Q4 2023 First Hawaiian Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the first Hawaiian Inc. Q4, 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session. Please press star one one on your.
Telephone and wait for your name to be announced to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Kevin Hasegawa Investor Relations manager.
Thank you Josh and thank you everyone for joining us.
We review our financial results for the fourth quarter of 2023.
With me today are Bob Harrison, Chairman, President and CEO, Jamie Moses Chief Financial Officer.
Moreover, 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.
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.
Next to this presentation.
Reconciliation of these non.
Financial measurements to the most directly comparable GAAP measurements.
Now I'll turn the call over to Bob.
Good morning, everyone I'll start with a quick overview of the local economy.
Overall, Hawaii has been resilient in spite of some headwinds.
State bureaus are improving at a modest pace prior to the Hollywood wildfires, but were certainly impacted by that disaster.
Nevertheless, the unemployment rate remains low.
The seasonally adjusted unemployment rate for December was two 9% compared to the national unemployment rate of three 7%.
The visitor industry has performed well on a year to date basis with the Maui visitor industry recovering faster than expected and visitors to the rest of the state reaching record levels.
Through November total visitor arrivals were 5% higher than last year, and total spend was $6 2% higher.
Arrivals from Japan continued to increase with year to date arrivals at 506000 up over 220% from the prior year.
The housing market remained relatively stable despite reduced activity.
In December the median sales price for single family home on Oahu.
Right about $1 million, which was 5% below December 2022.
Median sales prices for condos on Oahu was 510000.
One 5% higher than the previous year.
Turning to slide two I'll discuss the highlights of our fourth quarter financial performance.
We finished the year with a solid quarter, we continued to grow customer deposits. We believe that net interest margin has bottomed out.
Credit quality remains excellent.
As I'll cover on the next slide we took balance sheet actions that are immediately additive to earnings.
Our return on average tangible assets was 0.81% and return on average tangible common equity was $13 66%.
We continue to maintain strong capital levels with a CET one ratio of $12, three 9% and total capital ratio of $13 five 7%.
Turning to slide three wanted to go over the balance sheet actions, we've taken a fourth quarter that will reduce earning assets, while adding to net interest income.
In late December we sold 526 million of lower yielding investment securities at a loss of $40 million.
We intend to use those proceeds to reduce high cost deposit balances starting in the first quarter.
By eliminating the negative spread from this asset liability combination.
It will improve our net interest margin.
Capital ratio levels are high and we have ample liquidity. So we continue to look for opportunities to optimize our balance sheet.
We plan to break down our cash levels to a more normalized rates of around $500 million to $600 million.
Separately following the change visa announced in late 2023 that improve the economics of selling class B shares.
<unk> to sell our remaining shares for a gain of about $41 million.
The shares were carried on our balance sheet at zero book value.
Turning to slide four.
Period end loans and leases were $14 4 billion.
$21 million higher than September 30.
We had good growth in C&I loans was primarily driven by growth in dealer floor.
As we have anticipated decline in CRE loans was primarily due to the payoff of several completed construction projects.
While there is a headwind for balances it speaks to the quality of the projects strength of the sponsors and overall credit quality of the portfolio.
The decline in consumer loans was primarily in indirect auto.
Looking forward to 2024, we expect that full year loan growth rate to be in the low single digit range.
Continued weak demand for residential loans and additional pay downs from our completed construction projects present headwinds to loan growth.
Now I'll turn it over to Jamie.
Thanks, Bob turning to slide five retail and commercial deposits increased by $405 million in total commercial deposits were up $243 million in retail deposits increased by $162 million, which allowed us to reduce our reliance on public time deposits.
No material impact from any Maui recovery related deposit flows.
Total deposit balances declined by $179 million due to a $584 million decline in public deposits $506 million of which were those higher cost time deposits.
The percentage of noninterest bearing deposits to total deposits was a healthy 36%.
We expect further reductions in the balances of higher cost public time deposits starting in the first quarter.
The rate of increase in deposit cost slowed down in the fourth quarter.
Our total cost of deposits was 156 basis points, a 16 basis point increase from the prior quarter.
Turning to slide six net.
Net interest income declined by $5 4 million from the prior quarter to $151 $8 million due to lower average, earning assets and a lower net interest margin.
The net interest margin declined by five basis points to 281%.
As we discussed previously we expect that the security sales and reduction in higher cost deposit balances in Q1, while at about 10 basis points to the 2020 for margin and improved net interest income.
Our Spartan ended December was $2, 75%. So looking forward, we projected an imminent 285% range in Q1.
