Q4 2022 First Hawaiian Inc Earnings Call

Okay.

Good day, and thank you for standing by.

Welcome to the first Hawaiian fourth quarter 2022 earnings conference call.

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Like to hand, the conference over to your Speaker today, Kevin Husky AMA Investor Relations manager. Please go ahead.

Thank you Shannon and thank you everyone for joining us as we review our financial results for the fourth quarter of 2022.

With me today are Bob Harrison, Chairman, President and CEO , Jamie Moses Chief Financial Officer, and Ralph Music Chief Risk Officer.

We have prepared a slide presentation that will be referred to in our remarks today.

<unk> 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 one for our safe Harbor statement.

We may also discuss certain non-GAAP financial measures you finish to this presentation contains reconciliations of these non-GAAP financial measures to the most recently comparable to the most directly comparable GAAP measurements and now I'll turn the call over to Bob.

Good morning, everyone and I'd like to start by welcoming our new CFO , Jamie Moses He brings a wealth of banking experience and a proven track record and our financial management.

We're excited to welcome Jamie to the bank.

I also want to extend a special thanks to Ralph music for his contributions as acting CFO over the last year until Jayme joined us.

A brief update on the local economy.

The Hawaii economy continues to do well.

In December the state wide unemployment rate fell to three 2% slightly below the national unemployment rate of three 5%.

Total visitor arrivals were 735000 in November of last year.

Nine 1% below the November 2019 arrival.

Japanese visitor arrivals remained below historical levels at three 8% of the total.

Compared to 16, 3% in November of 2019.

We continue to expect a gradual return of Japanese visitors to more normalized levels.

Despite the lower number of overall arrivals visitor spend in November was $1 5 billion up 13, 7% over November 2019.

The housing market is very stable and.

In December the median sales price for a single family home on Oahu was just over $1 million unchanged from the year before.

Median sales price for condos on Oahu was 503003, 6% higher than the previous year.

Turning to slide two.

Comment on our fourth quarter results.

We ended the year with a very good quarter as net income grew to grew to $79 6 million or.

Or <unk> 62 per share.

Loans grew net interest income continued to increase.

Noninterest income returned to normalized levels.

Noninterest expenses stabilized.

Our return on average tangible assets was 134% and.

Our return on average tangible common equity was 25, 93%.

We continue to maintain strong capital levels with a CET one ratio of 11, eight 2% and total capital of $12, 92%.

The board maintained the quarterly dividend of <unk> 26 cents and.

And adopted a $40 million share repurchase program for 2023.

Turning to slide three the balance sheet continues to perform very well.

It remains moderately asset sensitive with about $5 6 billion.

Or 41% of the loan portfolio repricing within 90 days.

We continue to use excess cash in the investment portfolio to fund loan growth and deposit runoff.

We ended the year with cash and cash equivalents at about $527 million.

<unk> to where we started the year at $1 2 billion.

The investment portfolio duration remained stable at $5 six years for the quarter and cash flow from the portfolio. It was about $75 million per month.

Our liquidity position remains very strong with a 65% loan to deposit ratio.

A strong core deposit base.

Our steady cash flows from the investment portfolio.

Turning to slide four period end loans and leases were $14 1 billion, an increase of $392 million or two 9% from the end of Q3.

About half of the growth was due to a $201 million increase in C&I loans, which was primarily due to a $120 million increase in dealer flooring.

And $38 million increase in other dealer related loans.

For all of 2022 total loans and leases were up $1 1 billion or eight 7%.

Excluding PPP loans total loans and leases were up $1 3 billion or 10, 4%.

We expect loan growth to be in the mid single digit range for full year 2023.

Now I'll turn it over to Jamie.

Thanks, Bob and good morning, everyone turning to slide five deposit balances decreased by $403 million or one 8% to $21 $7 billion at quarter end.

Retail and commercial deposits declined $668 million with most of that decrease coming from commercial deposit accounts.

Commercial deposits declined by about $611 million, while retail balances were relatively stable declining by only $57 million.

The five largest outflows from commercial accounts accounted for over $290 million.

Almost half of the total decline and we're all part of normal business operations.

Our total cost of deposits was 52 basis points in the fourth quarter, an increase of 28 basis points from the prior quarter and consistent with our expectations.

Rates on checking and savings accounts continued to remain stable.

Turning to slide six.

Net interest income increased by $9 1 million or five 6% over the prior quarter to $171 8 million.

