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spk10: Good day, and thank you for standing by. Welcome to the first Hawaiian fourth quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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 Haseyama, Investor Relations Manager. Please go ahead.
spk04: 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 Misik, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.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. The appendix to this presentation contains reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measurements. And now I'll turn the call over to Bob. Good morning, everyone.
spk07: 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 in financial management. We're excited to welcome Jamie to the bank. I also want to extend a special thanks to Ralph Musick for his contributions as acting CFO over the last year until Jamie joined us. Now, a brief update on the local economy. The Hawaii economy continues to do well. In December, the statewide unemployment rate fell to 3.2%, slightly below the national unemployment rate of 3.5%. Total visitor arrivals were 735,000 in November of last year, 9.1% below the November 2019 arrivals. Japanese visitor arrivals remained below historical levels at 3.8% 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, visitors' spend in November was $1.5 billion, up 13.7% over November 2019. The housing market has remained stable, 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 $503,000, 3.6% 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 $79.6 million or 62 cents per share. Loans grew, net interest income continued to increase, while non-interest income returned to normalized levels, and non-interest expenses stabilized. Our return on average tangible assets was 1.34%, and return on average tangible common equity was 25.93%. We continue to maintain strong capital levels with a CET one ratio of 11.82% and total capital of 12.92%. The board maintained the quarterly dividend at 26 cents 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 continued to use excess cash and the investment portfolio to fund loan growth and deposit runoff. We ended the year with cash and cash equivalents at about $527 million compared to where we started the year at $1.2 billion. The investment portfolio duration remains stable at 5.6 years for the quarter and cash flows from the portfolio was about $75 million per month. Our liquidity position remains very strong with a 65% loan to deposit ratio, a strong core deposit base, and 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 2.9% 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 $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 8.7%. 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.
spk01: Thanks, Bob, and good morning, everyone. Turning to slide 5, deposit balances decreased by $403 million, or 1.8%, 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 were 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. RAC rates on checking and savings accounts continue to remain stable. Turning to slide six, net interest income increased by $9.1 million, or 5.6% 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 3.15%, 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. The 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, non-interest income was $48.2 million in Q4, a $2.3 million increase over the prior quarter. The improvement was due to the return of BOLI 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 non-interest expense as our new baseline, we expect that full year 2023 expenses will be approximately four to four and a half percent 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 four to five million dollars annually, we expect 2023 expenses to be approximately three to three and a half percent higher than that annualized fourth quarter number. Now I'll turn it over to Ralph.
spk03: Thank you, Jamie. Moving to slide eight, the bank enjoyed good credit performance in 2022, and our asset quality metrics were strong at year end. Net charge-offs were down by $1.2 million year over year, or almost 10%. And our annual net charge-off rate was eight basis points, two basis points lower than 2021. NPAs and 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 1.02% 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 anticipates cyclical losses consistent with a recession and includes a qualitative overlay for potential macroeconomic impacts not captured in our base model. Let me now turn the call back to Bob for any closing comments.
spk07: Thank you, Ralph. Thank you, Jamie. Nothing else to add? Welcome. Any questions? Kevin?
spk10: Thank you. As a reminder, to ask a question, please press star 11 on your telephone. and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Steven Alexopoulos with JP Morgan. Your line is now open.
spk06: Hi, everybody. Hey, Steve. Hey, Steve. I want to start, so I appreciate the lone 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 beta on interest-bearing deposits. But how do you think about by the fourth quarter of 23?
spk01: Yeah, well, you know, that's the question, isn't it, Steve? This is Jamie. Good morning. You know, I think that that's going to be entirely dependent on what we see macro rates do. If the Fed... If that continues to increase, we'll see deposit costs go up, probably consistent with that data that we described. And if they don't, then we'll probably see some stabilization here in rates in the first or second quarter. Anything else to add, Bob?
spk07: Yeah, no, just that, you know, from the beginning of the cycle, we stayed very close to our customers and really taking care of them on deposit rates and making sure that, you know, we're competitive. That will continue depending on where the Fed goes with rates. 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.
spk06: And then on the growth side, can you guys talk about that? You know, we know 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.
