Apr 28, 2017
Executives
Kevin Haseyama – Senior Vice President, Strategic Planning and Investor Relations Manager Bob Harrison – Chairman and Chief Executive Officer Mike Ching – Executive Vice President, Chief Financial Officer and Treasurer, Finance Group Eric Yeaman – President and Chief Operating Officer Ralph Mesick – Chief Risk Officer, Risk Management Group
Analysts
Jacque Bohlen – KBW & Company Steven Alexopoulos – JPMorgan Dave Rochester – Deutsche Bank Dave Rochester – Deutsche Bank Laurie Hunsicker – Compass Point
Operator
Good day, ladies and gentlemen, and welcome to the First Hawaiian Bank First Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would like to introduce your host for today's conference, Mr. Kevin Haseyama.
Sir, you may begin.
Kevin Haseyama
Thank you, Amanda, and thank you, everyone, for joining us as we review our financial results for the first quarter of 2017. With me today are Bob Harrison, Chairman and CEO; Eric Yeaman, President and CEO; Mike Ching, CFO and Treasurer; 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 downloading and viewing on our website at fhb.com.
Before I turn things over to Bob, I would like to direct you to Slide 2 and remind you that we may make forward-looking statements during today's call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see our SEC filings, including our Form 10-K for the year ended December 31, 2016, which is available on our website and the SEC's website.
We will also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measures to comparable GAAP measures.
And now I will turn the call over to Bob who will provide you with first-quarter highlights starting on Slide 3.
Bob Harrison
Thank you, Kevin. Aloha, everyone, and thanks for joining us today.
I am pleased to report that we started the year with a solid first quarter. We had good earnings, loan and leases grew to a record level, and our credit quality remained excellent.
Mike will go through the details of our financial results, so I will just touch on a few highlights. Net income for the quarter was $56.7 million or $0.41 per diluted share; core net income was $57 million, the same at $0.41 per diluted share; and yesterday our Board of Directors declared a quarterly cash dividend of $0.22 per share payable on June 9 to shareholders of record at the close of business on May 30.
Loans and leases grew $260 million or 2.3% to a record $11.8 billion in the first quarter, while deposits increased $144 million, just under 1% to $16.9 billion. Eric will go into the details of the changes when he discusses the balance sheet.
Asset quality remains excellent with net charge-off ratio of 15 basis points, and we remained well-capitalized. Our efficiency ratio was 47.2% in the quarter, and our profitability measures remain solid.
Return on average tangible assets was 1.16%, and core return on average tangible assets was 1.17%. Our return on average tangible common equity was 15.41%, and core return on average tangible common equity was 15.48%.
In addition, we had a successful follow-on offering where BNP sold 28.75 million shares, reducing their ownership interest to 62%. Now I will turn it over to Mike who will take you through the financial results.
Mike Ching
Thanks, Bob. Starting with the summary income statement on Slide 4, net income for the quarter was $56.7 million or $0.41 per diluted share.
Core net income was $57 million. This represents a $0.01 per share increase in our core EPS versus the prior quarter and a $0.04 per share increase in our core EPS compared with the first quarter one year ago.
The core adjustments in the first-quarter 2016 included $25.7 million of gains from the sale of Visa Class B shares and investment securities, partially offset by $2.5 million of IPO-related expenses. Turning to the next slide, net interest income in the first quarter was $129.3 million, a decrease of $2 million compared to the prior quarter.
Net interest income in the fourth quarter of 2016 included $2.1 million of loan prepayment fees. Net interest margin for the quarter was 3.0%, an increase of 1 basis point from the prior quarter.
However, excluding the $2.1 million in loan prepayment fees in the fourth quarter, net interest margin during the first quarter of 2017 increased by 6 basis points. Turning to Slide 6, non-interest income in the first quarter remained fairly stable compared to the prior quarter.
Noninterest income was $49.4 million, a slight increase of $0.4 million compared to the fourth quarter of 2016. During the first quarter, we experienced modest increases in our core noninterest income categories.
Noninterest income in the first-quarter 2017 also included $1.3 million in death benefits from bank-owned life insurance, or BOLI. Noninterest income in the fourth-quarter 2016 included $1.5 million of net gains on the sale of securities.
Finally, as a reminder, the first-quarter 2016 included the previously mentioned securities gains of $25.7 million. We do not currently have any plans for future sales of our remaining Visa stock.
