Bank of Hawaii Corp (BOH) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation Third Quarter 2021 Earnings Conference Call. (Operator Instructions) I would like to hand the conference over to your speaker, Janelle Higa. Please go ahead.

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 that actual results may differ materially from those projected. During the call, we'll be referencing a slide presentation as well as our 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.

Great. Thank you, Janelle. Good morning, everybody, or good afternoon. I'll lead off with a little commentary on what's happening here in the Hawaii marketplace. I'll then as is our custom to turn the call over to Dean, who will fill you on the financials for the quarter, generally a pretty clean and good quarter for us. And then he'll turn the call over to Mary to touch on credit items, and then we'd be happy to take your questions.

So leaving off to talk a little bit about the economy here in the islands. Got hit pretty hard late in the summer with the Delta variant and our forecasters over at the University of Hawaii really had anticipated a pretty meaningful impact to employment in the state. And then we were actually kind of surprised to see unemployment come out just recently at 6.6%.

So continued positive downward trending in unemployment here in the state. Well, like I said, a bit of a surprise. And then if we go to the next page, I think what's happening is the 9/20 forecast you see an elevated level of forecast unemployment for '22 and '23. We'll see what happens in the next forecast. But at this point, looking like employment and a bit of a better space than what we had -- what we were all thinking coming out of our most recent Delta surge.

Turning to the real estate market. like many places in the country, if not in the world, actually. Real estate continues to be hot. Sales prices -- median sales prices for single-family homes up 19%, up 7.4% for condominiums that September -- on September. And then inventory levels continue to trend downwards. So inventory levels for single-family homes here in the islands are now -- or here on Oahu actually are now down to 1.2 months and 1.8 months for condominiums.

Daily arrivals, really visitors into our marketplace, I think that this is an interesting chart. It shows a couple of things here. What it shows is the ramp-up, if you will, in visitor count into the islands, really was on a pretty nice trajectory for most of 2021 right up until about July.

You see from the chart that we have up here. But basically, we had comped back to 2019 levels by the end of July. And mind you, that was accomplished really with only 1 of our 2 primary markets in place. So lots of supply in from the North America market, mainly in the United States, both east and west coasters, and really not much in the way of demand in from Asia as that marketplace continued to work through its vaccine and infection protocols.

Then the Delta hit and a number of policies put in place a pretty meaningful downturn visitor traffic, you see post -- really kind of post-August. So we're in a bit of a repositioning phase, I think, at this point. It feels like and talking to some of the hoteliers in town that the winter should be a pretty good season for us again. And so I think absent any recurring surge here in the islands or nationally speaking, I think we should be in for kind of resumption of that upward trend in arrivals. But we'll see how this all plays out.

Switching to the COVID situation. I mentioned we went through a pretty meaningful spate with the Delta variant in late -- kind of mid-late summer. Things have gotten quite a bit better here in the islands. So you see here on this chart that we're trending towards the bottom of the country in terms of number of infections, which is a good thing. And then as it relates to vaccination rates, we're now at 70 -- almost 71% of the total population fully vaccinated. That's a very good number, I think, by national standards. And I think the interesting number is that if you look at the number -- the percentage of people vaccinated here in the islands that are eligible to be vaccinated, that number is now actually into the 90-plus percent range.

And so hopefully, we'll see if the under-12-year-old population gets authorization to be vaccinated. Assuming that happens, I think we would anticipate a very, very high percentage of our local state of Hawaii population to be vaccinated, but not too distant future. So I'll stop there and turn the call over to Dean, who will update you on our financials for the quarter. Dean?

Thank you, Peter. Growth from core customers remained solid in the third quarter. Core loans net of PPP waivers increased to $276 million or 2.4% linked quarter and $542 million year-over-year or 4.8%. Waivers on PPP loans have accelerated and balances declined by $245 million in the quarter.

Our strong deposit growth continued. Core customer and operating account balances grew by $613 million linked quarter. Offsetting this growth was a reduction in noncore public time deposits of $289 million.