The increase was primarily due to higher yields and balances on loans, partially offset by higher deposit costs.

The net interest margin increased 22 basis points to three 5% driven by higher yields on loans cash and investment securities and was partially offset by higher rates on deposits.

The acceleration in deposit costs can be seen in the fourth quarter beta which was about 38% on interest bearing deposits.

Cumulative beta on interest bearing deposits to date of about 19% was within our expectations and we continue to expect that the full cycle beta will be about 30% on interest bearing deposits.

Looking forward, we expect the net interest margin to increase by four to five basis points in the first quarter.

On to slide seven noninterest income was $48 2 million in Q4 of $2 $3 million increase over the prior quarter.

<unk> was due to the return of bully income to a normalized level as market volatility subsided in the fourth quarter.

Expenses were $113 9 million essentially unchanged from the third quarter.

Using the fourth quarter noninterest expense as our new baseline, we expect that full year 2023 expenses will be approximately four to four 5% higher than the annualized fourth quarter number.

If you exclude the impact of the increase in the FDIC assessment fee, which we estimate to be $4 million to $5 million annually. We expect 2023 expenses to be approximately three to three 5% higher than that annualized fourth quarter number now I'll turn it over to Ralph Thank.

Thank you Jamie moving to slide eight the bank enjoyed good credit performance in 2022.

Our asset quality metrics were strong at year end.

Net charge offs were down by $1 $2 million year over year were almost 10%.

At our annual net charge off rate was eight basis points two basis points lower than 2021.

NPA is a 90 day past due loans were 11 basis points at the end of Q4 up one basis point from the prior quarter.

Criticized assets continued to decline dropping nine basis points over the quarter to 72 basis points.

The bank recorded a $3 million provision for the quarter.

And finally loans 30 to 89 days past due were $57 million or 40 basis points of total loans and leases at the end of Q4 six basis points higher than the prior quarter.

Moving to slide nine you see a roll forward of the allowance for the quarter by disclosure segments.

Reserve needs for loan growth this quarter were again offset by improvements in the portfolio risk profile the allowance for credit loss decreased $4 3 million to $143 9 million.

The level equates to 1.0% to 2% of all loans.

The reserve for unfunded commitments increased $3 7 million to $33 $8 million based on an increase in undrawn exposures.

The allowance anticipate cyclical losses, consistent with a recession and includes a qualitative overlay for potential macroeconomic impacts not captured in our base model.

Let me now I'll turn the call back to Bob for any closing comments. Thank.

Thank you Ralph Thank you Jamie.

Nothing else to add welcome any questions Kevin.

Thank you.

As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.

Please standby, while we compile the Q&A roster.

Sure.

Our first question comes from the line of Steven Alexopoulos with Jpmorgan. Your line is now open.

Hi, everybody.

Steve.

I wanted to start so I appreciate the loan outlook mid single digit can you talk about the deposit growth outlook for the year and in terms of the cost of deposits I appreciate the 30% full cycle.

On interest bearing deposits, but how do you think about by the fourth quarter of 2003.

Yes, well.

That's the question isn't it Steve.

This is Jamie good morning.

I think that I think that that's going to be entirely dependent on what we see macro rates do.

Fed is that it continues to increase we will see deposit costs go up probably consistent with that data that we described.

If they don't then we will probably see some stabilization here in rates in the first or second quarters.

Anything else to add Bob Yes, no.

Just from the beginning of the cycle, we've stayed very close to our customers and really taking care of them on deposit rates and making sure that we're competitive that will continue depending on where the fed goes with rates but.

We're comfortable in that.

We don't see a lot of pressure on the consumer side to where we can still maintain a decent margin throughout the cycle.

And then on the growth side can you guys talk about that.

2022 used cash right to fund part of the loan growth. How are you thinking about that obviously you have a lot of room, because the loan to deposit ratio is still very low.

I think we will start with as we have been funding it with the run off of the investment portfolio that $75 million a month that might slow a little bit, but still we are in the $800 million plus range.

Investment flows for 2023, that's the start certainly that allows us to not only fund a good amount if not all of the loan growth, but also take care features.

Feature deposit runoff should that happen.

Okay.

On the noninterest bearing outflows is there a way to quantify what portion could be a risk we're seeing customers. They're investing some of that cash are chasing higher rate can you size for us we're trying to get a better sense of how it would keep asking the same question where that mix of noninterest bearing could move to.

Yes.

