Kevin Haseyama; Strategic Planning and Investor Relations Manager; First Hawaiian Inc
Robert Harrison; Chairman of the Board, President, Chief Executive Officer; First Hawaiian Inc
James Moses; Vice Chairman, Chief Financial Officer, Finance Group; First Hawaiian Inc
Andrew Liesch; Analyst; Piper Sandler Co.
Anthony Elian; Analyst; J.P. Morgan
Thank you for standing by, and welcome to First Hawaiian Inc's third quarter 2024 earnings conference call. At this time, all participants are in a listen only mode. (Operator Instructions)
I would now like to hand the call over to Investor Relations Manager, Kevin Haseyama. Please go ahead.
Thank you, Latief, and thank you for joining us as we review our financial results for the third quarter of 2024. With me today are Bob Harrison, Chairman, President and CEO; James Moses, our Chief Financial Officer; and Lea Nakamura, our Chief Risk Officer. We 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 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 to 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.
Thank you, Kevin. I'll start by giving a quick overview of local economy. The overall Hawaii economy continues to be resilient. Well, [Maui] continues its recovery for the wildfires the rest of the state has seen relatively stable tourism numbers and a low unemployment rate. The statewide seasonally adjusted unemployment rate for September was 2.9% compared to the national rate of 4.1%.
Through August, total visitor arrivals were down 2.2% and spending was down 2.3% compared to 2023 levels for the same period. Housing market remains stable. In September, the median sales price for a single-family home on Oahu was $1.1 million, 6% higher than last September. The median sales price for condos on Oahu was $518,000, 2.8% below the previous year.
Turning to slide 2, I'll give an overview of our third quarter results. We're really pleased that the momentum we saw building in the second quarter carried over the third quarter. Deposit balances left out and deposit costs were up 1 basis points from the second quarter. Unexpected loan payoffs were a headwind for loans in the third quarter for credit quality remained excellent and assets repriced up driving margin expansion.
Non-interest income continued to be solid, and we continue to exercise good discipline on expenses. During the quarter, we released $3.8 million of tax reserves we recorded in connection with our 2016 separation from BNPP increased expenses for the third quarter by $3.8 million of reduced income tax expense by the same amount, resulting in no impact to net income.
Turning to slide 3, I'll go over some balance sheet highlights. The investment portfolio runoff is still being used to fund loan growth and reduce high-cost deposits continue to have ample liquidity. We had a $500 million FHLB advances maturing the third quarter and took out a new $250 million, 12 months advance a lower rate.
The balance sheet remains well capitalized and our capital levels continue to grow due to strong earnings and a favorable AOCI change. Because of our stronger growing capital levels, we intend to resume share repurchases in the fourth quarter.
Turning to slide 4, total loans were down $119 million compared to the prior quarter. And while construction loans grew as expected, we had good activity in the C&I and CRE portfolios. Unexpected payoffs of those portfolios were a headwind in the third quarter. The pipeline in the fourth quarter remained strong due to those pay-offs in the third quarter, full year loan growth will be relatively flat.
Now I'll turn it over to Jamie.
James Moses
Thanks, Bob, and good morning, everyone. On slide 5, we see that the positive deposit trends we saw in the second quarter continued in Q3. Total deposits were down $91 million, driven by a $112 million decline in total public deposits. Retail and commercial deposits stabilize and were slightly up compared to the prior quarter.
Commercial deposits increased $112 million, and that was partially offset by a $91 million decline in retail deposits. The migration of non-interest bearing deposits to higher cost accounts continue to taper, and the ratio of non-interest bearing deposits to total deposits remains a solid 34%, unchanged from the prior quarter.
Deposit costs also continued to level off in our total cost of deposits only increased 1 basis points from the prior quarter. We've been proactively managing deposit rates in anticipation of the Fed rate cut, and we saw our September cost of deposits decreased by 1 basis points to 171 basis points from 172 basis points in August.
Turning to slide 6, I'll go over net interest income in the margin, net interest income was $156.7 million, $3.9 million higher than the prior quarter. The margin was up 3 basis points, primarily due to the asset repricing dynamics that we've detailed in prior calls and stable deposit costs. Looking forward, we expect them to decline modestly in the fourth quarter and be around 2.9%.
