Q2 2021 First Hawaiian Inc Earnings Call
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I would now like to hand, the conference over to your first speaker for today Investor Relations manager Kevin <unk>.
Please go ahead.
Thank you Anne and thank you everyone for joining us as we review our financial results for the second quarter of 2021.
With me today are Bob Harrison, Chairman, President and CEO, Ravi <unk>, CFO, and Ralph Mesick Chief risk Officer.
We have prepared a slide presentation that we'll refer to in our remarks today. The presentation is available for downloading and viewing on our website at <unk> Dot com in the Investor Relations section.
During today's call, we will be making forward looking statements. So please refer to slide 1 for our safe Harbor statement we.
We may 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.
Thank you Kevin good morning, and thanks for joining us today.
To start with a quick update on the state of Hawaii. This is slide 2 in the deck.
We continue to see a steady increase in visitor arrivals.
And are approaching pre pandemic levels with almost a 100% being from the mainland U S.
Restrictions on Trans Pacific travel, where further he's starting on July 8 when individuals' vaccinated in the mainland U S. We're also allowed to enter Hawaii without a pre travel COVID-19 tests.
The economy continues to recover as the unemployment rate fell to 7.7% in June.
15 month low in the housing market remains strong.
We are continuing to make progress towards our goal of having 70% of the population vaccinated at.
Which point all COVID-19 restrictions are expected to be removed according to statements by the governor.
Similar to the rest of the country, we have seen increases in new cases recently and the test positivity rate, which offer with authorities are closely monitoring.
Turning to slide 3 I'll briefly go over our second quarter results.
We have a very good quarter, we saw broad based pickup in loan activity strong deposit growth.
Rebound of noninterest income while credit quality remained excellent.
Total loans grew by $151 million, excluding the impact of PPP loan paydowns with growth coming in multiple categories.
Deposit growth continued to be driven by commercial and consumer deposits.
Diluted EPS was <unk> 67.
And the board maintained the dividend at <unk> 26 per share.
We also repurchased $22.4 million of common stock under the current share repurchase program.
Now I'll turn it over to Robert to grow over the financials.
Thanks, Bob.
Turning to slide 4 period end loans and leases were $13.1 billion.
Down $197 million from the end of Q1.
PPP balances declined $348 million.
Excluding PPP balances C&I.
C&I declined by $209 million.
Merrily due to a $179 million decrease in dealer flooring balances.
Excluding the impacts of PPP forgiveness.
And dealer flooring balances.
Loans grew $330 million or 2.8% in the second quarter.
We were pleased to see good growth this quarter in many categories, including commercial real estate construction and residential loans each growing by over $100 million.
Our loan pipeline is building and we reiterate our view that full year loan growth.
Excluding PPP will be in the low single digit range.
Turning to slide 5 total deposit balances ended the quarter at $20.8 billion.
$701 million increase versus the prior quarter.
This was driven by a $769 million increase in consumer and commercial deposits and partially offset by a $67 million decrease in public deposits.
Our cost of deposits fell 1 basis point to 7 basis points in the quarter.
Turning to slide 6 net interest income was $131.5 million.
At $2.3 million increase versus the prior quarter.
The increase in net interest income was primarily due to higher average balances of investment securities and lower balances and rates on time deposits.
Net interest margin was 246% a 9 basis point decrease from the previous quarter.
Core asset and liability repricing contributed about 4 basis points of NIM compression.
All excess liquidity cost about 8 basis points of additional compression.
Just a reminder, we currently consider excess liquidity as balances over $500 million.
The decline in NIM was partially offset by higher income due to the higher balance of PPP loans forgiven.
Versus the prior quarter, which increased net.
Net interest margin by about 3 basis points.
In Q3, excluding the impact of excess liquidity and PPP loan forgiveness, we expect our net interest margin to decline, 3% to 5 basis points.
Turning to slide 7 noninterest income in Q1 was $49.4 million.
$5.5 million increase over the previous quarter.
Noninterest income was driven by a nice increase in credit and debit card fees and merchant services interchange, which in total contributed $2.2 million to the increase this quarter.
Other service charges increased $1.5 million.
Of which approximately $1 million was from onetime fees generated by our commercial customers.
Swap fees increased 800000, and boldly and trust income increased 900000 this quarter.
Noninterest expenses were $99.4 million.
$3.1 million higher than the previous quarter.
The increase was driven by a 1 time charge of $1.2 million in salaries and benefits.
And $1.4 million and higher card rewards expenses, which was due to higher activity.
The remaining increase was primarily driven by higher sales incentives paid in the quarter.
The efficiency ratio was 54, 7%.
On a year to date basis expenses are running about 4.1% higher than the same period last year.
However, we continue to expect full year expenses to be about 7% higher than in 2020.
And now I'll turn it over to Ralph to go or asset quality.
Thank you Ravi.
If you could turn to slide 8 I'll make a few comments on credit and asset quality continues to hold up and the recovery is underway with a strong return of mainland tourists in.
In Q2, the net charge offs for the quarter were $1.1 million.
While below the $4.6 million recorded in the prior quarter.
Our year to year to date annualized net charge off rate is at 9 basis points significantly lower than the levels in 2020 in 2019.
Bank recorded a negative $35 million provision for the quarter.
NPA and 90 day past due loans were marginally down this quarter with a 2 basis point decrease from the prior quarter to 12 basis points.
Criticized assets continued to decline as well dropping from 347% of total loans in Q1 to 251% in Q2.
Loans 30 to 89 days past due declined 5 basis points to 22 basis points at the end of Q2.
Moving to slide 9 you see a roll forward of the allowance for the quarter by disclosure segments.
The $35 million negative provision we recorded this quarter came on a more optimistic outlook and improvement in the portfolio of credit quality.
The allowance decreased by $31.2 million to $169.1 million, which is 129% of all loans and 133% to 8% net of the PPP loans.
And with that I'll turn the call over to Bob. Thanks.
Thanks Ralph.
Really you may have seen the announcement last week to the addition of 2 new directors to the Board Kelly Thompson and Jim Moffatt.
Their combined expertise in the areas of technology strategic planning risk management and E Commerce will provide valuable insight and guidance as we execute our digital transformation.
As I mentioned on our last call, we introduced a redesigned <unk> dot com web site and our new mobile banking App that includes features such as third party accounts integration and personal financial highlights.
The improvements have been well received as the number of visitors to our website has increased.
They are staying longer with higher levels of engagement.
We have also seen in over 500% increase in the active users.
For our new personal financial management tool money map versus our previous offerings.
Also under mentioned that our core conversion initially targeted for the third quarter of this year has been pushed back to the first part of 2022.
And with that we'd be happy to take your questions.
Thank you as a reminder to ask a question you may need to present time and day number 1 on net Kelly fan.
Thats Star 1 on net.
Thanks, Dan.
We have a first question from the line of Steven Alexopoulos from Jpmorgan. Your line is now open.
Hi, everyone.
Yes.
I wanted to start so Bob as we've seen in other parts of the U S. Reopen increased sales have been strong of companies, which has been great for deposit growth for banks, but not so much for loan growth.
Hawaii increasingly comes back online could you walk us through how this could have really should impact the loan portfolio and what do we need to see to move up from the low single digit guidance.
