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spk00: Good day, and thank you for standing by. Welcome to the first Hawaiian second quarter 2024 earnings conference call. At this time, all participants are in a 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 second quarter of 2024. 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 statements, 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 GAAP measurements. And now I'll turn the call over to Bob.
spk05: Good morning, everyone. I'll start by giving a quick overview of the local economy. Hawaii economy continues to perform well. The state unemployment rate has remained low. Tours have been steady, and we enjoy a healthy construction industry. Statewide seasonally adjusted unemployment rate for June was 2.9% compared to the national rate of 4.1%. Through May, total visitor arrivals were down 4.1% and spending was down 4.9% compared to 2023 levels. The year-over-year decline was primarily due to the drop in visitors to Maui. On a year-to-day basis, Kauai and Hawaii Island also saw small declines in arrivals. Japanese visitors continued to return to Hawaii, but the numbers remain well below pre-pandemic levels. The housing market has remained relatively stable despite reduced activity levels. In June, the median sales price for a single family home on Oahu was $1.1 million, 6.7% higher than March of this year. The median sales price for condos on Oahu was $530,000, 3.9% below last year. Turning to slide two, I'll give an overview of our second quarter results. Overall, we're very pleased with our strong financial performance We had good loan production, improving deposit trends, and a well-controlled cost of deposits at 1.7%. Credit quality remained excellent, and several key credit metrics improved in the quarter. Our results also benefited from solid non-interest income and good expense discipline. Additionally, we believe that the trends we saw in the quarter put us in a good position for a strong second half of the year. Turning to slide three, The balance sheet remains a source of strength. We continued to use the runoff in the investment portfolio to fund loan growth and reduce high cost deposits. We also maintained ample liquidity. Our deposit mix continued to show signs of stability. The ratio of non-interest bearing deposits to total deposits was unchanged from the prior quarter at 34%. We remained well capitalized and our capital levels continued to grow during the quarter. Turning to slide four, total loans grew by $39.7 million over the prior quarter. Overall, we had good production in several areas, led by draws on existing construction loans and new leasing opportunities. CNI production was driven by an increase of about $150 million in dealer flooring loans. This was partially offset by paydowns and payoffs of other CNI loans. In particular, we sold two criticized SNCC loans at par that totaled $27.5 million. The decline in the consumer loan balances was due to runoff in the indirect auto portfolio. Looking forward, the pipeline is strong, and we think the production will pick up in the second half of the year, weighted towards the fourth quarter. Our outlook for the full year is low single-digit loan growth. Now I'll turn it over to Jamie.
spk09: Thanks, Bob. Turning to slide five, total deposits were down $351 million, driven by a $216 million decline in total public deposits. Overall results in the second quarter continued to demonstrate the strength of our deposit franchise as we saw several positive trends that should put us in a good position for the second half of the year. The migration of non-interest bearing deposits to higher cost accounts slowed in the quarter, and the ratio of non-interest bearing deposits to total deposits remain a solid 34% unchanged from the prior quarter. This favorable deposit mix contributed to our low 170 basis point total cost of deposits, which increased only five basis points links quarter as compared to nine basis point increase in the first quarter. Overall, deposit pricing in the local market has remained rational and we anticipate that these trends will continue to support our performance in the second half. On slide six, We see that net interest income was $152.9 million, $1.6 million lower than the prior quarter. The decline was primarily due to lower average balances of cash and investment securities than the prior quarter. The margin was up one basis point as the benefits from asset repricing, changes in balance sheet mix, and a maturing swap were partially offset by higher deposit costs. Looking forward, we expect the NIM in the third quarter to be relatively flattish. We continue to believe that the balance sheet repricing dynamics support an upward trend for the NIM, but the timing and pace of rate cuts will impact that absolute level. Turning to slide seven, non-interest income was $51.8 million, about $400,000 more than the prior quarter. Non-interest income in both the first and second quarters of this year included about $2 million of various insurance proceeds. So we continue to expect quarterly non-interest income to be in the $49 to $50 million range. Non-interest expenses were $6.7 million lower than the prior quarter. Now recall that first quarter expenses included the $4.1 million FDIC special assessment. We continue to expect our quarterly expense run rate to be in the $125 million range. And now I'll turn it over to Leigh.
spk01: Thank you, Jamie. Turning to slide eight, our overall credit quality remained excellent and we saw improvement in a number of key credit metrics compared to the prior quarter. As Bob mentioned on a previous slide, we sold two criticized SNCC flows at par for a total of $27.5 million in the second quarter. This action was part of our continuous credit monitoring and management process, and we currently do not see any areas of credit concern in the portfolio. Moving to slide nine, we show our first quarter allowance for credit losses broken out by disclosure segments. The coverage ratio remained unchanged at 1.12%. we continue to stress test the portfolio and believe that we remain well covered. Turning to slide 10, we provide an updated snapshot of our CRE exposure. CRE represents approximately 30% of total loans and leases. Credit quality remains strong with LTVs manageable and criticized loans continuing to comprise a very small portion of the portfolio. Let me now turn the call back to Bob for any closing remarks.
