that I think that is actually this is Bob Jack is we are moving our minimum wage up to $16 an hour $15 an hour and that will be in.
Q1.
That is embedded into the guidance at Ravi gave you, but so.
If theres any waiting back to I think he brings earlier question there might be a little bit less than Q1, a little bit more later in the years that kind of roll through during the quarter, but not significantly on the quarter on the year basis, we're still very comfortable with the guidance we gave.
Okay. Thank you that's helpful. Just one last one from me and then I'll step back into public deposit balances.
Was there anything that drove the the additional reduction in the quarter and might we see more of that next year.
Yes, I mean, I think we saw some good growth on consumer and commercial during the quarter. We saw about 253 million and growth there and you will see it hits and the DTA line, which we like its core and we like that a lot and I think that just gave us an opportunity to be able to reduce public time by about 100.
And 58 million in the quarter now we feel very comfortable with where we are right. Now is that for 99 million in public time, and we feel that gives us one of the lever well lever to be able to pull if we see outsized loan growth in the quarter, but.
We have very happy with the way deposits played out this quarter.
Okay and is that with the uptick on and I know the average loan to deposit ratio was pretty flat at red, 79%, but there is that 80% deposit ratio.
Level that you're comfortable with or would we see that trend higher if you saw either opportunities maybe future like that.
Yes, I mean, I think we'd see it sort of move with the way, we think about the balance sheet in totality, so depending on where we see.
From the Securities book standpoint, any pay offs and our abilities to go into the market and replace replenish those and loan growth overall, whether its outsize quarter to quarter, we feel relatively comfortable with the level OSAT right now.
Okay, great. Thank you.
Thank you. Our next question comes from Steven Alexopoulos of JP Morgan. Please go ahead.
Hi, everybody.
Hi, Steve just start so for look at the 6.5 million increase in expenses tied to the separation from BNP.
How are you thinking about the timing of that.
Yeah, I think we'll be sort of that's in the run rate now we won't be we typically got it quarter over quarter over quarter. So is spread out over the course of the year. So beyond that we don't see any major changes, it's going to be spread out over the year, yes. The reimbursement last year as Ravi said was by quarter. So.
Shouldnt, you shouldn't see any volatility or cyclicality within the year.
Because of that Steve.
And then just a follow up on the new core what's the timing of that and when should we anticipate seeing some of the cost related to that.
We're looking to have that completed by mid next year mid 2021.
And so we're starting to capitalize some of those costs now as appropriate and then.
Post conversion that would enter the expense line as just amortization of the expenses as you would expect.
Okay.
And then if I thought I heard you say, you're targeting see Q1 at 12%.
Right.
That's correct and we had guided last year at about 11 75, we just.
Looked at it and decided that we're at now and what we see going forward, we're going to and set up a little bit to 12%.
Okay. What was the thought buying that because I think most would've assumed that you might have brought it down a little bit just given how conservative balance sheet is what's the thought on holding even more capital here.
Well as we looked at the loan growth going forward, there's little less certainty regarding Cecil and what's going to happen on provisioning with that and we just like the fact that.
Well, a little bit more capital until we kind of get into a run rate going forward and bet over to predict what's going to happen with that that's a fairly large changes a little bit harder to predict based on the modeling in the economic scenarios you put into that so that's where we're coming out of.
Okay.
And then one final one Ravi just a follow up on the guidance for relatively stable NIM to loan yields were down quite a bit this quarter, which not a surprise right just given what happened with LIBOR, where do you see loan yield stabilizing.
And I think where I.
I think if we start to see stabilization in the shape of the yield curve and we start to see no. We have much more clarity on the fact that the fed won't move this year, it's probably later in the year.
That will see sort of stability around loan yields.
I think what we did this quarter with respect to deposit costs was.
During deposit costs down 10 basis points on a on a 54 basis points average prior quarter. We feel we we moved the deposit number quite well and we think we'll be able to offset some of the yield changes on the loan side until you yields on loans side stabilize in the second half of the year.
