First Hawaiian, Inc. (NASDAQ:FHB) Q3 2022 Earnings Conference Call October 28, 2022 1:00 PM ET

Company Participants

Kevin Haseyama - Strategic Planning & IR Manager
Robert Harrison - Chairman, President & CEO
Ralph Mesick - Interim CFO, Finance Group, Vice Chairman & Chief Risk Officer of Risk Management Group
Christopher Dods - Vice Chairman, Digital Banking & Marketing Group and COO

Conference Call Participants

Steven Alexopoulos - JPMorgan Chase & Co.
David Feaster - Raymond James & Associates
Andrew Liesch - Piper Sandler & Co.
Timur Braziler - Wells Fargo Securities
Christopher Larmoyeux - Holocene Advisors
Kelly Motta - KBW
Laurie Hunsicker - Compass Point Research & Trading

Operator

Good day, and thank you for standing by. Welcome to the First Hawaiian, Inc. Q3 2022 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Kevin Haseyama, Investor Relations Manager. Please go ahead.

Kevin Haseyama

Thank you, Tanya, and thank you, everyone, for joining us as we review our financial results for the third quarter of 2022. With me today are Bob Harrison, Chairman, President and CEO; Ralph Mesick, Chief Risk Officer and Interim CFO, and other members from the management team.

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 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 may also discuss certain non-GAAP financial measures. 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.

Robert Harrison

Thank you, Kevin. Good morning, everyone. I'll start with a brief update on the local economy. Hawaii economy continues to be resilient. In September, the statewide unemployment rate fell to 3.5%, which is in line with the national unemployment rate. Total visitor arrivals were 703,000 in September of this year, which is 4.5% lower than September 2019 arrivals. This is a strong result considering the Japanese visitor arrivals were 3.4% of the total this year compared to 19.6% of the total in September 2019. Japanese visitor arrivals represent a significant upside when they return to more normalized levels.

Despite the lower number of arrivals, visitor spend in September was $1.48 billion, which was 18.5% higher than September 2019. While higher interest rates have caused a slowdown in the housing market, continued demand and lack of supply have kept prices stable. In September, single-family home sales on Oahu were down 34.4% from last year, but the median sales price was $1.1 million, 4.8% higher.

Turning to Slide 2 to review our third quarter results. We had a very strong quarter as net income grew to $69 million or $0.54 per share. We continue to benefit from our asset-sensitive loan portfolio and low-cost core deposit base. Our return on average tangible assets was 1.14%, and return on average tangible common equity was 21.53%. The Board maintained the quarterly dividend to $0.26.

During the quarter, we repurchased approximately 107,000 shares for $2.5 million, and we continue to maintain strong capital levels after dividend payments and share repurchases. The common equity Tier 1 ratio was 11.79% at quarter end and total capital was 12.92%.

Turning to Slide 3. The balance sheet continues to be well positioned for the current environment. It remains asset sensitive, with about $5.4 billion or 39% of the loan portfolio repricing within 90 days, and we saw the responsiveness of our loan yield to higher interest rates in the third quarter.

We also improved the balance sheet mix in the third quarter as we deployed excess cash and investment securities runoff into higher-yielding loans. The investment portfolio continues to perform well as rates have increased. The duration of the portfolio remains stable at 5.5 years in the third quarter, virtually unchanged from year-end. And cash flows from the portfolio ran about $90 million per month for the third quarter.

During the quarter, we reclassified an additional $420 million of securities to held to maturity to reduce the accounting volatility associated with AOCI adjustments. Our liquidity position remains very strong, with a 62% loan deposit ratio, a strong core deposit base and steady cash flows from the investment portfolio.

Turning to Slide 4. Period-end loans and leases were $13.7 billion, an increase of $438 million or 3.3% from the end of Q2. We experienced growth in all portfolios, with the largest increases in CRE and C&I loans. On a year-to-date basis, total loans and leases are up $738 million or 5.7%. Excluding PPP loans, total loans and leases are up $928 million or 7.3%, in line with our full year outlook of mid- to high single-digit growth, which remains unchanged. As expected, a large portion of the increase in the commercial book was on the mainland, where the rebound in loan demand started earlier.

Looking forward, the fourth quarter loan pipeline remains robust, driven primarily by commercial loans in Hawaii and Guam. This should put us at the high end of our original full year loan -- sorry, this should put us at the high end of our original full year loan growth guidance.

