Q2 2023 First Hawaiian Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the first Hawaiian Inc. Second quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question answer session to ask a question. During this session you will need to press star one one of your telephone you were hit then here an automated message advising your hand is raised.
Your question. Please press star one again.
Be advised that today's conference is being recorded.
I would now like to hand, the conference over to your speaker today, Kevin Husky.
Our relations manager. Please go ahead.
Thank you Shannon and thank you everyone for joining us as we review our financial results for the second quarter of 2023.
With me today are Bob nurses, Chairman, President and CEO , Jamie Moses Chief Financial Officer, and Leigh Nakamura, 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 H B 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.
Your next to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements.
I will turn the call over to Paul.
Good morning, everyone I'm pleased to welcome Lee Nakamura Lee was recently promoted to chief risk officer after holding a variety of positions in the bank.
Deputy Chief risk officer and Treasurer.
Well he has over 30 years of banking experience and I'm confident she'll do great in her new role.
I'll start with an overview of the local economy.
The economy continues to do well.
The statewide seasonally adjusted unemployment rate in June was 3%.
Is lower than the national rate of three 6%.
Total visitor arrivals were 800 in 2000 and May just.
Five 4% at the May 2019, a rightful number.
Japanese visitor arrivals at 34000 was 70% a lot of the main 19 levels.
Visitor spend in March was $1 7 billion, 19% higher than May 2019.
The housing market has remained stable in June the median sales price for single family home on Oahu was $1 1 million or four 5% June of last year.
The median sales price for condos Oahu.
510004, 5% below 2022.
Turning to slide two I'll give an overview of our second quarter results.
Net income was $62 $4 million or <unk> 49 per share as long as group, we continue to grow capital and credit quality remained excellent.
Our return on average tangible assets was 1.15%.
And our return on average tangible common equity was $18 five 7%.
We continue to maintain strong capital levels with the CET one ratio of 12 five.
And total capital of $13 one 7%.
The board maintained the quarterly dividend at <unk> 26.
Turning to slide three our balance sheet remains solid.
In the second quarter, we brought down our excess liquidity by a little over $300 million as the recent disruption in the banking industry calmed down.
This enabled us to reduce some higher cost short term borrowings.
We continue to have a strong liquidity position.
As of June 30, our total available liquidity was $8 6 billion, which was over 100%.
Uninsured nonpublic deposits.
The duration of our investment portfolio remained stable at five five years.
Cash flows from the portfolio, we're about $60 million per month, as we had expected.
Turning to slide four.
Period end loans and leases were $14 4 billion, an increase of $142 million.
Or 1% from the end of Q1.
In the second quarter of about $130 million of completed construction loans.
<unk> CRE.
And during the quarter, we also exited approximately $55 million.
Non relationship shared national credits.
We continue to believe that full year loan growth will be in the low to mid single digit range.
Now I'll turn it over to Jamie.
Thanks, Bob and good morning, everyone turning to slide five total deposit balances decreased by $203 million or 1% to $21 1 billion at quarter end.
The retail and commercial deposits declined by $664 million or three 4% in the second quarter.
Commercial deposits declined by about $450 million and retail balances declined by about $214 million on a year to date basis retail and commercial deposits are down $964 million or four 9%.
Public deposit balances increased by $461 million in the quarter as public time deposit excuse me time deposit balances grew by $555 million, which was partially offset by decline in public operating balances.
Our total cost of deposits was 111 basis points in the second quarter, an increase of 29 basis points linked quarter due to higher rates paid and the shift in mix to higher rate deposit accounts.
Turning to slide six net interest income declined by $7 $3 million from the prior quarter to $159 9 million.
The decrease was primarily due to higher funding costs, partially offset by higher asset yields.
Similarly, the net interest margin declined by 20 basis points to 291%.
Throughout the end of the second quarter. The accumulative betas were 34, 5% on interest bearing deposits and 21% on total deposits.
Looking forward, we anticipate that the NIM will decline by 15% to 20 basis points in the third quarter due to continued repricing and deposit immigration.
On slide seven noninterest income was $47 $3 million this quarter, a $1 7 million decline from the prior quarter.
The decline was primarily due to lower bully income along with lower credit and debit card fee income.
First quarter Bully income included a $2 million death benefit.
Expenses were $120 9 million to $3 million or 2% higher than the prior quarter.
Increase in expenses was driven by a $1 $9 million increase in salaries and benefits, which included $2 9 million of separation and severance payments.
We expect our overall annual expenses to be in line with our original outlook now I'll turn it over to Lee. Thank.
