Bank of Hawaii Corporation (NYSE:BOH) Q4 2023 Earnings Call Transcript

Bank of Hawaii Corporation (NYSE:BOH) Q4 2023 Earnings Call Transcript January 22, 2024

Bank of Hawaii Corporation misses on earnings expectations. Reported EPS is $0.72 EPS, expectations were $0.89. Bank of Hawaii Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Bank of Hawaii Corporation Fourth Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like now to turn the conference over to Cindy Wyrick, Director of Investor Relations. Please go ahead.

Cindy Wyrick: Thank you, and welcome everyone. Thank you for joining us today as we discuss the financial results for the fourth quarter and the full year of 2023. Joining me today is our CEO, Peter Ho; our CFO, Dean Shigemura; our Chief Risk Officer, Mary Sellers; Vice Chair and Deputy Risk Officer, Brad Shairson; and our Manager of Investor Relations, Chang Park. Before we get started, let me remind you that today’s conference call will contain some forward-looking statements. While we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected. During the call, we’ll be referencing a slide presentation as well as the earnings release. Both of these are available on our website, boh.com, under the investor relations link. And now I’d like to turn the call over to Peter Ho. Peter?

Peter Ho: Thanks, Cindy. Good morning or good afternoon, everyone. We appreciate your interest in Bank of Hawaii. Bank of Hawaii produced another solid financial performance for the fourth quarter of 2023. Average deposits grew for the second consecutive quarter, up 1% on a linked basis and up 1.8% year-over-year. Loans were again flat in the quarter. Margins ebbed in the quarter with NIM of 2.13%, flat to the second quarter. Expenses outside of the industry-wide FDIC special assessment were well controlled and fee income was solid. Capital is measured by Tier 1, CET1. Total capital and Tier 1 leverage continue to improve. Credit remains a strong story. I’ll start off with some commentary on funding and liquidity, and then touch on broader market conditions in Hawaii.

I’ll then hand the call over to Mary, as is our custom to discuss credit, and Dean will then share with you some more granular color on the financials. So let me touch a little bit on our deposits. I think as many of you know, we consider our deposit base to be the crown jewel of the franchise, built slowly over 125 years of our history in the islands, one relationship at a time. As most of you know, Hawaii is maybe the most unique deposit market in the country, where five locally headquartered banks hold 97% of the states FDIC-reported deposits. As I mentioned, we have an amazing tenure in our deposit relationships, with 53% of our deposits with a tenure of 20 years or more, and 75% of our deposits having a tenure of 10 years or more. Despite the volatility created by the regional bank crisis in the first quarter of 2023, both average and spot balances have been steady and growing throughout the year.

Further, non-interest bearing deposits have begun to stabilize, with average non-interest bearing deposits in December flat to November’s month average. For the year, you can see Bank of Hawaii meaningly outperformed banks nationally in deposit growth as shown in the 8-K data. I’d note too, that we generated that performance without the usage of broker deposits. Deposit pricing relative to broader industry averages remains a strong story in terms of cost of interest-bearing deposits and total cost of funds, betas appear to be flattening. Additional sources of liquidity remain abundant. Now let me switch over to the marketplace. The Hawaiian economy, from a jobs perspective certainly, continues to outperform the broader market. And UHERO, our research entity at the University of Hawaii, forecasts continued stability.

The visitor market continues to be impacted by the tragic Lahaina fires. Visitor spending and visitor days were down modestly in November compared to 2022, but up modestly ex the Maui fire figures, or ex the Maui figures. The Japan market, which as you know, has been slow to recover, is up 119% year-on-year, but it’s still down 50% from pre-pandemic levels. So we’re seeing improvements in the Japan market. And actually, I think, that represents some upside for us down later on into the year and into next year. As you can see from the chart here, hotels continue to perform well with RevPAR up steadily. Residential real estate on Oahu is stable, with median prices for single-family homes down 5% from a year ago in December. Condominiums, however, are up 1.5% on median.

Inventory levels remain extremely tight with average days on market of 18 days and 26 days for single family homes and condos, respectively. And month supply inventory of 2.8 months and 3.2 months for single family homes and condos, respectively. Now let me turn the call over to Mary Sellers. But before I do, let me congratulate Mary on her upcoming much deserved retirement this March 31st. Mary, I think as many of you on the call know, has been an outstanding member of our team, with the company, with BOH for 37 years, 18 of those years as our Chief Risk Officer. Mary, you’ve been truly amazing and I’d also like to welcome Brad. Brad joined us this past May, seems like [indiscernible] year at this point, but he’s doing a terrific job and he’ll be stepping into Mary’s role shortly.

