First Hawaiian, Inc. (FHB) Earnings Call Transcript & Summary

Great. Thanks. Good afternoon, everybody. I'm Jared Shaw from Wells Fargo, and thank you for joining us for this group meeting with First Hawaiian. We would like this to be as interactive as possible, but, unfortunately, we don't have the ability to have you ask questions directly. So if there's questions that come up that you would like me to address, you can e-mail them to me at [email protected], and I'll be sure to pass them along. Today, we're pleased to have Bob Harrison, CEO; Ravi Mallela, CFO; Ralph Mesick, the Chief Risk Officer; and Kevin Haseyama, Head of Investor Relations.

For all of my meetings, I've been starting off with a broader question, and I'll do that here as well. With the environment we find ourselves in, how are you all at First Hawaiian Bank protecting against financial downside? And how have you seen your business change over the past few months? So maybe, Bob, you can kick it off with that.

Thank you, Jared, and thank you for hosting us today. It's a very different time. What we've done to take care of our employees and our customers, to start with, many people working at home. Roughly half of our folks are working at all. We've also separated our operations center to provide that redundancy to make sure we can continue to serve our customers and the community through this crisis. What we've done to protect the downside on the -- for the bank is really reach out to the customers and see how we can help them. One of those ways to do that is be proactive, certainly on the consumer side, and grant them some deferrals to get through this period of time for if you've lost your job, to be able to start you on unemployment insurance, get back on your feet and return to a paying status. And really reach out to others in the community to see how we can help. We've started funding a number of community events, both for foods -- helping people and the people who need food in the community and the food banks and mental health services, and really being that community support network that's so needed in a time of crisis. So we're taking care of our customers. We're taking care of our employees, and we also need to take care of the community as well.

Great. Hawaii is obviously a special place, but it's a little remote and tends to have its own ebb and flow in terms of the economy. Can you give an update on what you're seeing sort of boots on the ground in the state, in the islands, and how the expectation is for a return to tourism, and, I guess, how everyone's handling the big pullback in tourism at this point?

Sure. Thank you, Jared. No, it's been unique to be in Hawaii because we have the ability to kind of control the border. The governor does. And so we've been in a quarantine status for some time. That's worked very effectively to reduce the amount of the virus within Hawaii. We've had, for the month of May, less than 4 cases a day and many days with 0 cases. So the virus is well in hand. And now the question is, how do we start reopening the economy to welcome back, to provide free air circulation within the state, and also to welcome back visitors, which is so crucial part of our economy. So the governor announced a plan that a number of us have been working on with public-private partnership over the last few weeks. He announced that on Monday this week, which kind of gives a gradual reopening of the economy, and you're starting to see that happen with various types of businesses being authorized to reopen. He hasn't announced the date yet for interisland travel or opening for international or mainland travel to Hawaii, but that's expected over the next several weeks. Probably sometime in late June or July, we'll start to see both of those start to open up.

As you look at the economy and your consumer exposure there, can you give an update on trends that you're seeing in the auto portfolio and in the broader consumer portfolio in terms of the deferrals and what the expectation is for once we reach the end of sort of that first 90-day deferral period, how you'll be working with customers? Will that be more on a case-by-case basis? Or will it still be a broader view of deferrals?

Our outlook on deferrals is maybe different than some of our peers. We are very proactive, realizing this was an unusual event. We wanted to give people some time to kind of put their house in order, so to speak. So what we have done is very broad outreach, both on the consumer and on the commercial side, and, in particular, the car dealers. And since our car dealer customers, all their showrooms were changed, closed, although a number of them were able to stay open for service depending on what city they were in, both here and in California. So we gave them that deferral and talking to them. We're talking to all of our commercial customers on a one-on-one basis. We're seeing them start to reopen. They're very positive about being able to return to paying status. We haven't talked to anyone yet who is anticipating the need for further deferral. On the consumer side, it's really more nuanced. It depends on really people getting back to work. The reason we were so positive on the outreach for the deferrals was we wanted people to be able to start getting -- those who have lost their jobs to start getting their unemployment insurance or stimulus checks. All that's happened. So we're thinking that more broadly that most of those will return to paying status. But we're going to have to work with them and see how this unfolds as the economy reopens.

