First Hawaiian, Inc. (NASDAQ:FHB) Q4 2022 Earnings Call Transcript January 27, 2023
Operator: Good day and thank you for standing by. Welcome to the first Fourth Quarter 2022 Earnings Conference Call in Hawaii. At this point, all participants are in a listen-only mode. Please note that today’s conference will be recorded. I would now like to hand the conference over to your speaker today, Kevin Haseyama, Investor Relations Manager. please continue
Kevin Hasyama: Thank you Shannon and thank you all for joining us as we review our fourth quarter 2022 financial results. With me today are Bob Harrison, Chairman, President and CEO; Jamie Moses, Chief Financial Officer; and Ralph Mesick, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for download and viewing on our website at fhb.com in the Investor Relations section. During today’s conference call, we will make forward-looking statements. Please therefore 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 measures to the most directly comparable GAAP measures. And now I’m transferring the call to Bob.
Robert Harrison: Good morning everyone. And I would like to start by welcoming our new CFO, Jamie Moses. He brings to us a wealth of banking experience and a proven track record in financial management. We are delighted to welcome Jamie to the bank. I would also like to give special thanks to Ralph Mesick for his contributions as acting CFO over the past year until Jamie joined us. Now a quick update on the local economy. The Hawaiian economy continues to perform well. In December, the national unemployment rate fell to 3.2%, slightly below the national unemployment rate of 3.5%. The total number of visitors increased by 735,000 in November last year, down 9.1% from November 2019. Japanese visitor arrivals remained below historical levels at 3.8% of the total, compared to 16.3% in November 2019.
We continue to expect a gradual return of Japanese visitors to normalized levels. Despite the lower total number of arrivals, November’s attendance totaled $1.5 billion, a 13.7% increase from November 2019. The housing market has remained stable. In December, the average selling price for a single-family home on Oahu was just over $1 million, flat from a year earlier. The median selling price for condos on Oahu was 503,000, up 3.6% year over year. Let’s turn to slide 2. Comment on our fourth quarter results. We ended the year with a very good quarter as net income increased to $79.6 million or $0.62 per share. Lending increased, net interest income continued to rise, while noninterest income returned to normal levels and noninterest expenses stabilized.
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Our return on average tangible assets was 1.34% and return on average tangible share capital was 25.93%. With a CET1 ratio of 11.82% and total capital of 12.92%, we continue to maintain strong capital levels. The board maintained a quarterly dividend of $0.26 and approved a $40 million share repurchase program for 2023. Turning to Slide 3, the balance sheet continues to perform very well. It remains asset sensitive at about $5.6 billion, or 41% of the loan portfolio within 90 days. We continue to use excess cash and the investment portfolio to fund credit growth and deposit reductions. We ended the year with cash and cash equivalents of approximately $527 million compared to $1.2 billion at the beginning of the year. Investment portfolio duration remained stable at 5.6 years during the quarter and cash flows from the portfolio were approximately $75 million per month.
Our cash position remains very strong with a loan-to-deposit ratio of 65%, a strong core deposit base and steady cash flows from the investment portfolio. Turning to Slide 4, loans on leases at the end of the period were $14.1 billion, up $392 million or 2.9% from the end of the third quarter. About half of the growth was due to a $201 million increase in C&I loans, driven primarily by a $120 million increase in dealer floors and a $38 million increase in other dealer-related loans. For all of 2022, total loans and leases increased by $1.1 billion, or 8.7%. Excluding PPP loans, total loans and leases increased $1.3 billion, or 10.4%. We expect full-year 2023 credit growth to be in the mid-single digits. Now I’m handing over to Jamie.
Jamie Moses: Thanks, Bob, and good morning, everyone. Turning to Slide 5, deposits were down $403 million, or 1.8%, to $21.7 billion at the end of the quarter. Deposits from retail and commercial customers decreased by $668 million, with most of this decrease being attributable to commercial deposit accounts. Commercial deposits declined about $611 million, while retail deposits were relatively flat, declining just $57 million. The top five trading account outflows accounted for over $290 million, nearly half of the total decline, and were all part of normal business operations. Our total cost of deposits was 52 basis points in the fourth quarter, up 28 basis points sequentially and in line with our expectations.
RAC rates on checking and savings accounts remain stable. Turning to Slide 6, net interest income was $171.8 million, up $9.1 million, or 5.6%, sequentially. The increase was primarily due to higher yields and loan balances, partially offset by higher deposit costs. Net interest margin increased 22 basis points to 3.15%, driven by higher yields on loans, cash and investments and partially offset by higher deposit rates. The acceleration in the cost of deposits can be seen in the fourth quarter beta, which is about 38% for interest-bearing deposits. Our previous cumulative beta on interest-bearing deposits of around 19% has been in line with our expectations, and we continue to expect full-cycle beta on interest-bearing deposits to be around 30%.
Looking ahead, we expect the net interest margin to increase by 4 basis points to 5 basis points in the first quarter. Going to slide 7, noninterest income was $48.2 million for the fourth quarter, up $2.3 million sequentially. The improvement was driven by BOLI earnings returning to normalized levels as market volatility eased in the fourth quarter. Expenditures were $113.9 million, essentially flat from the third quarter. Using fourth-quarter noninterest expenses as a new baseline, we expect full-year 2023 expenses to be approximately 4% to 4.5% higher than annualized fourth-quarter numbers. Excluding the impact of the FDIC assessment fee increase, which we estimate at $4 million to $5 million per year, we expect spending in 2023 to be about 3% to 3.5% higher than the annualized figure for the fourth quarter.
Now I’m handing it over to Ralph.
Ralph Mesick: Thanks Jamie Go to slide 8. The bank had good credit performance in 2022 and our asset quality metrics ended the year strong. Net charge-offs were down $1.2 million year-over-year, or nearly 10%, and our annual net charge-off rate was 8 basis points, down 2 basis points from 2021. NPAs in 90-day pass-through loans were 11 basis points at the end of the fourth quarter , 1 basis point higher than the previous quarter. Criticized assets continue to fall, falling 9 basis points to 72 basis points for the quarter. The bank recorded a provision of $3 million for the quarter. Finally, loans 30 to 89 days past due at the end of the fourth quarter were $57 million, or 40 basis points of total loans and leases, up 6 basis points sequentially.
On slide 9 you can see a roll-over of the allowance for the quarter by disclosure segment. Reserve requirements for credit growth this quarter were again offset by improvements in the portfolio’s risk profile. The allowance for credit losses decreased $4.3 million to $143.9 million. The level corresponds to 1.02% of all loans. The reserve for unfunded commitments increased $3.7 million to $33.8 million based on an increase in undrawn receivables. The allowance anticipates cyclical losses that are session-consistent and includes a qualitative overlay for potential macroeconomic impacts not captured in our base model. Now let me hand the call back to Bob for final comments.
Robert Harrison: Thank you Ralph Thanks Jamie There is nothing to add. Welcome to questions. Kevin?
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