As a result, total deposits increased by $324 million or 1.6% linked quarter and $2.8 billion or 16% year-over-year. Our strong and stable deposit base remains a readily available source of liquidity for continued growth in income. Excess liquidity is being deployed in high-quality, low-risk investments that can easily be converted into funding, if needed, while providing current income and mitigating margin pressures. Our balance sheet asset sensitivity positions us well for rising rates and greater net interest income. Our strong core deposits and low loan-to-deposit ratio of 59% will allow us to lag rate increases, while maintaining a significant funding source for continued growth.

Our mix of floating and adjustable rate loans, ample monthly cash flow and cash balances represent significant flexibility and greater income potential in a rising rate environment. Net income for the third quarter was $62.1 million, and earnings per common share was $1.52.

Net interest income in the third quarter was $126.8 million, up 2.7% linked quarter and up 2.1% from the third quarter 2020. Included in the third and second quarter's net interest income were $5.9 million and $3.8 million, respectively, of accelerated loan fees from PPP loan waivers.

Adjusting for PPP loan forgiveness, the third quarter's net interest income increased by $1.2 million or 1% linked quarter as the lingering impact from lower interest rates was offset by strong core loan growth and deployment of liquidity. We expect these trends to continue and expect core net interest income will increase by approximately 2% in the fourth quarter, excluding the PPP loan waivers.

As Mary will discuss later, we recorded a negative provision for credit losses of $10.4 million this quarter. Noninterest income totaled $41.4 million in the third quarter compared with a reported $44.4 million in the second quarter. Included in the second quarter were gains of $3.7 million from the sale of investment securities. Adjusted for these gains, the third quarter noninterest income increased by approximately $700,000 from higher deposit fees and swap transaction fees.

We expect noninterest income will increase to approximately $42 million in the fourth quarter from increasing deposit fees, service charges and other transaction fees as we emerge from the negative impact from the Delta variant and further reopening of the economy.

Noninterest expense in the third quarter totaled $96.5 million, approximately unchanged from the second quarter. The third quarter's expenses included charges of $3.8 million related to the early termination of repurchase agreements and $1.2 million of severance expenses. These were offset by a $6.3 million benefit from the sale of property. The termination of the repo has allowed us to reduce our noncore funding, free up capital and increased net interest income.

Adjusting for these items, expenses were higher by $1.3 million linked quarter, primarily due to a very successful marketing program initiated during the quarter that contributed to the quarter's strong loan growth. The strong loan growth also led to an increase in variable expenses. The marketing and variable expenses represented $1.2 million of the linked quarter expense increase.

Expenses are projected to be between $98 million and $99 million for the fourth quarter or approximately $391 million on a reported basis and $388 million adjusted for onetime items for the full year. When evaluating our expenses over a longer period and comparing with the full year 2021 estimate to the prepandemic year of 2019, we continue to demonstrate expense discipline. Expenses on a reported basis increased at an annualized rate of 1.5%, which was well below the rate of inflation of 2.4%.

More importantly, our current expense levels and normalized expense run rate already include expenses related to the significant innovation investments that are resulting in balance sheet growth and core expense efficiencies. In 2019, the level of our investment spending has increased by $17 million, and we're realizing annual savings of $8 million.

Our return on assets during the third quarter was 1.07%. The return on common equity was 17.08%, and our efficiency ratio was 57.38% Our net interest margin in the third quarter was 2.32%, a decline of 5 basis points from the second quarter. The decline in the margin in the third quarter reflects the ongoing impact from the strong deposit growth partially offset by core loan growth, deployment of liquidity and PPP loan waivers.

Excluding the impact of further PPP loan waivers, we expect the margin will increase by low single digits in the fourth quarter over the third quarter, primarily due to continued loan growth and stable interest rates. Our capital levels remain strong and will -- and well-positioned to support continued growth.

Our CET1 and total risk-based capital ratios were 12.02% and 14.72%, respectively, with a healthy excess over the minimum well-capitalized requirements. During the third quarter, we paid out $28 million or 46% of net income available to common shareholders and dividends and $1 million in preferred stock dividends.

