Earnings Call Transcript - BOH Q4 2021

Operator, Operator

Good day, and thank you for standing by, and welcome to the Bank of Hawaii Corporation Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Janelle Higa. Please go ahead.

Janelle Higa, Chairman, President, and CEO

Thank you, Carmen, and good morning, good afternoon, everyone. Thank you for joining us today. On the call with me this morning is our Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean Shigemura; and our Chief Risk Officer, Mary Sellers. Before we get started, let me remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons the actual results may differ materially from those that are provided. During the call, we will be referencing a slide presentation as well as the earnings release. A copy of the presentation and release are available on our website, boh.com, under Investor Relations. And now, I'd like to turn the call over to Peter Ho.

Peter Ho, Chairman, President, and CEO

Great. Thank you, Janelle. Good morning, or good afternoon, everyone. Thanks for your interest in Bank of Hawaii. I think we finished off the year with a pretty solid quarter that we're pleased to share with you over the next few moments. I'll begin, as usual, by giving you a backdrop on the local marketplace and economy. I will then flip the call over to Dean, who will get into the financials. We'll finish off with Mary on the credit side, which looks very good right now and should be a pretty short report. If you look at the slide on unemployment, you see kind of nice, steady improvement in the unemployment rate from a very distressed level back in April of 2020, with unemployment now at about 6%, most recently in November. The forecast generally shows continued improvements as we move out from some of the impacts of the Delta and Omicron variants. On the next slide, you see real estate was a very good story in the islands in 2021. This is Oahu only information. The neighbor islands, Maui, Kauai, and the Big Island, are trending similarly. For 2021, on Oahu, single-family homes had a near record year, with closed sales up almost 18% and median sales price up 19.3%, reaching $990,000 for the year. Notably, we pierced the million-dollar level for median single-family home sales prices in December of 2021. As for the condominium side, their performance was not quite as strong, but volumes were up 53% for the year, with prices up 9% and inventory levels similarly constrained as the single-family home market. Regarding the visitor industry, daily arrivals are represented in the gray bars for 2019 and the dark blue for our performance over 2021. The main takeaways here are that, despite any extreme surge situations, the visitor market performed exceptionally well. By the summer, we almost reached parity in terms of arrivals with 2019 levels, which is remarkable given that we still haven't seen the resumption of international travel yet. Toward the end of the fourth quarter, during the Christmas holiday season, the overall performance was good; however, we have been impacted of late by Omicron. Everyone I talked to in the industry feels pretty good about the upcoming year, especially with domestic visitors eager to travel to Hawaii. That's it for me on the marketplace. Now let me turn the call over to Dean.

Dean Shigemura, CFO

Thank you, Peter. Growth on core customers remained solid in the fourth quarter. Core loans, net of PPP waivers increased by $327 million, or 2.8% linked quarter and by $710 million year-over-year, or 6.2%. Waivers on PPP loans slowed in the fourth quarter, with balances declining by $142 million; $127 million in PPP loans remained at the end of the year. Net interest income in the fourth quarter was $126.4 million, which included a one-time reduction of $900,000 for an adjustment to deferred mortgage loan fees. In the third and fourth quarters, total PPP loan interest income was $7.9 million and $5.7 million, respectively. Adjusting for the one-time charge, the fourth quarter’s core net interest income was $121.5 million, up $2.6 million or 2.2% linked quarter, driven by strong loan growth, asset shifts from investments to higher yielding loans, and repricing of our liabilities. Our strong base of low-cost deposits remains a readily available source of liquidity, enabling us to lag rising rates and continue growing our net interest income. 94% of our deposits are from core commercial and consumer customers, an increase from 91% at the end of 2020. Non-interest-bearing demand balances increased 26.5% and comprise 36% of total deposits. In contrast, time deposit balances decreased by 40% and now represent 5% of total deposits. Total deposit costs dropped 1 basis point to 6 basis points in the quarter. Our low-cost core deposits, combined with our balance sheet's asset sensitivity, a low loan to deposit ratio of 60%, and strong cash flow positions us well to take advantage of rising rates while maintaining current income and funding sources for continued growth. In 2021, Bank of Hawaii achieved record net income of $253.4 million, with net income for the fourth quarter at $63.8 million and $1.55 per common share. We also recorded a negative provision for credit losses of $9.7 million this quarter, with non-interest income totaling $42.6 million, up from $41.4 million in the third quarter. Looking ahead, we expect first-quarter non-interest income to be approximately the same as the fourth quarter, with an increase to about $44 million by the end of the year. Our return on assets during the fourth quarter was 1.12% and the return on common equity was 17.4%. Our capital level remains strong, well-positioned to support continued growth. We paid out $28 million in dividends and repurchased 87,000 shares of common stock for $7.3 million. The Board declared a dividend of $0.70 per common share for the first quarter of 2022. Now I'll turn it over to Mary.

Mary Sellers, Chief Risk Officer

Thank you, Dean. Credit metrics remain very strong for the fourth quarter. Net loan and lease charge-offs were $700,000, or 2 basis points annualized, compared to charge-offs of $1.2 million, or 4 basis points in the third quarter, and net recoveries of $300,000 in the fourth quarter of 2020. Non-performing assets totaled $19 million or 15 basis points, down $1.6 million or 2 basis points from the third quarter and flat year-over-year. Loans delinquent 30 days or more were $28.5 million or 23 basis points at the end of the quarter, flat for the linked period and down $8 million or 8 basis points year-over-year. Criticized loan exposure represented 2.23% of total loans, down 11 basis points for the linked period and down 40 basis points from the year prior. As noted, we recorded a negative provision for credit losses of $9.7 million this quarter, which included a negative provision to the allowance for credit losses on loan and leases of $9.4 million. The allowance decreases reflect the recent UHERO economic outlook and forecasts for our market. By year-end, customer loan balances on deferral were down 98% from their peak. 100% of our commercial loans continue to pay interest, and our return to payment performance remains strong. I'll now turn the call back to Peter.