Okay. That's great. Shifting a little bit. You have a Shared National Credit portfolio that you've used. In the past, you said it's to get some geographic diversity. As we go through this cycle, do you feel that, that's going to be a net benefit to you on the credit side? Or given the size and structure of loans that you could actually see maybe a potential drag on net credit impact from that?

That's a very high-quality portfolio of ours. As you recall, last summer, we reduced that by just over $400 million. It's about 1/3 of the portfolio. And so what's left in that is, one, very high-quality names with operations in Hawaii. And it does give us that diversification between just being Hawaii-based assets, but also some ability to have assets in a broader, more diversified market. So we see that as -- we've always looked at that portfolio as it's got to be a higher quality than anything we can do in Hawaii. It is names that have access to the capital markets. And while some of them did draw on their lines initially, we're starting to see some repayment on that already as those companies have gone to the capital markets to issue debt, et cetera. So we see that as a very strong way to diversify, support people that have operations in Hawaii and also to balance the risk between being just Hawaii-only assets and a more diverse market elsewhere.

Do you anticipate any more remixing in the Shared National Credit book? Or do you feel that you're where you want to be with that?

We've been doing that for some time. And actually, even right after we did the sale last summer, there were a number of names that were coming up to maturity before year-end that we didn't sell, but we just exited as a mature. And so that's something we're always looking at to get the right balance. We think we're in a pretty good place right now. A lot of those names, we have other relationships with other than credit, but that's something we're always looking at.

Okay, great. More broadly, are there any other -- are there any expense levers that can be pulled here, and whether that's anything that could accelerate structural change, whether it's digital adoption, new investments or potentially looking at your physical distribution network?

Yes. Maybe I'll start that and hand it over to Ravi. Clearly, we're looking at all that. Digital adoption has gone up dramatically over the last couple of months with people being in stay-at-home status. And so that's worked out very well. We have closed 45% of our branches, and we're going to start reopening them on June 1 in phases, but we're relooking at that model as well as the digital adoption goes up. But maybe I can hand it off to Ravi to talk more about the expenses.

In Q4, we gave some guidance on expenses, primarily driven by 3 items: one, the loss of reimbursements, about $6.5 million that we had in 2019 that went away this year; and then 1% to 2% increase in technology spend, really driven by the implementation of a new core platform that, frankly, is the foundation for our digital transformation, both with our customers and internally. And then 1% to 2%, just general inflation. And I think when we look for opportunities, we're really committed to doing the core platform work because it's foundational to our digital offering. It's foundational to us gaining efficiencies in the long run. And so we're going to continue to do that work. But where we look for opportunities on the salaries and expense side, obviously, with the current environment, an incentive comp is going to be moving down just because we probably won't be seeing as much loan activity as we expected starting the year. They're also going to just be some volume-related -- other volume-related items, things like card expense as we see -- card rewards expense as we see activity sort of slowing down during this period, where we've essentially shut down and moving into a phase where we're: one, transacting with each other in the local economy; and then building back towards a fully opened economy where tourism has returned. We're committed to these long-term activities, both growing ourselves through the digital platforms and the core platform being a foundation to that. But we've been expense-focused for many, many years, and we continue to look for opportunities in those areas.

Does the slowdown in loan growth allow you to accelerate your deposit remixing? I guess I'm thinking more specifically on the public time deposits and what the dependence on that going forward would look like?

I mean, I think, Jared, the story on that is going to be a little noisy for a couple of quarters. And that has a lot to do with the way we thought about funding our PPP loans. When we think about matching the duration of the PPP loans to a funding mix, we found that public time has been a very effective means of funding those loans. We took public time down to a little bit below $500 million. We let it creep up a little bit in anticipation of line draw activity that we saw in Q1. And we see that as an opportunity to -- we saw that as an opportunity in Q2 to do more public time to match fund some of the PPP loans that we've put on. So I think if you remove that from the equation mix -- I think the mix is going to continue to improve as, I think, our time deposits tend to mature into lower-cost deposits. And also just the expectations of our customers are very rational in this market. And so we see overall costs going down and the mix improving with a move primarily from time deposits, both on the public side and on the consumer and the private wealth side, to noninterest-bearing deposits.