Yes, Thats a great question.
<unk> started to see in this what we've talked about I believe about certainly the last call. Maybe the last couple of calls is we're seeing the loan growth on the mainland first and we're expecting to see the loan growth in Hawaii coming later and Thats with the exception of residents residential has been very strong share in Hawaii as it is in many parts of the country.
The challenge areas staying ahead of the runoff.
The commercial real estate construction has been somewhat in Hawaii as we have a number of projects that are ongoing and then on the mainland as well as we look forward, we're really going to see is Hawaii gets back to work and people are spending more money.
We've seen the activity numbers on the loan side, we think that there will be recovery.
Consumer area credit card started indirect lending will follow when there is little more cars to purchase.
I think that will be the first things that we will see and then later on we will see the businesses kind of run through these high <unk>.
Deposit balances they have go back.
Managing their money and doing some borrowings as well so that will take a little bit of while a little while after the recovery starts.
Okay.
That's helpful.
Rob 1 thing that caught my eye was on the 1 slide where you talked about home prices were up over 20%.
And 1 of the markets and I know zoning issues have been tough NOI rates locals I wanted to give up more land for development, but just given the price increase I know you're involved with some of this are there more calls for.
More supply, which I think would benefit you guys is there any traction on that side.
Yes.
Complicated topic as it is in many cities I think the first things a lot of people are focused on is certainly the county level governments, our focus on better managing the Airbnb and <unk> just because it does take supply out of the local market.
I think thats the first step many counties here in Hawaii are very focused on certainly here on Oahu and to a lesser extent on Maui.
So the next thing is you've seen a couple of large projects that were approved some time ago whole purely at Koa Ridge.
Accelerating their development plans so given that the market is so strong they are trying to push out ahead.
And then lastly, we are also seeing continued interest in the high rise residential condominiums here on Oahu that.
A number of those projects.
That have been talked about are moving ahead strongly so altogether that helps.
Looking at land reform and looking at the way of changing how we have our our selling process for AG urban thats a longer term topic.
Okay.
That's good.
Maybe final question for Ravi on the Securities book, you saw quite a bit of growth again this quarter.
What's the yield on what you were able to add in the quarter and given us a bit of a step down in rates do you have less of an appetite here to continue adding thanks.
Yes.
Sort of a new volume rates have been coming in and around 120.
To 140, depending on the duration of the securities we're buying.
I think we.
We're up to about $6.9 billion and an.
Imbalances on the investment security side, I think it will really depend on what's available certainly it is a lever we can use to manage liquidity. During this time, but we don't want to.
Growth of portfolio too much when we feel as Bob had mentioned earlier in the call that as loan growth starts to pick up we want to take advantage and take advantage of those opportunities and deploy our liquidity towards those loan opportunities. So right now we feel very comfortable with where we are around.
$6.9 billion, maybe it might tick up a little bit, but it will really depend on what the environment's like going forward.
Steve maybe a follow on to my earlier answer.
Key point I forgot to make us.
For our dealer flooring were down right about $570 million from the 4 year average balance.
In 2019, and Thats all supply driven.
The amount of capacity and committed lines is out there it hasn't really changed that much. So as you see a recovery.
That product.
The manufacturer's ability to deliver.
Cars Youll see.
Pretty strong recovery, both here in Hawaii and on the mainland in those in that particular.
Portfolio.
Yes, I guess the million dollar question. There is do dealers return inventory levels to where they were which I don't think anybody knows at this point, but I hear you net it should get better from where it is.
Okay. Thanks for taking my questions. Thanks, Steve.
Thank you. Our next question comes from the line of Jackie Bohlen from <unk>. Your line is now open.
Hey, everyone. Good morning, good morning, Jackie.
Hey, guys first.
And just get a little bit of background on what drove net checking that system conversion timing.
Yes.
Maybe a little bit of background on expenses, I think we talked a little bit about the drivers quarter over quarter.
I think the.
Delay in the core implementation didn't really change our outlook for 2021 expenses, So we feel pretty comfortable with that 7%.
The guidance that we gave.
And I think when we look to 2022, we will we will certainly give guidance as we typically do at the end of the year.
Okay, and with I guess was there anything.
Good day internally or externally driven that caused the shift in the conversion timing.
Jackie This is Bob maybe I can take that it really is a conversation we're having we're having with our technology partner and it was just.
Cautious and things were a little behind where we had wanted them to be so we just wanted to make very share. We can do this successfully and wanted to give ourselves a little more time.
The other issue is.
We just weren't comfortable doing a conversion in the fourth quarter that was just the fourth quarter brings in a whole bunch of other.
Externalities that we didn't want to have to worry about.
Okay that makes sense.
And then just.
The employee base and kind of where you sit today versus what you might consider full employment.
Aside from the standard.
I'm assuming.
So past announcements, but just wondering where you stand.
Hello, Eddy recruitment efforts that you might be having are going.
It does everything kind of weighted back up.
Sure. This is Bob again.
We didn't let anybody go as we closed 40% of our branches during Covid, we just redirect them to other areas of the bank.
Having said that we also didn't replace people necessarily as normal attrition took place people moving retiring et cetera. So we're still out there even though we don't have huge needs. We're always out there trying to find the right employees and it's difficult right now, it's just a tough environment to do that dependent on.
What job of course.
Different jobs have different challenges, but.
We've been moderately successful, but it is not easy right now that is a challenge for us and I think everybody in the market.
Okay.
And then are your recruitment efforts geared toward any 1 place in the sector, meaning more entry level positions first is kind of middle or upper management or is it more broad day.
I think as.
Probably.
More entry level and there are certain specialized areas of course, we're always looking for certain people in the technology area and that's always a challenge anytime we can find someone with the skill set.
To grab them right away, but it's typically more entry level.
Okay Alright.
Alright, Thanks, Pat for all the color I appreciate it.
Thank you Jackie.
Thank you. Our next question comes from the line of Ebrahim canola.
Bank of America. Your line is now open.
Hey, good morning.
Good morning, good morning.
I guess just.
Question on following up on the dealer finance, we saw another decline.
So I heard your comments earlier, Bob do you think that balances those balances have stabilized and do you see a needle for any meaningful improvement in the back half of the year or is it all a 'twenty 'twenty 2 event at this point.
Yes, it's hard to predict the.
The 2 factors that we talked about first of all <unk> congratulations on your promotion.
Good news.
And to address the question.
The hard part is.
Trying to pick when manufacturing capacity will increase and demand will moderate so we haven't seen either of those come back although youre starting to see.
Semiconductor issue that's affecting so many manufacturer so it looks like the.
The semiconductor companies are starting to pivot towards making more chips for cars, which should help in the back half the cash.
<unk> will be is that going to be enough to keep up with the demand that still seems to be quite strong.
What we're hearing and talking to a whole bunch of our customers, we were where all of our customers kind of a mix of the conversations between the west coast and here as they expect to see some return in the back half of the year, but nobody is predicting it gets back to normal inventory levels until probably early.
2022.
Understood and just in terms of I guess.
So quickly on <unk>.
And when you're thinking about free revenue, we've seen a fair amount of.
Recovery.
Close to prevent day make levels, how are you thinking about the outlook for fee revenue activity and customer activity as it impacts please.
