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First Hawaiian, Inc. (NASDAQ:FHB)
Q3 2019 Earnings Call
Oct 24, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Hawaiian Inc. Q3 2019 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Mr.

Kevin Haseyama. Investor Relations manager. Sir, you may begin.

Kevin Haseyama -- Investor Relations Manager

Thank you, Valerie. And thank you, everyone, for joining us as we review our financial results for the third quarter of 2019. With me today are Bob Harrison, CEO; Ravi Mallela, CFO; and Ralph Mesick, chief risk officer. We have prepared a slide presentation that we'll refer to in our remarks today.

The presentation is available for downloading and viewing on our website 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 will also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP measurements. And now I will turn the call over to Bob, who will provide you with the third-quarter highlights, starting on Slide 2.

Bob Harrison -- Chief Executive Officer

Thank you, Kevin. Hello. Hi, everyone, and thanks for joining us today as we review our third-quarter results. Pleased to report we had a solid quarter driven by excellent credit quality, growth in non-interest income and continued prudent expense management.

Profitability measures remained strong with a core return on average tangible assets of 1.56% and a core return on average tangible common equity of 18.21%. We continue to optimize our balance sheet with the sale of $409 million of Shared National Credits. And at the same time, $334 million reduction of public time deposits. These actions enabled us to increase our 2019 stock repurchase program by $50 million to a total of $150 million.

During the quarter, we executed an additional $59 million of share repurchases, bringing the year-to-date total repurchases to $99 million. Yesterday, our Board of Directors declared a $0.26 per share dividend, representing an attractive annualized dividend yield of 3.73% based on today's closing price. Now I'll turn it over to Ravi to go over the financials.

Ravi Mallela -- Chief Financial Officer

Thanks, Bob. Turning to Slide 3. Period add loans were down $231 million versus the prior quarter. This was primarily due to the $450 million reduction in SNC loans, which included the $409 million of loans sold, plus an additional $40 million of SNC loans that matured.

CRE loans grew by $115 million. Almost $100 million of that growth was in Hawaii and Guam and included $50 million related to the conversion of construction loans to permanent financing. This conversion of construction loans to permanent financing represented $50 million of the $63 million decline in construction loan balances that we saw in the quarter. Residential mortgages grew by about $53 million as production benefited from loan mortgage rates.

C&I loans declined by about $524 million, primarily due to the previously mentioned sale and runoff of about $450 million of SNC loans. Dealer flooring loans declined by about $37 million. Consumer loan balances were down $13 million, primarily due to indirect auto loans. Looking forward, our CRE and residential real estate pipeline looks good, but because of uncertainty in C&I demand, we are reducing our full-year loan growth outlook slightly to be in the low to mid-single-digit range, excluding the impact of the SNC loan sales.

Turning to Slide 4. Deposit balances ended the quarter at $16.9 billion, up $65 million from the prior quarter. Public time deposit balances declined by $334 million. Balances and consumer deposit products increased by about $70 million, and balances in commercial deposit products increased by about $347 million.

The increase in commercial deposits was due to $400 million of temporary deposits that were withdrawn early in the fourth quarter. Our cost of deposits decreased by three basis points versus the prior quarter, primarily the result of the reduction in public time deposits. Turning to Slide 5. Net interest income in the third quarter was $143.1 million, a decrease of $2.5 million versus the second quarter and an increase of $1.8 million versus the third quarter of 2018.

The decline in net interest income in the third quarter was primarily due to lower loan balances and lower loan yields. Net interest income in the third quarter included a $1.7 million negative premium adjustment, close to the $1.8 million negative premium adjustment experienced in the second quarter. The reported net interest margin was 3.19%, a six-basis-points decrease from the reported second-quarter NIM of 3.25%. The decrease was primarily due to lower loan yields and balances and higher cash balances partially offset by lower deposit costs.