Through the end of the third quarter, the cumulative excuse me fourth quarter. The cumulative betas were 44, 6% noninterest bearing deposits and 28, 6% on total.
On slide seven noninterest income was $58 3 million $12 $3 million more than the prior quarter.
We had several significant nonrecurring items that contributed to the increase.
As mentioned previously we sold a little over 120000 shares of <unk> stock for a net gain of $40 8 million.
We also recognized a net gain of $7 $9 million from the sale of a branch property.
These were partially offset by the $40 million loss on the previously mentioned sale of securities and another $1 $3 million from other miscellaneous items.
Excluding these nonrecurring items noninterest income would have been $50 9 million in the fourth quarter.
We expect noninterest income to run at about 49% to $50 million per quarter in 2024.
Expenses were $142 3 million $22 $9 million more than the prior quarter similar.
Similar to noninterest income we had several nonrecurring items that drove the increase the largest item was the $16 $3 million FDIC special assessment.
We also had several smaller nonrecurring expenses totaling about $7 3 million in the quarter.
Excluding these items noninterest expense was about $118 7 million in the fourth quarter.
In 2024, we expect full year expenses to be around $500 million.
Primarily due to continued investments in technology and infrastructure as well as some general inflation now I'll turn it over to Lee. Thank you Jami moving to slide eight the bank maintained its strong credit performance and healthy credit metrics in the fourth quarter, while we have seen some modest deterioration in credit quality our experience so far.
As well within our expectations.
We're not observing any broad signs of weakness across either the consumer or commercial books, and we have sufficient loan loss coverage commercial criticized assets increased to one 2% of total loans and leases driven primarily by a single credit which was downgraded to special mention while classified assets fell two basis points to <unk>.
19 basis points of total loans and leases year to date net charge offs were $12 2 million.
Our annualized year to date net charge off rate was nine basis points three basis points higher than in the third quarter nonperforming assets and 90 day past due loans were 15 basis points of total loans and leases at the end of the fourth quarter up two basis points from the prior quarter and lastly, the bank recorded a $5 3 million.
Division for the quarter.
Moving to slide nine we show our fourth quarter allowance for credit losses broken out by disclosure segments, Yes at ACL increased $1 7 million to $156 $5 million with coverage of one basis point to 1.09% of total loans and leases.
Turning to slide 10, we provide a snapshot of our commercial real estate exposure CRE represents approximately 30% of total loans and leases. The CRE portfolio is well diversified across collateral type well secured and remains of high quality office exposures remain manageable at five 2% of <unk>.
Total loans and leases we continue to closely monitor the CRB segment, given the implications of the rate environment credit tightening and recessionary headwinds and there are follow on impacts your vacancy rates debt service and asset values. The credit quality of this portfolio remains very good and now I'll turn it back over to Bob.
Thanks Lee.
We had a solid quarter. We believe we are well positioned to continue to perform well in a challenging environment.
The security sale executed in December will enable us to pay down our higher cost deposits.
We will immediately improve the margin and net income now we'd be happy to take your questions.
Okay.
Thank you.
Minder task 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 again, one moment for questions.
Yes.
Our first question comes from Steven Alexopoulos with Jpmorgan you May proceed.
Hi, everybody.
Good morning, Steve.
I wanted to starting a margin.
285 is what you expect for the first quarter and Bob You said, you think you hit it.
Bottom on the margin so.
So I'm curious once we get into the fed starting to cut rates.
Do you see the NIM trending.
Because you are at this point I believe.
That's right I would call it sort of moderately asset sensitive off of a flat balance sheet look.
That still continues to be the case Steve.
The dynamics of the balance sheet today as it exists though we.
We continue to see securities portfolio run off and when you look through the numbers there at.
Got something like a two 1% yield in totality in the portfolio should we expect about $600 million in cash flow throughout the throughout the year off of that and.
When the when your funding things on the margin, it's 5% or so with public time deposits.
That's a pretty significant tailwind in terms of the in terms of how the margin goes so.
When we when we look at the way that the fed at <unk> sorry.
Forward curve looks in <unk>.
A fed cut its also kind of <unk>.
Laid out later in the year. So we think generally speaking the dynamics of the balance sheet allow for.
The NIM to continue to grind higher over the course of the year, even with that even with the way that the forward curve loans.
Okay.
That's positive.
We have a little bit deeper with that so you guys are not one of the highest deposit ratepayers writes a functioning market.
In order to get NIM.
The higher <unk>.
Curious assumption because.
