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spk02: 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 on the 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 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.
spk07: 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 Harrison, Chairman, President, and CEO, Jamie Moses, Chief Financial Officer, and Lee Nakamura, 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 these non-GAAP financial measurements to the most directly comparable gap measurements. And now I'll turn the call over to Bob.
spk06: 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, including Deputy Chief Risk Officer and Treasurer. Lee 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 Hawaii economy continues to do well. The statewide seasonally adjusted unemployment rate in June was 3%, which is lower than the national rate of 3.6%. Total visitor arrivals were 802,000 in May, which is 5.4% of the May 2019 arrival number. Japanese visitor arrivals at 34,000 was 70% below the May 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 a single family home on Oahu was $1.1 million, or 4.5% June of last year. The median sales price for condos on Oahu was $510,000, 4.5% below 2022. Turning to slide two, I'll give an overview of our second quarter results. Net income was $62.4 million, or 49 cents per share. As loans grew, we continued to grow capital, and credit quality remained excellent. Our return on average tangible assets was 1.05%, and our return on average tangible common equity was 18.57%. We continue to maintain strong capital levels with the CET one ratio of 12.05 and total capital of 13.17%. The board maintained the quarterly dividend at 26 cents. 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 30th, our total available liquidity was $8.6 billion, which was over 100% of uninsured non-public deposits. The duration of our VETMA portfolio remains stable at 5.5 years, and cash flows from the portfolio were 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, about $130 million of completed construction loans were converted to CRE, and during the quarter, We also exited approximately $55 million of 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.
spk10: 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 3.4%, 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 4.9%. Public deposit balances increased by $461 million in the quarter, as public time 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 2.91%. Throughout the end of the second quarter, the cumulative 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 migration. On slide seven, non-interest income was $47.3 million this quarter, a $1.7 million decline from the prior quarter. The decline was primarily due to lower BOLI income along with lower credit and debit card fee income. First quarter BOLI income included a $2 million death benefit. Expenses were $120.9 million, $2.3 million or 2% higher than the prior quarter. The 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 Leigh.
spk01: 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 two charge-off rate was 10 basis points, one basis point higher than in quarter one. Non-performing assets and loans 90 days or more past due 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 assets at 52 basis points and classified assets at 41 basis points of total loans and leases. the bank recorded a $5 million provision for the quarter. Loans 30 to 89 days past due were $40.8 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. The reserve increased marginally this quarter, resulting from offsetting factors including loan growth, an improved economic outlook, and an increase in the qualitative overlay on construction and home equity. The allowance for credit loss increased $1.5 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 anticipates cyclical losses consistent with a recession and includes a qualitative overlay for potential macroeconomic impacts 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. The overall credit portfolio, sorry, excuse me, the overall credit quality of this portfolio remains very good. The increase in criticized office 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 is being actively resolved. This loan is current and we are comfortable with the plan. The 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.
spk06: Okay, well, thank you, Jamie and Lee. Now I'll be happy, we'll be happy to take your questions.
spk02: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 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.
spk05: Hi, everyone. Morning, Steve. Hey, Steve. I want to start. So on the noninterest-bearing deposits, there was another quarter where you and the industry saw strong outflows. But I'm curious, how did this trend through the quarter, and are there any signs of the pace of outflows abating?
spk10: You know, it's kind of hard to say for sure. I would suggest 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, you know, on a relative basis, less outflow than what we saw through the three months in Q2. So, you know, I think if you're drawing, you know, if you're looking at a graph of where deposits have been going and you're drawing a trend line, I think you start to see that flatten out. At least so far in the quarter, that's what we've seen. Okay.
spk05: 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? I know it's going to be contingent on what you just talked about, but if that trend line is starting to flat on the NIB outflows, do you think we might get some stability after the third quarter?
