First Hawaiian, Inc. (NASDAQ:FHB) Q1 2024 Earnings Call Transcript

First Hawaiian, Inc. (NASDAQ:FHB) Q1 2024 Earnings Call Transcript April 26, 2024

First Hawaiian, Inc. reports earnings inline with expectations. Reported EPS is $0.42 EPS, expectations were $0.42. FHB isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the First Hawaiian Inc. Q1 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Kevin Haseyama, Investor Relations Manager. Please go ahead.

Kevin Haseyama : Thank you, Tanya. And thank you everyone for joining us as we review our financial results for the First Quarter of 2024. With me today are Bob Harrison, Chairman, President, and CEO; Jamie Moses, Chief Financial Officer, and Lea 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 1 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.

Robert Harrison : Good morning, everyone. I’ll start with an overview of the local economy. Hawaii economy continues to perform well with the state unemployment rate remaining low, tourism is steady, and the construction industry is healthy. Statewide seasonally adjusted unemployment rate for March was 3.1% compared to the national unemployment rate of 3.8%. The statewide visitor industry is continuing to recover faster than expected following the Maui wildfires, but still remains slightly below 2023 levels. The legislative session is wrapping up, and additional funding was secured for the Hawaii Tourism Authority, and a new marketing campaign was announced a couple days ago, so things are looking up to that. Through February, total visitor arrivals were down 0.6% and spending was down 1.9% compared to 2023 levels.

That was primarily due to declines on Maui. Excluding Maui, arrivals and spending were above 2023 levels. Growth in international visitors have helped offset declining visitors from the U.S. Mainland, with increases in Japanese visitors making up most of the increase in the international arrivals. The housing market is relatively stable despite reduced activity levels. In March, the median sales price for a single family home on Oahu was $1.1 million, a 1.5% higher than 2023. The median sales price for condos on Oahu was $500,000, 6.7% below the previous year. Turning to Slide 2, I’ll go over the highlights of our first quarter financial performance. We started the year with a solid quarter. Net income was $54.3 million or $0.42 per share. The return on average tangible assets was 0.94%.

And the return on average tangible common equity was 14.53%. As expected, the net interest margin expanded in the first quarter, this drove a $2.6 million increase in net interest income versus the prior quarter. Turning to Slide 3, We continue to execute the balance sheet optimization that started in the fourth quarter with the sale of $526 million of investment securities. During the first quarter, we used those proceeds to pay down about $470 million of higher cost public time deposits. The duration of the investment portfolio increased slightly in Q1, as a result of the security sale during the prior quarter. Our balance sheet strength continued to increase as we grew capital levels and have ample liquidity. Turning to Slide 4, period-end loans and leases were $14.3 billion, about $33 million lower than December 31st.

Line draws for ongoing construction projects drove the $72 million increase in construction loans. We did continue to face headwinds due to the slowdown of residential real estate market and the continued run-off in the indirect auto portfolio. We still believe that loan demand will pick up in the second half of the year and that full year growth will be in the low-single digit range. Now I’ll turn it over to Jamie.

James Moses : Thanks, Bob, and good morning, everyone. Turning to Slide 5, total deposit balances declined by $663 million, primarily due to the $470 million decrease in public time deposits. The decrease in public costs — sorry, excuse me — in higher cost public time was intentional and was part of the overall balance sheet actions that we announced on our last call. Retail deposits increased by $142 million in the first quarter, and that was offset by a $355 million decline in commercial deposits. The drop in commercial deposits was primarily due to normal fluctuations in a few large commercial accounts, as well as about $170 million of insurance payments related to the Maui wildfires. The non-interest-bearing deposit ratio was 34% at the end of the quarter.