spk07: I think we'll start with, you know, as we have been funding it with the runoff of the investment portfolio, At that $75 million a month, that might slow a little bit, but still we're in the $800 million-plus range of investment flows for 2023. That's the start, and certainly that allows us to not only fund a good amount, if not all, of the loan growth, but also take care of future deposit runoff should that happen.
spk06: Okay. And then on the non-interest 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, they're chasing higher rate. Can you size for us, we're trying to get a better sense, I know we keep asking the same question, where that mix of non-interest bearing could move to?
spk07: Yeah, that's, you know, 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 offered to the customer, so it hasn't, 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, you know, that sort of thing. So there's a lot of moving parts of that without seeing a big change in customer relationships. But Jamie or Ralph, anything you would add to that?
spk01: No, I think you've nailed it, Bob. You know, I think, you know, we are likely to see some migration continue to go from non-interest-bearing to interest-bearing accounts. And, I mean, you know, I suppose if you look back to history, we were, you know, kind of just under 40% or so non-interest-bearing deposits to total deposits. So, I mean, I think if you, you know, think about, you know, that sort of migration, I think, you know, that is maybe what we could see or, you know, maybe slightly better than that. I mean, you know, it really depends on, you know, how long this cycle lasts.
spk06: Okay. Jamie, congrats on the position. Ralph did a great job while they were waiting for you. And thanks for taking my questions. Thanks, Steve. Thanks, Steve.
spk10: Thank you. Our next question comes from the line of Andrew Leash with Piper Sandler. Your line is now open.
spk05: Hey, good morning, everyone. Hi, Jamie. Hi, Andrew. Question on the margin here. Sounds like a little bit more expansion this quarter, but then do you think it's going to top out there, or is there still some benefit that could come from rate hikes, depending on what we get here in the next few months?
spk01: Yeah, 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 NIMH. And if there aren't, then maybe we're sort of, you know, at that range on the guidance there. So, you know, again, right, this is all forecasting what we think the Fed is going to do and, you know, how our balance sheet sort of catches up on those things. So, 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.
spk07: We do feel what deposit rates are now relative to interest rates. So, we don't feel there's a catch-up. 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.
spk05: Gotcha. And then on the cadence of the loan growth, mid single digits, how's that going to transpire throughout the year? I guess, how's the pipeline looking for this quarter? How much is, what are the dealer flooring customers telling you?
spk07: Yeah. You know, as you saw, we ended up, the year with a strong fourth quarter and dealer flooring higher than it had been. It had been going to about $25 million a month increase for fourth quarter. It was above that right at 120, but that still left us at just about 450 million versus December 2019 at 860. So I don't think there's any way we're going to go up $400 million in 2023, but I think there will continue to be accretion and increase in that dealer flooring book and supply lines become unstuck and we see a little bit slowdown in buying activity by the consumer. So I think there will be kind of a tailwind for us in 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 are seeing growth in that based on existing relationships we have with customers. So I think those are some of the puts and takes. The one that we have more control over and we're still in that market is commercial real estate. And that still remains active, but probably not at the same level we saw in 2022. Got it.
spk05: That's a great color. Thanks so much. Guys, I'll step back.
spk10: Thank you. Our next question comes from the line of Kelly Mata with KBW. Your line is now open.
spk08: Hi. Good morning. And, Jamie, it's nice to have you on the call. I thought I would follow up on the loan growth side. If you could provide any further outlook on what your mid-single-digit loan growth guidance incorporates in terms of growth in Hawaii versus on the mainland.
spk07: Yeah, 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'll 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 lines in the mainland now, as we've talked about on previous calls. So as far as a ratio of dealer floor plan growth, it will be a little bit more heavily weighted towards mainland versus Hawaii. but primarily because there's a larger amount of lines to our mainland customers and our Hawaii customers. So I think that will happen. On 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.
spk08: I think that's helpful. I would like to turn back to the expense guidance. I think what you said implies about $118 to maybe $120 million quarterly runway, which is certainly a step up from this quarter. Part of that was 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 And conversely, is there any areas where, you know, as you look into the next year and beyond, where you can find areas of improvement on efficiencies?