spk10: I do think that, right? And obviously, Steve, that's entirely contingent upon what happens with the Fed and rates and all that. But we do see that sort of the bottom of our guidance. We think that's probably about where it bottoms out given sort of a stable forward outlook at this point. And that's probably like somewhere in the fourth quarter for us. So that's kind of how we're thinking about it and how we're planning going forward.
spk05: 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 you had a very strong second half, but you're not expecting to have good momentum, good conversions, decree. You're not expecting more momentum to continue. I'm surprised you're not at least pointing to mid-single digit growth. Thanks.
spk06: Yeah, it's a tough one, Steve. We have a number of commercial real estate projects that are, you know, completing and going to get paid off. So a little bit, we're swimming upstream on that. And, you know, origination to your point is 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.
spk05: Got it. And I saw you're called out that you saw a good growth in the dealer. Where do dealer balances sit now versus historical? Just wondering how much room there might be for still an improvement there.
spk06: You know, I have that here somewhere, but I know we're still several hundred million below the 2019 year end. I think it was 850, give or take it 2019. And where are we at today, Jamie?
spk10: I think it's just under, it might be right around 700, just under 700. So, yeah, Steve, I think we have, I think there's probably a good, you know, as Bob said, right, I think there's probably at least a couple hundred million dollars worth of room there given historicals.
spk06: Yeah, the question is, does it go back to the way it was before? And, you know, you probably saw an article in the Wall Street Journal yesterday saying probably not. I tend to agree with that. The 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, it's higher than where we are today, but it's probably not where we ended 2019. Okay.
spk05: Thanks for answering my questions.
spk02: Thank you. Our next question comes from the line of David Feaster with Raymond James. Your line is now open.
spk04: Hey, good morning, everybody. Hey, Dave. Maybe just following up on your commentary about the upcoming 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 6 to 12 months, where roll-off rates are, and then where maybe repricing tends to be, as well as new loan yield add-on rates?
spk10: So, Dave, just to clarify, you're talking about securities or loans?
spk04: Loans.
spk10: Got it. Okay. Yeah. So, I mean, so I think what you're really asking is essentially a NIM question here, right? That's what you're trying to get at, right? So, I appreciate you trying to ask that a different way. But, you know, so I think, you know, the NIM guidance is the NIM guidance. We're seeing, you know, we'll call it like – adds to the portfolio in totality. We're seeing sort of on the commercial side a little bit higher in sort of the low sevens. We're still adding to 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 the roll-on rates at the moment. And to be fair to all that, we're seeing in general we're seeing a better ability for us to dictate pricing, structure, and credit today than we were in the past, right? A little bit more of a buyer's market rather than a seller's market today.
spk04: That's terrific. And ultimately, what I'm trying to figure out is kind of where does the core NIM stabilize as we look forward? So, Maybe on the other side of the coin, I guess on the deposit front, 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 core deposit growth going forward, the strategy to continue to drive that, and where new money yields are on interest-bearing deposits?
spk06: Yeah, 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, you know, 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, you know, more value to the customer. We're upgrading our mobile offering system. this month, later this month, or actually next month in August. And so all those things, I think that's been successful. So really trying to grow that core operating account type of deposit. On the lending side, it's very interesting. To Jamie's point, it's being much more disciplined on how we're going after business. We've seen rates and terms move back to what I think is more sustainable levels. People with, you know, being very aggressive and 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. You know, 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. It's something we've been in for a long time. But it just didn't make sense there for a while. Now you're starting to see that, and especially to Jamie's point on the commercial side, a more reasonable market out there.
spk04: That's – and then just where are you seeing, you know, I guess new deposit – interest-bearing deposit costs coming on?