Thank you Jamie.
Moving to slide eight the bank maintained its strong credit performance and healthy credit metrics in the second quarter year to date net charge offs were $6 $8 million and our annualized quarter to charge off rate was 10 basis points, one basis point higher than in quarter one.
Nonperforming assets and loans 90 days or more past you were 11 basis points at the end of quarter two down two basis points from the prior quarter criticized assets increased to 93 basis points with special mention now sits at 52 basis points and classified assets at 41 basis points of total loans.
<unk>.
The bank recorded a $5 million provision for the quarter.
Loans 30 to 89 days past due or $48 million or 28 basis points of total loans and leases at the end of quarter two unchanged from the prior quarter.
Moving to slide nine we have a roll forward of the allowance for the quarter by disclosure segments to reserve increased marginally this quarter, resulting from offsetting factors, including loan growth and improved economic outlook and an increase in the qualitative overlay on construction and home equity.
The allowance for credit loss increased one 5 million to $148 6 million.
This level equates to 1.03% of total loans and leases.
The reserve for unfunded commitments was unchanged at $36 2 million.
The allowance anticipate cyclical losses, consistent with the recession and includes a qualitative overlay for potential macroeconomic impact not captured in our base model.
Turning to slide 10, we provide a snapshot of our CRE exposure CRE represents about 30% of our total loan portfolio outstanding.
Overall credit portfolio, Alright, excuse me the overall credit quality of this portfolio remains very good.
The increase in criticized loans in the second quarter was primarily due to two loans. One loan consists of a handful of small office properties in downtown Honolulu, and it's being actively resolve this loan is current and we are comfortable with the plan.
Other loan is located in downtown Los Angeles and is going through the sales process, we expect a full recovery on that loan.
We continue to closely monitor this segment given the implications of higher rates credit tightening and recessionary headwinds.
Okay, well. Thank you Jamie Lee now I'll be happy we'll be happy to take your questions.
Thank you.
Minor to ask a question. Please press star one wondering your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again please.
Please stand by what we compile the Q&A roster.
Yeah.
Our first question comes from the line of Steven Alexopoulos with Jpmorgan. Your line is now open.
Hi, everyone.
Good morning.
I wanted to start so on the noninterest bearing deposits. It was another quarter, where you and the industry saw a strong outflows, but I'm curious.
This trend through the quarter and are there any signs of that piece.
Pace of outflows abated.
It's kind of hard to say for sure.
I would suggest that the way that we look at the data we think that it is abating somewhat.
And what I mean by that is so far what we've seen this quarter has been on a relative basis less outflow than what we saw.
Two to three months in Q2 so.
I think if youre drawing.
Youre looking at a graph of where deposits have been growing and youre drawing a trend line I think you start to see that flatten out.
At least so far in the corridor, that's the what we've seen.
Okay. That's helpful and on the margin then so you were down 20 basis points this quarter, a little bit worse than what we thought.
Coming into the quarter, now, you're saying down 15% to 20 I'm curious.
I know you don't give longer term guidance, but do you feel like we're getting pretty close to the bottom once we roll through right now it is going to be contingent.
Talked about but if that trend line starting to flat on the niv outflows.
Get some stability after the third quarter.
I do think that rate and obviously, Steve thats entirely contingent upon what happens with the fed and rates and all of that.
But we do we do see that sort of the bottom of our guidance, we think thats, probably about where it bottoms out given.
Given sort of a stable forward outlook at this point and Thats, probably like somewhere in the in the fourth quarter.
For us so that's kind of how we're thinking about it and how were.
Planning going forward.
That sounds good and then just on loan growth. So I heard you Bob reiterating the low to mid single digit, which I'm, a little surprised because you're running about 8% higher year over year I know the comps are tougher because we had a very strong second half, but you would not expect that you've had good momentum good converge as the Cree youre not expecting more momentum to continue.
As youre not at least pointing to mid single digit growth. Thanks.
At the topline Steve we have.
A number of commercial real estate projects that are completing and kind of get paid off so a little bit we're swimming upstream on that.
Origination to your point Theres still been fine, but we are seeing.
In the next quarter to a fair number this quarter, meaning Q3, and Q4, a fair number of commercial real estate payoffs and so there is a balance there.
Got it.
So you called out that you saw good growth in the dealer to dealer balances sit now versus historical just wondered how much room, there might be for still an improvement there.
Yeah.
Have that here somewhere, but I know, we're still several hundred million dollars below the 2019 year and I think it was 850 give or take at 2019 and where we are today Jamie.