The NIM impact of the premium adjustments was the same in both the second and third quarters, about four basis points. Turning to Slide 6. Non-interest income was $50 million, $1.2 million higher than the prior quarter. Nonrecurring items in the third quarter included $1.7 million in BOLI debt benefits, as well as a $1.2 million loss from the sale of the SNC loans in the quarter.

Non-interest expenses were $93.5 million, about $176,000 higher than the prior quarter. Our efficiency ratio in the third quarter was 48.4%, and our core efficiency ratio was 47.3%. With that, I'll turn the call over to Ralph to cover asset quality.

Ralph Mesick -- Chief Risk Officer

Thank you, Ravi. I would like to turn your attention to Slide 7 in the deck. Asset quality was high at quarter end. Credit costs remained low and we had few nonperforming assets.

Net charge-offs were $5.6 million for the quarter. On an annualized basis, this amounts to about 17 basis points on average loans and leases. This is four-basis-points lower than the prior quarter. Total nonperforming assets were $4.3 million or three basis points of total loans and leases and other real estate owned.

This is flat to the prior quarter. As a result of the reduction in the loan portfolio following the SNC loan sales, no provision was taken in the third quarter and the allowance loans and leases remained at 104 basis points. Finally, we continue to prepare for the CECL implementation next year. Based on the current portfolio and expected conditions, we estimate the impact of the adoption would increase our reserve by 10% to 15%.

Please note that this estimate is preliminary and subject to change. And now let me turn the call back over to Bob.

Bob Harrison -- Chief Executive Officer

Thanks, Ralph. Turning to Slide 8, Hawaii's economy remained steady in the third quarter. State unemployment rate was 2.7%, compared to 3.5% nationally. Visitor industry continued to operate at a high level through the first eight months of the year.

Year-to-date through August, arrivals were up 7.1 million, up 5.2% versus the same period of last year. Visitor spending, which was lagging in the first half of the year, began to pick up in the third quarter and was $12.1 billion, a 0.5% lower compared to the same period last year. Real estate market remained sound, prices on Oahu remained stable but we have a slight decline in sales volume compared to the previous year. Looking forward, while there are some signs of slowing, the economy continues to operate at a high level and the overall outlook for our economy here in Hawaii is stable.

Now we would be happy to take your questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Steven Alexopoulos of JP Morgan. Your line is open.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hi, everybody.

Bob Harrison -- Chief Executive Officer

Hi, Steve.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hi. I wanted to start, first, you guys have taken down the loan growth guidance a bit. You cited uncertainty on C&I, can you give more color on what you're seeing there?

Bob Harrison -- Chief Executive Officer

Well, we're still seeing good volumes, especially in the CRE space, but C&I has been a little flat and part of that is an outlook on dealer flooring, which is -- with the economy stable, car sales have been stable, we aren't seeing the increases we've seen in previous years.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. That's helpful. And then on deposit costs, it looks like deposit costs came down even without the outflow public funds. Can you talk about what you're seeing from local peers just in terms of deposit competition? And do you think you'll continue to bring deposit costs down and maybe enough to stabilize the NIM here?

Ravi Mallela -- Chief Financial Officer

There's certainly opportunity, obviously, Steve. Our market is a very rational market, and so we've been definitely looking at deposit costs as a way to moderate the impact on NIM. That being said, I think the market is moving sort of relatively in tandem and I think that will provide us opportunities for the future.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. And then, Ravi, how are you thinking about the NIM here in the fourth quarter?

Ravi Mallela -- Chief Financial Officer

Yes. So the fourth-quarter outlook -- our fourth-quarter outlook incorporates the impact of two 25-basis-point rate cuts. So the cut at the end of September and the expected cut at the end of October. We probably would see a drop of about 10 to 12 basis points from the adjusted Q3 NIM.

The impact of the December rate cut in the fourth quarter should have less impact, but that could really depend on how much LIBOR moves in advance of the cut that could happen in December.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. And even with a cut of that magnitude, you think the efficiency guidance is still intact?