And then maybe I can start and I'll hand, it off to Ravi I think the missing piece, we're seeing here and of course, it's a lot of that activity driven what's Ravi can speak to is we don't have our international travel are back yet and that won't be tour till the end of this year early next year, primarily Japan, but also Canada and Thats.
It has been in the past over 20% of our travelers are generally higher spending travelers.
So that's a.
Positive.
Indication for later, but Robert maybe you could address.
Thanks to their EBIT this is ronnie.
Certainly we saw a nice uptick in.
Credit and debit card fees, along with merchant services interchange, that's really a reflection of economic activity here.
Thankfully, it's hard to get a dinner reservation these days in Honolulu.
And to the extent that that continues on and we continue to see that level of activity I think we feel very good about that line item.
Adam.
Continuing to support our.
The income for for the rest of the year some of the other lines. Other other service charges, we talked about a number of 1 time fees generated by our commercial customers, we typically see that quarter over quarter. There are always 1 time.
Opportunities for us and we continue to expect to see those types of 1 time items over the course of the year and trust and investment income has been strong and consistent over the course of the year and certainly we feel that that really will continue to go on.
And Bali.
Saar recovery this quarter, primarily due to <unk>.
Some investments we have that are mark to market in the portfolio.
As long as rates stay relatively stable, we feel pretty good about that line too and swap income had a nice little pick up this quarter I think that's a reflection hopefully as we start to see more loan growth.
The commercial side, we will see swap income continue to.
To rebound from where it was previously so when you put all those things together, we feel pretty good about.
A range of 47% to $49 million for the next quarter.
Got it thanks for that color Ravi Thank you and thanks for taking my questions.
Thank you. Our next question comes from the line of David. Thank you Pfister from Raymond James Your line is now open.
Hey, good morning, everybody.
David.
Welcome.
I appreciate the commentary on the pipeline in the prepared remarks, I'm just kind of wanted to follow up on that and get a sense of some of the puts and takes with loan growth I mean, we've talked about dealer floor plan, but however, originations trended and how our payoffs and pay downs.
Been an offset to that and just the composition of the pipeline is similarly, well balanced.
We saw growth in the quarter or were there any segments that you are seeing notable strength.
Yes, a couple a day.
Bob David and.
Maybe I'll comment and ask Ralph to make couple of comments, we're seeing some transitions in our dealer portfolio. Some.
Customers are selling net new customers are buying and we've been fortunate to be able to help them with those transitions. So that in a couple of new customers with led so nice.
Line growth in that area and some loan growth as well, although given the depressed level of flooring balances.
Opportunity for later more than it is for today.
We're also seeing some good commercial real estate activity, both here and to a lesser extent on the west coast. So that is ongoing and then with the commercial real estate activity is on the construction side deals that had been in place for some time that are now funded and we're expecting several of the projects that were lending on too.
<unk> finish up later this year. So this is a part of the construction cycle, where they're actually doing their drawers and before it was more of the equity going in and now it's actually the <unk>.
Inc money, finishing the project before they go into sales, but Ralph anything you would add to that no I think that pretty much sums up the areas that we're seeing.
Growth.
I just wanted to follow up on your comments on construction not just curious how much of the growth this quarter in drawings on prior commitments.
Versus new deals and just how do you approach underwriting construction projects in light of the inflationary pressures on both building materials and labor in this environment.
Yes, I think.
I think the.
What will happen what happens I think earlier this year was some projects got delayed just because of the fact that they were trying to lockdown.
Cost and I think that'll work its way through but that could be a short in the short run a little bit of a blip, but.
But we are seeing loans that we're originating that had originated.
Start to start to fund, but behind that we're also.
Hosing, new loans. So it looks like we're going to continue to have that sort of pace.
The 1 thing that we're starting to see which is a bit unusual as there continues to be.
More aggressive sort of take out activity. So we would.
In the past, we would see situations.
Situations, where we're doing an apartment loans and we would hold the loan all the way through the stabilization of the project and then what started to happen was we.
We started to see people coming in and paying us off.
The project was complete and now actually we're seeing people coming in and looking to refinance before the projects actually completes itself.
Pretty high.
You talked to the level of.
The supply of credit Thats out there today.
That's great.
And I'd just like to shift gears to the technology I mean, what you guys have been billings pretty impressive if you can talk a lot about it being <unk>.
Open API structure I'm, just curious how do you think about fintech and the opportunity to leverage that and play into those and whether there is even any partnerships or investments that you guys can make in fintech and embed that in your platform.
And just any any thoughts on that front.
Great question.
That's something we look at it very closely we certainly are looking to probably a partner first.
At some point in the future we are quite at that stage yet.
Very actively looking at ways to partner with different Fintech.
And even quote non syntax, but other technology partners to do things that they can do faster better or much less expensive than we can.
David This is Ravi and maybe I would just add that the open API architecture that we're building towards actually gives us a tremendous amount of flexibility and we are building towards a capability where.
So fin techs and the products that they have available to us will be able to partner quickly with them. So that we have the best of breed when we when we have our infrastructure setup will be able to partner with the best of breed Fintech and work with them closely.
That's great. Thanks.
Thanks, guys.
Thank you.
Yes.
Thank you. Our next question comes from the line of Andrew Liesch from Piper Sandler. Your line is now open.
Hey, good morning, everyone.
Good morning.
Question on the allowance and the negative provision.
Reserve ratio is still above the day, 1 system level, but is this now a level, where you're comfortable where you think you grow into it at this point or.
Think there could be other reserve releases at some point down the line.
Well you know.
This is Ralph Andrew.
We're going to have to see the rebound that we have that are happening today, which is much better than we would have anticipated as sustainable and then I think how that translates into performance for our business customers and households will be important to us.
Evaluate over the next couple of quarters, we know that variant is starting to.
We're seeing higher infection rates. So we have to kind of see what happens there and then I think finally, we want to know how what happens once we see the stimulus and relief programs go away.
<unk>.
Our consumers continue to hold up so I think it's kind of hard to say right now, but that was a pretty pretty big release, and I think it's reflective of how quickly the economy has rebounded here in the outlook improving.
Got it okay. Thank you and then.
Robert I think you said, excluding the impact of excess liquidity.
Pvp forgiving interest expected looking for the margin to be down 3 to 5 basis points.
Net liquidity front I mean, I know, it's still somewhat early in the quarter, but what have you seen so far is there any has that been alleviated at all.
Going forward are you seeing there.
Yes, I mean, I think over the course of the quarter we mentioned.
Commercial and consumer deposits were up quarter over quarter to the extent that we see.
PPP loan forgiveness continue.
Continue sort of at a pretty good clip.
Some of that money is going to flow back onto our onto our balance sheet in the form of.
Liquidity.
So I think it's a little early to say where liquidity levels are going to go.
Certainly.
As we've as we've mentioned before we had quite a bit of capital we have plenty of room on the balance sheet for per loan growth and when we see those opportunities come.
We're going to be able to take advantage of it.
Got it okay.
Thanks for taking the questions.
Thank you again as a reminder to ask a question you May Press Star then the number 1 on your telephone keypad.
Thats Star 1 our net telesat.
Our next question comes from the line of Jared Shaw from Wells Fargo. Your line is now open.
Hi, good morning, everyone. Thanks for the opportunity to ask your question.