Peter Ho, Chairman, President, and CEO

Great. Thank you, Mary. So that's our prepared remarks. We're happy to answer whatever questions you may have.

Operator, Operator

Thank you. We have a question from Andrew Liesch with Piper Sandler. Your line is open.

Andrew Liesch, Analyst

Hi, good morning, everyone.

Peter Ho, Chairman, President, and CEO

Hi, Andrew.

Andrew Liesch, Analyst

Dean, question on the margin guidance of 3 to 5 bps per quarter, assuming higher rates. How many rate hikes does that assume in this forecast?

Dean Shigemura, CFO

Yes, we are assuming three rate hikes starting in March, and looking at about a 2% 10-year.

Andrew Liesch, Analyst

Got it. Okay. That's helpful. And then on Slide 9, the adjustable mix at 10% of the loan portfolio, what's the timing of that repricing?

Dean Shigemura, CFO

It varies over several years, but the average is roughly about three years. There's about $400 million that are two years or less.

Andrew Liesch, Analyst

Got it. And then similar question on the fixed-rate loans. How many of that 55% reprices in the first year?

Dean Shigemura, CFO

That's embedded in the cash flows. I would estimate about $1.5 billion or $2 billion.

Andrew Liesch, Analyst

Got it. And then just a clarification question on the fee income guide for this quarter building the $44 million in the fourth quarter.

Dean Shigemura, CFO

Could you repeat that again?

Andrew Liesch, Analyst

The reported fee income number for the fourth quarter was $42.6 million. You said for the first quarter something similar. Is that the number we should be using, the $42.6 million?

Dean Shigemura, CFO

Yes, yes. Sorry.

Andrew Liesch, Analyst

Okay. That covers all my questions. Thanks so much.

Dean Shigemura, CFO

Thank you.

Operator, Operator

Our next question comes from Kelly Motta with KBW. Your line is open.

Kelly Motta, Analyst

Hi. Thank you so much for the question. I think, just to piggyback off of Andrew’s question on the NIM, just wondering how many rate hikes do you think need to happen until you see an impact on your deposit costs?

Dean Shigemura, CFO

Yes, overall betas are about 20% over the complete cycle. Given our deposit base, we're going to lag initially. It’s probably towards mid-year that we’ll see deposit increases after the second rate hike.

Peter Ho, Chairman, President, and CEO

To Dean's point, several layers to our deposit beta contribute to our stickiness. With a loan to deposit ratio now sitting at 60%, we want to maintain market share, but as of now, there is no compelling need to build deposits.

Kelly Motta, Analyst

Thank you so much for all the color. Just to follow up on the public deposits with the roll-off that happened this quarter. How much of that was seasonal versus part of your effort to roll off some higher-cost funding?

Peter Ho, Chairman, President, and CEO

Yes, we are intending to bring down the public book as rates rise. The $298 million that rolled off in public deposits was mostly transactional and more seasonal than structural.

Kelly Motta, Analyst

Got it. That's super helpful. I'll step back. Thanks so much for the question.

Peter Ho, Chairman, President, and CEO

You're welcome.

Operator, Operator

Thank you. Our next question is from Laurie Hunsicker with Compass Point. Your line is open.

Laurie Hunsicker, Analyst

Hi, thanks. Good morning.

Peter Ho, Chairman, President, and CEO

Hi, Laurie.

Laurie Hunsicker, Analyst

I wondered, Dean, if you could take us back to expenses. I appreciate how you laid everything out. As we think about 2023, are we likely to see you go back to slower growth rates, like 2% to 2.5% CAGR? Or are you more likely to replicate the 5.9% growth that you're expecting in 2022?

Dean Shigemura, CFO

In 2023, we haven't focused much on yet, but the 2.3% seems reasonable as a starting point. We intend to continue our strategic investments into 2023.

Peter Ho, Chairman, President, and CEO

Laurie, I'd add that for '22, our expense build reflects a core component of 2.4% due to inflationary pressures. We want to ensure our employees remain financially secure, which had us increase merit raises this year.

Laurie Hunsicker, Analyst

Very helpful. Do you have any branch rationalization plans for next year?

Peter Ho, Chairman, President, and CEO

We took a significant step last year closing supermarket branches which led to annual savings. We may see opportunities for further branch rationalization but should be comfortable with our current square footage.

Laurie Hunsicker, Analyst

Great. Dean, question on tax rate, it was low at 17% and noisy at 22% for the full year. How should we think about 2022?

Dean Shigemura, CFO

Yes, the estimate will be around 23%.

Laurie Hunsicker, Analyst

Perfect. Just to clarify, how much of the $7.9 million in PPP from the third quarter was from PPP gains?

Dean Shigemura, CFO

In the third quarter, it was $5.9 million in the accelerated component, $4.9 million in the fourth quarter, with $2.4 million remaining.

Laurie Hunsicker, Analyst

Great. Thanks for taking my questions.

Peter Ho, Chairman, President, and CEO

Thanks, Laurie.

Operator, Operator

Thank you. I’m not showing any further questions in the queue. I will pass back the call to Ms. Higa for final remarks.

Janelle Higa, Chairman, President, and CEO

I would like to thank everyone for joining us today, and for your continued interest in Bank of Hawaii. Please feel free to contact me if you have any additional questions or need further clarifications on any topics discussed today. Thank you so much everyone.

Operator, Operator

And this concludes today's conference call. Thank you for participating, and you may now disconnect.