On slide 7, non-interest income and expenses are detailed the income was $53.3 million, about $1.5 million more than the prior quarter. The increase in non-interest income was due to higher volume driven credit and debit card fees and higher bully income, and that was partially offset by lower other income. As a reminder that other income line included about $2 million of insurance recoveries in the prior quarter.
Non-interest expenses were $4.1 million higher than the prior quarter. And as Bob mentioned, we recognized the $3.8 million expense in the third quarter that was offset equally by a $3.8 million reduction in income taxes having no impact on net income. Excluding that, expenses in the third quarter were essentially flat to the second quarter. We continue to expect full year expenses to be in the $500 million range.
And now I'll turn it over to Lea.
Lea Nakamura
Thank you, Jamie. Moving to slide 8, the bank maintained its solid credit performance in the third quarter. Our credit risk metrics remained strong and stable and well within our expectations. We are not observing any broad signs of weakness across either at the consumer or commercial books, and we are very comfortable with our loan loss coverage level. Classified assets increased by $64.6 million due mostly to a couple of downgrade. The recently downgraded loans are well collateralized and we believe that the potential for loss is extremely limited.
Moving to slide 9, we show our third quarter allowance for credit losses broken out by disclosure statement. The ACL sales increased by $3.2 million to $163.7 million which coverage increasing 3 basis points to 115 basis points of total loans and leases.
Turning to slide 10, we providing updated snapshot of our CRE exposure. CRE represents approximately 30% of total loans and leases. Credit quality in this portfolio remains strong with LTVs, manageable and criticized loans continuing to comprise only a small portion.
Let me now turn the call back to Bob for any closing remarks.
Robert Harrison
I don't know any closing remarks. Thank you for your participation. We welcome any questions you have.
Operator
(Operator Instructions)
David Feaster, Raymond James.
David Feaster
Hey, good morning, everybody. I wanted to follow-up on the growth side. I mean, I appreciate the color on the growth outlook. And obviously, it sounds like this quarter was really impacted by pay-offs and pay-downs on. I'm curious, how does the pipeline looking where are you seeing opportunities for growth, and I'll just kind of maybe touch on the competitive landscape as well and where you're seeing new origination yields.
Robert Harrison
Yeah. Great question, David. Thanks, we had expected third quarter be mostly flat. And then with the payoffs and came in below that, obviously, we think the opportunities are really continue to be in the commercial real estate space, both here in Hawaii and on the primarily the West Coast and also on our dealer floor plan area.
So some growth here in Hawaii where onboarding a new relationship now, actually. But there's also some opportunities we have in the West Coast, I think really those two to begin with the top opportunities you have the consumer side is still going to be soft. There's not a lot of action residential home equity. So we're really looking to the C&I and commercial to see the growth.
David Feaster
Okay. And then just thinking about the earning asset repricing and remixing side, I'm curious, how do you like could you just touch on kind of the securities cash flows, the roll-off rates that are coming there, the loan cash flows and what you're seeing there? And just kind of how you think about where again, we're our new loan yields. Were you able to put new loan yields on especially with this kind of covenant?
James Moses
Right? Yeah. Thanks, David, it's Jamie. And so we continue to see about $400 million per quarter of fixed rate cash flows coming off the books. And so that repricing dynamic there. So that's coming off, let's say in the 4.5% range or so new loans coming on with the rate cuts made in the 6.5% to 7% range, something like that.
In total, I think that's probably the way to think about that in Q4. That dynamic itself is probably 2 basis points to 3 basis points to the good for the NIM in Q4 so that's the dynamic there. We think when we really look at it when our guidance is based off of another rate cut in November, and then we have the similar dynamics of that $6 billion of loans that reprice based off of that and about $4.1 billion of deposits that will reprice off of any sort of rate cut news as well. So we're getting to, like the media 2 basis points decline in Q4 and then NIM.
David Feaster
Okay. Perfect. Then maybe just touching on your ability exclusive of those in the index deposits, how are the conversations you're having with repricing deposits lower? What's kind of the new add-on rate for new deposit growth? And is there any other ways to maybe help accelerate the margin side? I mean, with rates coming down, is there any change in appetite for securities restructuring or anything like that?
Robert Harrison
Maybe I'll start on that, Dave and hand it over to Jamie. So on the way up, we were very clear with our deposit customers that we were going to give them full benefit of rate increases, basically immediately the on the way down, we would adjust accordingly. So that those have been in conversations we've been having with them over the last couple of years, and that's really borne out and really transparent referrals and walking them through that.