That's great color. Can we switch a little bit over to the PPP, to the originations there? Can you give us an update on how that went with the second round? And then, I guess, what percentage of the loans that you originated went to existing borrowers? So in fact, giving you a little more credit protection on a loan book. And then how does that help or hurt or flow through to the expectation for second quarter provision from sort of the mini component as opposed to the macro component?

Jared, this is Bob, and I'll start. Maybe others can join in. The PPP loans, we did for our customers only. And so we did over 5,500 loans for $970 million in the first and second phase. All those have been disbursed -- or, virtually, all those have been disbursed. So that process worked very well. We did that with an in-house process, a mix of kind of paper and a portal, so electronics. So that worked extremely well, a lot of our customers benefiting from that. Kind of what happened on the way in seems to be happening on the way out. The rules keep changing as we're doing it. So there's some talk about maybe extending to 8 weeks. And so we'll have to see how that plays out. But that money in the hand of our customers has really made a difference. And I think as we were talking a little bit earlier on with some other customers, is it allows them the ability to bridge this quarantine status as we start to reopen. And so it's hard to draw a direct line between that and credit performance later on. But definitely, their ability to take advantage of the PPP loan, get forgiveness for all or a good portion of that really gives them a leg between being in quarantine and being back to reopening. But Ralph, do you want to touch on that a little bit?

No. I mean, I think Ravi probably touched everything that we needed to talk about on the PPP.

And then as we look at the second quarter provision, obviously, from March 31, the broader economic backdrop continues to deteriorate, so that's going to impact provision. What about sort of on the loan specific side? Is it too early to start seeing credit migration when everything's in deferral? And I guess, how do you -- what's the interplay with getting that $970 million of PPP effectively protection on the loan book? Does that just defer you having to make a credit decision? Or should we expect to see credit migration within the quarter?

So the -- I think the combination of the deferrals and the PPP really were, I think, an important part of our strategy in terms of giving people a bridge to work through. And now in terms of looking at the reserve, we're -- on the commercial side, we'll be reviewing individual credits, sitting down with clients, understanding what their resources are, what their cash burn rates would be, how they'll be able to sort of deal with a period of extended or, I should say, depressed activity. On the consumer side, that's going to be a little bit more model-driven and sort of more top down, doing various shocks to the portfolio, looking at different types of factors and seeing how they might play out in a more, I would say, sort of adverse scenario. So that's sort of how we're looking at it right now.

And clearly, a big factor in the consumer side is getting people back to work. A lot of our -- the unemployed here in Hawaii, a little less than half of them work in the local economy, serving other people within the state of Hawaii, and a little over half of the unemployed are in the tourism economy. So having a plan that the governor can execute on along with the mayors to reopen the state and have people come back and visit is an important factor to that. And that process has started, and we're going to see how we can execute that over the next few weeks to reopen the economy.

Great. Maybe shifting a little to capital and what your thoughts are in terms of, obviously, the dividend is on pause for the time being, what your thoughts are on that dynamic between capital growth and the dividend, and ultimately how we should be thinking about capital levels and the buyback potentially at the end of the year or not really for a while?

Yes. I think you might have misspoken, Jared. The dividend is not on pause. The share repurchase is on a pause.

I'm sorry.

Yes. So the dividend is still very much in effect. And as we look at it, we have quite a bit of capital in the deck, I can't remember which page it was on, we refer to how much additional capital we have to remain well capitalized. It's over $300 million. So that's a very significant buffer we have along with our allowance for credit losses and also our pre-provision net revenue, our ability to generate earnings on a continual basis. And all those are factors that we're looking at. The strength of the dividend is very important to us. It is something that certainly, if in an extended period of downturn, we would relook at. But it's an important factor for us to continue our dividend, and we feel we can do that for now and remain well capitalized as we did through the first quarter announcing the dividend continuing at $0.26 a share. Ravi, do you want to comment on that as well?