We're going through that same analysis to be totally honest with you. Steve we don't have a precise answer for you. We have seen some of that money that had been on balance sheet move into money markets that we offer to the customers. So it hasnt quote left the bank in that sense.

We haven't seen customer relationships leave, but we had a lot of money parked on our balance sheet. In addition to the normal title companies or construction project deposits that sort of thing. So theres a lot of moving parts of that without seeing a big change in customer relationships, but Jamie Ralph anything you would add.

No I think you've nailed it Bob.

Think.

We will are likely to see some migration continue to go from noninterest bearing to interest bearing accounts and I mean, I suppose if you look back to history.

We were kind of just under 40% or so noninterest noninterest bearing deposits to total deposits. So I mean, I think if you think about.

That sort of migration I think that that is maybe what we could see.

Or maybe slightly better than that.

It really depends on.

How long.

How long this cycle lasts.

Okay, Jamie congrats on the position Ralph did a great job, while they are waiting for you and thanks for taking my questions.

Thanks, Steve Thanks, Steve.

Thank you. Our next question comes from the line of Andrew Lee with Piper Sandler. Your line is now open.

Hey, good morning, everyone.

Amy.

Hi, Andrew.

Question on the margin here it sounds like a little bit more expense in this quarter, but then do you think thats going to top out there or are there still some benefit that could come from rate hikes.

Depending on what we get here in the next few months.

Yes, I think I think the guidance is pretty good.

In terms of where we expect Q1 to be if there are some more rate hikes, we could see a little bit more accretion to the NIM.

And then if there arent and maybe we're sort of.

At that range on the guidance there. So again this is all forecasting what we think the fed is going to do and how our balance sheet sort of catches up on those things. So I think I think we feel good about four to five but I think there is room for improvement if we see some more fed rate hikes.

Yes, we do got it thats helpful.

Where deposit rates are now relative to interest rates. So we don't we don't feel there is a catch up we've been saying pretty close to our customers on this and making sure that.

They see the value of their relationship with the bank and as we take care of them.

Got you.

And then.

The cadence of the loan growth.

Mid single digits, how is that going to transpire throughout the year I guess, how is the pipeline looking for this quarter how much is that.

What are the dealer flooring customers telling you.

Yes, as you saw we ended up the year with strong fourth quarter and dealer flooring higher than it had been it had been growing at about $25 million a month increase for fourth quarter. It was above that or right at 120, but thats still left us.

About $450 million versus December 2019 at $860. So I don't think Theres any way we're going to.

Go up $400 million in 2023, but I think there will continue to be accretion and an increase in that dealer, Florida book as supply lines.

Unstuck and we see.

Little bit of slowdown in buying activity by the consumers. So I think there will be kind of a tailwind for us and dealer flooring.

That's up against.

Certainly a headwind in residential the refinance market has essentially ended as we all know we are seeing a little bit slower activity in home equity lines as far as new loans, but we're seeing growth in that based on existing relationships. We have with customers. So I think those are some of the puts and takes the.

The one that we have more control over and we're still in that market as commercial real estate and that still remains active.

Active but probably not at the same level, we saw in 2022.

Got it that's great color. Thanks, so much guys I'll step back.

Thank you.

Our next question comes from the line of Kelly Motta with <unk>. Your line is now open.

Hi, good good morning, Jamie.

Nice to have you on the call.

Why don't we follow up on on the loan growth side.

If you could provide any.

Further outlook on your mid single digit loan growth guidance.

In terms of.

Growth in Hawaii versus on the mainland.

Yes, as we've talked about we have seen the Hawaii activity increase but 2022 is more heavily weighted towards the mainland. So I think it will still continue to be a mix between the two on the dealer floor plan.

Most of that growth in Q4 was in the mainland we have more of our alliance in the mainland now as we've talked about on previous calls so as far as a ratio of dealer floorplan growth there will be a little bit more heavily weighted towards mainland versus Hawaii, but primarily because there is a larger amount of lines to our mainland customers.

Hawaii customers, so I think that will happen.

Commercial real estate, we are still seeing transactions here in Hawaii.

But we still look at them on the mainland as well. So I think the mix might continue to go up a little bit as far as the mainland portfolio, but not dramatically. So.

Thanks, that's helpful.

I would like to turn back to the expense guidance.

Sure.

Boy, what you said implies about 118 to maybe $120 million.

Quarterly run rate, which is certainly a step up from this quarter.

Part of that with the FDIC.

Which you called out which you have no control of but can we just walk through some of the other parts and kind of pressures you're seeing and Conversely is there any areas where.