Turning to Slide 5. Deposits fell by $510 million or 2.3% to $22.1 billion at quarter end. Approximately $347 million or 2/3 of the decline was attributable to 10 large commercial accounts. Our total deposit costs of 24 basis points in the third quarter, an increase of 16 basis points from the prior quarter. This is primarily due to rate increases on corporate accounts, money market accounts and other high-balance accounts. RAC rates on savings and checking accounts in our market have remained stable so far this cycle.

Our favorable deposit mix with, 42% of deposits and noninterest-bearing accounts, continues to help provide stability to our total deposit cost. We expect continued volatility in deposit balances given the unprecedented growth in deposits we saw during the pandemic as well as rising rates. However, our liquidity levels remain strong, and we have a variety of options to fund loan growth.

Now I'll turn it over to Ralph.

Ralph Mesick

Thank you, Bob. Turning to Slide 6. Net interest income increased by $17.6 million or 12.1% over the prior quarter to $162.7 million. Excluding the impact of PPP fees and interest, net interest income increased $18.5 million. The increase was primarily due to higher yields on balances of loans, partially offset by higher deposit costs.

The net interest margin increased 33 basis points to 2.93%, driven by higher yields on loans, cash and investment securities, partially offset by higher rates on deposits. While we anticipate that deposit cost increases will begin to accelerate in the fourth quarter, the balance sheet remains well positioned to continue to benefit from rising rates, and we expect the margin to increase by 10 to 15 basis points in the fourth quarter.

Turning to Slide 7. Noninterest income was $45.9 million this quarter, a $1.7 million increase over the prior quarter. We continue to see improvement in activity-based revenue, including trust and investment services income despite the continued market volatility.

BOLI income was continued to be negatively impacted by higher bond yields and the continued decline in the equity markets. We expect BOLI income to return to historical levels of $3 million to $3.5 million per quarter when the market volatility subsides.

Expenses were $113.3 million, an increase of $4.2 million from the prior quarter, in line with expectation. The increase was primarily due to higher compensation expenses, a full quarter expenses associated with the new core system and additional post core conversion costs. As we stated last quarter, we believe that expenses will be between $113 million and $114 million in the fourth quarter.

Turning to Slide 8. I'll make a few comments on credit. Asset quality continues to be strong. In Q3, the net charge rate -- net charge-offs were $2.8 million. Our year-to-date annualized net charge-off rate is flat at 8 basis points lower than the last three years. NPA and 90-day past due loans were 10 basis points, also flat from the prior quarter. Criticized assets continued to decline dropping from 0.91% of total loans in Q2 to 0.81% in Q3. The bank recorded a $3.2 million provision for the quarter, which included $1.2 million set aside for unfunded exposures.

Loans 30 to 89 days past due were $46.1 million or 34 basis points of total loans and leases at the end of Q3, about 7 basis points below Q2.

Moving to Slide 9. You see a roll forward of the allowance for the quarter by disclosure segments. The allowance for credit loss decreased by $0.8 million to $148.2 million. The level equates to 1.08% of all loans. The reserve for unfunded commitments increased $1.2 million to $30.1 million. Reserve needs for loan growth were offset by improvements in the portfolio risk profile this quarter. The allowance anticipates higher credit losses consistent with the recession, and includes a qualitative overlay for potential macroeconomic impacts not captured in our model.

Let me now turn the call back to Bob for any closing remarks.

Robert Harrison

Thanks, Ralph. To summarize, we expect to finish 2022 with another strong quarter, and our balance sheet is well positioned to perform well in a range of economic outcomes. And finally, you have probably seen the announcement earlier this month of the addition of Mike Fujimoto to the Board of Directors of First Hawaiian, Inc. Mike has served on the bank Board, and we are pleased to extend his expertise to the holding company Board of Directors. And now we're happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from Steven Alexopoulos of JPMorgan.

Steven Alexopoulos

I wanted to start and dive a little bit into the reduction in the noninterest-bearing deposits. Can you give more color on what you saw in the quarter? I know you called out the 10 accounts where customers just moving a portion of balances to higher-yielding alternatives and how much additional runoff should we expect?

Robert Harrison

Yes. This is just that's a volatile part of having large corporate customers is somewhat volatile about $100-plus million of that was title companies, which you just can't predict what the balances are going to be at the end of the quarter. We weren't seeing anything -- we didn't lose any accounts. Some of it moved for reasons we're not quite sure of. But it really was not related to anything specific and didn't seem that they were, in particular, moving to higher-yielding accounts.