I guess.
With loan growth and the.
The share of persistent headwinds from flooring any change in your appetite to retain or book more residential loans maybe.
Beyond what we saw this quarter, but.
As a percentage of the loan book.
Longer period of time.
I think it'll be a reflection of what we see sort of.
In the marketplace the marketplaces.
I think slowly starting to move towards more of a purchase market and as that market moves from <unk>.
<unk> from purchase and refi, we will see the reflection on the balance sheet of either retaining more loans or are selling us certainly the bump here at $106 million quarter over quarter and residential was good for us and we like those loans, we like the quality of those loans.
And when we feel its appropriate we'd like to put those on the balance sheet.
Yes. This is Bob Derrick just to add to that given where pricing is at.
The average price per home is quickly moving out of Freddie and Fannie category here in Hawaii, and so a lot of the new loan origination is not able to do so.
At least to Freddie or Fannie.
Okay, that's great and then on expenses.
I guess first looking backing into your full year guidance sort of assumes.
And expenses stay relatively flat from where we are here even with some of those items that were that were called out.
As we look with the move of the timing of the core conversion were there any expenses associated with delaying that that are in.
'twenty, 1 or will the expenses.
The main expense of that conversion moving.
Moving now from 'twenty, 1 to 'twenty 2.
I think it sort of.
There's a lot of different moving parts. There certainly some of it is going to shift into 2021, but we are for.
For example, in our training program and the costs associated with training are our frontline staff sort of stretched out a little bit more and so that's 1 impact certainly.
That's a benefit to us here, but it will have to spend that money at some point in time.
On the flip side, we are extending some of the relationship existing relationships with technology providers to get across the finish line next year and so there's going to be a lot of puts and takes on on it we feel pretty good about our guidance still intact for 2021.
And we.
We feel that overall when we looked at look at these puts and takes.
He doesn't have a material impact this year.
Okay and do you have a date set for the conversion or is that still to be determined.
Yes, we're still working on that with our technology partner, but looking for Q1 of 2022, if everything works out well.
Okay. Thank you.
Thank you. Our next question comes from the line of Laurie Hunsicker from Compass from Compass point. Your line is now open.
Hi, Thanks, good morning.
Our net.
Just wondering your credit is looking Christine.
Deferrals Didnt see any deferral numbers in any of your deferral last quarter were very very low at $81 million can you just give us an update on where we are with deferrals.
Sure Larry This is Ralph.
Right now we're at $35 million in deferrals.
That I think about 21 million is residential mortgages.
That's down from I think $2.4 billion is what we sort of have on the books of loans that had been granted deferrals.
Last year.
Great Scott.
That's helpful. And then just wondering if we could go back on the PPP loans I. Appreciate all the detail that the 23 million net remaining unamortized piece, how much of that round, 1 or how should we think about the pace of that forgiveness is the majority of that $23 million potentially forgiven.
In the back half of this year, how should we be thinking about that.
Yes.
Laurie This is Ravi it's a little hard to say when we think it's going to be coming at me out.
I think round 1.
And the balances related to that are around around too.
$2 million.
And we.
We had quote unquote around 2 which came sort of relief and partnership with round..1 that's really low and then so the bulk of it really came in the latest round in Q1 and so.
Yeah to the extent that we get that forgiveness pipeline going which is what we did in the start of Q2 as we shifted our attention to helping.
Helping our customers go through the forgiveness process and it will just take time and we'll just have to see how it plays out.
And Laurie this is Bob just to add Robin to answer a bit what we're doing is kind of bar belling because the the easy forgiveness is 150000 vendor we've been very engaged with those customers and then the very large the larger loans, which have more sophisticated CFO accounting staff than <unk>.
Year to work with them and now we're kind of in the group in the middle So it's taken a little bit more handholding and we're just going to have to work through that with the with the customers.
Got it Okay Super helpful. And then just 1 last question as me.
All of that together and you look past PPP.
3 quarters now or whatever the number is and there's still obviously some challenges on margin. If our core margin is running at 235 is that the right way to be thinking about that as far as.
Is there a better guide you can give us on that.
I think it will.
It will depend on a number of different factors I think it all depend on.
What we see with respect to the loan portfolio, our appetite for investment securities and deploying some of that liquidity going forward and just general levels of liquidity. So that's probably a good number to start from but from there.
Things could change go up go up or down depending on what we see.
Alright. Thank you helpful. Thank you for taking my question.
<unk>, Inc.
Thank you. Our next question comes from the line of Jackie Bohlen. Your line is now open.
Hi, Thanks for taking my follow up.
Just wanted a refresher on capital targets and ratios I know the ratios didn't really change much quarter to quarter, but I feel like the economy is rapidly evolving.
An update on how you think about the capital ratios, you're targeting and if that was it.
The quarter's pace of repurchases will be pretty indicative level.
Jackie This is Bob maybe I'll start and hand, it over to Robert.
<unk>.
We haven't changed any of our targets, we're still looking at a common equity tier 1 net.
12% and so we're still well above that as you can tell.
As Ralph had mentioned, it's a little hard to predict as far as where the credit quality will continue at this level, where there'll be chat.
Challenges as the stimulus kind of wears off and various other things and then lastly, we'd love to see that capital being used to support loan growth.
Thats, a little bit early to figure that out, but Robert anything to add.
Jackie I would just add that I think we mentioned during the call that we did about $22.4 million in share repurchases in the quarter. We think that's a pretty good pace for the quarter and kind of puts us in line with the $75 million.
Share repurchases that we are authorized to do in the year and so given where capital levels are we feel confident about kind of moving through that.
Over the course of the year.
Okay, great. Thank you for all the background.
Thank you.
Thank you.
And I would now like to turn the corner.
Vince over back to Mr. Kevin Hassan.
Alright, and I think we have 1 more question from Brock.
And it really in the queue.
Oh, Okay, Sir sorry about that so we have 1 more question from Brock Vandervliet from UBS. Your line is now open.
Good morning, this is Sean Sarhan on per for Brock.
Going back to how credit's been cleaner recovery, which we would think about in terms of.
The NCL profile next couple of quarters.
The NPA profile is that what you said Sean.
The NCL.
Encino profile, yes.
This is Ralph.
I think.
As we thought through this going in we would have anticipated taking taking provisions and <unk> seen those provisions eventually sort of flow to losses.
You look at where the level of NPA Dr. Today.
Very low so I mean at this point.
If that if that trend continues.
We're in a really we're not going to see a lot of losses. This year not as not to the extent that we saw.
But as I said, we have to kind of see how it all.
How strong this recovery is and what happens with.
Our consumers and households, once the stimulus programs go away so.
We're prepared to take quite a bit of loss and the provision today.
I think as you look at about 138 basis points net of PPP. That's that's fairly large it's something that would be indicative of.
Something that more of a recessionary sort of level of provisioning.
Great. That's helpful. Thanks for taking my question.
Thanks, John.
Thank you and now I will turn the call over to Mr. Kevin Hassan Ahmad.
Thanks, everyone for joining us today, we appreciate your interest in first Hawaiian and please feel free to contact me if you have any additional questions.
Enjoy the rest of your day and have a good weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Good day and thank you for standing by welcome to the first Hawaiian Inc. Kora, 2 if any to any 1 earnings conference call. At this time all participants are in a listen only mode.