And I think I think it's just under just maybe you're out right around 700, just under 700. So yes, Steve I think we have I think there is probably a good.
As Bob said right I think theres, probably at least a couple of hundred million dollars.
Theres room there.
Given historically.
The other question is does it go back to the way it was before.
You probably saw an article in the Wall Street Journal yesterday, saying, probably not I tend to agree with that.
Industry has changed but.
I do feel that.
The new number is given that we don't have a huge difference in the amount of lines and availability to our customers.
Higher than where we are today, but it's probably not where we ended 2019.
Yes.
Okay. Thanks for answering my questions.
Thank you.
Our next question comes from the line of David Feaster with Raymond James Your line is now open.
Hey, good morning, everybody.
Dave.
Maybe just following up on your commentary about the.
Yes.
I'm coming maturities and stuff I'm, just curious could you quantify that for us how much you have.
Expected to roll off maybe in the next six to 12 months, where roll off rates are and then where maybe repricing tends to be or as well as new loan yield add on rates.
So Dave just just to clarify are you talking about securities or loans.
Loans.
Got it okay. Yeah. So I mean, so I think what you're really asking is essentially a NIM question here right.
Youre trying to get at right. So.
So I appreciate you try and ask it a different way.
But.
So I think the NIM guidance is the NIM guidance, we're seeing we're seeing Mitch.
We'll call it like.
Adds to the portfolio in totality.
We're seeing sort of on the commercial side, a little bit higher than sort of the low sevens.
We're still adding a very few amount of residential mortgages those are sort of high sixes now versus where they've been in the past.
But those are sort of.
Those are sort of their role on.
Roll on rates at the moment and to be to beat to be fair to all that we're seeing in general we're seeing a better ability for us to dictate pricing structured credit today than we were in the past right a little bit more of a little bit more of a buyer's market rather than a seller's market today.
That's terrific and ultimately what I'm trying to figure out is kind of where where does the core NIM stabilize like as we look forward. So maybe on the other side of the coin.
I guess on the deposit front, how how is new account growth going where are you seeing good opportunities to take share and acquire new clients.
And then just any thoughts on odd core deposit growth going forward the strategy.
To drive that and where new money yields are on on interest bearing deposits.
Yes, a number of questions in there Dave So let me pick off a couple of them.
First of all on new accounts, new deposit accounts.
Like I think most banks in your coverage, we're very actively going after new accounts. That's been successful we are trying to do that in a number of different ways, not just marketing, but more value to the customer we're upgrading our our mobile offering.
Later this month or next.
Next month in August and so all of those things I think thats been successful.
So really trying to grow that core operating account type.
Deposit.
<unk>.
The lending side, it's very interesting to jamie's point as being much more disciplined.
How we're going after business, we've seen the rates and terms.
Move back to what I think is more sustainable levels people with being very aggressive in low rates for long periods of time, that's kind of gone now as liquidity is more dear and we're really seeing.
More of a balance for example, we have not been very active in indirect lending for the last gosh four plus years.
That that line item was down almost exactly $300 million over that period, we just didn't see it being accretive at the time, we love the business is something we've been in it for a long time.
But it just didn't make sense there for a while and now youre starting to see that and especially to Jamie's point on the commercial side, a more reasonable market out there.
That's that's.
And then just where are you seeing.
No.
I guess, new deposit interest bearing deposit costs coming on.
So.
It's a tough question because it's sort of they come on at different different rates for different types of customers that we have won in general Dave What we're what we're trying to do is right. We are trying every day, we're trying to go out and grab new new customers and thats not at the moment, that's not really through some promotional offer that we're really offering.
On especially on liquid side of things right and so this is part of the reason why you've seen the run off imbalances that we have right. So every day.
We're focused on acquiring new customers and turning those customers into relationships and then taking care of the existing relationships that we have on our balance sheet and so to the extent that it is not a relationship that has been here for a while we're kind of thinking sort of letting some of that some of those deposits kind of run off the balance sheet, while taking care of our core.
<unk> so.
Kind of.
It's a tough question there being some customers obviously are our best our best customers are getting say higher exception rates and yields in their liquid portfolios are.
Less best customers are getting lower rates and of course, that's dependent upon.
Account size and things of that nature in there as well so.
It's kind of a continued management of managing the entire balance sheet and managing the relationships that we have.
Both on the acquisition side and the current relationships that we have.
Talked about this started a year ago, Dave that for our larger balance commercial.
And.
Personal customers, we really start taking care of them early and now it's just kind of going through the rest of the balance sheet, we're getting to the earlier question from Steve We're getting close to the end on that I think.