I don't know if youre seeing competitors test the market for lower rates already or not but how quick could you lower your deposit rates.
Once the fed does start coming down.
Yes.
We have a pretty.
The deposit rates, our deposit customer segments are pretty pretty well defined at the moment and.
A very large chunk of.
Our customers saw immediate increases to their deposit rates on the way up and they expect to see those same things on the way down.
The amount of that is slightly smaller than what our floating rate assets are so we are technically asset sensitive there, but but we do think that pretty.
Pretty large chunk of those deposits will reprice lower immediately and again, Steve the dynamics on the balance sheet. We also have.
Another almost $1 5 billion of fixed rate cash flow that we expect kind of comes off this year as well and so that gets repriced up higher.
Today's rates, even as the fed is coming down these rates are still higher than where those were put on so.
Again, it's.
It's not really about asset sensitive or liability sensitive it's more about kind of dynamics, we see on the balance sheet.
And.
There's going to be a function of some some some lower earning assets as well, but a higher NIM grind over time.
Got it thanks, if I could ask one other question totally different topic. So it's nice to see the dealer growth in the quarter curious where are those balances and is there still room to catch up.
Or is that now the new normal like where those balances sit today. Thanks.
Steve maybe I'll take this one.
Bruce if you say it enough times eventually it's true finally, we saw some nice lift.
And dealer Floorplan.
For US you saw.
The bulk of that is in the mainland portfolio.
Really is driven by.
That is bigger commitments out there, but also driven by a manufacturer base. The domestics have done a better job of bringing back supply.
More of the imports quote unquote foreign producers have been lagging a bit but it has been very helpful. So we are seeing those balances grow.
So the balance at the end of the.
The year was $563 million in total.
Still just about $300 million less than it was at the end of 2019.
So just to give you some perspective also road.
Roughly the same commitments the same basic dealer group. It won't go back to that none of US expect that we'll go back to that but certainly there is still some room there.
Thanks for taking my questions.
Okay.
Thank you.
One moment for questions.
Our next question comes from Andrew Liesch with Piper Sandler You May proceed.
Hey, good morning, everyone. Thanks for taking the question Andrew.
Standard.
Just on the expense guidance, there is a little bit steeper ramp up than I was expecting I guess, where where are you seeing most of that pressure come in is it really just inflation is it vendor contracts, where there isn't a lot of that expense guide coming from.
Andrew we're hoping they're going to ask that question. So we figured someone.
And it really comes down to and we've talked about this in pieces and maybe I'll take a couple of minutes to try to wrap it together to give you a better idea of what we.
Been doing for the last couple of years, and we're continuing to invest it.
So we're always trying to be very thoughtful in how we're spending our money.
And we really have been focused on ever since our core conversion and part of that to enhance our strategy across really three different pillars, and that's data technology and people. So what we've been doing over the last couple of years as we built out a pretty sophisticated data and analytics platform.
We've also increased our capabilities with a lot of different things, including AI as I think we've talked about before we've already incorporated AI into our consumer lending and Thats been.
Very positive for us, but we're also making strides in our digital offerings. We did the conversion of our online consumer banking last summer that went very well we are going to open.
Or put in place a new digital account opening platform and probably mid year of this year and we built out our in house engineering capabilities, which is really based on opening I architecture, and then finally, we're putting in a new CRM. So all of that has been done we feel.
Most of those investments are in place.
As that kind of comes into.
Income statement raises our cost a little bit more than we thought you can see our employment numbers are basically flat. So we are adding more people, but we are investing in our people because we have put in place a pretty sophisticated.
Engineering team to be able to do things in house and so why are we doing all of that we think thats really going to position us well for the future.
Be competitive in our market and our unique deposit market to give our customers a lot more options going forward than we have done in the past and I think really be a first mover in the market. So thats driving a lot of it the same number of people.
A number of investments.
Platforms and technology that is really at the end of that and then some inflation et cetera in there as well, but Jimmy anything you would add to that.
I think thats, a really good summary, Bob.
The other thing to add Andrew.
We recognize the number's, probably a little bit higher than what you were expecting and others had been expecting but.
We think it's important that we do invest in those things then.
I've kind of alluded to in his comments commentary over time.
Right.
This rate of growth should come down because these investments ought to be able to increase scale and efficiencies for ourselves.
That's part of the investment that we've been making and we will continue to make this year and just add to that good point Jamie.
Finish up the new stuff, we will be.
Sunsetting the outdated systems.
Improving our operating.