spk05: Thank you, Lee. Thank you, Jamie. All in all, we had a good quarter. We saw some very positive trends that will drive our performance in the second half of the year. Loan production is picking up. Deposits and deposit costs are stabilizing. Credit quality remains excellent. Expenses are well managed. And non-interest income is stable. Now we'd be happy to take your questions.
spk00: 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. Our first question comes from the line of Stephen Alexopoulos with JP Morgan. Your line is now open.
spk06: Hi, everybody. Hi, Steve. I want to start. So, Bob, on the loan outlook, you're sticking with low single digit. You're basically flat right now where you were year end. By my math, you need $300 million, $400 million of growth to get to low single digit in the second half. Can you walk us through how you'll get there, like what will change that dramatically versus the first half?
spk05: Yeah, we saw some paydowns in the first half that we don't anticipate in the second half. That's part of it. You know, we're not swimming upstream as much. We think that the rate of indirect runoff will slow. For residential, we think that will continue to be a challenge, candidly. You know, so we're not expecting much change there from what we saw in the first half. But on the commercial and CNI side, there's a number of transactions that are in the pipeline that we think are going to meaningfully add to our balances. You've also seen some of the comeback in dealer floor plan loans. Those are somewhat volatile, but that is seemingly coming back. If you kid with Kevin and Jamie, you say it enough times, eventually it'll be true, which happens to be the case this quarter. But I think those are the really key areas, CNI, CRE, less so on the consumer side.
spk06: Got it. Bob, could you help us understand, so if you look at the paydowns that occurred in the first half, just so we see what you're looking at, why you're confident they're not going to repeat again in the second half. Is it just maturities you had in the first half and you don't have the same degree in the second half? Just help us understand what gives you the confidence on the paydown side.
spk05: Yeah, we saw several loans pay off on the construction side in the first half. One of those we liked, which was this quarter, we talked about it on the last call, was that $24.5 million substandard multifamily deal that paid off. That was sooner than expected, but welcome. The couple of deals we just sold at par, we're not looking to prune the portfolio anymore at this time. So that is, again, helpful. We're not expecting too much in the way of construction completion during the second half of the year, so that continued build as the draws come in over the next six months will be helpful. So those are really the things, Steve. The wild card is still a little bit the dealer floor plan. It's hard to predict exactly what those balances will be. Right. Okay.
spk06: And then on the margin and NII outlook, So it looks like, based on the inflation data today, we will very likely get a rate cut in September. Help us think through what your updated thoughts are on NIM. Can you grow NIM, hold NIM flat with cuts? And can you grow net interest income, which is probably even more important, in the backdrop of the Fed cutting rates, I don't know, once per quarter or something like that?
spk09: Yeah, that's a great question, Steve. So from a NIM perspective, I guess I would say that we expect the trajectory of the NIM to continue to rise. But if there is a rate cut, just on an absolute level, the NIM will decline in the quarter that there is a rate cut. We still do have a slightly asset-sensitive balance sheet. And you'd also expect one month SOFR to lower itself in anticipation of rate cuts as well. So repricing of loans happens slightly ahead of the repricing of deposits. And so you'll see a small decline in the NIM based on that. But then the underlying dynamics of the balance sheet should allow us to actually increase NIM even through the backdrop of rate cuts, but at lower absolute levels.
spk06: Okay. And what about your ability to grow net interest income?
spk09: Right. So net interest income, that's, yeah, sorry about that, Steve. So that will be dependent upon loan growth. You know, continued rotation out of securities and into loans, that could help us grow NII. But, you know, on an apples to apples basis, the NII would decline in that scenario.
spk05: And just to add to that, to Jamie's comments, which I agree with 100%, is, you know, the Stabilization of our deposit balances is a big part of that as well. But at some point, if they start going the other way, which they haven't yet, that would certainly be helpful.
spk06: Okay. And then, thank you. Just finally, on the securities portfolio, the yield really jumps out quite a bit, how low it is. And I know you're not reinvesting there, which is a factor, but still six billion of securities or so. Have you guys looked into or seen quite a few banks do portfolio restructurings to you have the capital to pick up yield? What are your thoughts there? Thanks.
spk09: Yeah. Yeah. Thanks, Steve. So, you know, we're aware we've seen we've seen people do that out in the marketplace. You know, we did that a little bit in the fourth quarter of last year. But, you know, we continue to think that the right move here is to sort of, you know, continue to run the securities balances down, you know, and just try to rotate that into loan growth at the moment. So, you know, we're aware, we kind of weigh the costs and benefits of that. You know, we understand why people do it. You know, we understand the reasonings behind it, but, you know, at the moment, we're comfortable with how we are managing it, which is to just continue to run securities down and try to rotate that into loan growth.