The rate of increase in deposit costs continued to slow down in the first quarter. Our total cost of deposits for the quarter was 165 basis points, a 9 basis point increase from the prior quarter. Turning to Slide 6, net interest income increased $2.6 million from the prior quarter to $154.4 million, and our reported net interest margin increased by 10 basis points to 2.91%. We had a non-recurring interest income related to the recognition of interest on deferred loans tied to the Maui wildfires that added about $1.5 million to interest income and 3 basis points to the margin in the first quarter. The spot NIM in March was 2.87% and we are projecting the NIM in the second quarter to be about 2.89%. We do expect that the NIM will increase about 1 to 2 basis points per quarter for the remainder of the year.

Through the end of the first quarter, the cumulative betas were 46.5% on interest-bearing deposits and 30.2% on total deposits. Turning to Slide 7, non-interest income was $51.4 million, $7 million less than the prior quarter. We had about $2 million of non-recurring income in Q2, excuse me — in Q1 as a result of insurance proceeds we received for losses we incurred during the Lahaina wildfires. We continue to expect quarterly non-interest income to be in the $49 million to $50 million range. Non-interest expenses were $128.8 million in the first quarter and included a $4.1 million FDIC special assessment. Excluding that special assessment, expenses were in line with our expectations and we continue to expect full year expenses to be around $500 million.

Now I’ll turn it over to Lea.

Lea Nakamura : Thank you, Jamie. Moving to Slide 8, the bank maintained its strong credit performance and healthy credit metrics in the first quarter. While we have seen some modest deterioration in credit quality, our experience so far is well within our expectations. We are not observing any broad signs of weakness across either the consumer or commercial loan books, and we have more than sufficient loan loss coverage. Classified assets increased by $64.3 million, driven by several downgraded credits. This caused the ratio of classified assets to total loans and leases to increase by 45 basis points to 64 basis points of total loans and leases. Of that $64.3 million increase, $24.4 million was paid-off in full after the end of the first quarter.

Year-to-date net charge-offs were $3.8 million. Our annualized year-to-date net charge-off rate was 11 basis points, 2 basis points higher than in the fourth quarter. Non-performing assets and loans past due 90 days or more [were] (ph) 15 basis points of total loans and leases at the end of the first quarter, unchanged from the prior quarter. And finally, the bank recorded a $6.3 million provision in the first quarter. Moving to Slide 9, we show our first quarter allowance for credit losses broken out by disclosure segment. The asset ACL increased by $3.3 million to $159.8 million with coverage rising 3 basis points to 1.12% of total loans and leases. The ACL continues to include a reserve for the potential impact of the Maui wildfires. This estimate includes the potential impact to borrowers located both inside and outside of the fire zones, as well as any insurance coverage.

Turning to Slide 10, we provide an updated snapshot of our commercial real estate exposure. CRE represents approximately 30% of our 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.

Robert Harrison : Thank you, Jamie. Thank you, Lea. We’d welcome any questions that you would have.

See also 30 Largest Software Companies in the World by Market Cap and 15 Best Cuisines in the World.

Q&A Session

Operator: [Operator Instructions] And our first question will come from David Feaster of Raymond James, your line is open.

David Feaster: Hi, good morning everybody.

Robert Harrison : How are you David?

David Feaster: Doing great. Maybe just touching on the margin side a bit. I appreciate all the color that you guys gave. But I mean, really like the key driver to the margin is going to be deposit performance right, especially on the NIB front. I’m curious if you could help us maybe think through how the NIB balances trended throughout the quarter? And just any thoughts on overall core deposits growth in the initiatives that you have got in place from that perspective. Just curious kind of on the deposit side, how you think, things play out.

James Moses: Yeah, thanks Dave. It’s Jamie. In terms of one part of your question, right, which was sort of performance throughout the quarter, most of the non-interest bearing decline that we saw that happened in January and February, moderated quite a bit in March. But our guide forward does include some continued non-interest bearing movement from – again from NIB into interest-bearing deposit accounts. And I think, you kind of nailed the forward NIM expectation as well, right? That is — that’s going to be kind of entirely driven by how that performance — about how that migration happens throughout the year. So we — in our modeling right, with our guidance — that implies some decrease from Q1 into Q2 continued moderation in Q3 and continued moderation in Q4.