Ravi Mallela -- Chief Financial Officer

Yes.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. Great. Thanks for taking my questions.

Bob Harrison -- Chief Executive Officer

Thanks, Steve.

Operator

Our next question come from Ebrahim Poonawala of Bank of America. Your line is open. Please make sure your phone is not on mute.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Hello.

Bob Harrison -- Chief Executive Officer

Hi, Ebrahim.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Yeah. Just wanted to follow up on Steve's question both in terms of margin outlook and sort of tying it in from an efficiency standpoint, if we could just look further out into 2020, Ravi, just talk to us in terms of, like, is there a point at which the NIM becomes defensible or should we expect that until the Fed continues on its path to cutting rates, we will see this level of NIM declines? And on the expense side, are there levers to pull? I mean you're obviously a fairly efficient bank, are there things that you can do to sort of pull back on expenses to defend the efficiency ratio?

Ravi Mallela -- Chief Financial Officer

I mean I think with respect to 2020, there's just a lot of moving parts. We typically only give guidance one quarter in advance. What I would say is that not only are -- what the expectations are for Fed rate cuts in 2020 impacting what we would project, but also just the shape of the yield curve itself. And so not without going out any further, I think, we would be impacted by cuts that would occur in 2020.

Maybe just on the expense side, I think we've given guidance -- the first half of the year on expenses were about $186 million and I think we came in at $93 million -- a little bit over $93 million in the third quarter. I think that given that we're running at a very pretty lean efficiency ratio, I think we gave a guidance of second half of about 1% to 2% higher. We're -- that being said, we're always looking at opportunities to manage our expenses and our cost structure.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. And are there any additional balance sheet action that we should look out for in terms of is there more to go in terms of running off certain SNC loans or was this a one time and we shouldn't expect more of this?

Ravi Mallela -- Chief Financial Officer

I mean I think...

Bob Harrison -- Chief Executive Officer

Sorry, Ravi, this is Bob. Certainly, something we're kind of continue to look at. We took advantage of an opportunity that we saw in the market to kind of pull back a bit on the credit-only Shared National Credits and then at the same time look to reduce our funding cost and increase the share repurchase. And while we'll continue to consider it, we don't have any current plans.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Alright. Thank you.

Operator

Thank you. Our next question come from Jackie Bohlen of KBW. Your line is open.

Jackie Bohlen -- KBW -- Analyst

Hi. Good afternoon, everyone. Looking to one of the charts in the back that calls out some one-time cost of -- it was roughly $2.2 million, is that all executive comp from the footnotes or was there something else in there?

Ravi Mallela -- Chief Financial Officer

Yeah. Actually, there was. I think that's a good catch, Jackie. There was one other sort of significant items.

It really had to do with an accrual that we took, just true up mark-to-market impact of the conversion rate of the vis-a-vis shares and the swap associated with that that we had to true up at the end of the quarter that Visa had announced a plan to deposit some additional money into the escrow account. And as a result, they took their conversion factor down and we trued up to mark-to-market that swap. It was about $300,000.

Jackie Bohlen -- KBW -- Analyst

OK. So if I think about those two expenses, a little over $2 million and then I extract those out of what you have from 2Q versus 3Q. It's a pretty low number for 3Q. How does that play into your prior growth guidance you gave for the latter half of the year?

Ravi Mallela -- Chief Financial Officer

Yeah. I mean, I think we -- I think we're not really changing that much. That was definitely a one-off item, but I think our guidance continues to be the same.

Bob Harrison -- Chief Executive Officer

And one of the issues on it, Jackie, is it's just difficult to find people. We have a number of positions opened and we'd love to fill them. We've had some success, but that's the factor we can't really control.

Jackie Bohlen -- KBW -- Analyst

OK. So to the extent you're able to fill some of those positions, then we would see outside of adjusting for changes in exec comp, we'd see that line tick up?