We repurchased 241,000 shares of common stock for a total of $20 million. And finally, our Board declared a dividend of $0.70 per common share for the fourth quarter of 2021. Now I'll turn the call over to Mary.

Thank you, Dean. Customer loan balances on deferral are down 95% from their peak to 0.8% of total loans. As you'll recall, we elected to partner with our customers through this unprecedented event to provide additional relief primarily through principal deferrals on low-margin real estate.

100% of the loans remaining on deferral are secured with our consumer deferrals having a weighted average loan-to-value of 70% and our commercial deferrals having a weighted average loan-to-value of 37%. A 100% of the commercial loans on deferral continue to pay interest. And our return to payment performance remained strong with less than 1% of these customers delinquent 30 days or more.

Credit metrics remained strong and stable in the second quarter. Net charge-offs were $1.2 million or 4 basis points, flat for the linked period. Nonperforming assets were $20.6 million or 17 basis points, up 1 basis point from the second quarter. Loans delinquent 30 days or more were $28.3 million or 23 basis points at the end of the quarter, down 2 basis points for the linked quarter. And criticized loan exposure totaled 2.34% of total loans, up 17 basis points for the quarter. As Dean noted, we recorded a decade of provisions for credit losses of $10.4 million, this included a negative provision to the allowance for credit losses of $11.3 million, which with net charge-offs of $1.2 million, reduced the allowance to $167 million, 1.39% of total loans and leases or 1.42% net of PPP balances.

The decrease in the allowance reflects the most recent UHERO economic outlook and forecast for our market coupled with our credit risk profile. The allowance does continue to provide for the uncertainty and potential downside risk inherent with the pandemic. I'll now turn the call back to Janelle.

Thank you, Mary. This concludes our prepared remarks. We are now happy to answer any questions you may have.

(Operator Instructions) We have a question from Andrew Liesch with Piper Sandler.

Just want to talk on the margin guide here to be up slightly. Does that include any improvement in the earning asset mix? You continue to have pretty good deposit inflows. Just kind of curious how you see the level of cash shifting around here?

Yes. I think the -- well, the guidance assumes a little bit about balance sheet growth and as well as continued loan growth and a little bit more of investing of the excess liquidity. So that's how we got to -- how I got to the number.

Okay. Got it. It looks like you've -- over the last few quarters, you've been pretty, I wouldn't say aggressive, but consistent with adding to the securities portfolio. So is that still the plan? And I guess with the steepness of the yield curve, are you even more inclined to add to the book?

We are. But the -- keep in mind that the way we've handled the investment portfolio in the past is it's really because it's kind of a storage of liquidity for us, we tend to adjust the balances based on deposit and loan growth. So it would kind of be the net outcome from both of those lines.

Got it. Okay. That's very helpful. And then on the expense front, with your guide of $98 million to $99 million, is that a good run rate to you going into next year but then maybe layering on some merit increases and then the seasonal payroll taxes in the first quarter?

It will serve as a base. We do have those items that you've mentioned, but we intend to continue to make strategic investments, especially in our innovation kind of area like we've seen in the past.

Our next question comes from Jeff Rulis with D.A. Davidson.

A question for -- maybe for Mary. And I don't want to get too into the weeds here, but trying to get a sense of that provision recapture. My guess is that provision and reserve levels are more led by like unemployment projections, correct, versus less about what you're actually seeing the 6.6% number that you quoted. But is that correct that it's more on the projections that lead that number?

Yes, absolutely.

Okay. And so I guess, intuitively, if projections more closely aligned with lower actuals, we could read that continued recapture is possible? I suppose it's oversimplified, but you get there?

Yes.

Got it. All right. And Peter, just on the loan growth side, I mean it continues to be very strong. I think in quarters past, you've done a thorough job of sort of pegging by segment where you think you have some tailwinds, some that might have some headwinds. So just if you wouldn't mind kind of rattling through the book and where you see in terms of not only Q4 but '22, where you're optimistic and where some areas that might come in.