spk10: It's a tough question because they come on at different rates for different types of customers that we have. In general, Dave, what we're trying to do is we are trying every day, we're trying to go out and grab new customers. At the moment, that's not really through some promotional offer that we're really offering, especially on liquid side of things. This is part of the reason why you've seen the runoff and balances that we have. 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. To the extent that it's not a relationship that has been here for a while, we're thinking letting some of those deposits run off the balance sheet while taking care of our core customers. You know, it's kind of a, you know, it's a tough question that there being some customers, obviously, our best customers are getting, say, higher exception rates and yields in their liquid portfolios. Our less best customers are getting lower rates. And, of course, that's dependent upon, you know, account size and things of that nature in there as well. So, you know, it's kind of a continued management of, managing the entire balance sheet and managing the relationships that we have, you know, both on the acquisition side and the current relationships that we have.
spk06: We talked about this starting a year ago, Dave, that, you know, for our larger balance commercial and personal customers, we really started taking care of them early, and now it's just kind of going through the rest of balance sheet. We're getting to the earlier question from Steve. We're getting close to the end on that, I think.
spk04: That's great. But maybe following up on some of your commentary on the loan side, Bob, I'm just curious, 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? 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?
spk06: Yeah, and start maybe with the end of that question. We're right about 24% of our loans on the mainland now. As we've talked about in previous calls, we assumed that would go up a little bit sooner than the Hawaii loans, although it is keeping pace, a 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 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 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 floor plan outstandings. On the commercial real estate side, you know, to Jamie's point, better pricing, better structure, that's both here in Hawaii as well as on the mainland. So, you know, if you're open for business, which we are, we're going to be more particular, but you really can get a better structured transaction. at higher pricing, and so we're looking at that. Where it's going to be slow, not surprisingly, is residential. Home equity, I think, 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.
spk02: Thank you. Our next question comes from the line of Kelly Mata with KBW. Your line is now open.
spk03: Hi, thanks for the question. I apologize, I'm joining a little bit late, so I apologize if this has been already asked, but it seems like you're 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, you know, headwinds for margin that you've been discussing, at least near term, is there any additional room on the expense side? I know you're already directing a lot of attention there. And, you know, as we look ahead, is this still a good range and still looking for the same kind of level of expenses that you have at this point? Thanks.
spk06: Kelly, this is Bob. Yes, we're always focused on expenses. We have been investing more, clearly, in our technology and our people. Getting good people, like many other places, has been a challenge, so we have made adjustments there. That, we think, is really a long-term investment, much like our technology. Now that we've gotten there, I think we're closer to being more of a status quo on our salary and benefits type expenses. But on a broader level, maybe I'll turn that over to Jamie.
spk10: Yeah, 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 things on that side, operational efficiencies, that sort of stuff in the house. And whether or not, you know, the name is going to be lower or, you know, 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 on the year that we gave up front is still, you know, we still 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 were. managing those what I would call expenses that are sort of, you know, non-strategic. 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'll, you know, we're heading into budgeting season and things right now. So, you know, we'll obviously be looking at that, but not ready to give any guidance sort of into 2024 at the moment.
spk03: Got it. And maybe a final question for me. I think in your prepared remarks, you said something about exiting some SNCCs or mainland kind of club deals. As you look ahead to where loan growth is going to be coming from, what's the appetite for continued growth on the mainland?
spk06: Yeah, Kelly, really, I look at that as almost two different questions. I think there is clearly why we exited those relationships. Well, they weren't relationships. They were just credit-only deals. And we're really, as we look at the scarcity and value of liquidity and capital, we really wanted to focus on relationships and whether those relationships are here in Hawaii, which is our home, and we want to do as much of that as we possibly can. And we also have relationships in the U.S. mainland. So it really is more of a focus on where we can add value and where there's more than maybe just a credit relationship as opposed to where the domicile is.
spk03: Got it. Appreciate it. Thanks so much. Thank you.
spk02: Our next question comes from the line of Andrew Leash with Sandler O'Neill. Your line is now open.
spk09: Everyone, just a couple housekeeping items for me. The non-interest income is like $47 to $48 million, still the right range to be thinking about. You got it. Got it. And then, you know, the tax rate for a couple quarters was slightly below where I was forecasting. What should we be using on that front?
spk10: I think 24 to 24.5% is a good number on the tax rate.