Noninterest expense shown on Slide 7 was $84.3 million in the first quarter, an increase of $1.8 million from the fourth quarter. Comparing the first quarter with the prior quarter, significant variances included an increase in salaries and benefits of $2.8 million, primarily due to annual merit increases, increased overtime and the normal increase in payroll taxes we see at the beginning of the year.
Contracted services and professional fees decreased by about $2 million as they were elevated in the fourth-quarter 2016 due to expenses related to system upgrades and product enhancements. Our efficiency ratio in the first-quarter 2017 was 47.2%, which was, as expected, an increase from the fourth-quarter 2016 and approximates our expected full-year 2017 efficiency ratio.
We are continuing to negotiate the contracts under the Transitional Services Agreement, so we are still refining the outlook for 2018. With that, I will turn the call over to Eric to cover the balance sheet starting on Slide 8.
Eric Yeaman
Thanks, Mike. Total assets at the end of the first quarter were $19.8 billion, an increase of $131 million compared to the end of the fourth quarter.
Investment securities increased by about $200 million compared to December 31, 2016 as we reinvested the proceeds from the portfolio cleanup trades we executed near the end of the fourth quarter. This also helped bring our cash levels down to our targeted level of about $500 million.
Turning to Slide 9, total loans and leases grew by $261 million or 2.3% to $11.8 billion at March 31, 2017. The growth was largely due to strong growth in the commercial and residential real estate loan segments.
Commercial real estate loans increased $189 million, and residential real estate loans grew by $68 million. Construction loan outstandings grew by about $20 million.
C&I loan balances remained relatively flat in the quarter, and consumer loan balances declined slightly as growth in the indirect auto portfolio of about $20 million was offset by the seasonal decline in credit cards of about $23 million. We believe that we can still continue to prudently grow loans at a rate that is slightly faster than our local economic growth rate, which would translate into loan growth in the mid to high single digit range.
Turning to Slide 10, you can see that total deposits increased by $144 million or 0.9% in the third quarter. Increases in demand, money market, and time deposits were partially offset by a decrease in savings deposit balances.
Now I will turn the call over to Ralph to cover asset quality.
Ralph Mesick
Thank you, Eric, and now I will cover some key asset quality measures that are shown on Slide 11. In the first quarter, net charge-offs were $4.1 million or about 15 basis points on average loans and leases.
This is 3 basis points higher than the prior quarter and 19 basis points higher than the first quarter of 2016, which included a recovery of $3.1 million on a previously charged-off commercial loan. Non-accrual loans were $7.3 million or around 6 basis points as a percentage of total loans and leases.
This represents a reduction of two basis points from the prior quarter and 7 basis points year over year. Delinquencies were $33.3 million or about 28 basis points, and this is down 4 basis points from the prior quarter but up 6 basis points year over year.
The delinquency rate for indirect auto was 1.24%. This was down from 1.73% at year-end.
The delinquency rate for our credit card portfolio was 1.09%. The allowance for loan and lease losses was $135.8 million at March 31.
The ratio of this reserve relative to total loans and leases was about 115 basis points. In the first quarter, the provision expense was $4.5 million or about $600,000 higher than the prior quarter.
And now I will turn the call back over to Bob.
Bob Harrison
Thank you, Ralph. Turning to Slide 12, Hawaii's economy continues to perform well.
The state unemployment rate was 2.7% in March compared to 4.5% nationally. The visitor industry had a good start to the year, continuing the momentum from 2016.
Year-to-date through February, visitor arrivals are up 3.3% over the same period last year, and visitor spending increased by 9% over the same period of last year. The housing market remains robust.
In the first quarter, Oahu single-family home sales were up 1%, and condominium sales were up 7.1% over the same periods of last year. The median home sale price on Oahu was $750,000, up 3.5%, and the medium condominium sales price was $390,000, up 2.6% over the first quarter of last year.
With that, we would be happy to take your questions.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Jacque Bohlen of KBW & Company.
Your line is open.
Jacque Bohlen
I wondered if we could start off with expenses and just give an update just given the limited disclosure you were able to provide last quarter given the timing of the filing on them. Just where you stand in terms of expenses related to being independent, if any of those have been realized, and kind of the timing of any expectations you have for future quarters.
Mike Ching
Sure. This is Mike.