As you look into the next year and beyond where you can.

Find areas of improvement on efficiencies.

Yes, Hi, Kelly. This is Jamie I think we'll always be looking at that and trying to improve efficiencies wherever we can.

I think.

The 3% three 5% guidance is sort of reflective of inflation and.

Inflationary pressures that we're seeing which I think is.

Pretty sort of normalized in this environment and I think we want to make sure that we're continuing to invest in the business.

Continuing with the digital transformation that we're undergoing core is kind of behind us for the most part now.

We're really looking to take advantage of all the options are that it's going to bring us. So.

Yes.

I think the I think the guide.

<unk> is a good number of COO.

We will always be looking.

But.

I don't see much difference off of off of that three five or sorry, the four to four 5% inclusive of FDIC at this point got it. Thanks, so much for the help I'll step back.

Thank you.

A reminder to ask a question at this time. Please press star one one on you touched on the telephone.

Our next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is now open.

Hey, good morning, Jamie Congratulations hope you enjoy the weather they are better than new England, It's a little colder here today.

Thanks Sharon.

Yes.

Yes, maybe just looking at the on the on the loan production side. What are you seeing in terms of new loan production rates and then when you look at the construction pipeline funding up is that something up that at rates or lower rates from a prior rate environment or what is the how the construction funding recurring like specifically.

Two.

Hi, Jerry maybe I'll stop start this Bob and ask Ralph to add some comments on it we have seen an increase in margin.

Restructured loans.

Also an increase in rates because.

I think it's pretty much 100% of those are floating rate. So we have seen an increase in both absolute rate and margin on that so that's been a nice tailwind, we haven't seen a quarter over quarter.

A nice increase in our weighted average coupon across the entire loan portfolio.

So.

Maybe it was there anything else you would add to that no not really I mean, I think we're at a point in the cycle, where we would anticipate some.

Improvement in the margins.

Okay. Yeah. That's my question.

Yes that was good.

I wanted to make sure that we weren't going to see a drag on maybe that incremental loan yield from funding of construction loans in our prior earlier construction loans, but all floating.

Yes, yes.

I guess it will be out there.

The old margin, but they are coming in at higher rates just because of.

Rate increases.

Yes.

And then on the allowance.

The decline.

This quarter in the ratio can you just give a little more color behind what youre looking at to drive that lower I think that's a little.

Counterintuitive to what we're seeing from from some other banks that are that are so growing the ICL and the Moody's baseline model continues to.

Be more heavily weighted to downside scenario.

I guess, just some color driving that that ratio.

Yes, I would say this is Ralph Jarret I think when you look at our model our base model.

Actually.

It really is reflective of current conditions and current risk rating of the portfolio that actually improved this quarter.

As far as the economic outlook.

Our economic modifier as base pretty heavily on.

Unemployment.

In anticipation of an unemployment rate here in Hawaii.

Thats, a little bit lower than the U S. Mainland in fact, I think this quarter.

We did put a little bit more stress on the qualitative side still ending up with.

A slight reduction in the portfolio.

<unk> said that I think we are provision for what would be a recession I think our view when we calculate our one year.

Expected loss against that portfolio.

It's probably a little bit higher than our peak loss.

Which I think during the GST was about 72 basis points.

Okay.

And then just finally for me on.

The buyback authorization is that something that.

We should we should think you are.

Fairly active with earlier in the year or how should we be thinking about the timing and pace of buybacks.

Yes, maybe I'll start and turn it over to Jamie This is Bob.

Really we're still looking at that.

CET one guide of 12% we had some very good loan growth in Q4 and as that mix changes.

Lower risk weighted securities. It obviously much higher risk rated loans.

That's more of a capital Greg So thats, what we didn't we didn't increase.

John .

Two our targeted Q4, but we're still working on that I think would be increased profitability.

Based on the margin expansion, along with a little bit slower loan growth that we're forecasting into the year that we will be at some point looking to use that authorization that is just really hard to peg a date on when that would be but jamie anything to add to that yeah. No I think you got it Bob.

Thank you.

Boil it down it's like a combination of opportunism.

And dependent upon where our capital ratios go so I wouldn't expect it to be even throughout the year.

Okay. Thank you.

Thank you.

Our next question comes from the line of Laurie Hunsicker with Compass point. Your line is now open.

Yeah, Hi, Thanks, Good morning, and Jamie I, just wanted to say welcome.