Please be advised that today's conference is being recorded.
After the speaker's presentation, there will be a question and answer session to ask a question during that time, you will need to press star 1 on your telephone.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your first speaker for today Investor Relations manager Kevin have Fiamma. Thank you. Please go ahead.
Thank you Anne and thank you everyone for joining us as we review our financial results for the second quarter of 2021.
With me today are Bob Harrison, Chairman, President and CEO, Robin <unk>, CFO, and Ralph Mesick, Chief Risk Officer, we have prepared a slide presentation that we'll refer to in our remarks today. The presentation is available for downloading and viewing on our website at <unk> Dot com in the Investor Relations section.
During today's call, we will be making forward looking statements. So please refer to slide 1 for our safe Harbor statement.
We may also discuss certain non-GAAP financial measures yeah finish 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.
Thank you Kevin good morning, and thanks for joining us today.
To start with a quick update on the state of Hawaii. This is slide 2 in the deck.
We continue to see a steady increase in visitor arrivals.
And are approaching pre pandemic levels with almost a 100% being from the mainland U S.
Restrictions on Trans Pacific travel were further EU starting on July 8 when individuals' vaccinated in the mainland U S. We're also allowed to enter Hawaii without a pre travel Covid test.
The economy continues to recover as the unemployment rate fell to 7.7% in June.
15 month, low and the housing market remains strong.
We are continuing to make progress towards our goal of having 70% of the population vaccinated.
At which point all COVID-19 restrictions are expected to be removed according to statements by the governor.
Similar to the rest of the country, we have seen increases in new cases recently.
First positivity rate, which author authorities are closely monitored.
Turning to slide 3 I'll briefly go over our second quarter results.
We have a very good quarter, we saw broad based pickup in loan activity strong deposit growth.
Rebound of noninterest income while credit quality remained excellent.
Total loans grew by $151 million, excluding the impact of PPP loan Paydowns.
With growth coming in multiple categories.
Deposit growth continued to be driven by commercial and consumer deposits.
Diluted EPS was <unk> 67.
And the board maintained the dividend of <unk> 26 per share.
We also repurchased $22.4 million of common stock under the current share repurchase program.
Now I'll turn it over to Ravi to go over the financials.
Thanks, Bob.
Turning to slide 4 period end loans and leases were $13.1 billion down.
Down $197 million from the end of Q1.
PPP balances declined $348 million.
Excluding PPP balances C&I declined by 209 million per.
Primarily due to a $179 million decrease dealer flooring balances.
Excluding the impacts of PPP forgiveness.
And dealer flooring balances.
Total loans grew $330 million or 2.8% in the second quarter.
We were pleased to see good growth this quarter in many categories, including commercial real estate construction and residential loans each growing by over $100 million.
Our loan pipeline is building and we reiterate our view at full year loan growth.
Excluding PPP will be in the low single digit range.
Turning to slide 5 total deposit balances ended the quarter at $20.8 billion.
$701 million increase versus the prior quarter.
This was driven by a $769 million increase in consumer and commercial deposits and partially offset by a $67 million decrease in public deposits.
Our cost of deposits fell 1 basis point to 7 basis points in the quarter.
Turning to slide 6 net interest income was $131.5 million a.
At $2.3 million increase versus the prior quarter.
The increase in net interest income was primarily due to higher average balances of investment securities and lower balances and rates on time deposits.
Net interest margin was 246% a 90 basis point decrease from the previous quarter.
Core asset liability re pricing contributed about 4 basis points of NIM compression.
While excess liquidity cost about 8 basis points of additional compression.
Just a reminder, we currently consider excess liquidity as balances over $500 million.
The decline in NIM was partially offset by higher income due to the higher balance of PPP loans forgiven versus.
Versus the prior quarter, which increased net income.
Net interest margin by about 3 basis points.
In Q3, excluding the impact of excess liquidity and PPP loan forgiveness, we expect our net interest margin to decline, 3% to 5 basis points.
Turning to slide 7 noninterest income in Q1 was $49.4 million.
$5.5 million increase over the previous quarter.
Noninterest income was driven by a nice increase in credit and debit card fees and merchant services interchange, which in total contributed $2.2 million to the increase this quarter.
Other service charges increased $1.5 million.
Approximately $1 million was from onetime fees generated by our commercial customers.
Swap fees increased 800000.
And all the interest income increased 900000 this quarter.
Non interest expenses were $99.4 million.
$3.1 million higher than the previous quarter the.
The increase was driven by a 1 time charge of $1.2 million in salaries and benefits and.
And $1.4 million and higher card rewards expenses, which was due to higher activity.
The remaining increase was primarily driven by higher sales incentives paid in the quarter.
The efficiency ratio was 54, 7%.
On a year to date basis expenses are running about 4.1% higher than the same period last year.
However, we continue to expect full year expenses to be about 7% higher than in 2020.
And now I'll turn it over to Ralph to go or asset quality.
Thank you Ravi.
If you could turn to slide 8 I'll make a few comments on credit and asset quality continues to hold up and the recovery is underway with a strong return of mainland first in.
In Q2, the net charge offs for the quarter were $1.1 million well below the $4.6 million recorded in the prior quarter.
Our year to year to date annualized net charge off rate is at 9 basis points significantly lower than the levels in 2020 in 2019.
Bank recorded a negative $35 million provision for the quarter.
NPA and 90 day past due loans are marginally down this quarter with a 2 basis point decrease from the prior quarter to 12 basis points.
Criticized assets continued to decline as well dropping from 347% of total loans in Q1 to $2.5 1% in Q2.
Loans 30 to 89 days past due to declined 5 basis points to 22 basis points at the end of Q2.
Moving to slide 9.
You see a roll forward of the allowance for the quarter by disclosure segments to $35 million negative provision. We recorded this quarter came on a more optimistic outlook and improvement in the portfolio of credit quality.
The allowance decreased by $31.2 million to $169.1 million, which is 1.9% of all loans and 133% to 8% net of the PPP loans.
And with that I'll turn the call over to Bob Thanks, Ralph.
Finally, you may have seen the announcement last week of the addition of 2 new directors to the Board Kelly Thompson and Jim Moffatt.
Their combined expertise in the areas of technology strategic planning risk management and E Commerce will provide valuable insight and guidance as we execute our digital transformation.
As I mentioned on our last call, we introduced a redesigned FASB dot com web site and our new mobile banking App that includes features such as third party account integration and personal financial highlights.
The improvements have been well received as the number of visitors to our website has increased.
And they are staying longer with higher levels of engagement.
We have also seen in over 500% increase in the active users.
For our new personal financial management tool money map versus our previous offerings.
I also want to mention that our core conversion initially targeted for the third quarter of this year has been pushed back to the first part of 2022.
And with that we'd be happy to take your questions.
Thank you as a reminder to ask a question you may need to press Star then the number 1 on net daily fan.
Thats Star 1 on your telephone.
We have a first question from the line of Steven Alexopoulos from Jpmorgan. Your line is now open.
Hi, everyone.
Okay. Thank you I wanted to start so Bob as we've seen in other parts of the U S. Reopen increased sales have been strong of companies, which has been great for deposit growth for banks, but not so much for loan growth.