As an example, the volatility this week, our noninterest-bearing account balances are up a couple of hundred million relative to quarter end. So it's just it's a volatile time for our deposits.

Maybe I'll turn it over to Ralph, if he has some thoughts to add to that.

Ralph Mesick

Sure. Steve, what we saw this quarter, I think, was not unexpected. Some larger accounts with temporary balances moving out. If you back out those balances, the net differential was probably about a 2% to 2.5% annualized decrease. In Q4, we're projecting deposits to be flat to slightly down. And I think the outlook for the NIM expansion would incorporate a range of outcomes that we might expect.

The midpoint probably approximates a decline that would approximate that net differential that we saw where the higher side would probably represent something with a more stable balance sheet and the low end of the range would probably be indicative of the deposit flows we saw in Q3.

Steven Alexopoulos

Got you. Okay. That's helpful. I want to stay along those lines. So if we look at your cycle to date deposit beta is relatively low, and I know historically, Hawaii has been viewed as a market where you could pay lower rates on deposits just given the competitive dynamics of the market. We think about digital age, right, businesses, consumers could move money basically pretty easily on their phone. Is that historical view still accurate?

Ralph Mesick

Yes. So I think if you were to take a look at what we're projecting for through Q4, I think the total deposit beta is around 10%, and then interest bearing about 18%. You compare that to the last cycle. I think what we saw in terms of cumulative beta was about 18% total deposits and about 29% in interest-bearing. We think the slope of the deposit repricing is about what we expected based on past cycles. I think, at this point, we're, as I said, expecting about a cumulative beta around 10% to 11% through year-end.

And then I think what we're looking at going forward is we're trying to be thoughtful, align our pricing to the value proposition we have across the product sets. And I think if we're successful in doing that, we're going to minimize our funding costs through the cycle and maximize retention of those deposit customers.

Robert Harrison

And to add to that, Steve, your question specifically on mobile, that's something we pay a lot of attention to. In fact, Chris is with us today to answer any of the technology questions. But the -- as far as this specifically relates to ability to move money, that's something we watch very closely. We haven't seen that yet, but that's one of the reasons we continue to invest in technology and really the data and the analytics around our customers so that we can stay in front of that when it -- if it's not -- if it comes, is when it comes.

Steven Alexopoulos

Right. Right. Okay. That's helpful. And then one final one for me. just looking at the C&I loan growth was really strong this quarter, even beyond the pickup in dealer. Can you give a little more color on why such strong growth this quarter there?

Robert Harrison

Yes. Maybe I'll start and ask Ralph to add comments. I mean, first, as you mentioned, dealer, in Q1, floor plan balances grew $9 million Q2, $43 million this quarter, $57 million. So we are really starting to see slower than maybe we would have anticipated a year ago. We are starting to see that build back on those balances. And we think that will continue. It's hard to predict exactly what it is.

So that's just staying there in the background, and my assumption is that we'll continue to see steady growth in that as 2023 unfolds, Q4 in 2023. And -- as far as the rest of the portfolio, we've just seen a lot of commercial real estate transactions, both here for fourth quarter and this past quarter on the mainland. So it's been a good market. We see that continuing through Q4. It's a little harder to see what Q1 and 2023 looks like.

But Ralph, comments you would add?

Ralph Mesick

Yes. I mean the only thing I would say to add to that is we're starting to see spread widening, which is good, I think, and we're able to look at opportunities that I think are going to be pretty attractive in terms of putting it on the balance sheet, even with the rate environment that we're facing today.

Operator

And our next question will come from David Feaster of Raymond James.

David Feaster

Maybe just touching on the margin expansion. I appreciate the guidance, 10 to 15 basis points in this upcoming quarter. Just curious what rate hike assumptions are embedded in that? Is that assuming a 75 in the next two meetings?

And then just, at a high level, how do you think about managing rate sensitivity? You're obviously very rate-sensitive naturally just given the nature and complexion of your loan and deposit portfolios. But I'm curious whether you're interested in maybe trying to lock some of that in at this point?

And how would you do that, whether it's longer-duration securities, more fixed rate lending or just curious how you think about that more broadly?

Robert Harrison

Yes. A couple of questions there. I'm going to punt to Ralph first and then do any cleanup afterwards. Ralph?