That's great, but maybe following up on some of your commentary on the loan side, Bob I'm just curious.
No.
Where are you with.
With liquidity being Paramount and some other folks pulling back and you still being open for business, where are you seeing good risk adjusted returns.
Sure.
How is demand from your clients, where are you seeing opportunities and I guess, if you had to peg how much of your growth would you expect to come from the mainland versus Hawaii.
Yes.
Let's start maybe with the end of that question, we're right about 24% of our loans on the mainland.
As we've talked about on previous calls we assumed that would go up a little bit sooner than the Hawaii.
Loans, although it is keeping pace percentage point or so.
We are seeing the dealer balances because of portfolio is larger on the mainland that will be a little bit stronger on the mainland than here in Hawaii, but we do see that coming back.
Up in California, a couple of weeks ago, the domestic manufacturers seem to be ahead of the foreign manufacturers on bringing back supply. So I think that's been helpful. I think.
All the manufacturers by year end, we will be closer to where they want to be on that so that will rebalance to whatever the new the new normal is by year end as far as.
Floorplan Outstandings.
On the commercial real estate side.
Yeah.
To Jamie's point better pricing better structure, that's both here in Hawaii as well as on the mainland. So if you are open for business, which.
Which we are.
We're going to be more particular, but you really can't get a better structured transaction at higher pricing.
We're looking at that where it's going to be slow not surprisingly as residential home equity I think we will slow down a bit credit cards on balance should hold its own but.
The consumer side, I think will be a bit slower than the commercial side.
That's helpful. Thank you.
Thank you.
Our next question comes from the line of Kelly Motta with <unk>. Your line is now open.
Hi, Thanks for the question.
I apologize joining a little bit late so I apologize. If this has been already asked but.
It seems like Youre doing a pretty bang up job with expenses that.
Have been really within the range you've been looking for.
But just with the challenging.
Headwinds for margin that you've been discussing.
Near term is there is there any additional room on the expense side.
I know you've already directing a lot of attention there and.
As we look ahead is it still a good range.
So looking for the same kind of level.
Is that you have.
<unk>.
At that point thanks.
Kelly as Bob Yes, we're always focused on expenses, we have been investing more clearly in our technology and our people.
Getting good people.
Many other places is has been a challenge so we have made adjustments there.
That we think is really a long term investment much like our technology. So.
Now that we've kind of.
Got in there I think we're closer to being more of a status quo, our salary and benefits type expenses, but on a broader level, maybe I'll turn that over to Jamie yes. Thanks, Kelly I mean, I think the way to think about it for the rest of this year is that coming into 2023, we knew that we had to make certain investments.
To improve our digital offerings to improve improves things on that side of the operational efficiencies that sort of stuff.
In the house, and whether or not the NIM is going to be lower.
In the back half of the year, we still feel like we need to make those investments for this year. So.
Our guide on the year that we gave upfront is still.
Don't think that's where we're going to be.
As Bob said, we are always looking at expenses, but we were pretty tight this year on how we.
Managing those what I would call on expenses that are sort of.
Non.
So we're feeling strongly that we need to continue the trend that we were on from an expense perspective this year.
And then after that we will we are heading into budgeting season in things right. Now. So we'll obviously be looking at that but not ready to give any guidance sort of into 2024 at the moment.
Got it and maybe a final question for me.
I think in your prepared remarks, you said something about exiting next.
Mainland.
And then the club deal.
As.
If you look ahead.
Where loan growth is going to be coming from what's the appetite for.
Total growth on the mainland.
Yes.
Kelly. This is really I look at that is almost two different questions. I think there is clearly why we exited those relationships.
Arent relationships. They were just a credit only deals and were really as we look at.
The scarcity value of liquidity and capital, we really wanted to focus on relationships.
And whether those relationships our share in Hawaii, which is our home and we wanted to do as much of that as we possibly can and we also have relationships in the U S.
So it really is more of a focus on.
Where we can add value and where theres more than maybe just a credit relationship as opposed to.
Where the Domino silos.
Got it I appreciate that thanks, so much.
Thank you.
Our next question comes from the line of.
Andrew Liesch with Sandler O'neill. Your line is now open.
Hi, everyone just a couple of housekeeping items for me.
Noninterest income.
748 million still the right range to be thinking about.
You got it.
Got it and then.
The tax rate for a couple of quarter. It was slightly below where I was forecasting what are what should we be using on that front.
I think 24 to 24, 5% is a good is a good number on the tax rate.
Gotcha. Thank you you've covered everything else I wanted to ask about.