spk05: And Steve, there's one clarification we want to make with you as well, that on the million-dollar donation in Maui, along with the Federal Home Loan Bank, that did come from the bank, as it has to in that situation, but they triple-matched us, so we put in a quarter million and they put in $750,000, so the total is a million. So just to give you that additional detail. Got it, got it.
spk06: Okay, thank you. All right, thanks for taking my questions.
spk00: Thank you. Our next question comes from the line of David Feaster with Raymond James. Your line is now open.
spk07: Hi, good morning, everybody.
spk00: Good morning, David.
spk07: I just wanted to dig into maybe some of the core deposit trends. You laid out some of the dynamics that we saw in the core of public funds moving out some of the pressures on retail and commercial deposits. But I was hoping you could maybe talk to about some of the movement that you saw throughout the quarter, you know, kind of from early in the quarter through quarter end. And what gives you confidence that things are stabilizing?
spk09: Thanks, Dave. So we saw most of the deposit outflow happen in the first part of the quarter. Now, you know, we saw the same thing in first quarter as well. But the overall magnitude of the change, in particular on a non-interest bearing deposit side, was significantly less in Q2 than it was in Q1. And so we continue to be cautious around that, but we think that the magnitude of the deposit changing the way it did is really, you know, makes us hopeful for the rest of the year. It gives us some confidence that we think that those dynamics are slowing for sure. And again, when you think about this in the context of the greater economy and rate cuts looming, we think that, you know, we think that the kind of the worst is over in terms of folks shifting out of noninterest bearing into interest bearing deposits.
spk07: All right. That's great color. And then maybe somewhat of a difficult question to answer because there are a lot of moving parts, but I'm just curious, how do you think about the size of the balance sheet going forward? Obviously, we talked about loan growth improving and maybe to the extent that we do get core deposit growth, would you expect to reduce higher cost funding and use securities cash flows to fund growth? And the balance sheet maybe remain relatively stable or even decline. I'm just kind of curious, how do you think about it?
spk05: Yeah, Dave, maybe I'll start and then hand it off to Jamie. So we see that shrinkage slowing, is deposit runoff is slowing, and that's what really drives it for us. We aren't in a situation with 70% loan-to-deposit ratio where we're stretching and doing outside funding, market-based funding to be able to fund loan growth. So as the securities portfolio runs off and the deposits stabilize, that should give us a floor on really where the balance sheet is at. But Jamie, anything you'd add to that?
spk09: Yeah, no, I think you said it really well, Bob.
spk07: Okay, okay, that makes sense. And then last one for me, just wanted to touch on the HELOC side. Look, that's the largest portion of your MPAs. I just wanted to get a sense of what you're seeing in that book How do you think about the mortgage portfolio as well? I know you mentioned that things are stable, but just any thoughts on the housing market more broadly?
spk05: Maybe I'll start and see if Lee has any comments to add. The housing market is just so strong here. We saw pricing continue to move up. There's very little supply coming on market. What is out there is still getting multiple, multiple bids. So we're not seeing the need to really any of the borrowers to discount. And so we're not seeing that as an issue, but specific to the HELOC, I'll defer to Lee.
spk01: As far as credit quality, we continue to monitor it closely, but we're not seeing anything within the portfolio that we feel is outside of what we would normally expect. So at this point, we're quite comfortable still with the portfolio and how it's performing.
spk05: Yeah, but, you know, it's not easy out there. You know, unemployment is low, but still we live in a high-cost state, and, you know, that's the balance. There's still some stress in a number of people's daily lives for income. Yeah.
spk07: Okay. All right. Yep. Thanks, everybody.
spk00: Thank you. Our next question comes from the line of Andrew Leash with Piper Sandler. Your line is now open.
spk02: Hey, guys. Good morning. Question on capital here. It continues to build these last several quarters, now above the CET1 ratio at 12% that you've been targeting over the long term. So what are your thoughts on the buyback? And then the dividend has been at this level for some time. Just curious sort of the capital return thoughts.
spk05: Yeah, thank you, Andrew. Great question. You know, maybe starting with the dividend, you know, we had started out when we were public almost eight years ago to the day now with a relatively high dividend payout of roughly 50%. And so we're still at that, you know, 50, 54%, 55% we're very comfortable with. We think that's a very solid payout. We'll certainly look at that as income grows over time. we are going to start looking in the second half of the year as i think we talked about earlier for restarting the buybacks there's still people out there uh you know won't name names but there's still people out there that are still you know doing marks and looking at us kind of oddly in my opinion but i won't delve into that so we still think it's a prudent time to have adequate capital but at some point in the second half of the year you can look to us to restart the buybacks got it all right that's helpful and then
spk02: Among your deposit commentary earlier, sorry if I missed it, but the public funds, is that reduction there just planned just because you don't necessarily need that funding? And I guess how do you think those funds will trend over the balance of the year with any seasonality?