Truly excited to have Brad on board. He brings with us a wealth experience and experience from places like Regions Bank, Union Bank and MUFG among other banks. So Brad, would like to say a few words.

Brad Shairson: Yes. Thanks, Peter. I would like to just take a moment to say that I feel fortunate to have had the opportunity to work for Mary for the past several months through our planned transition. And I can see the incredible legacy that she’ll be leaving behind. I also feel fortunate that under her leadership she will also be leaving behind a portfolio with such strong asset quality. And I plan to do my best to continue in her footsteps and maintain that same disciplined approach to managing risk. All of that said, let’s turn this back to Mary, so she can do this one last time.

Mary Sellers: Thank you, Brad, and, Peter, for your kind remarks. First, I must say, though, that credit for our strong and consistently strong credit quality goes to the entire team, particularly our line management, our relationships managers and our credit team, as well as probably most importantly to our customers. Brad, I’ve enjoyed working with you during the transition. You’ve been a terrific partner. I’m pleased to leave it in your capable hands and I’m sure you’ll do a terrific job. Now onto the usual stuff. First, Bank of Hawaii’s lending philosophy is grounded in two fundamental tenants. We lend to long-standing relationships that we understand in our core markets of Hawaii and the West Pacific. We combine this with ongoing disciplined portfolio management, actively exiting those products or segments that have proven to be higher risk.

This positions our portfolio for continued lower net charge-offs through different economic cycles. The loan portfolio is built on long tenured relationships diversified by asset categories with 59% consumer and 41% commercial, has appropriately sized exposures, and is 79% secured with real estate with a combined weighted average loan to value of 54%. Our commercial real estate portfolios, which represent 27% of the total loan portfolio is diversified across the various asset types. The portfolio, built on relationships with demonstrated experience and financial capacity is conservatively leveraged with a weighted average loan to value of 55%. Our office portfolio is granular and has a weighted average loan to value of 55%. 23% of the portfolio is in the downtown Honolulu Central Business District.

This segment has a weighted average 60% loan to value and 43% of the exposure is further supported by repayment guarantees. 4% of the loans in the office segment are maturing through 2025. While not immune from the changing dynamics impacting the office market across the U.S., vacancy and rent have remained relatively resilient in the office market on Oahu, as conversions to alternative use continue to reduce overall inventory levels. In the last five years alone, approximately 1 million square feet of inventory have been removed and it’s estimated an additional 300,000 square feet will be removed in the next several years. Hawaii’s supply constraints, driven off its unique geography and onerous regulatory process, serve to create relative stability in our real estate markets over the long term and less volatility during periods of stress.

This is particularly pronounced in the housing sector, where severely limited supply is compounded by the high cost of home ownership. These two factors together continue to drive consistent, strong rental demand. Tight market conditions continue to persist in the Oahu industrial market with vacancy rates at historic lows, sub 1%. Supply constraints continue to also be an issue in this segment. Oahu’s real estate market, whether it’s supply chain disruptions, manufacturing shutdowns, backlog sea ports, and inflation, with vacancy and rents returning to pre-pandemic levels. Grocery and drug anchored continue to outperform. Again, relatively flat inventory levels helped to support stability in this segment over time. Despite the delay in the return of the Japanese tourist pre-pandemic levels, flat inventory levels helped to support occupancy and RevPAR levels in Oahu’s lodging segment.

The Hawaiian Islands remain a top five destination in terms of highest revenue per average room and average daily rate, with Oahu attracting more visitors than any other island in the state. In addition to the continued strength in our market’s real estate fundamentals, we have just 8% of our commercial mortgage loans maturing in 2024, minimizing repricing risk in the portfolio. Tail risk in the commercial real estate portfolio remains modest, with just 0.4% having an LTV greater than 80%. Our construction portfolio represents 2% of total loans, with the majority being in low income or affordable housing, which continues to be chronically undersupplied in our markets. Asset quality remains strong in the fourth quarter. Net loan and lease charge-offs were $1.7 million or 5 basis points annualized of total average loan and lease outstandings, down $300,000 or 1 basis point with the linked quarter, and down $100,000 year-over-year.

For the full year, net loan and lease charge-offs were $7.8 million or 6 basis points compared with $5.1 million or 4 basis points in 2022. Non-performing assets were $11.7 million or 8 basis points, stable from the third quarter and down $900,000 or 1 basis point year-over-year. All non-performing assets are secured with real estate with a weighted average loan to value of 56%. Loans delinquent 30 days or more increase modestly and remain low at 31 basis points at the end of the quarter. Criticized loans as a percentage of total loans were 1.93% at the end of the quarter, down 8 basis points for the linked quarter as we continue to see improve financial performance in a number of credits which had been slower to recover from the ancillary impacts of COVID.