So as far as onboarding new deposits, of course, we're always trying to onboard new relationships, which includes operating accounts and people's personal accounts. So there's an element of non-interest bearing that along with interest or so. So the to further your question, maybe I'll turn it over to Jamie.
James Moses
Yes, I think Bob summarized the deposit piece of that pretty well. You know, we -- those deposits are not specifically indexed, but that's the expectation of our customers. I think the teams have been really good, really proactive talking to them. And everybody seems to understand sort of what the deal is on those. And so I think that's been a good story for us, for sure.
And then in terms of securities restructure, you know, I mean, we see others do that. We understand why they do it on, from my perspective, I think the share buyback this quarter is probably sort of a better use of, I don't know, reduction in capital. If you want to think about average securities restructure that way, how we think maybe that's a better way to return capital to shareholders and at least this quarter and will continue to look at those things.
But with that trajectory has continued declines in rates. And maybe we'd rather just have that accretion to tangible book value on the securities portfolio rather than trying to remixing or do something different on the asset liability side.
David Feaster
I think that makes a lot of sense. Thanks, everybody.
Operator
Andrew Liesch, Piper Sandler.
Andrew Liesch
Hi, everyone. Good morning. Thanks for taking the questions. Want to request on the provision in the quarter and it looks like you build the reserve for the consumer and the home equity books. So just curious what might be behind that? Doesn't sound like there's anything concerning out. So curious on the reserve build.
Lea Nakamura
I don't think it was particularly about consumer, cycle scores did go marginally lower, but we actually have some pieces of the book that we are spending a little more time looking at like environmental, but it wasn't particularly about any one particular part of the book per se. We're not actually that concerned about our home equity position.
Robert Harrison
To add to Lea comments, I think it's we're very well secured loan portfolio. So it's really not that. That's just as we do our modeling, we thought was appropriate to accelerate some of the coefficients as we looked at that. And that's how it ended up. There is a primarily a quantitative side, but there's also the qualitative side to the model.
Andrew Liesch
Got it. Helpful. And then Jamie, but the $500 million of expenses for the full year, but I would assume that includes the $3.8 million tax reversal in this quarter. I guess if you look at how we will give more detailed guidance on the January call, but if you just look at the next rate of expense growth on given a lot of the investments that you've made lately, I mean just what do you think a better or a big natural expense growth rate is with all these investments now?
James Moses
And that's a good question, Andrew. And as you said --
Robert Harrison
We are in the budget process right now.
James Moses
That's right, that's right. And we've got a budget process. So we'll have a lot of our guidance around that next year. But I think we've been pretty clear that on the way we've been thinking about it is we've made some strong investments, though those investments now are able to create efficiencies for us on that weren't there before.
And so that we think are sort of natural growth rate of expenses is much more in line with what you would consider sort of normal banking industry growth rate. So we expect to be kind of in line with that on a go-forward basis in general. And so that's pretty significantly lower than the 5.5%, 6% that we've seen over the past two, three years.
Andrew Liesch
Got it. Good to hear. Thanks for taking the questions. I will step back.
Operator
Jared Shaw, Barclays.
Jared Shaw
Thanks. Good morning. Maybe just to come back to the loan growth in the payoff activity you discussed this quarter. What's really driving that is have you seen other banks taking are coming and being aggressive for customers? What's was served driving the elevated level of paydowns payoff activity, especially on the C&I side?
Robert Harrison
Sure. Good question is about. So what happened there is a couple of deals were participating with those. We were at the lead on and the floor planning area and the Netherlands, maybe our pricing was a little bit higher as a group. Someone else came in and replace it. So there's really a more aggressive mainland lender, and this is a pretty broadly syndicated four or five bank deal.
So we were at the lead that's what happens sometimes were big boys and girls and you just have to be competitive in the market. And this is a very high-quality. They use their names, plural, the that's just the way it goes. So maybe is some subsegments of what we're doing this more competition, but nothing that doesn't make sense is just you know, that's what happens on this.
Jared Shaw
Yeah. Okay. Got it. And then when you do any call outs or the ability or the outlook for floor plan growth, I'm assuming that's sort of self-originated versus participation and that are you able is that just getting bigger with existing customers? Are you actively out trying to take market share? Are you expanding sort of the geographic footprint of that business?