No, we are already incurring a number of the transition or I would say public company, independent company-related expenses that's already in the base. We've got higher insurance costs, higher audit costs, we've hired a number of individuals related to preparedness for a public company.
So it is tracking as we expected and as we have discussed in prior discussions. We do expect to still see expenses probably slightly ramp from the first quarter.
But, again, we're still looking at an overall efficiency of 47% for the full year.
Jacque Bohlen
And when you look at their 47% efficiency target, does that include any additional thoughts on rate impacts? Any additional increases?
Mike Ching
Sure, yes. It does.
And so the revenue side is the other part of the equation, and we are still expecting and optimistic about further rate increases.
Jacque Bohlen
Okay. And looking at the salaries and expense lines and understanding the seasonality that's inherent in that, if we look back to 2016, the variance between 1Q and 2Q, is that a good indicator of the change between that seasonality, or were there some unique items then?
Mike Ching
Between 1Q and 2Q?
Bob Harrison
Of 2016 compared to 2017. Is that what you mean?
Jacque Bohlen
Yes, just trying to get a sense for how much of – how much seasonality is included in 1Q versus ramp-up in growth to see where the salary and compensation can trend in 2Q?
Mike Ching
Yes, there shouldn't be much seasonality, but what happened last between 1Q and 2Q last year is that we started adding some of the folks that I talked about earlier as we started the transition. So we started adding a couple bodies here and there.
We had some strategic planning folks, investor relations. We added, you know?
Jacque Bohlen
Okay. So still – so basically just a gentle increase from where we are at in 1Q as you continue to prepare for independence?
Mike Ching
That's right.
Jacque Bohlen
Okay. Thank you.
I will step back now.
Operator
Thank you. And our next question is from the line of Steven Alexopoulos of JPMorgan.
Your line is open.
Steven Alexopoulos
I wanted to start on the margin, which I guess was up pretty nicely ex the pre-pays. How are you guys thinking about margin expansion in the second quarter now that we have the March hike and the full quarter benefit from that?
Mike Ching
Hey, Steve, yes. We are expecting if we get to further rate increases and we did see it in March, it should continue to push up the overall yield.
There are other market conditions, though, that are affecting it somewhat on the loan pricing side, but we would expect to see still some overall increase to the NIM.
Steven Alexopoulos
And on the deposit side, are you seeing much pressure from competitors in terms of raising deposit costs as rates go up?
Eric Yeaman
Overall – Steve, this is Eric. Overall it's been a pretty disciplined market.
So deposit rates have been relatively stable. So we have not really seen any across-the-board increases, but more on a targeted basis.
The one area where we have seen some uptick in competitiveness and pricing is in public deposits. That's gotten tighter.
So that's been the primary driver for our overall increase in our cost of funds that you saw between the fourth quarter and the first quarter.
Steven Alexopoulos
Okay. That's helpful.
And then just a couple of questions on loans. The really strong growth you posted in commercial real estate this quarter, could you give some color on what drove that?
Eric Yeaman
Actually we saw nice growth actually across all our major asset classes within commercial real estate in our primary footprint, Hawaii and Guam. And really it's a matter of we are working a lot of deals constantly, and so we just saw a lot of the deals close in the first quarter.
So now that being said, it was a stronger quarter than normal, but we continue to see a pretty good pipeline in the segment. Clearly first quarter was higher than normal.
Steven Alexopoulos
That's simple. And just finally, I was hoping to get some stats on the indirect auto book.
Could you just cover where did we end the quarter in terms of size, what's the split between new and used cars, and then the split also between super prime, prime, and near prime? Thanks.
Eric Yeaman
Yes, I will start with the overall balances and some of the volume, and then I will have Ralph talk about the asset quality side. We saw indirect grow.
Volume was about the same as we've seen: a little over $100 million a quarter. But the outstandings went up about $20 million.
What we did see the overall was the quality of the borrower improve slightly, and in terms of new versus used, I think a total book is about 80/20.
Ralph Mesick
Yes, we are about 80/20 between new and used. About 75% of the production is here in Hawaii, the rest being on Guam, and overall things continue to perform well.
There is not – no real sort of differential between our loss rates here or in Guam. And over this past cycle, we have really been focused on credit selection, and I think that has sort of been proven out so far.
Steven Alexopoulos
And Ralph, do you have that split between super prime, prime, and near prime?