The allowance for credit losses and loans and leases was a $146.4 million, up $1.1 million for the linked period and up $2 million year-over-year. The ratio of the allowance for credit losses to total loans and lease outstandings was 1.05% at the end of the quarter, up 1 basis point from the prior quarter and down 1 basis point year-over-year. I’ll now turn the call over to Dean.

Dean Shigemura: Thank you Mary. And congratulations on your upcoming retirement. To better balance our interest rate sensitivity profile, in the fourth quarter we added an additional $1 billion of notional pay fixed received float interest rate swaps for a total of $3 billion notional. In addition, we continued to originate a greater proportion of floating and adjustable rate loans that hold more Fed funds sold. These actions have increased our floating rate assets exposure to 45% from 27% at the end of 2022 and positioned us well for this uncertain rate environment. Net interest income was $115.8 million in the fourth quarter, a decrease of $5.1 million linked quarter. As the regional bank crisis unfolded, we fortified our balance sheet in the second quarter by adding liquidity.

As uncertainty decreased and our core deposits remained strong, we reduced the on balance sheet liquidity in the third quarter by reducing wholesale and non-core funding by $2.2 billion. These actions reduced our balance sheet leverage and improved our capital position, but did reduce our earning asset base by $904 million on average in the fourth quarter. Net interest margin was stable linked quarter as asset repricing offset higher deposit costs. We continued to exercise deposit pricing discipline, while growing total balances, as evidenced by our deposit beta of continuing to outperform that of peer banks. As of December 2023, our cumulative total deposit beta was 31.6%. We believe that our deposit betas have peaked in the fourth quarter as our deposit rates began to flatten and non-interest bearing deposits have stabilized at 27% to 28% of total deposits.

In addition, lower cost and more granular consumer deposits increased on average by $129 million linked quarter. We expect this trend to continue into 2024. Our assets continue to reprice higher, supporting net interest income and margin growth. Annual maturities and paydowns of loan and deposit portfolios of $3 billion continue to provide an ongoing supplement to the $7.2 billion in assets, which includes our interest rate swap portfolio that reprice annually. The yield on maturities and paydowns of loans and investments in the fourth quarter was approximately 4.6% and 2.1%, respectively. These cash flows continue to be reinvested predominantly into new loans, which are yielding greater than 7.5% on average or held in cash at the Fed which earns an attractive yield and preserves liquidity.

As a result of these cash flows repricing our assets higher, our overall asset yields have steadily increased and are expected to continue to increase as new asset yields are well in excess of the runoff yield. As a result of continued asset repricing, together with the peaking of our deposit beta, the margin is expected to increase by 2 basis points to 4 basis points in the first quarter of 2024. Non-interest income totaled $42.3 million in the fourth quarter, an increase of $1.3 million over the normalized third quarter results. Recall that, third quarter results included $14.7 million of gains from the termination of private repurchase agreements, partially offset by a net loss of $4.6 million from the sale of $159 million of AFS securities and an $800,000 charge related to a change in the Visa Class B conversion ratio.

Market conditions improved in the quarter and transaction volumes were steady. As these conditions persist into 2024, we expect core noninterest income to be at similar levels as the fourth quarter in the first half of the year and continue to trend higher in the second half. During the fourth quarter, as is our practice, we managed our expenses in a disciplined manner as inflationary conditions continued. Expenses in the fourth quarter were $116 million, which included an industry-wide FDIC special assessment that resulted in a $14.7 million charge. In addition, in the fourth quarter, expense savings of $1.7 million were realized which are not expected to recur in 2024. Thus the adjusted core expense level in the fourth quarter was $102.9 million.

Third quarter expenses included severance expenses of $2.1 million and $400,000 of extraordinary expenses related to the Maui wildfires. Adjusting for these items, expenses in the third quarter was $103.1 million. Thus, core expenses linked quarter were modestly lower despite continued inflationary pressures. Expenses in 2024 are expected to be 2% to 2.5% higher than 2023 normalized expenses of $419 million. As a reminder, the first quarter’s results will include seasonal expenses related to payroll taxes and benefits from incentive payouts, currently estimated at $3.5 million versus $3.7 million in the first quarter of 2023. To summarize the remainder of our financial performance, in the fourth quarter of 2023, net income was $30.4 million, and earnings per common share was $0.72, a decrease of $17.5 million and $0.45 per share respectively.