Methods and everything else to break down our costs and optimize our expenses. So we are in kind of the track.
Transition between having invested in new platforms.
As those mature and rolling off the old stuff. So there's a little bit of that going on in 2024, as well, which built into that number.
Got it got it.
But I guess once you move past.
Do you think there's like a natural level of expense growth for the company.
Yes.
That's probably natural level.
Two 3% something like that would be the natural level of inflationary sort of expectations.
That's in the future.
When we get past this in 2024.
Right right.
Great. That's very helpful I will step back thanks.
Thank you.
One moment for questions.
Our next question comes from Timur <unk> with wells.
Wells Fargo you May proceed.
Hi, good morning.
Looking at the expectation for cash flows off of the bond book that $600 million, how much of that is going to be used to continue working down some of the higher cost funding.
And I guess at what point.
At what point does that stop and you actually start reinvesting some of those proceeds back into the bond book.
I think I think the cash flows coming off are going to do two things right. So number one is.
And immediately to pay off.
Cost deposits to the extent we can.
And then the other side of that is it funded loan growth as well so to.
To the extent that we.
Love to have a higher rate of loan growth to the extent that that happens we could that could be part of the story as well.
But I think for us at the moment.
Moment.
It's really kind of paying off those public time deposits that we have.
Those tend to be those are and sort of the 5% range right now.
Even if you even if you take I don't know if take a little bit of credit risk in the bond book the yields there is something like $535 40. If you want so you have a spread there between the cost of funding cost and the yield is not very high and so we're not real excited and reinvesting in the bond book right now and we.
You will be funding that on margins at 5% so.
For now it's kind of just got runoff mode.
Okay. That's helpful. And then maybe looking at the linked quarter reduction in non interest bearing I am just wondering if there is any visibility to how much excess liquidity do you think is within that line item and how much additional mix shift we may get out of noninterest bearing into some of the interest bearing accounts over the next two.
Quarters or something.
Yes, we don't know at Tamar.
We started pre pandemic, we were at about 36% noninterest bearing to total deposits and that's where we're at right now.
So I wouldn't say that it can't go lower from here anything is obviously anything is possible. We would expect to see in an elevated rate environment. We would expect to see some continued migration.
We're monitoring that.
Looking through that and Thats, obviously part of that.
Asset liability management decisions that we'll make throughout this year and on a go forward basis.
We could see some migration continuing migration on that but we think it's.
We think that the.
The rate of deceleration has changed.
Be less.
Less rapid on a go forward.
Great I guess last for me just TCE rebounded north of 6% here regulatory capital.
Yes.
Pretty good any reconsideration for buyback or any incremental thoughts on initiating a buyback.
Yes, Tahira this is Bob yes, we.
And.
That will be certainly something were considering.
Bob: We are above the kind of 12% CP CET, one number that we've been talking about the last several years.
Still we feel reasonable amount of uncertainty in the environment.
Not yet upon a year from the failures of those three banks so.
We're going to be a little bit cautious, but we're certainly very aware.
Being comfortable with our capital levels, having the ability to do share repurchase during 2024, and we're just going to continue to look at that evaluate it as we go through the year.
Great. Thanks for the questions.
Thank you and as a reminder to ask a question. Please press star one on your telephone.
One moment for questions.
Our next question comes from Kelly Motta with <unk> you May proceed.
Thank you so much for the question.
Hey, Kevin.
Hey.
I don't think we clocked yet lots about spread it obviously metrics remained really strong just wondering what you're watching.
At this stage any changes.
Youre doing certain portfolio add.
Any kind of expectation for what credit normalization type look like over the next two years or so.
Yes.
Yes, great question, and maybe I'll start and then turn it over to Lee.
We're watching that very closely some of the.
Offers.
Issues, we talked about mid year last year have been resolved there is still no that's.
Area of high attention that were paid to it not only on the credit side, but also the line officers.
We continue to stay very close to the customers in the commercial side, but in particular, the commercial real estate.
As I mentioned in the comments there is some nor.
Normal function going on we are getting paid off from construction deals that they had moved from construction into mini firm as they got fully leased up which for a little while there are a couple of years ago. You recall they were just getting paid off as soon as construction completed so.
It's now back to a more normal environment to me, which is which is healthy.
On the rest of the commercial side, we're still seeing strength in a lot of the areas that.
We talked about consumer we are starting to see a little bit of weakness for.
<unk>.
The indirect and cards.
Kind of back to normal in a sense that.
Maybe a last comment Frank turn it over to Lee.
As she mentioned in her comments just to highlight we have.