Ralph Mesick
About 90% of our production would be above 680 [ph].
Steven Alexopoulos
Okay. Okay.
Thanks for all the color.
Operator
Thank you. Our next question is from the line of Dave Rochester of Deutsche Bank.
Your line is open.
Dave Rochester
Just as a quick follow-up on expenses, you mentioned expecting a ramp in 2Q. Is there any way to put a range on your expectations there?
And then on the rate assumptions you guys are including for your efficiency ratio guidance, what's the timing of the rate hikes you are assuming?
Mike Ching
I don't think we are really prepared to give you specifics around the ramp. We are not looking at – it's not a significant ramp, having said all that, and we see that ramp slightly over the course of the entire year as we work through again the transition services agreements as the lot of the contracts start to run off towards the latter part of the year.
In terms of the – I think it – what was your last question on the efficiency?
Dave Rochester
When the timing…
Mike Ching
We are actually looking at two more rate hikes, one in June, one late in the year.
Dave Rochester
Perfect. And so it sounds like you are expecting expenses to just continue to step up each quarter through the end of this year, then at the end of this year, you will basically be fully transitioned and have all the expected expenses in the run rate heading into 2018?
Mike Ching
Not the run rate on the expenses, but we're still looking at again the full year of 47%. We haven't developed and landed on the 2018 forecast yet.
Bob Harrison
And Dave, this is Bob. The issue with that is we're still in the middle of negotiating a large number of the separation – the contract fits our transactional services agreements that we have.
So largest among those that we've discussed previously is our IT contract, and we're making good progress but we haven't reached a final answer on that yet. So, as long as those are out there, it is really hard to give strong guidance on 2018, other than the range that we have provided previously.
Dave Rochester
Sure. Understood.
Got that. Thank you.
And then back on the NIM, I saw the C&I yield was down 5 bps in the quarter. Was there actually some prepayment penalty income coming out of that, or was that just pressure ex that?
If you could just talk about what drove the decline there, that would be great.
Mike Ching
Probably just a shift, I think, in the quality of the – we are looking at higher-quality deals during the – in the current quarter. Also, you see some of the impact.
We had some slight loan prepayment fees in the prior quarter.
Eric Yeaman
Dave, this is Eric. I would just add that there was a lot of activity in the C&I portfolio.
We had a lot of new loans booked, and then we had a lot of not prepayments, but paydowns, normal expected paydowns. And so as, you know, the new loan is coming in at slightly higher quality, priced a little bit differently than the loans that are getting paid down.
Dave Rochester
Where are the yields generally coming in on that book at this point?
Eric Yeaman
I don't think we have the information to disclose on that.
Mike Ching
We can get back to you on that.
Dave Rochester
Okay. No problem.
And just one last on capital. I was hoping you could give us an update on how you are thinking about a buyback in the next round of planning?
Thanks.
Bob Harrison
Yes, this is Bob, Dave. And so as you recall, we are part of a CCAR filer, and we have put in a CCAR plan and submitted that on time or actually a little bit ahead of time to the Federal Reserve.
And until we get answers on that, we really can't share any information on what the capital plan would look like and potential share buybacks. As we have discussed in the past, that is something we plan to do at some point, and that is more of a timing issue than anything else.
But until we get an answer on the capital plan, we won't be in a position to comment.
Dave Rochester
Okay. All right.
Thanks, guys. Appreciate it.
Operator
Thank you. [Operator Instructions] Our next question is from the line of David Eads with UBS.
Your line is open.
David Eads
Maybe you can follow up on some of the comments you just made about the C&I portfolio. Were the paydowns still coming out of the SNC portfolio, and I guess were the greater new originations also coming out of SNC portfolio?
I guess how did the dynamic flow between those buckets to get to your flattish results?
Eric Yeaman
Yes, no – there is a lot of SNC activity, as well as other non-SNC activity going through that portfolio. So it wasn't necessarily anything unusual other than normal growth and normal paydowns.
David Eads
Okay. I think you made a comment earlier about maybe seeing some change on loan pricing with maybe loan pricing being more competitive.
Is there anything that you were trying to point to there?
David Eads
I think Mike may have made reference to that in response to a question on the NIM. I think you have some long duration loans, three, five years, the rates have overall come down over time.
So those are higher and rolling off higher, and the new loans that are going on are slightly lower. And we are focused on quality, which priced differently as you know.