Sure. So we had good growth in both commercial as well as consumer on a core basis, Jeff. C&I -- actually, if you net out the PPP out of C&I, that was up 5.4% on a linked basis for the quarter, really driven by -- we've made some great investments in people over the past couple of years. and those individuals have helped us build market share in a few markets, submarkets here in the islands.

So I think C&I has an opportunity to grow into '22, probably not at the 5% linked level, but a reasonably healthy growth rate there. CRE was up 1.7% in the quarter on a linked basis. And we think there's a good amount of room in that space as well, both in a granular, what we call our fast track product, which is smaller commercial mortgages to the smaller investors and mom-and-pop types but also in the institutional space, I think, clearly, the market has recognized the durability of Hawaii assets at the institutional level.

And we're seeing kind of renewed interest after taking a pause through the pandemic. Construction, I think, should be strong as well. That was up pretty nicely in the quarter, and really led by hopefully affordable housing output because it is we certainly need that here in this marketplace. Switching over to the consumer side. Resi was about flat for the quarter. On a linked basis, production was down about 30% as rates started to pick up. But the good news is that was offset by really great production in just about all of our other consumer categories.

So HECO was up very smartly indirect even was up despite the inventory challenges of that industry. And our other consumer, which is basically installment, was up $36 million or just under 10% for the quarter on a linked basis, really driven by -- we kind of restarted that program as we took a bit -- we pulled back a bit on that programming through the pandemic. And so I think that was -- that created some pent-up demand in the book, but still a very good result.

And I think the other interesting thing on the consumer side is we're seeing good uptake in our digital channels. So 18% of our production for the quarter was through our digital channels, up 62% year-on-year.

Okay. I appreciate it. A lot of detail, sounds pretty good momentum into '22, I suppose. Maybe 1 last one. Just Dean -- and maybe it's Dean's question. Just the PPP, could we kind of assume that's largely cleaned up by year-end? Is that fair to say?

Yes. We expect the fourth quarter to pay off most of the -- what's remaining, but we also do expect some might carry over, but not that material amount.

(Operator Instructions) We have a question from Laurie Hunsicker with Compass Point.

Can you just refresh us on how much in PPP fees are actually remaining?

Yes. We have approximately $7.7 million remaining.

Okay. And then I just want to make sure I heard you right. It was $5.9 million that was reflected in this quarter?

That was the accelerated fees. The...

(inaudible)?

Right.

Is that correct?

Right.

Okay. Okay. So if I'm stripping that out, so your margin then was 2.21% relative to 2.30% ex PPP gains last quarter. I guess can you help us think a little bit about your comments about potential margin widening? And also maybe the FHLB borrowings that were prepaid in the quarter, when were they repaid and how much? And what were those costing?

Okay. Let me take that second one first on the repos. It was towards the end of the quarter. The approximate rate was about 2.6% -- 2.4%, sorry, 2.4%. And then the -- in terms of the margin, I think I get to the same numbers that you did on the PPP waivers. Liquidity impacted us quarter-over-quarter by about 11 basis points. And then our growth and deployment of assets added back about 2 basis points.

Okay. Great. And then just 1 last question around that. Do you anticipate doing any borrowing prepays in the coming quarter? Or how are you thinking about that?

I think it will depend on the situation. I mean we've done these opportunistically. When they look positive from various fronts, we will do it. But right now, I guess, nothing planned yet for the quarter.

Okay. Great. And then sorry, just 2 more ones to me. I just want to make sure I've got this right. So the preferred this quarter was $1.006 million? Next quarter we'll see the full impact that will be $1.969 million? Am I doing the math on that right?

Yes. For the fourth quarter, you'll see approximately $2 million in preferred dividends.

$2 million, okay. Perfect. And then just last one for me. How should we think about tax rate going forward?

For the fourth quarter estimate is about 24%.

Okay. And what about for next year, ex whatever is happening in Washington? How should we think about that?

I think for now, 24% is also a good number.

And I'm not showing any further questions.

Okay. I'd 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 of the topics discussed today. Thank you, everyone.

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