Hawaii increasingly comes back online could you walk us through how this could have really should impact the loan portfolio and what do we need to see to move up from the low single digit guidance.
Yeah, Thanks, Steve Thats, a great question.
<unk> started to see in this what we've talked about I believe is certainly the last call maybe the last couple of calls.
We're seeing the loan growth on the mainland first and we're expecting to see the loan growth in Hawaii coming later and Thats, what the exception.
Residents residential has been very strong share in Hawaii as it is in many parts of the country. The challenge areas staying ahead of the runoff.
The commercial real estate construction has been somewhat in Hawaii as we have a number of projects that are ongoing and then on the mainland as well as we look forward, we're really going to see is Hawaii gets back to work and people are spending more money.
We've seen the activity numbers on the loan side, we think that there will be recovery.
Consumer area credit card. This started indirect lending will follow when there is a little more cars to purchase.
I think that will be the first things that we will see and then later on we will see the businesses kind of run through these high.
Deposit balances they have and go back.
Managing their money and doing some borrowings as well so that will take a little bit of while a little while after the recovery starts.
Okay.
That's helpful.
Bob 1 thing that caught my eye was on the 1 slide where you talked about home prices were up over 20%.
And 1 of the markets and I know zoning issues have been tough in Hawaii right locals don't want to give up more land for development, but just given the price increase I know you're involved with some of this are there more pause for.
More supply, which I think would benefit you guys is there any traction on that side.
Yes.
Very complicated topic as it is in many cities I think the first things a lot of <unk>.
People are focused on certainly the county level government, our focus on better managing the Airbnb <unk>, just because that does take supply out of the local market.
I think thats a first step many counties here in Hawaii are very focused on certainly here on Oahu and to a lesser extent on Maui.
And the next thing is you've seen a couple of large projects that were approved some time ago Hope Yulia Koa Ridge.
Accelerating their development plans, so given that the market is so strong they're trying to push that ahead.
Then lastly, we are also seeing continued interest in the high rise residential condominiums here on Oahu that.
A number of those projects.
Have been talked about are moving ahead strongly so altogether that helps.
Looking at land reform and looking at the way of changing how we have R. R zoning process for AG urban Thats a longer term topic.
Okay that sounds good.
Maybe final question for Ravi on the Securities book, you saw quite a bit of growth again this quarter I'm curious, what's the yield on what you were able to add in the quarter and given us a bit of a step down in rates do you have less of an appetite here to continue adding thanks.
Sure.
Under the new volume rates have been coming in and around 120.
To 140, depending on the duration of the securities we're buying.
<unk>.
We're up to about $6.9 billion.
Imbalances on the investment security side, I think it will really depend on what's available certainly it is a lever we can use to manage liquidity. During this time, but we don't want to.
Growth of portfolio too much when we feel as Bob mentioned earlier in the call that as loan growth starts to pick up we want to take advantage and take advantage of those opportunities and deploy our liquidity towards those loan opportunities. So right now we feel very comfortable with where we are around 6.
$6.9 billion, maybe it might might tick up a little bit, but it will really depend on what the environment's like going forward guidance.
Steve maybe a follow on to my earlier answer that Keith key point I forgot to make us.
For our dealer flooring were down right about $570 million from the 4 year average balance.
In 2019, and Thats all supply driven.
The amount of capacity and committed lines is out there hasnt really changed that much. So as you see a recovery.
That product.
The manufacturers the ability to deliver card.
As you'll see.
A pretty strong recovery, both here in Hawaii and on the mainland in those in that.
Particular portfolio.
I guess the million dollar question. There is do dealers return inventory levels to where they were which I don't think anybody knows at this point, but I hear you net it should get better from where it is.
Okay. Thanks for taking my questions. Thanks, Steve.
Thank you. Our next question comes from the line of Jackie Bohlen from <unk>. Your line is now open.
Hey, everyone. Good morning, good morning, Jackie.
Thank you guys start with expenses.
Little bit of background on what drove net checking.
The system conversion timing.
Yes.
Maybe a little bit of background on expenses, I think we talked a little bit about the drivers quarter over quarter.
I think the delay in the core implementation didn't really change our outlook for 2021 expenses, So we feel pretty comfortable with that 7%.
Guidance that we gave and I think when we look to 2022, we will we will certainly give guidance as we typically do at the end of the year.
Okay, and then I guess was there anything.
Does it internally or externally driven that caused the shift in the conversion timing.
Jackie This is Bob maybe I can take that.
Really is a conversation we're having we're having with our technology partner.
We're cautious and things were a little behind where we had wanted them to be so we just wanted to make very share. We can do this successfully and wanted to give ourselves a little more time.
The other issue is.
We just weren't comfortable doing a conversion in the fourth quarter that was just the fourth quarter brings in a whole bunch of other.
Externalities that we didn't want to have to worry about.
Okay that makes sense.
And then just.
The employee base and kind of where you sit today versus what you might consider full employment.
Aside from this effort.
I'm assuming relates to past announcements.
Just wondering where you stand.
And Hello, Eddy recruitment efforts that you might be having or go away.
So everything kind of works back up.
Sure. This is Bob again.
We didn't let anybody go as we closed 40% of our branches during Covid, we just redirected them to other areas of the bank.
Having said that we also didn't replace people necessarily as normal attrition took place people moving retiring et cetera. So we're still out there even though we don't have huge needs. We're always out there trying to find the right employees and it's difficult right now.
A tough environment to do that dependent on what job of course.
Different jobs have different challenges, but.
We've been moderately successful, but it is not easy right now that is a challenge for us and I think everybody in the market.
Okay.
And then are your recruitment efforts geared toward any 1 place in the sector, meaning more entry level positions versus middle or upper management or is it more broad based.
I think as.
Probably.
Entry level and there are certain specialized areas of course, we're always looking for certain people in the technology area and that's that's always a challenge anytime we can find someone with the skill set we tend to grab them right away, but it's typically more entry level.
Okay Alright.
Alright, Thanks, Bob Robert color I appreciate it thank you Jackie.
Thank you. Our next question comes from the line of Ebrahim <unk> from Bank of America. Your line is now open.
Good morning.
Good morning, good morning.
I guess just.
On following up on the dealer finance, we saw another decline.
So I heard your commentary Bob do you think that balance of those balances have stabilized and do you see any room for any meaningful improvement in the back half of the year or is it all of 2020 event at this point.
It's hard to predict.
The 2 factors that we talked about first of all congratulations on your promotion.
Great News.
And to address the question.
<unk>.
The hard part is.
Trying to pick when manufacturing capacity will increase and demand will moderate so we haven't seen either of those come back although you're starting to see.
Semiconductor issue that's affecting so many manufacturers it looks like the.
Somebody conductor companies are starting to pivot towards making more chips for cars, which should help in the back half the cash.
<unk> will be is that going to be enough to keep up with the demand that still seems to be quite strong.
What we're hearing and talking to a whole bunch of our customers. We were all of our customer is kind of a mix of the conversations between the west coast and here. It is they expect to see some return in the back half of the year, but nobody is predicting it gets back to normal inventory levels until probably early.
2022.
Understood and just in terms of I guess.
So firstly on <unk>.
And when you think about free revenue, we've seen a fair amount of.