spk01: Yeah. Hi, Kelly. This is Jamie. You know, I think we'll always be looking at that, trying to improve efficiencies wherever we can. You know, I think, you know, the three to three and a half percent guidance is sort of reflective of inflation and inflationary pressures that we're seeing, which I think is, you know, pretty sort of normalized in this environment. And, you know, I think we want to make sure that we're continuing to invest in the business, you know, continuing with the digital transformation that we're undergoing. You know, core is kind of behind us for the most part now. So now we're really looking to take advantage of all the options that that is going to bring us. So, you know, I think the guide, you know, is a good number. Of course, we'll always be looking. But, you know, I don't see much difference off of the three and a half, or sorry, the four to four and a half percent inclusive FDIC at this point.
spk08: Got it. Thanks so much for the help. I'll step back.
spk10: Thank you. As a reminder, to ask a question at this time, please press star 11 on your touch-tone telephone. Our next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is now open.
spk02: Hey, good morning. I'm Jamie. Congratulations. Hope you enjoy the weather there better than New England. It's a little colder here today.
spk01: Thanks, Jared.
spk02: Maybe just looking 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 funding up at lower rates from a prior rate environment, or what is the construction funding looking like specifically, too?
spk07: Jared, maybe I'll start this, Bob, and ask Ralph to have some comments on it. We have seen an increase in margin in construction loans. also an increase in rate because you know I think 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 have seen a quarter over quarter nice increase in our weighted average coupon across the entire loan portfolio and so maybe was there anything else Ralph you would add to that
spk03: No, not really. I mean, I think we're at a point in the cycle where we would anticipate some improvement in the margins.
spk02: Okay. Did I answer your question, Derek? Yeah, yeah, 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 and earlier construction loans, but all floating is good.
spk07: Yeah, they're still going above the old margin, but they're coming in at higher rates just because of rate increases.
spk02: Yep. And then on the allowance, with the decline this quarter in the ratio, can you just give a little more color behind what you're looking at to drive that lower? I think that's a little counterintuitive to what we're seeing from some other banks that are still growing the ACL and the Moody's baseline model. continues to be more heavily weighted to a downside scenario. I guess just some color driving that ratio move.
spk03: Yeah, I would say, this is Ralph, Jared. I think when you look at our model, our base model, actually, it really is reflective of current conditions and the current risk rating of the portfolio. That actually improved this quarter. As far as the economic outlook, our economic modifier is based pretty heavily on the anticipation of an unemployment rate here in Hawaii. That's a little bit lower than the US 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. Having said that, I think we are provisioned for what would be a recession. I think when we calculate our one-year expected loss against the portfolio, it's probably a little bit higher than our peak loss, which I think during the GFC was about 72 basis points.
spk02: Okay. And then just finally for me on the buyback authorization, is that something that we should thank you for? fairly active with earlier in the year, or how should we be thinking about the timing and pace of 5X?
spk07: Yeah, maybe I'll start with Jamie. This is Bob, Jared. And really, we're still looking at that CET1 guide of 12%. We had some very good loan growth in Q4, and it's that mixed changes out of lower risk-weighted securities and obviously much higher risk-weighted loans. That's more of a capital drag, so that's what You know, we didn't increase a CT1 to our target in Q4, but, you know, we're still working on that. I think with the 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. It's just really hard to peg a date on when that would be.
spk01: But, Jamie, anything to add to that? Yeah, no, I think you got it, Bob. I mean, I think it sort of boil it down, it's like a combination of opportunism and dependent upon where capital ratios go. So yeah, I wouldn't expect it to be even throughout the year.
spk02: Okay, thank you.
spk10: Thank you. Our next question comes from the line of Lori Hunsaker with CompassPoint. Your line is now open.
spk09: Hi, thanks. Good morning. And I just want to say welcome. Welcome. Thank you. So circling back to dealer floor plan, can you help us think about how big that portfolio is going to go to? You've added a lot. And then what's the split on the $456 million in terms of what's in California? And can you just remind us, what are the terms of the new loans coming on the coupon?