Bob Harrison -- Chief Executive Officer

Correct.

OK. And just one last one for me and then I'll step back. Even if I normalize for the BOLI gain in the quarter, it looks like that income line item was still up a bit from where it's been earlier in the year, is that normal fluctuation or is there anything else unusual there?

Ravi Mallela -- Chief Financial Officer

Sorry, Jackie, the BOLI line item or just...

Bob Harrison -- Chief Executive Officer

Or noninterest income?

Jackie Bohlen -- KBW -- Analyst

Yeah. The BOLI line item.

Ravi Mallela -- Chief Financial Officer

Yeah. We -- in the BOLI line item this quarter, I think we had sort of a larger gain there just because we had some debt benefits of about $1.7 million in the quarter. And that, typically, sort of an outsize number for the quarter.

Jackie Bohlen -- KBW -- Analyst

Yeah. Yeah. No. Understood on that.

I just -- if I normalize for that payment, it still looks a little bit elevated, was there anything else unusual in there or is just a normal fluctuation?

Ravi Mallela -- Chief Financial Officer

Yeah. No. There was nothing really unusual in there, just normal fluctuations.

Jackie Bohlen -- KBW -- Analyst

OK. Thanks for the color. I'll step back.

Operator

Thank you. [Operator instructions] Our next question comes from Timur Braziler of Wells Fargo.

Timur Braziler -- Wells Fargo Securities -- Analyst

Hi. Good afternoon. Looking at the $40 million Shared National Credit runoff, was that one of the credit-only or were those credit-only loans that ran off?

Bob Harrison -- Chief Executive Officer

Actually, it was a mix of both, Timur. So before we had our Mainland SNCs, it was about 50-50 credit only relationship and that's moved to about 70% relationship and 30% credit only. But that extra runoff was a mix of both.

Timur Braziler -- Wells Fargo Securities -- Analyst

OK. But in regard to the credit-only SNCs that remain, should the expectation be as those come due that you're just going to let them run off or is there a willingness to keep portfolio of credit only Mainland SNCs?

Bob Harrison -- Chief Executive Officer

There's a willingness to keep the portfolio there. We're constantly looking at it and being very choosy. As you can tell by the credit quality of what we saw given the pricing, that's something that, foremost to us, is really the credit quality and getting into good deals. So we haven't closed that option out.

Timur Braziler -- Wells Fargo Securities -- Analyst

OK. And then just in regard to total loan growth, I appreciate the color on the dealer floorplan, but as we look out, is there anything that gives you confidence that loan growth will accelerate kind of back to that mid-single-digit level or as we look out in the near term it's going to trend in the low- to mid-single-digit range?

Bob Harrison -- Chief Executive Officer

We're not giving guidance past, really, the fourth quarter, but we're still seeing good economy here and a strong growth and it's just finding those right opportunities. So we're not looking past the fourth quarter, but there's nothing structurally wrong with the economy here in Hawaii, it's still doing quite well.

Timur Braziler -- Wells Fargo Securities -- Analyst

OK. And then one last one for me. Looking at the public funds that remain, what's a good number that we should kind of model in for where public funds will shake out? And then those that were exited during the third quarter, if we can just have an update on the timing of when those left the bank?

Ravi Mallela -- Chief Financial Officer

Yeah. I think -- Timur, this is Ravi. I think those course of the quarter. We had about $334 million in public time of reduction during the quarter end.

Typically, we see about $350 million or so mature during the course of a quarter, so think about it sort of staggering in from the quarter. Where we are right now in terms of levels, public time, I think we feel pretty good about it. There'll be a conversation about the whole balance sheet and totality, where we see loan growth, where we see deposit growth and opportunities on the investment securities side. So given where we are, we feel pretty comfortable, but it's really looked at in totality on the balance sheet.

Timur Braziler -- Wells Fargo Securities -- Analyst

Understood. Thank you.