Thank you so just.

So circling back to the dealer floor.

Can you help us think about how big that portfolio is going to go to you.

Added a lot and then what's the split on the $456 million in terms of what's in California.

Can you just remind us what are the what are the terms of the of the new loans coming on the coupon.

Yes, maybe I'll start off with that and ask Ralph to jump in and help me out or Kevin on some of the dollar details, but dealer floor plan. We don't have a huge difference that I go back to 2019, I don't think its a real significant difference in the amount of lines available to our customers has been.

Some ins and outs increases declines so customers actually selling their business to other of our customers are outside of our network, but there hasnt been a big change in the total of commitments.

The mix in Hawaii state the amount in Hawaii has stayed pretty constant over the over the years, while the growth has been in California, So as I mentioned earlier.

Higher percentage of our lines are in California relative to Hawaii, I don't have that percentage Oscar.

Jeff to comment on that in a second.

If you look at.

When you look at the growth in the fourth quarter much of it was from California, I think it was $117 million at $120 million were draws under the California lines. So.

Yes.

The cars that are getting delivered and why it is more of a backlog in that sort of hard to tell but I think youll see as we go into 2023.

We'll see.

The Hawaii Outstandings relative to this model.

So the greater question of what the total is completely.

Might've mentioned earlier were about $400 million less in Outstandings and we were at the end of 2019.

Really don't think we get $400 million increase in 2023, but I think we could see some substantial growth off of where we are today.

Clearly the manufacturers are figuring out production issues and chips are more available demand is down slightly although we still have a pretty good backlog that a lot of our dealers that are people that are border cars that have not yet been delivered so it's really hard to peg.

When supply lines unlock in cars get delivered or do people follow ups around the.

The reservation commitments, they've made or give that car up to somebody else all of that is going to be the flex, but I think we're going to see healthy growth in 2023, just based on our existing customers, but where else do you have any specifics you could add just to give you the numbers the mainland portfolio is about $310 million.

In Guam about $146 million, so most of that growth as Bob had mentioned.

Came in in the mainland.

Got it perfect and then can you just remind us.

What the coupons are right now.

New loans coming on there.

Generally we are.

Library Flash so far plus.

No.

1% plus margin and it varies by customer, but everything's over about 641 today okay.

Thank you.

Thank you, Okay, and then just going back to the.

Funding side.

You, obviously had some increase there in the public funds the $1 9 billion how much of that is time versus your second transaction and how are you thinking about.

Where that Buck Atlas.

Yes, so on the on the public side.

Just under $1 billion is with time and the rest of us demand and savings accounts.

I think yes.

It's hard to say Laurie.

I think that we will use the public public markets there to kind of plug any holes that we fill are that we need to fill in terms of.

On balance sheet loan growth.

Arent quite.

Filled by the securities portfolio run off so.

That.

That sort of number is going to be entirely dependent on our loan growth and our ability to other together other deposit so.

That's kind of how we're thinking about it right now.

Okay, Perfect and then Jamie or Rob can you share with us where we're at.

You're spot margin for December <unk>.

So for December but December was $3 90.

Okay Perfect and then just two last questions on the income statement, how should we think about forward looking tax rate.

And then secondly can you comment a little bit you had.

Outside fully in the quarter and I and I know that line item is lumpy, but was there any death benefit there or.

Was that part of the market moving can you help us think about that $2 9 million in the bullet line.

Yeah sure. So in the bowling line, we see that as kind of normalized back to where we think it will run on a go forward and that would know death benefit in there that was market driven.

And then your other question Laurie tax rate with tax rate, yes, sorry. So we think a good guidance is 25% we had some tax credits come through in the fourth quarter that sort of reduce our tax rate here to that lower level, but were expecting 25% for 2003.

Alright, perfect. Thanks for taking my question.

Thanks Laurie.

Our next question is a follow up from Kelly Motta with <unk>. Your line is now open.

Hi, Thanks, Thanks for letting me jump back in just a real quick one.

Can you just with the expense guide four to four 5% or 4% to 5%.

Different things and I don't trust the life transcripts. So I just want to make sure I have my numbers correctly.

Well, we definitely appreciate you following up here versus trusting a transcript so about four to four 5% perfect. Thanks, So much I appreciate it.

Alright Kelly.

Thank you and I'm currently showing no further questions at this time I would like to hand, the call back over to Kevin <unk> for closing remarks.

Thank you Shannon we appreciate your interest in 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.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

Yes.

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