Recovery.
Close to pre pandemic levels, how are you thinking about the outlook for fee revenue activity and customer activity as it impacts fees.
Maybe I can start and I'll hand, it off to Ravi I think the missing piece, we're seeing here and of course, it's a lot of that's activity driven what's Ravi can speak to is we don't have our international travel are back yet and that won't be tour till the end of this year early next year, primarily Japan, but also Canada and Thats it.
<unk> has been in the past over 20% of our travelers and generally higher spending travelers.
So that's a.
Positive.
Indication for later, but Robert maybe you could address what's happening to their EBIT. This is ronnie.
Certainly we saw a nice uptick in.
Credit and debit card fees, along with merchant services interchange, that's really a reflection of economic activity here.
It's hard to get a dinner reservation these days in Honolulu.
And to the extent that that continues on and we continue to see that level of activity I think we feel very good about that line item.
Continuing to support our.
Fee income for for the rest of the year some of the other lines. Other other service charges, we talked about a number of onetime fees generated by our commercial customers, we typically see that quarter over quarter. There are always 1 time.
Opportunities for us and we continue to expect to see those types of 1 time items over the course of the year and trust and investment income has been strong and consistent over the course of the year and certainly we feel that that really will continue to go on and.
In Bali.
Saar recovery this quarter, primarily due to some investments we have that are mark to market in the portfolio as.
As long as rates day relatively stable, we feel pretty good about that line too and swap income had a nice little pick up this quarter I think that's a reflection hopefully as we start to see more loan growth.
The commercial side, we will see swap income continue to.
To rebound from where it was previously so when you put all those things together, we feel pretty good about.
A range of 47% to $49 million for the next quarter.
Got it thanks for that color Ravi Thank you and thanks for taking my questions.
Thank you. Our next question comes from the line of David. Thank you Pfister from Raymond James Your line is now open.
Hey, good morning, everybody.
David.
You're welcome.
Appreciate the commentary on the pipeline in the prepared remarks, I just kind of wanted to follow up on that you get a sense of some of the puts and takes with loan growth I mean, we've talked about dealer floor plan, but however, originations trended and how our payoffs and paydowns.
Been an offset to that and just the composition of the pipeline.
Really well balanced.
We saw the growth in the quarter or were there any segments that you are seeing notable strength.
Yes, a couple of days this Bob David and.
And maybe I'll comment and ask Ralph to make couple of comments, we're seeing some transitions in our dealer portfolio. Some.
Customers are selling net new customers are buying and we've been fortunate to be able to help them with those transitions. So that in a couple of new customers has led so nice.
Line growth in that area.
Loan growth as well, although given the depressed level of flooring balances.
Opportunity for later more than it is for today.
We're also seeing some good commercial real estate activity, both here and to a lesser extent on the west coast. So that is ongoing and then with the commercial real estate activity is on the construction side deals that had been in place for some time that are now funded we're expecting several of the projects that were lending on too.
Finish up later this year. So this is the part of the construction cycle, where they're actually doing their drawers and before it was more of the equity going in and now it's actually.
Take money, finishing the project before they go into sales, but Ralph anything you want to add to that no.
That pretty much sums up the areas that we're seeing.
Growth.
I just wanted to follow up on your comments on construction or just curious how much of the growth this quarter in drawings on prior commitments.
Versus new deals and just how do you approach underwriting construction projects in light of the inflationary pressures on both building materials and labor in this environment.
Yes, I think.
I think the.
What will have what happened I think earlier this year was some some projects got delayed just because of the fact that they were trying to lockdown.
Cost and I think that will work its way through but that could be a short in the short run a little bit of uplift, but we are seeing loans that we're originating that had originated.
Start to start to fund, but behind that we are also closing new loans. So.
Looks like we're going to continue to have that sort of pace. The 1 thing that we're starting to see which is a bit unusual as there continues to be.
More aggressive sort of take out activity. So we would.
In the past, we would see situations, where we're doing an apartment loans and we would hold the loan all the way through the stabilization of the project and then what started to happen was.
We started to see people coming in and paying us off.
Once the project was complete and now actually we're seeing people coming in and looking to refinance before the projects actually complete itself.
We're pretty I think you talked to the level of.
The supply of credit Thats out there today.
That's great.
And I would just like to shift gears to the technology I mean, what do you guys have been doing pretty impressive. If you can talk a lot about it being open API structure I'm just curious how do you think about fintech and the opportunity to lead.
Average that in play into this and whether there is even any partnerships or investments that you guys can make.
Correct and embed that in your platform.
And just any any thoughts on that front.
Great question Dave.
It's something we look at it very closely we certainly are looking to probably a partner first.
Some point in the future we are quite at that stage yet.
We are very actively looking at ways to partner with different fintech.
And even quote non syntax, but other technology partners to do things that they can do faster better and much less expensive than we can.
David This is Ravi and maybe I would just add that the open API architecture that we're building towards actually gives us a tremendous amount of flexibility and we're building towards a capability where.
So fin techs and the products that they have available to us we will be able to partner quickly with them. So that we have the best of breed when we when we have our infrastructure setup will be able to partner with the best of breed Fintech and work with them closely.
That's great. Thanks, guys.
Thank you.
Thank you. Our next question comes from the line of Andrew Liesch from Piper Sandler. Your line is now open.
Hey, good morning, everyone.
Good morning.
Question on the allowance and the negative provision.
Reserve ratio is still above the day, 1 seasonal level, but is this now a level, where you're comfortable where you think you grow into it at this point or do you think there could be other reserve releases at some point down the line.
Well.
This is Ralph Andrew.
I think we're going to have to see the rebound that we have thats happening today, which is much better than we would have anticipated as sustainable and then I think how that translates into performance for our business customers and households will be important to us.
Evaluate over the next couple of quarters, we know that variant is starting to.
We're seeing higher infection rates. So we have to kind of see what happens there and then I think finally, we want to know how what happens once we see the stimulus and relief programs go away.
<unk>.
Our consumers continue to hold up so I think it's kind of hard to say right now, but that was a pretty pretty big release, and I think it's reflective of how quickly the economy has rebounded here in the outlook improving.
Got it okay. Thank you and then.
Robert I think you said, excluding the impact of excess liquidity.
Pvp forgiving interest expect looking for the margin to be down 3 to 5 basis points.
Net liquidity front I mean, I know, it's still somewhat early in the quarter, but what have you seen so far is there any has that been alleviated at all.
Going forward are you seeing there.
Yes, I mean, I think over the course of the quarter we mentioned.
Commercial and consumer deposits were up quarter over quarter to the extent that we see.
PPP loan forgiveness continue.
Continue sort of at a pretty good clip.
Some of that money is going to flow back onto our onto our balance sheet in the form of.
Liquidity.
So I think it's a little early to say where liquidity levels are going to go.
Certainly.
As we've as we've mentioned before we had quite a bit of capital we have plenty of room on the balance sheet for per loan growth and when we see those opportunities come.
We're going to be able to take advantage of it.
Got it okay.
Thanks for taking the question.
Thank you again as a reminder to ask a question you May Press Star then the number 1 on your telephone keypad.
Net star 1 our net telesat.
Our next question comes from the line of Jared Shaw from Wells Fargo. Your line is now open.