So that’s kind of what the basis for our NIM guidance is. And then as it relates to deposit gathering initiatives, I think we’re really continue to be focused on generating net new checking accounts is really where the focus is. We have — our securities portfolio continues to run-off. We are going to continue to do that. So our need to grow deposits has moderated a little bit because of that. And with our loan growth guidance in sort of the low single-digit area, the need to really be hypercompetitive and go out and gather new money market accounts or newer CDs and things like that. It is kind of – I’d say, we [have this] (ph) — moderate need for those things. So we are really focused on net new checking accounts. And then the second part of that in terms of deposits really comes down to our relationships, right?

And so we want to make sure that we continue to be there for our customers in the way that they need us to be. So to the extent that — there are more deposit customers that have some rate sensitivity, we will respond to that with them. And to the extent that we can gather more non-interest bearing deposits, obviously we would like that as well.

Robert Harrison: And David, this is Bob. Maybe just to add to Jamie’s comments, which are spot on is just to remember from the call last quarter — last quarter’s call that this year, we have about $1.5 billion of fixed rate loans rolling over and $600 million of securities. So that is — what’s really helping drive that NIM expansion throughout the year. You can’t exactly predict what’s going to happen with deposits to Jamie’s point, but that we do know — that those will reset and the securities will mature.

David Feaster: And that kind of feeds right into my next question. That is a really good point. You guys are – look — you’re naturally rate sensitive just given the strength of your deposit base, right? And you’ve been active managing the balance sheet with the securities book and all that. I’m curious, how do you think about managing the balance sheet today, right? The rate outlook continues to change pretty rapidly. Once again, everybody is worried about rate cuts and now we are talking about a higher for longer environment. But I’m just curious, how do you think about managing the balance sheet at this point, just kind of given that uncertainty on the rate front? And anything that you guys are considering at this point?

James Moses: It’s a great question, Dave. I think the way that I’m kind of thinking about it right now is that we have the securities portfolio, it is [yielding 230] (ph) or somewhere in that neighborhood. On the margins, we are funding that with 5% higher cost deposits. And so, at the moment, we are kind of waiting, biding our time, I would say, right? We are kind of just managing through that natural grind. We feel really good about the cash flows of that portfolio. They were structured in such a way so that it wouldn’t extend or contract too much given a different rate environment. So what we are really focused on is helping our customers, being there for our customers to the extent that there is loan growth opportunities with our customers, we want to be there for that.

And in the meantime, we are really thinking about the overall balance sheet kind of on the margins and the securities portfolio. That is going to continue to run off. and we’ll fill in the gaps, where we need on the funding side with public time deposits, if that’s required. I don’t — So we’re not really thinking about hedging anything at this point. We feel pretty good about where we are at, even in a down rate scenario, say, 100 basis points down, 200 basis points down, that is still a net positive action with replacing securities portfolio and running off the time deposits. So we also have an FHLB borrowing that is going to mature in the third quarter. So there is a lot of sort of moving parts there. But at the moment, I think we are comfortable with the balance sheet.

We like the way we are doing it. As you say, rate outlooks change intraday even today, right? So we’re really trying to just be focused on our customers. and just grinding through this sort of odd mix at the moment with the securities portfolio and the marginal higher cost of funds.

David Feaster: That’s extremely helpful. Could you remind us the size of that upcoming maturity and the rate on it?

James Moses: The FHLB, it’s $500 million. It’s going to mature in September 1, and it is — I think it’s at a [$490 million rate] (ph).

David Feaster: Okay. Perfect. And then just last one for me. Look, you guys touched on credit broadly. And you feel like you are well-covered, talked about some downgrades that you saw in the book? I mean non-accruals held steady and it’s benign. Talked about some downgrades. I was curious what drove those? And maybe just your thoughts more broadly on credit what you are seeing, what you are watching closely? And just any thoughts even on CRE, just kind of given the market hyper focus on that segment?