Alright, Andrew Thank you Andrew thank.
Thank you as a reminder to ask a question at this time. Please press star one one on your Touchstone telephone.
Our next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is now open.
Hey, everybody. Thanks sure.
Taking my questions.
Let me starting with.
Going back to the shared national credit.
Discussion the exits that you talked about this quarter with those sales or are those natural run offs and if there were sales was there a was there a loss on that.
They were good question Sharon.
They were sales but at par.
Okay.
Then in the commentary you talked about the office criticized loans. Thank you.
It said that they were one of them was downtown L. A but I thought last quarter, we talked or you had said that your la office was.
More west L. A and not downtown can you just give an update on what your non Hawaii office current office exposure looks like geographically.
Connecting what we said last quarter to what we said right now.
Both correct, we had one loan in downtown La.
The majority of the rest are in.
West L. A so.
It's really being resolved is this one loan in downtown that way.
As far as broader office, it really hasnt changed from what we've talked about last night.
Primarily those gateway cities on the West coast several of which are.
Our.
Credit tenants and so the least is set up to be.
But it really is tied it to a specific credit tenant.
We're very comfortable with that or a couple that are to very high net worth individuals.
<unk> strong support in the past so we're very comfortable with the rest of the office portfolio of these two popped up and they are being addressed.
Okay. Thanks, and then when I look at slide nine and the growth in the provision for construction and home equity.
I don't know I guess, how does that square with what you were talking about in terms of very good employment trends and very strong.
<unk> it seems like construction projects and in residential.
There'll be very little loss.
The loss content in Hawaii at this point.
What's driving the higher the need for higher provision does in those sectors.
So I can answer that this is lee so with respect to construction.
We did in the both the first quarter in the second quarter is we.
Took a deep dive into our investor CRE and construction portfolios.
In the second quarter, we actually re underwrote the portfolio based on current NOI and interest rates and cap rates.
And it really was with respect to construction it really was more about the.
Mainland multifamily, where theres still under construction and the metrics are still good today, but we have a little bit of uncertainty as to what the market would look like in a year or 18 months.
Then with respect to home equity it was about we looked at the portfolio and we looked at the pool the support where there was very large utilization.
And they were coming off of the teaser rates.
And so there's just a little bit of concern about.
Increase in the.
The interest expense.
These particular loans we've been facing.
Not a specific.
I don't think its.
In contrast to anything we've said before about the economy, it's just the sub pockets.
In May for you to have an excellent point I forgot to mention earlier Jared.
We re underwrote the entire CRE investor CRE portfolio over anything over $5 million in balance during the quarter during the second quarter.
Current interest rates cap rates really looking at.
The risks are and the stresses and we didn't regret anything right.
So that's we did at basically two quarters in a row.
<unk>.
Ourselves feel comfortable.
Great. Thanks, and then on the construction loans that are rolling onto permanent are those.
Rates negotiated from prior.
Before the the rate hikes are those coming on at lower rates or are those coming on at current market rates when they go to permanent.
Most all of the construction loan I can't think of any that are fixed rates. So they're all floating rates now the difference in those floating rates from when they were put on versus something that would be put on today is as my earlier comments, there's a little more spread today than there was 12 or 18 months ago, but all of those are.
At floating rates.
Okay and then finally for me I appreciate you taking the questions.
When we look at sort of terminal beta on interest bearing deposits was 45% sort of a good ballpark to be looking at.
I think I think that's OK Jared.
Part of the part of the issue with that is it really depends on what happens with deposits right to the extent that we're funding the balance sheet with either borrowings are ore deposits that beta sort of can change depending on how that looks so.
That's an okay number to use.
Yes.
I think thats, an okay number to use for now and we're going to see how that moves as we go throughout the quarter and again thats good solid quarter in the back half of the year and Thats, just going to be sort of dependent upon again right what what how we end up funding the balance sheet.
Great. Thanks very much.
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.
I have one last comment.
This is Bob I would like to wish Jamie a happy birthday today.
Welcome. Thank you second earnings call and all of that.
Kevin.
Thanks, everyone. We appreciate your interest there first Hawaiian and please feel free to contact me. If you have any additional questions. Thanks again for joining us and enjoy the rest of your day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.
Yes.
[music].
Sure.
[music].
Okay.
[music].
No.
Hum.
[music].
Yes.
Okay.
[music].
Okay.
Okay.
Yes.
[music].
Okay.
[music].
No.
Hum.
[music].
[music].
Yes.
Okay.
[music].
Okay.
Yes.
[music].
Okay.
[music].
Okay.
[music].
Yeah.