Our fourth results included the industry wide FDIC special assessment which reduced EPS by $0.29 per common share. Our return of common equity was 9.55%. We recorded a provision for credit losses of $2.5 million this quarter. The effective tax rate in the fourth quarter was 23.25% and 24.62% for the full year. The tax rate for 2024 is expected to be approximately 24.5%. We continue to organically grow our capital from prior quarters and we continue to maintain healthy excesses above the regulatory minimum well-capitalized requirements. Our risk-weighted assets to total assets ratio are well below peer median, reflecting the low risk nature of our asset mix. During the fourth quarter we paid out $28 million to common shareholders and dividends and $2 million in preferred stock dividends.

We did not repurchase shares of common stock during the quarter under our share repurchase program. And finally, our board declared a dividend of $0.70 per common share for the first quarter of 2024. Now I’ll turn the call back over to Peter.

Peter Ho: Thanks, Dean. That concludes our prepared remarks. We’ll be happy to take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from Jeff Rulis with D.A. Davidson. Your line is now open.

Jeffrey Rulis: Thanks. Good morning. Peter, I think you mentioned the increase – well, the non-interest-bearing deposits spot quarter-end up, up considerably, I think you mentioned, pretty flat November to December. I just want to kind of get a sense for, was that still need to, like, Maui fire-related, insurance payouts or anything that kind of came in early part of the quarter that led to that increase in noninterest bearing?

Peter Ho: Yeah, Jeff, the quarter-end spot, as you know, December oftentimes is kind of a funny quarter-end, because it is a year-end. And we saw probably, I want to say, $300 million, $400 million of stuff just kind of pop in and out. Some of that was in noninterest bearing, which is in part why you saw that jump up. Kind of the better number to look on just to understand the spot, I think, is the average NIBD for the quarter was 5 point — just about $5.7 billion and that compares to $5.8 billion for the third quarter. So a real flattening there. And I would anticipate, Jeff, at least our early insight into this quarter, that number feels to be pretty stable.

Jeffrey Rulis: Okay. So if I look at that average balance and you would not anticipate then some outflows of, again, kind of Maui-related. Was there any temporary in that? Or do you think the average is kind of balanced that out and from here it’s…

Peter Ho: Yes, we’re hopeful that we can maintain that average NIBD’s balance of called $5.7 billion. Overall balances, I think, we’re running about $20.6 right now. If we came through the quarter $20.6 billion, that would have surprised me on average balances. And yes, you’re right, we do have — there’s probably $200 million, $300 million of Maui-related aid that’s kind of flowing in and out of our balance sheet. And so, a little unpredictable, some of it in the NIB, most of it earning some quarterly yield though, thankfully for them.

Jeffrey Rulis: Got it. Okay. And so, Dean, I guess if I — that’s all I consider that would be baked into the margin, maybe just a follow on to that. The cost of that hedge is, I don’t know if you have that available, is there — does that lean on margin a few basis points of kind of what you added in terms of — what was added in the quarter, was that impactful?

Dean Shigemura: It was accretive in terms of net interest income of about $5 million, So it did help us, but it does kind of neutralize or hedge our exposure at the short end.

Jeffrey Rulis: Okay. So it was a short-term benefit and also balances out going forward. I guess the bigger question then, kind of you’ve mentioned the first quarter expectations. Could you just frame up, Dean, should we see second half of a cut or two or maybe kind of range bound if it’s more than that, how you think margin generally trends all things being equal?

Dean Shigemura: Yes, all things equal, we expect the margin — from short-term changes in rates, we expect to be neutral. But what we’re expecting is the – on the asset side to grow — to increase from the just the asset repricing that we have, the cash flow coming off and be invested at much higher yields.

Jeffrey Rulis: Sure. Okay, great. Well, I will step back and congrats Mary on the retirement and thank you for your help over the years. I appreciate it.

Mary Sellers: Thank you.

Operator: Please stand by for the next question. The next question comes from Andrew Liesch with Piper Sandler. Your line is now open.

Andrew Liesch: Thanks. Hi, everyone. Dean, just a clarification question on the swaps here. Do you have what the pay and receive rates are right now?

Dean Shigemura: We haven’t disclosed it, and the average tenor is approximately 2.5 years. And just to clarify on the previous question, the $5 million is based on the $3 billion of total — the total interest income from the $3 billion.

Peter Ho: The incremental in the quarter was $1 billion, right?

Dean Shigemura: Of swaps, yes.

Peter Ho: So it would be some number less than a third, I’d call it.

Andrew Liesch: Got it. All right. And then to start — also clarification on the margin commentary with the Fed’s cutting rates gradually should be pretty neutral to the margin, was that correct?

Dean Shigemura: Yes.