spk09: Gotcha. Thank you. You've covered everything else I wanted to ask about.
spk10: All right, Andrew. Thank you, Andrew.
spk02: Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your touchtone telephone. Our next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is now open.
spk08: Hey, everybody. Thanks for taking the questions. Maybe starting with going back to the shared national credit, Um, discussion, the exits that you talked about this quarter, were those sales or those natural runoffs? And if they were sales, was there a, was there a loss on that?
spk06: They were good question, Jared. They were sales, but at far.
spk08: Okay, and then in the commentary, you talked about the office criticized loans. I think you said that they were that 1 of them was downtown L. A. But I thought last quarter we talked or you said that your L. A. office was more West L. A. and not downtown. Can you just give an update on on what your non Hawaii office current office exposure?
spk06: Looks like geographically connecting what we said last quarter to what we said right now. They were both correct. We have 1 loan in downtown L. A. and the majority of the rest are in. West L.A. So, you know, what's really being resolved is this one loan in downtown L.A. As far as broader office, it really hasn't changed from what we talked about last time. It's primarily those gateway cities on the West Coast, several of which are credit tenants. And so the lease is set up to be, you know, it's a loan, but it really is tied into a specific credit tenant. And we're very comfortable with that or a couple that are to very high net worth individuals that have shown strong support in the past. So we're very comfortable with the rest of the office portfolio. These two popped up and they're being addressed.
spk08: 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 valuations, and it seems like, you know, construction projects and residential, there'd be very little, I guess, lost content in Hawaii at this point. What's driving the need for higher provision in those sectors?
spk01: So, I can answer that. This is Lee. So, with respect to construction, what we did in both the first quarter and the second quarter is we took a deep dive into our investor CRE and construction portfolios. And in the second quarter, we actually re-underwrote the portfolios based on current NOIs and interest rates and cap rates. And it really was, with respect to construction, it really was more about the mainland multifamily where they're still under construction and the metrics are still good today, but we had a little bit of uncertainty as to what the market would look like in a year or 18 months. And then with respect to home equity, it was about, we looked at the portfolio and we looked at the pool, the sub pool 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 the increase in the interest expense that these particular loans will be facing. So it's not a specific, I don't think it's in contrast to anything we've said before about the economy. It's just these subpockets.
spk06: And Lee brings up an excellent point I forgot to mention earlier, Jared, that we re-underwrote the entire investor CRE portfolio over anything over $5 million in balance during the second quarter. Current interest rates, current cap rates, really looking at what the risks are and the stress is and we didn't regrade anything. Right. We did that basically two quarters in a row, just to make ourselves feel comfortable.
spk08: Great. Thanks. And then on the construction loans that are rolling onto permanent, are those rates negotiated from prior, you know, so prior, before the rate hikes, are those coming on at lower rates, or are those coming on at current market rates when they go to permanent?
spk06: Most all the construction loans, 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 my earlier comments. There's a little more spread today than there was 12 or 18 months ago, but all those are floating rates.
spk08: Okay. And then finally for me, and I appreciate you taking the questions. When we look at sort of terminal beta on interest-bearing deposits, is 45% sort of a good ballpark to be looking at?
spk10: I think that's okay, Jared. You know, part of the issue with that is, you know, it really depends on what happens with deposits, right? To the extent that we're funding the balance sheet with either borrowings or deposits, right, that beta sort of can change, right, depending on how that looks. I think that's an okay number to use, you know, I think that's an okay number to use for now. And, you know, we're going to see how that moves as we go throughout the quarter. And, again, that's going to be sort of dependent upon, again, right, how we end up funding the balance sheet.
spk08: Great. Thanks very much.
spk02: 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.
spk06: I have one last comment. This is Bob. I'd like to wish Jamie a happy birthday today, and welcome. Thank you. Kevin?
spk07: Thanks, everyone. 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.
spk02: this concludes today's conference call. Thank you for participating. You may now disconnect.
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