Operator

Thank you. Our next question comes from Laurie Hunsicker of Compass Point. Your line is open.

Laurie Hunsicker -- Compass Point -- Analyst

Yeah. Hi. Good morning. Just wondered a couple of things.

Just going back to SNC, I know that you reduced your balances around $450 million, but I just wanted to make sure I have the actual number. So the actual number, as of September 30, is right around $1 billion or do you have a better actual figure? And then how much of that is Hawaii versus Mainland? Can you guys hear me?

Bob Harrison -- Chief Executive Officer

Yes. We can.

Laurie Hunsicker -- Compass Point -- Analyst

OK. I didn't know if there was feedback coming from. OK. Yeah.

Go ahead.

Bob Harrison -- Chief Executive Officer

So the total SNCs at the end of the third quarter, both Mainland and Hawaii, was right at $1 billion. Of that, $700 million was Mainland.

Laurie Hunsicker -- Compass Point -- Analyst

OK.

Bob Harrison -- Chief Executive Officer

About $300 million was Hawaii.

Laurie Hunsicker -- Compass Point -- Analyst

OK. That's great. And then -- and I know you've talked about this, but can you just take us through as just generally as we look forward in 2020, how you're feeling about where that SNC book goes, just specifically the SNC book?

Bob Harrison -- Chief Executive Officer

Well, as I mentioned, we're comfortable where it's at now. We're, of course, very committed to the Hawaii-based SNCs and, as well as the Hawaii -- the relationships SNCs have had some type of tie here to Hawaii, so certainly that. One of the things we continue to evaluate are the credit-only SNCs, which is roughly 30% of that $700 million.

Laurie Hunsicker -- Compass Point -- Analyst

OK. OK. And then the dealer floorplan loans, do you have a balance on that?

Bob Harrison -- Chief Executive Officer

Sure. We ended the quarter at $838 million, so down $60 million from second quarter.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then how much of that is in California?

Bob Harrison -- Chief Executive Officer

$545 million.

Laurie Hunsicker -- Compass Point -- Analyst

$545 million. OK. Great. And just wanted to back -- back over to Jackie's question around expenses.

In other words, when we're taking out that $2.2 million of one-time items, your noninterest expenses are sitting at $91 million and it looks like your professional fees are little bit outsized too, so theoretically that could almost be a lower number directional. I mean you're almost pushing close to $90 million a quarter and yet your efficiency guide suggest a whole lot higher. So can you help us think about that a little bit? Thanks.

Ravi Mallela -- Chief Financial Officer

Yeah. Hi, Laurie, this is Ravi. I mean I think, obviously, I think Bob mentioned to the fact that one of the factors that we're always challenged in that could vary from quarter-to-quarter is just our ability to retain and aggressively recruit talent. The other thing is that there's obviously, at the end of the year, there can be seasonality impacts on the expenses.

So we could see changes relative to end of year expenses that might come up.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then just one last question around expenses. Are there any big or unusual items that you're planning to spend in 2020 different than what you currently have in your infrastructure?

Bob Harrison -- Chief Executive Officer

We don't have any plans for anything different in our -- on the business plan.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Perfect. Thanks. I'll leave it there.

Operator

Thank you. I'm showing no further questions at this time, I would like to turn the conference back over to Kevin Haseyama for any closing remarks.

Kevin Haseyama -- Investor Relations Manager

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.

Duration: 27 minutes

Call participants:

Kevin Haseyama -- Investor Relations Manager

Bob Harrison -- Chief Executive Officer

Ravi Mallela -- Chief Financial Officer

Ralph Mesick -- Chief Risk Officer

Steven Alexopoulos -- J.P. Morgan -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Jackie Bohlen -- KBW -- Analyst

Timur Braziler -- Wells Fargo Securities -- Analyst

Laurie Hunsicker -- Compass Point -- Analyst

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