Ralph Mesick

Okay. The assumption for Fed funds is, at the end of Q4 would be to kind of give you an idea of what we're modeling today. I guess the question you had on hedging, last quarter, we said that we were going to look at trying to become less asset sensitive, but we're going to do that over time. We weren't going to try to time the market.

So we have started slowly a program to sort of address that. I think you see this quarter that we did about a $200 million swap. It actually was a collar that we put in place. So we'll do that in a very measured and programmic way. So I think what we want to do is be in a position, when rates do, at some point, trend back down being less asset sensitive than we were last cycle.

David Feaster

Okay. That makes sense. And then maybe just following up on the pipeline, I'm glad to hear that it's holding up well, primarily comprised of commercial loans in Hawaii and Guam. Just curious, how is demand trending and maybe the pulse and sentiment of your clients in Hawaii?

And then I guess if we had to think about your growth, if we were going to sustain this mid- to high single-digit kind of pace, would you expect it to be more of a function of continued stronger originations or maybe slower payoffs and pay downs, I guess, maybe probably a combination thereof. But I'm just curious how you think about those two dynamics as you think about your loan growth rate.

Robert Harrison

Yes. Let me start. And as far as we're looking forward, we think there's clearly -- for the residential portfolio payoffs will come to -- only if someone moves. Nobody is going to be refinancing anytime soon, and we've seen a real slowdown in that origination much like the rest of the country.

So where we're really seeing the loan growth is in the commercial side of it. As far as sentiment of the customers, it's still pretty bullish. As I mentioned in my opening remarks, even though arrivals is down, we're still seeing really strong growth in spend by visitors, and that has not slowed down.

We're cognizant of the demand. The people from Japan are going to be a little bit slow to come back given the yen-dollar exchange rate, but that will come back over time and that will only add to a very strong Westbound Traveler that we've seen really throughout the entire pandemic once we really started to open back up.

Ralph, comments you would add to that?

Ralph Mesick

Yes. I think, right now, there's concern, but not a ton of change. I think there's a pretty big condo project coming to market today. So we'll sort of see what's happening with regard to buyer demand in the residential space. But certainly, it's -- given the situation with rates, I think it's something that we're keeping track of, and we're trying to balance sort of opportunity against risk.

David Feaster

And that's the perfect segue. I wanted to touch on asset quality. I mean when we talked last quarter, I think you kind of had -- you talked about maintaining a degree of caution just given the environment, and you've got a really good pulse on the market. I'm just curious, as you look at the Hawaiian economy, are there anywhere -- I mean, within your portfolio or even just from a competitive landscape that you're seeing that's causing you any concern?

And I guess, are you seeing higher rates? I mean, obviously, your portfolio is pristine at this point. But I'm just curious, are higher rates starting to impact cap rates at all? And just any other trends maybe from an industry or competitive landscape that you think might be helpful or worth pointing out?

Robert Harrison

Sure. Let me start on the consumer, and I'll pass over to Ralph on more rates affecting commercial real estate. But on the consumer, we're still seeing very strong performance across all those portfolios. A little bit of normalization I would say, on the card side and a little bit indirect. But that's where we always see that. It was better than normal during COVID, and I think we're returning more to a normalized environment.

Where that will go with inflation being what it is as the months unfold? We'll have to wait and see. But right now, it's still excellent. And we really haven't seen any signs of weakness in that. We do have some concerns about interest rates impacting real estate projects.

And maybe I'll turn it over to Ralph for a comment on that.

Ralph Mesick

Yes. I'll. Probably add to you, David, kind of first sort of talking to what do we anticipate for cap rates. We're not really sure what to anticipate other than I think if you look back historically, there's usually a pretty strong correlation between rates and cap rates. I think, this time, with the amount of inflation in the market, I think that's probably something that we'll have to sort of see.

But then speaking more to sort of our underwriting, I would say that we're a cash flow lender. So cash flow has been pretty much the constraint that we've had in terms of lending in the real estate market, not so much LTVs. You'll see, I think, across like most banks portfolios today that the LTV ratios are pretty low, primarily because of the fact that people are really lending against cash flow.