Haven't really seen a lot of impact from Maui. So.
Something as well, we're watching closely but anything you'd add to that no.
I don't really have much to add what I will say, though is.
Sure.
We actually are quite pleased with the performance of the portfolio even in this environment.
We continue to watch certain pieces very carefully because you hear about the headline numbers and you think about how it impact here of borrowers, but so far.
We really haven't seen the kind of.
I guess weakness that we thought we would.
Bob: This time in the cycle.
I really appreciate all the color you guys.
Maybe one more for me just wondering if you've evaluated.
Great. That's my proposal.
Interchanging overdrafts.
Yes.
And sorry, if you could make any preliminary estimate on.
Hi.
What the impact of Btu and <unk>.
If you're doing any changes.
Your fee structure.
Yes.
Bob: Sure.
On the interchange side, we haven't done a full analysis Kelly I mean, its something were looking at something we don't agree with basically in principle and we're supporting the <unk> position in the stand there taking in that so.
I think that's important we're evaluating it from a mid sized bank coalition perspective, as well will likely supported the avs position because.
But having said that we're also starting to do the analysis of what it would be because you have to be responsive to it it isn't a rulemaking process, which means it will take some time to come into effect and not knowing exactly what the final outcome will be.
We're still.
Waiting to get a better idea because they're doing the analysis I think it's fairly straightforward. Once we have an idea of what the final will be.
Yes.
Great. Thank you I'll step back with my questions have been asked and answered appreciate it.
Okay.
Thank you.
One moment for questions.
Our next question comes from Christian <unk> with Goldman.
Goldman Sachs you May proceed.
Alright, thanks for the question.
Putting the public deposits the side for a second can you maybe provide some context on how.
Commercial and retail deposit rates have performed alongside the rising rate cycle, and how you expect repricing to react.
Relative to that win rates ultimately start to fall.
Yes.
For the most part again I guess Christian ill just kind of.
Speaker Change: I'll go back into it we have a we have a few different segments. The way we think about.
In both the retail and the commercial side of the world.
There is a segment or a portion of the balances as rate sensitive and there is a portion that therefore.
Operating accounts and EBITDA working capital that kind of thing and so.
On the way on the way up they got the benefit of rates on the way up pretty much in a 100% kind of beta scenario and so.
On the way down.
Expectations are very similar.
We would be able to reduce those rates.
As well.
Again.
The portion of deposits that we have that are in that 100% beta is probably like think about it in round numbers, it's probably like 80% of what our what our floating rate loans are.
So.
And kind of a down rate scenario.
There'll be an immediate reprice of loans that are there is a little bit higher than what our deposit start but a substantial amount of those deposits will also ticked down as well so.
In totality, we kind of.
Just think that that's it.
That's where we're at in terms of the mix and we will be able to we'll be able to manage those rates down.
Time pretty well.
Speaker Change: Just to add the jamie's comments.
I think we talked about it it's been several quarters.
We were talking to our customers are those segments high net worth mass affluent.
Corporate when we were increasing rates on the way out and we continue those conversations but the expectation is when rates go the other way that there won't be a lag that we will be working with them on the way down as well so that's been.
Very well communicated.
Our bankers to the customers. So we think thats.
Doable thing, we are not seeing much deposit pressures in the market and to be honest.
Great. Thank you.
Speaker Change: Yeah.
Thank you.
One moment for questions.
Our next question comes from Andrew Liesch with Piper Sandler You May proceed.
Alright, thanks for taking the follow up here I'm, sorry to keep bringing up expenses, but what's the.
The quarterly trajectory how do you expect these costs to play out this year.
So it's always slightly elevated Q1.
Extra taxes and things like that just true up things happened in Q1, but Intel.
In totality, it's probably going to be generally flat across the across.
Across the year.
That's kind of the way that we have it looked into.
Enter into my model of it so generally pretty flat maybe slightly elevated Q1.
Got it so more seasonally adjusted stopped during the first quarter than more of the investment starting to ramp up and offset some of the seasonal adjustments as they fall off as the year goes on.
Yes, I think Thats a.
Pretty good way of looking at it.
Got it okay. Thanks, so much I appreciate it.
Yes.
Thank you I would now like to turn the call back over to Kevin <unk> for any closing remarks.
Thank you. We appreciate your interest in first Hawaiian and please feel free to contact me. If you have any additional questions. Thank you.
For joining us and enjoy the rest of your day.
Speaker Change: Thank you. Thank you for your participation you may now disconnect.
Okay.
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