Okay.
Terrific. Thanks for all the color.
Thank you. Our next question comes from Aaron Deer.
Hyper Sandler your line is open.
Afternoon, everyone.
Hi aren't I had.
Actually most of my question has been addressed I'm, just curious though I'm.
Wondering if you didnt touch on was.
Noninterest income items I'm, just wondering if there's any areas within your kind of fee based businesses, where you see opportunities to grow or.
Invest in over the course of this year for some expansion on along those line items.
Maybe I'll start and Bob can jump in here I think the area that we've seen some nice growth and frankly.
The composition of the growth has been in the trust and investment sides were seeing sort of solid.
Recurring revenue growth in that area, that's been solid and consistent across the year and if we look at that line, specifically I think thats a place where we continue to invest in the business and and it's a starting into a very solid a source of noninterest income for us.
Just add to that derive is robs comments, our assets under administration or just over 15 billion now 15.1 billion and we've also been successful on repositioning that business from more transactional to ongoing fee basis, which takes out some of the volatility and so we're very pleased that we've been able to do that over the last really.
18 month.
That's great and then.
Credit obviously is extremely good here just curious.
We are starting to see periodic kind of one off items pop up in banks elsewhere in the country I'm just curious if theres anything that you're seeing across the portfolio Thats you know that you're starting to keep a close riaan or areas and the watchlist or greater concern at this point.
No. This is Ralph Lauren and actually right now the the outlooks pretty stable and we Havent really had a lot of change in the composition of our assets in fact, our criticized assets at the levels of come down a little bit over the past year.
Okay, great. Thanks for taking my questions.
Thank you again to ask a question. Please press star one on your telephone again at Star wondering you touched on telephone to ask a question.
Our next question comes from the line of Lori on sector.
Compass point your question please.
Yes, thanks, good afternoon.
I was hoping we could just go back to deposits because to your point they came down in term adequately the cost in the quarter Palace the cost of total and the cost of core and just wondered if if we're going to continue to see that come down in other words, how much of that was with early in the quarter versus later in the quarter.
Hi, Larry this is roddy ironic.
Take that question here.
We certainly acted quickly on on moving our deposit costs down I think it's a really a reflection of you know.
The fact that deposit pricing in our consumer accounts are is really rational in our marketplace and so we certainly did take deposit costs down I think if you look quarter over quarter that was close to a 19%.
You know decline and deposit costs quarter over quarter, and so we certainly see there's more room, but it's certainly starting at that 44 basis point level. It's you know it doesn't give us a whole lot of room to move further down.
Okay, and I mean, just directionally because it wasn't just your total cod nother. What's your core deposits went from 34 down to 27 basis points Im just wondering.
As you took those down with it early in the quarter or was it later in the quarter.
I think we did it a couple of times during the quarter, so sort of throughout the quarter. We did okay. So okay, great and then I just wanted to go back.
The income statement within the other either of US noninterest income the 900.
And 58, that's obviously, where the the foreign half million was do you have a number for what is total swap income.
Hi.
Don't have that number with me, but you know we were we were we were down about a million quarter over quarter. Okay. I can follow up with you offline and then just wondered if you've got the numbers for where the snack actually finished.
At fourth quarter snack and also the dealer floorplan. Thanks.
We do do you have that Robyn yeah. The snick loans ended up about 700 million.
And dealer loans were about.
Thats the main and that's the mainland right. There total was about 1 billion billion billion won.
And.
You know dealer lowering was 862.
And then just last one here.
How should we be thinking about tax rate for this next year.
Yep.
We're projecting our 2020 tax rate to stay at 25.5%, Okay, great. Thanks.
There appear to be no further questions in queue at this time I'd like to turn the call back over to Mr.
For closing remarks, Sir.
Thank you. We appreciate your interest there first Hawaiian and please 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 everybody.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.