From our perspective, we do stress our underwriting. So we stress interest rates, we stress occupancies. I think that kind of an exercise helps us kind of understand where we might be today. And I think what we're feeling good about is really sort of the fact that we're in great locations that tend to hold up pretty well in terms of values. Sponsorship in our portfolio has been pretty strong. And I think, during COVID, there was really strong indication, especially with some of the hotel owners how they sort of managed through a period of like complete disruption.

So I think it's just something that we're going to pay attention to, but I think location, sponsorship, and I think the way that we underwrite in terms of being a cash flow lender, that gives us a lot of confidence in the portfolio as we move into 2023.

David Feaster

And then how -- I mean, how do you think about the reserve going forward? I mean just curious whether you would expect just given potential for weaker CECL inputs, just curious how you think about the reserve as it plays into some of those comments?

Ralph Mesick

So I would say that the reserve is -- right now is -- contemplates a recession in 2023. So it was -- initially, it was built up because of COVID, and COVID sort of kind of went away and then some of these other macroeconomic conditions started to come into place.

So if we look at it, we sort of impute like a 1-year loss rate against the portfolio. We're looking at sort of absorbing losses that would be indicative to what we saw at sort of our peak losses last cycle. So it's a healthy reserve. And it's certainly, I think, appropriate for what we see today in the marketplace and what we sort of projected out over the next -- kind of the next 12 months.

Robert Harrison

Yes. And then to add to that would be depending on loan growth is what we would look at the appropriate level for the reserve, to add to it.

Ralph Mesick

Yes. And as I had mentioned in the comments, we saw loan growth. Typically, that would have probably caused us to have a higher provision this quarter. But -- we had a lot of improvement in terms of the overall risk profile of the portfolio so.

Operator

And our next question will come from Andrew -- I'm sorry, Andrew Liesch of Piper Sandler.

Andrew Liesch

So a question on the expense outlook from here. I think in the past, you mentioned a more normalized expense growth rate would be 4% to 5%. Is that how we should be looking at it from here if we just sort of annualize this $113 million to $114 million and then build off that. Is that the best way to look at it?

Robert Harrison

Andrew, this is Bob. Maybe I'll start off and hand it to Ralph. No, we're really looking at dollars, and that's why we try to give the guidance of $113 million to $114 million for the quarter, which we're still very comfortable with for Q4. We came in very close to that, right on top of that in Q3. So that's how we're really looking at it. As far as beyond that, we're going through the budgeting process now, so don't really have a view to 2023.

There are still some moving parts. As we get through kind of the end of the core conversion and some of the consultants have -- certainly, most of them have gone and we finished the need for their services. There's still a little bit that's going on in Q4, but there's a lot of puts and takes in that side of it. But we're comfortable with the $113 million to $114 million number for this quarter. Ralph, anything you would add to that?

Ralph Mesick

No. I think, to Bob's point, we're going to have a little bit expense this quarter that related to kind of the cure period and the conversion that will go away. And then going into the next year, we'll probably have some inflation-related increases. But I think at this point, we're still working through the budget, and we haven't really sort of projected out for a 2023 expense growth rate.

Andrew Liesch

Got you. All right. That's helpful. And then on the fee side, if I just ignore the BOLI issue, the nice increase in fee income. How are -- how do you think that's going to trends here in the fourth quarter with maybe some holiday travel and increasing transactions? Do you think it's going to have another nice step up here in the fourth quarter?

Robert Harrison

Generally, the activity-related things for cards and merchant processing, we do see a nice uptick in Q4. Historically, that's what we've seen. And if we have good visitor numbers, which still really kind of driven by the Thanksgiving through year-end Christmas period. So a little hard to see right now. But, historically, we've always seen a pick up in those kind of activity revenue lines in the fourth quarter.

Ralph Mesick

Yes. And I think on the wealth side, we've seen some challenges with equity accounts, but we've seen a lot of good performance in terms of money market accounts now we're getting fee income off of. So that's where we're sort of seeing the kind of net increase in that area.

Operator

Our next question will come from Kelly Motta of KBW.

Kelly Motta

Thanks so much for the question, for all the color today. I was just wondering, I don't think it's been mentioned on the call yet today. If there is any update on the CFO search has been ongoing this year and perhaps timing of that?

Robert Harrison

Thank you, Kelly. This is Bob. No -- thanks for the question. We were close to a candidate. It didn't work out for them and their families. So we're still working on that, and we hope to bring that to a conclusion very soon.

Kelly Motta

Got it. Well, I can't imagine Hawaii is too hard of a sell.