spk09: Yeah, Andrew, this is Jamie. So the public, most of that decline in public deposits was in public time deposits, which is what we use to sort of fund any gaps that we find on the balance sheet at any given point in time. And so we would continue to see, we would expect to continue to see that decline over time. And in terms of seasonality, we don't see much in the way of seasonality in the other operating public accounts. It's much more of a you know, inflows and outflows based on whatever operations are happening at the time, you know, with those, you know, with those entities.
spk02: Got it. Very helpful. Thanks for taking the questions here. I'll step back.
spk00: 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 Kate Ashley with KBW. Your line is now open.
spk03: Hi, this is Kate on for Kelly Mata. So just to back on the margin, so came in a bit better than you'd expected last quarter. I was just wondering if you could walk us through any differences from what you were initially expecting versus what we saw.
spk09: Yeah, I think, you know, the last quarter we talked about, you know, slowing non-interest bearing deposit migration. And generally speaking, I would say that was the thing that came in better than what we had modeled through the range of outcomes that we were giving as forming our guidance. And so that was the thing that kind of came in better for us than anticipated. And so, you know, that still continues to inform the guide as we go forward. That will be, you know, the pace of noninterest bearing deposit inflows and outflows will really determine sort of the shape of the NIM along with loan growth. And, of course, if rate cuts happen, that will impact it as well.
spk03: Great. That's helpful. I'll step back.
spk00: Thank you. Thank you. Our next question comes from the line of Timur Breviller with Wells Fargo Securities. Your line is now open.
spk09: Hi. Good morning. Good morning. Hey, Timur.
spk10: I'm just curious what the pace of bond repricing is over the next couple of quarters. And if you can give us a sense of kind of the runoff rate for what's coming to.
spk09: Are you, you're specifically talking about the securities portfolio teamer?
spk01: Yeah.
spk09: Yeah. Yeah. So we have about, we're running off at about 50 million a month or so in the securities book. So that's a $600 million total throughout the year. And those are coming off, you know, in that 215, 225 range, you know, depending on the bond. The runoff is roughly in line with what the portfolio yield is.
spk10: Okay, got it. And then maybe looking at the link quarter increase in dealers, floor plan. I mean, that was a nice little bump there, but your comments maybe suggest that one quarter don't make a trend. Can you just maybe give us a sense of what's going on within that industry and why maybe the results this quarter don't port them to a rebound in that space?
spk05: We think there's going to be a natural rebuilding over time. I mean, the dealers were able to have very attractive environment there for a while with very high demand and low supply. And now we're seeing demand moderate a bit and supply increase. So that's why you're starting to see inventories rebuild on the lot. There's some specific manufacturers, specific things that we could go into. But I think more broadly, it really is that, As the economy slows and people slow down on their willingness and ability to buy cars and production continues to improve after all the slowdowns that we saw in the pandemic, that's why you're seeing balances kind of come back. Balances for us come back as inventory levels increase.
spk10: Okay. And I guess why with that statement, why don't you think this trend is sustainable? Why do you think there's still a little bit of volatility?
spk05: Oh, I, you know, it just is, is they, is the various manufacturers have not put a lot of programs out there just because they enjoyed, you know, very solid margins. And so as inventory has built up and some of the various manufacturers lines, I think there will be pressure and we're starting to hear that. I'll be up in California next week to meet with our customers up there. Uh, there will be pressure on the manufacturers to create incentive programs to, uh, help the dealers move inventory. And that's kind of the normal cycle. It just comes and goes, and it's that kind of give and take that kind of back to the pre-COVID normalcy. And we will have to find out where that leaves us as far as inventory balances on a new run rate basis.
spk10: Got it. And then just last for me, looking at slide 10, Multifamily criticized, you had mentioned that the loan discussed last quarter, that substandard loan had been paid off, but it looks like the criticized balances there actually ticked off a little bit. Did something backfill that sale and just maybe talk more broadly about what you're seeing within that multifamily space?
spk05: Yeah, I think if you go back a couple more pages, you'll see that it was the one that paid off was multifamily construction. And so that went to zero. What page was that, Lee?
spk01: There's questions in the appendix. It is on slide 16. Construction. But the change in the multifamily criticized is mostly the denominator actually went down slightly. So there was no change in the actual numerator or the amount of criticized. The percentage just changed slightly because of the denominator decreasing slightly on the quarter.
spk05: And the payoff is shown on slide 16, Timur.
spk10: Got it. Great. Thanks for the questions.
spk00: 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: 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 have a good weekend.
spk00: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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