Robert Harrison
Not expanding the geographic footprint, but new customers. Well, some new customers and some additional lines of existing customers. So mixable are not tied to that question, but it is truly a mix of all.
Jared Shaw
Got it. Okay. And then in terms of the buyback, I guess, how aggressive should we think you are with whittling away at that existing authorization? And should we be looking at a near term CET1 target or what's going to be the driving factor on the piece of the buyback?
Robert Harrison
Well, we have the as we mentioned earlier, that your authorization for the $40 million and we expect that's where we'll stay.
Jared Shaw
Okay. So once that's done then not looking to reload.
Robert Harrison
For 2024, we tend to look at it will follow.
Jared Shaw
Okay.
Robert Harrison
So yeah, we do it annually. So that's our annual outlook. And that's part of our planning process for 2025. As we certainly look at capital levels in the past, we've talked about a minimum of 12% CET1, and clearly, we're above that. So that's part of the discussion we're having internally. It will have of the Board and the various regulators.
Operator
Kelly Motta, KBW.
Kelly Motta
Hey, good morning and thanks for the question. You know, your expenses were really well controlled, and I appreciate the full year color on that. It might be a bit early with where you are in the budgeting process. But given the investments you've made with acquiring and what you're doing on the ground, that's what we're thinking about, the natural growth rate of expenses from here. And thoughts around that positive operating leverage ahead plays that having the current outlook for rates?
Robert Harrison
Thanks for the question, Kelly. Maybe I'll start and pass it over to Jamie. So we're deep into that. There's always in our budgeting process is always a lot of good investment opportunities internally that we look at and we have to just see how those stack up relative to where we want to be. And we think that the Jamie's earlier comments, I'll let them speak for himself in the second here, we just want to be disciplined as we go forward now that we've made those significant investments.
James Moses
Yes, thanks, Bob. Kelly, I think you know, from an expense perspective, I think that our growth targets around expenses are going to be much lower than they have been over the past few years, given the dynamics that Bob talked about. And then also when we consider the positive operating leverage scenario that you just brought up.
And so the challenge for a spread based bank is that when you expect rates to go down, we have a there's that had published in is going to go down as well and which creates challenges around positive operating leverage, as you know. And as part of the reason for the question, I'm sure. So we're going to do everything that we can to try and minimize that drop in margin.
I'm going to grow loans, prudently, manage our balance sheet as well as possible and be very proactive on the funding side as well and tried to extend our advantages and that we have in our markets to be able to do that and to tried to create that positive operating leverage that you're talking about. So in a down rate environment, tough in general, probably to do that. But I think we're in good position to be able to take advantage of our market and where we're at. And so yes, I think we're well positioned to perform pretty well next year.
Kelly Motta
Thank you, Jamie. That's really helpful. And I believe in your prepared remarks, you talked about some exception pricing where you were and maybe add some pretty generous on the way up or more generous on the way up with offering freight. And conversely, you have some and pretty ample room to cut with Fed rate cuts. I apologize. I may have missed it, but have you quantified at all the magnitude of that piece of that deposit portfolio?
James Moses
Yes, we have. So that's about $4.5 billion of deposits. That is not directly tied to an index that we control the pricing on and with the expectation that we'll be able to drive that pricing down on along with the Fed rate cuts that we price those customers and those deposits are up on the way up. And we feel pretty strongly that it will be able to price those down and our win rate when rates go down as well.
Kelly Motta
Got it. Maybe a final one me that fee income came in really strong this quarter. It looks like there was particularly strong uptake in credit and debit card fees as well as there have been increasing Bali. And so I am hoping you could give some color around the drivers of that. If there is any and fully gas benefits in the area, it looks like that number has jumped around a little.
Robert Harrison
Yes, no death benefits in the quarter. That's sort of market driven. Generally speaking, when rates drop will kind of get a pop in that line. So in the fourth quarter, depending on what happens, we're sort of expecting that to be kind of flat. And so with that, I think we're probably $50 million plus in the fourth quarter and fee income somewhere in that $50 million to $51 million properly that we're seeing some good growth, in particular in the card portfolio that you noted and so. We've seen some strength there, and we probably continue to expect that to happen.