Robert Harrison

It works for all of us so...

Kelly Motta

Maybe looking at capital and capital return, your CET1 ratios are still super healthy. I noticed you moved another portion to HTM. Just wondering how you thinking about buyback? If there's any changes to how you may be a bottom of where you're willing for [indiscernible] to go? And if continued interest rate volatility factors into your outlook for repurchases at all?

Robert Harrison

All right. Thank you, Kelly. It's -- maybe I will start. Relative to common equity Tier 1, our goal is still -- our guideline is 12%. We're under that primarily due to strong loan growth. As you saw, we didn't repurchase a lot of shares in Q3. And I think that will still be relatively nominal as we work to build back that common equity Tier 1 to our 12% guidelines. So we expect that to happen over this quarter and maybe into next quarter. We still have authority to repurchase shares. We could be opportunistic about that. And we'll look to continue looking at that in next year as well. But right now, we're still working towards that guide of the 12%.

Kelly Motta

Got it. That's helpful. And then just a minor point on yields. I just -- I noticed that your resi mortgage yields came down. I understand there wasn't a ton growth there, but just wondering -- it was surprising to see if the yields come down a little bit. Were there any specials who are running or anything unusual with prepay use or anything like that, that we're doing those trends?

Ralph Mesick

We did have a small -- this is Ralph. We did have a project that closed out -- a couple of projects that closed out this quarter that we had actually made some commitments on. So I think the yield on the production this quarter was a bit lower.

Operator

Our next question comes from Timur Braziler of Wells Fargo.

Timur Braziler

Maybe starting on the loan growth that you're seeing on the mainland. I'm just wondering, is that primarily shared national credits? And then for the commercial real estate portfolio, which industries are really driving that strong loan growth?

Robert Harrison

Yes. The part of that is the dealer floor plan because we have that both here and in the mainland. So some of that growth you're seeing is dealer floor plan. And in our dealer book, most of that is nonshared national credit, but there are a couple that are larger and more syndicated deals. So I don't know the breakdown of that specifically. We're also doing commercial real estate loans, and many of those are shared national credits, but not all. And that tends to be more in the multifamily.

But, Ralph, do you have more of a breakdown on that?

Ralph Mesick

No. With regard to this, in the CRE book, it was a combination of some dealer related assets owner occupied. And then pretty much multifamily and some industrial.

Timur Braziler

Got it. And as you're thinking about funding future loan growth, I understand your commentary about the deposit base, and there's still being a little bit of uncertainty there. Should we expect that, at least in the near term, majority of the loan growth is going to be funded through the bond book still?

And I'm just wondering what's your appetite is for maybe layering in some more time deposits? I know is those things ease this quarter and just maybe talk about the market for time deposits on Hawaii.

Robert Harrison

Yes. As we look at the investment portfolio, that's going to be our primary funding source for loan growth. There might be some timing differences in there depending on loan funding versus maturity or cash flows coming off the investment portfolio. So there might be some of the public time deposits or other methods we might use to kind of bridge that, but that's what we'd primarily be looking at.

Timur Braziler

Okay. And then for those public time deposits, what type of sensitivity do they have to interest rates? Is that pretty much 1 for 1 with what's going on at the Fed? Or is there some sort of discount to that?

Ralph Mesick

It's a pretty strong correlation.

Timur Braziler

Okay. Got it. And then maybe last for me, just going back to the asset quality conversation and conversation about the allowance level. I just want to make sure I'm hearing this correctly. It sounds like we're close to a bottom on the allowance to loan ratio and incremental loan growth is going to be funded for? Or is there still a possibility of this dynamic that broader credit trends within the portfolio improve, and you can actually see allowance for loan ratio continue to decline kind of -- irregardless of near-term loan growth?

Robert Harrison

We still have some qualitative element within the loan loss reserve. So that's a part that will just have to be more -- just have to keep our eye on what's happening now in the market and the economy and adjust to that. But other than that, I would think there would be some correlation between loan growth and provision. Ralph?

Ralph Mesick

Yes. I would think it'd be a pretty strong correlation at this point just given where we're at and what we sort of see out into the future.

Operator

Our next question will come from Christopher Larmoyeux of .

Christopher Larmoyeux

So with core conversion done, I think some resources might have been freed up. Can you talk about what the road map and focus [indiscernible] now regarding to take that going forward?