Hi, good morning, everyone. Thanks for the earning opportunities that first question.
I guess.
With loan growth.
The share of persistent headwinds from flooring any change in your appetite to retain or book more residential loans maybe.
Beyond what we saw this quarter, but as a percentage of the loan book.
Longer period of time.
Yes.
I think it will be a reflection of what we see sort of.
In the marketplace the marketplaces.
I think slowly starting to move towards more of a purchase market and as that market moves from <unk>.
<unk> from purchase and refi, we will see.
The reflection on the balance sheet of either retaining more loans or are selling us certainly the bump here at $106 million quarter per quarter in residential.
It's good for us and we like those loans, we like the quality of those loans.
And when we feel its appropriate we'd like to put those on the balance sheet.
Yes. This is Bob Derrick just to add to that given where pricing is at.
Sure.
Average price per home is quickly moving out of Freddie and Fannie category here in Hawaii, and so a lot of the new loan origination is not able to be sold.
At least a free to air.
Okay, that's great and then on expenses.
I guess first looking backing into your full year guidance sort of assumes.
Dollars of expenses stay relatively flat from where we are here even with some of those items that were that were called out.
As we look with the move of the timing of the core conversion were there any expenses associated with delaying that that are in.
<unk> 21 or will the expense.
The main expenses for that conversion.
Move now from 'twenty, 1 to 'twenty 2.
Yes, I think it sort of.
There's a lot of different moving parts. There certainly some of it is going to shift into 2021, but we for example in our training program and the cost associated with training are our frontline staff sort of stretched out a little bit more and so that's 1 impact certainly.
That's a benefit to us here, but it will have to spend that money at some point in time.
On the flip side, we are extending some of the relationship existing relationships with technology providers to get across the finish line next year and so there's going to be a lot of puts and takes on on it we feel pretty good about our guidance still intact for 2021.
We feel that.
Overall, when we looked at look at these puts and takes.
It really doesn't have a material impact this year.
Okay and do you have a day.
<unk> set for the conversion or is that still to be determined.
Yes, we're still working on that with our technology partner, but looking for Q1 of <unk>.
2022, if everything works out well.
Okay. Thank you.
Thank you. Our next question comes from the line of Laurie Hunsicker from Compass from Compass point.
Line is now open.
Great Hi, Thanks, good morning.
1 area.
Just wondering your credit is looking Christine.
Deferral Didnt see any deferral number's, an NDA or deferral last quarter were very very low at $81 million can you just give us an update on where we are with deferrals.
Sure Larry This is Ralph.
Right now we're at $35 million in deferrals and not that I think about $21 million is residential mortgages.
That's down from I think $2.4 billion is what we sort of have on the books of loans that had been granted deferrals.
Last year.
Got it that's helpful. And then just wondered if we could go back on the PPP loans I. Appreciate all the detail that the 23 million net the remaining unamortized piece, how much of that round, 1 or how should we think about the pace of that forgiveness is the majority of that $23 million potentially forgiven in the bag.
Half of this year, how should we be thinking about that.
Laurie This is Ravi it's a little hard to say when we think it's going to be coming at me out.
I think round 1.
And the balances related to that are around around too.
$2 million.
And we.
We had quote unquote around 2 which came sort of really in partnership with round..1 that's really low and then so the bulk of it really came in the latest round in Q1 and so.
Yeah to the extent that we get that forgiveness pipeline going which is what we did in the start of Q2 as we shifted our attention to <unk>.
Helping our customers go through the forgiveness process I will just take time and we will just have to see how it plays out.
Laurie This is Bob just to add Robert Thats a bit.
We're doing this kind of bar belling, because the the easy forgiveness is 150000 vendor we have been very engaged with those customers and then the very large the larger loans, which have more sophisticated CFO accounting staff been easier to work with them and now we're kind of in the group in the middle.
It's taken a little bit more handholding than we are.
It's going to have to work through that with with the customers.
Got it Okay Super helpful. And then just 1 last question as we put all that together and you look Pal PPP, we're kind of 3 quarters out or whatever the number is and their scale.
Nathan challenges on margin if our core margin is running at 235 is that the right way to be thinking about that first.
Is there a better guide you can give us on that.
Net.
I think.
Will depend on a number of different factors I think it all depend on.
What we see with respect to the loan portfolio, our appetite for investment securities and deploying some of that liquidity going forward and just general levels of liquidity. So that's probably a good number to start from but from there.
Things could change go up go up or down depending on what we see.
Alright. Thank you helpful. Thanks for taking my question.
Thanks.
Thank you. Our next question comes from the line of Jackie Bohlen. Your line is now open.
Hi, Thanks for taking my follow up.
And I just wanted a refresher on capital targets and ratios I know the ratios didn't really change much quarter to quarter, but I feel like the economy is rapidly evolving.
An update on how you think about the capital ratios, you're targeting and if that was.
The quarter's pace of repurchases will be pretty indicative level.
Jackie This is Bob maybe I'll start and hand, it over to Robert.
We haven't changed any of our targets, we're still looking at a common equity tier 1 net.
12%.
So we're still well above that as you can tell.
As Ralph had mentioned, it's a little hard to predict as far as where the credit quality will it continue at this level, whether it would be.
Challenges as the stimulus kind of wears off and various other things and then lastly, we'd love to see that capital being used to support loan growth.
And that's a little bit early to figure that out, but Robert anything that day.
Jackie I would just add that I think we mentioned during the call that we did about $22.4 million in share repurchases in the quarter, we think that's a pretty good pace.
For the quarter and kind of puts us in line with the $75 million.
Share repurchases that we are authorized to do in the year and so given where capital levels are we feel confident about kind of moving through that.
Over the course of the year.
Okay, great. Thank you for all the background.
Thank you.
Thank you.
And I would now like to turn the corner.
Vince over back to Mr. Kevin <unk>.
Alright, and I think we have 1 more question from Brock vandervliet in the queue.
Oh, Okay, Sir sorry about that so we have 1 more question from Brock Vandervliet from UBS. Your line is now open.
Good morning, This is Sean I'm, sorry, an entre for Brock.
Going back now credit's been cleaning recovery, which we would think about in terms of the.
The NCO profile next couple of quarters.
Yes.
The profile is that what you said Sean.
The NCL.
NPL profile, yes.
This is rob.
I think.
As we thought through this going in we would have anticipated taking taking provisions and <unk> seen those provisions eventually sort of flow to losses.
You look at where the level of NPA dark today.
They're very low so I mean at this point.
If that if that trend continues.
And it really we're not going to see a lot of losses. This year not as not to the extent that we saw.
But as I said, we have to kind of see.
How how strong this recovery is and what happens with.
Our consumers and households, once the stimulus programs go away so.
We're prepared to take quite a bit of loss and the provision today.
I think as you look at about 138 basis points net of PPP. That's that's fairly large something that would be indicative of something that more of a recessionary sort of level of provisioning.
Great.
Helpful. Thanks for taking my question.
Thanks, John.
Thank you and now I will turn the call over back to Mr. Kevin Hassan Ahmad.
Thanks, everyone for joining us today, we appreciate your interest in first Hawaiian Inc. Please feel free to contact me if you have any additional questions.
With that enjoy the rest of your day and have a good weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.