Kelly Motta
Great. Nice quarter, guys. I'll step back.
Operator
Anthony Elian, JP Morgan.
Anthony Elian
Hi, everyone. Just a few follow-up questions from me. Back to the payoffs, do you have dollars? How much the payoffs weighed on your loan growth in the third quarter in dollars?
Robert Harrison
I don't have that on this spot. I don't have the fee, yeah, Jamie. I didn't get into.
James Moses
Yes, we can get it is probably in the neighborhood of $90 million, $95 million. Something like that is probably the unexpected payoffs number that we saw.
Anthony Elian
Okay, got it. And then my follow-up, the slide 6, you call out the non-interest bearing remaining stable from the prior quarter. It is this the do you think the bottom for non-bearing deposits as a percentage of total, or do you think there could be some continuing declines from here in the percentage? Thank you.
Robert Harrison
Yeah, thanks. So the percentage has been pretty stable now for the last couple of quarters, last six months or so. So good trends there. We're hopeful that's the case. And we hope that as we move forward done, we're able to take market share in those areas. And of course, a part of deposit gathering is in that non-interest-bearing space.
So we're hoping that we can sort of stand in that number and keep that in a 34% range at about where we were, I think I had at the end 2019 ahead of the pandemic. So seems like a decent spot to think about it that way. So yeah, I think that's our outlook we don't know for sure. But then the trending has been good in that direction.
Operator
(Operator Instructions)
Timur Braziler, Wells Fargo Securities.
Timur Braziler
Good morning, everyone. Just maybe on decided to keep following up on if adjusting the expectation for loan growth. And first, the payoff cadence, I guess the fixed rate loan, kind of repricing schedule. How much could that be impacted by payoff cadence to those kind of mutually exclusive? Are you expecting that everything that rolls off has brought back on that incremental 200 basis points, 250 basis points of spread? Or is there some risk to that dynamic of payoffs they elevated?
Robert Harrison
So that $400 million cash flow forecast. It would be sort of independent of these. I'll call them unexpected payoffs that we see it. So there is there would be risk to that number or if there were more unexpected large payoffs that happened in the fourth quarter. Of course, there are unexpected for a reason and so we are forecasting that. But that full cash flow repricing that we talked about $400 million in the quarter. We would expect that to if you assume were flat in loans for the quarter, we would expect that to be reprice up to that to 250 basis points level or so.
Timur Braziler
Got it. And the FHLB advance that was rolled into that $250 million. What was the rate on that?
James Moses
4.14, I think was the exact rate on that. So there's when we think about, that maturing advance, we're thinking about asset liability management as well as sort of income dynamics and what other opportunities there are in the market for funding as well as our liquidity metrics. And so of course, we have a you have a little bit more of term associated with the FHLB borrowing. And so that helps our liquidity metrics on as well.
Timur Braziler
Okay. Last one on the margin for me just looking at security deals link look like those stepped down a decent amount in 3Q. I'm just wondering what the dynamic is there and how we should think about the roll-off, roll-on of the cash flows going forward.
James Moses
Yes. So in the securities portfolio, we do have a small amount of floating rate loans as there. So maybe that's like a $600 million, $700 million or so. And so when rates drop, you'll see a small dynamic come in there as well. So that's that 3 basis points to 4 basis points drop in the quarter that you see on.
Generally speaking, we are not reinvesting in the portfolio at this time. So if rates continue to go down, you'll probably you're likely to see the rate in that securities portfolio to go down on as well. However, right when those securities come off in that [175], 2% range every quarter, we don't have to fund those with 4.5% FHLB fundings for example. So there's a there's a positive income dynamic associated with just running off that portfolio.
Timur Braziler
Great. And then just last question for me, maybe for me, it just it looks like classified assets. So we're a little bit higher 2x versus second quarter of any kind of color on what drove the increase in classified assets.
Lea Nakamura
So it was primarily in multifamily and it was really just a handful of performing loans. These are actually well collateralized by doing this rate environment. They don't really have the level of cash flows that we would prefer to see. We don't actually believe that these loans are indicative of any kind of trend in the portfolio. The loans are performing.
Timur Braziler
Great. Thank you for your questions.
Operator
Thank you. I would now like to turn the conference back (technical difficulty)
Robert Harrison
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 have a good weekend.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.