And Bob, maybe I'd just add that the bank has been -- for a $20 billion bank, the bank has been running stress testing for a number of years. One, formerly under BNP, the bank ran a stress test -- looks I am having trouble talking here, a stress test in 2017. And I think we use that as a part of our annual planning process. So when we look at our budget and we look at our performance, we look at stress testing as an integrated part of how we think about capital management. And that's a part of the puzzle in which we look at our ability to withstand economic and idiosyncratic types of stresses. And we feel good about our capital levels right now and we feel like we have a pretty good buffer for us to be able to withstand a series of events. And certainly, this event hasn't played out fully, but we feel good about where we are right now.

And then maybe just to finish on that, Jared, is the -- when would we consider returning to a share repurchase program? Well, certainly, that's a factor we would consider as we kind of see the middle and the end of the crisis and get a better feel for the local economy and also the national economy.

Great. And then with you not using the Moody's model and using the University of Hawaii model, what are the main economic indicators we, as outsiders, should be following to gauge the Hawaiian economy coming back? Is it return of tourism and island visits? What's the main thing that we should be keeping an eye on?

Maybe I can start the answer and hand it off to Ralph and Ravi. One of the things that tends to get overlooked is the significant impact that the military has here in Hawaii. We tried to call that out on the deck a little bit. But we have 42,000 active service folks in Hawaii, men and women, another 60,000 dependents and 20,000 civilian workers that, in 2018, resulted in defense spending in Hawaii of over $7 billion. So while tourism is clearly the largest single sector money coming into the state, defense spending is a very significant second leg of that stool. But Ralph or Ravi, do you want to touch on this your own?

I mean, I think in terms of thinking about this as an outsider of looking into the state, I think some of the macro drivers that we look at, national -- that impact to national economy are very relevant to us here and play a part. And then there are specific things that would happen here that would be important in terms of the employment numbers and what's happening in the local economy in terms of the gross state product. But I don't think there's a lot -- I mean a big influence is going to be the national economy on what happens here.

I think Bob's brought this up in the past, but maybe we'll just continue to say this, which is the 2 phases of the economy opening up, Hawaii being -- having a population of 1.4 million being in the top 30 MSAs. We have an economy that works as we interact with ourselves and transact with ourselves. And that will be a first stage to get to. And then the next stage really will be opening up to tourism and coming back to whatever the new normal levels are. And so when you think about the big macro stages, that's really how we think about it, first, opening up to ourselves and transacting with ourselves, and then going to opening up for tourism and returning back to a new normal.

And we'll see how tourism evolves. Obviously, it's going to change. But having a very top-quality health care system here and being in a U.S. state versus somewhere else is, I think, going to be a factor for some people's decision-making going forward. So I can't tell you how many people will travel, but those who want to travel to a warm place, tropical destination, I think, Hawaii will be very close to the top of that list.

And then finally for me, how should we start thinking about loan growth coming out of this crisis? One example, I guess, we were thinking of, is there any pent-up demand for borrowing in the tourism industry as people to retrofit for social distancing or anything like that? I mean, do you think that there's going to be a surge of demand at some point? Or will it just be more, let's return to stability?

I think the first thing will be residential loans. You're seeing a lot of volume with that now. That will continue. We're an underserved market in as far as the amount of residential homes available. So that will continue to be an area of potential growth to refinance and also maybe some new borrowing. As the economy recovers, tourism would certainly be an area to look to, but I think you're also going to see an area of maybe slower growth for a while. But...

In some of the projects that are going on now in terms of -- that will continue to go on in the rail. There's a lot of development that will happen around those rail stations. So I think that's probably the next area that you're going to see loan demand.

And I think as the economy starts to open up, I think when you think about our skills and capabilities as being a balanced book from a loan perspective, we have the capability to be very strong on the commercial side. We also have a very strong residential and consumer book. So our ability to move where the economy tends to move and where the opportunity is allows us to be able to capture the opportunity when and if it presents itself.

Great. Well, thank you very much. I know we all have full calendars today. So I want to make sure that we're able to stay on track. But gentlemen, thank you very much for participating. Thanks, everybody, on the line for participating. Again, hopefully, next year, we'll all be live back in Chicago, May 19 and 20. Thanks very much.

Thank you, Jared. Appreciate it.

Thank you.