Robert Harrison

I'm sorry, Christian, we weren't able to hear the question. Would you mind repeating it?

Christopher Larmoyeux

With core conversion done, I imagine some resources have been freed up. So can you talk about what the road map is and focus is going forward from here regarding investment spend into the business?

Robert Harrison

Chris, why don't you handle that first, please.

Christopher Dods

Sorry, I have a little bit of the cold. This is Chris Dods. With the core conversion, we took a very deliberate approach to open banking architecture modern API architecture and that's really opened up our ability to differentiate our new product services and get a differentiated value proposition.

Recently, we launched a new credit card Priority Unlimited, which we built a custom integration using our software developers and integrated several different platforms to create a more integrated acquisition fulfillment platform over the last couple of months since the launch, of those cards.

In addition to that, we're building out a robust 360 view of our customer using both in more traditional dealer architecture combined with machine learning, which is giving us a real time dealer capture and ability to do real-time analytics to help our bankers assist our customers with more actionable and personalized in sites.

And then going forward, we're looking at -- we're in the process of upgrading our online banking platform for all of our consumer and small business customers. At the end of that conversion, we will be on the same -- we will have -- we will be on the same platform for our commercial small business, business and consumer customers, each of them having their own emphasis of the platform, but being on the same platform, which will provide more efficiencies from the back office and a better customer experience overall. And then we'll continue to leverage AI and the machine learning within the different aspects of the business place underwriting to help drive better and faster decisioning.

Robert Harrison

And then just to add to that, Christian. As we look at that pretty robust road map, and from a cost perspective and bringing back down to that, we're going to be doing that in really a thoughtful way to not overspend in any one period, but there's a lot on our plate, and that's what the customers want. They want that functionality, and we need to evolve.

So there will be that continued investment in the business to make that happen. And we're going through that budgeting process now for 2023. So we don't really have a view on it today, but that will be part of our budgeting process for next year.

Operator

[Operator Instructions]. And our next question come from Laurie Hunsicker of Compass Point Research & Trading.

Laurie Hunsicker

Just hoping that if we could go back to credit, which is looking absolutely stellar. But just specifically, the charge-offs, they all seem to be coming from consumer. Can you give us a little color around that? Is that auto? Is that unsecured consumer? Just any color around that, what you're seeing?

Ralph Mesick

It's primarily unsecured consumer. I mean, the rates were still pretty low. We're below where we were last year and half of what we were in 2019.

Laurie Hunsicker

And is that coming from Hawaii? Or is that -- I'm sorry, go ahead.

Robert Harrison

Sorry. This is Bob. We only do that within our footprint, Hawaii and Guam. So it's going to be primarily Hawaii. I don't have the breakdown between Hawaii and Guam, but it's going to be primarily Hawaii. And that's what referring to earlier is kind of a normalization back to what we've seen, to Ralph's point, is certainly lower than last year and lower than pre-pandemic, but might be up a little bit from quarter-over-quarter.

Laurie Hunsicker

Got it. Okay. Got it. And then on the income statement side, noninterest income just sort of two items. Could you comment a little bit about when you all might become more customer-friendly, how we should think about a drop in NSF/OD fees when that might start? And then also the other, other line, that million, and it jumps around, was there any onetime items in that line or onetime losses?

Robert Harrison

Sure, Laurie, this is Bob. I'll cover the NSF question. So we -- as we've talked about, I think, previously, going through the core conversion, really, that was our priority to get that done. And we continue to look at what's happening in the marketplace and how we can make sure that the services we're offering are value add to the customer.

We are looking at new different ways to serve them that incorporate different ways to approach overdraft payments, but part of that is driven by what the core providers can provide to us as far as technology solutions. So we're looking at that. We haven't made any decisions yet, but that's something we certainly keep front of mind. Ralph, do you want to touch on the other?

Ralph Mesick

Yes. So the big delta there, Laurie, was we had an airlines excise tax refund that we took in the prior quarter. So that was really sort of the delta.

Laurie Hunsicker

Got it. Got it. Okay. And then last quick one. On tax rate, how should we think about that for next year?

Ralph Mesick

Yes. Not a lot of change. We're looking at about 25%.

Operator

Now I'm showing no further questions. I would now like to turn the conference back to Kevin Haseyama for closing remarks.

Kevin Haseyama

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 day. Bye.

Operator

And this concludes today's conference. Thank you for participating. You may now disconnect.