spk07: Yeah, maybe I'll start off with that and ask Ralph to jump in and help me out or Kevin on some of those. you know, dollar details. But dealer floor plan, we don't have a huge difference. And I go back to 2019. I don't think it's a real significant difference in the amount of lines available to our customers. There's been, you know, some ins and outs, increases, declines, some customers actually selling their business to other of our customers or outside of our network. But there hasn't been a big change in the total of commitments. The mix in Hawaii has stayed, the amount in Hawaii has stayed pretty constant over the years while the growth has been in California. So as I mentioned earlier, it's a higher percentage of our lines are in California relative to Hawaii. I don't have that percentage. I'll ask Ralph to comment on that in a second. But when you look at the growth in the fourth quarter, much of it was from California. I think it was $117 million of the $120 million were draws under the California lines. So, you know, the cars that are getting delivered in Hawaii, there's more of a backlog and that sort of thing, hard to tell. But I think you'll see as we go into 2023, we will see in the Hawaii outstandings relative to the total. To the greater question of what the total is completely, As I might have mentioned earlier, we're about $400 million less in outstanding than we were at the end of 2019. I 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 has down slightly, although we still have a pretty good backlog that a lot of our dealers, people that have ordered cars that have not yet been delivered. So it's really hard to peg, you know, when supply lines unlock and cars get delivered and do people follow up around the reservation commitments they've made or, you know, give that car up to somebody else. All that's going to be the flex, but I think we're going to see healthy growth in 2023 just based on our existing customers. But Ralph, do you have any specifics you could add?
spk03: Yeah, just to give you the numbers, the mainland portfolio is about $310 million. Hawaii and Guam, about $146 million. So most of that growth, as Bob had mentioned, came in the mainland.
spk09: Got it. Perfect. And then can you just remind us what the coupons are right now for new loans coming on there?
spk07: Generally, we're library slash SOFOR plus, you know, a 1% plus margin. And it varies by customer, but everything's over... About 641 today. Yeah, okay. Yeah.
spk09: Perfect. Perfect. Thank you. Thank you. Okay, and then just going back to the funding side for a moment, 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 book goes?
spk01: Yeah, so on the public side, just under a billion was time, and the rest was demand and savings accounts. You know, I think, you know, it's hard to say, Laurie. You know, I think that we will use the public markets there to kind of plug any holes that we fill or that we need to fill in terms of on balance sheet loan growth that aren't quite filled by the securities portfolio runoff. So that sort of number is going to be entirely dependent on our loan growth and our ability to gather other deposits. So that's kind of how we're thinking about it right now.
spk09: Okay, perfect. And then Jamie or Ralph, can you share with us where is your spot margin for December, if you've got that?
spk01: So for December, it was 319.
spk09: Okay, perfect. And then just two last questions on the income statement. How should we think about forward-looking tax rates? And then secondly, can you comment a little bit? You had an outsized bully in the quarter, and I know that line item is lumpy, but was there any death benefit there or – Was that sort of the market moving? Can you help us think about that, that $2.9 million in the bully line?
spk01: Yeah, sure. So in the bully line, we see that as kind of normalized back to where we think it will run on a go forward. And that was no death benefit in there. That was market driven. And then your other question, Lori, was tax rate. Yeah, sorry. So we think a good guidance is 25%. We had some tax credits come through in the fourth quarter that sort of reduced our tax rate here to that lower level, but we're expecting 25% for 23. Great.
spk09: Perfect. Thanks for taking my question.
spk01: Thanks, Lori.
spk10: Thank you. Our next question is a follow-up from Kelly Motto with KBW. Your line is now open.
spk08: Hi. Thanks for letting me jump back in. Just a real quick one. Can you just – was the expense guide 4% to 4.5% or 4% to 5%? We have different things, and I don't trust a live transcript, so I just want to make sure I have the number correctly.
spk01: Well, we definitely appreciate you following up here versus trusting a transcript, so 4% to 4.5%.
spk08: Perfect. Thanks so much. Appreciate it.
spk01: All right, Kelly.
spk10: Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Kevin Haseyama for closing remarks.
spk04: 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.
spk10: This concludes today's conference call. Thank you for participating. You may now disconnect. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.
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