David Eads
Okay. And then last one, just on the tax rate, was there an adjustment related to this accounting change related to share-based comp this quarter?
Mike Ching
Yes, it was insignificant for us.
David Eads
Okay. So is the – I guess the tax rate was about 37%...
Mike Ching
Yes, the lower tax rate for the quarter was really a function of the higher level BOLI income that we had during the quarter.
David Eads
Because – so 38% is kind of a good run rate for the rest of the year?
Mike Ching
That's correct.
David Eads
All right. Great.
Thank you.
Bob Harrison
Maybe just to mention – this is Bob. Just to remind everybody that because BNP's ownership has dropped below 80% now, that we are going to be a federal tax filer on our own going forward.
Mike Ching
That's right.
Operator
Thank you. Our next question is from the line of Laurie Hunsicker of Compass Point.
Your line is open.
Laurie Hunsicker
Just to clarify on tax rates, so you are thinking 38% for the duration of 2017 is the number to be using?
Mike Ching
For the full year, that is correct, Laurie.
Laurie Hunsicker
For the full year, okay. And then just to go back to costs, I know Dave and Jackie both hit it, but can you just help quantify – and I realize you've got – some things you are still negotiating, i.e.
your IT contract, etc. But as we think about what you initially laid out in the IPO with respect to your $14.5 million to $17 million guide in terms of incurring ongoing and one-time expenses, can you just update us on where we are currently within that annual run rate?
Mike Ching
Yes, so we are still there, and we're still within that range. And that is – when I mentioned the 47% efficiency, that includes all of those expenses.
Laurie Hunsicker
Right but I mean how much are we already baked in at that point? Are we baked in $12 million of that, call it, $17 million potential ramp?
Where do we stand in that scale? It's hard to tell because it's not entirely broken out.
I'm just trying to get a better handle on that.
Mike Ching
It's probably about a $0.5 million increase each quarter…
Laurie Hunsicker
You mean from current levels of where we stand as of March? $0.5 million more to go and then we are fully baked.
Okay.
Mike Ching
Each quarter, each quarter.
Laurie Hunsicker
Each quarter, very helpful. Okay.
Great. And then on the credit, can you just update us on dollar amounts with respect to both your total dealer floorplan, what's in California and then also your SNC?
What is Hawaii versus mainland?
Eric Yeaman
Sure, this is Eric, Laurie. So the mainland – the total SNC is $1.3 billion, and the mainland is $1.1 billion.
So there was a slight uptick in the quarter for that. And then as it relates to the – the second question was on dealer flooring.
Dealer flooring – total dealer flooring was about $880 million, of which half, of $500 million is on the mainland.
Laurie Hunsicker
Okay. And then just from the standpoint of loan loss provisioning and your credit is so pristine that as we think about your reserves to loan and that number continues to go down sitting here at 1.15%, how should we think about that going forward with respect to provision build?
And then where do you see a floor – and I know I have asked this before, but if you can just refresh us in terms of your methodology on that? Thanks.
Eric Yeaman
I think at this point we're going to be – our provision will probably approximate our loss rates going forward, and that decision in terms of what the reserve will look like will be – that is really a function of what our asset quality will – our perspective on that going forward.
Laurie Hunsicker
Okay. And so potentially how low would you let that number go?
Ralph Mesick
There is – we are probably near the low point in the cycle I would say.
Laurie Hunsicker
Okay. That's helpful.
And then just one last question. Can you comment a little bit more on the C&I just linked quarter no growth there, what we are looking at for the pipeline going forward, and just any other color around this quarter specifically?
Ralph Mesick
Sure. We continue to see a lot of activity in that part of our portfolio.
We have a pretty good pipeline. That being said, we are very selective on the deals.
We are very selective of who we partner with, and if we take on new accounts, we are very selective as well. So we are very focused on quality there.
There's a lot of activity, but again we are focused on quality. So we still expect to see for the rest of the year mid to high single digit growth.
Laurie Hunsicker
Great. Thank you very much.
Operator
Thank you and at this time I'm showing no further questions. I would like to hand the call back over to Mr.
Kevin Haseyama for closing remarks.
Kevin Haseyama
Thank you for joining us on today's call. We appreciate your interest in First Hawaiian.
Have a good afternoon.
Bob Harrison
Thank you, everyone.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program.
You may now disconnect. Everybody have a great day.