Bank of Hawaii Corp (BOH) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Bank of Hawaii Corporation Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Cindy Wyrick, Director of Investor Relations. Thank you. Please go ahead, madame.

Thank you, Dylan. Good morning, good afternoon, everyone. Thank you for joining us today. Also with me is our Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean Shigemura; 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 the actual results may differ materially from those projected.

And now I'd like to turn the call over to Peter Ho.

Thanks, Cindy. Good morning, everyone. Happy New Year and thank you for joining us today.

2019 was another good year for Bank of Hawaii. We were pleased with our overall financial results and with the progress we made on our key strategic initiatives. Assets, loans and deposits all grew during the year, with total assets finishing the year at a record $18.1 billion. Earnings per share for the year reached a new record high of $5.56 per share. Excluding the early buyout of a leveraged lease during the fourth quarter, our loan growth was 5.6% in 2019, with solid growth in both our commercial and consumer portfolios. Deposits grew a healthy 5% in 2019 and finished the year at $15.8 billion.

2019 was a busy year for us as we continue to make steady progress in our long-term goal of positioning Bank of Hawaii as a preeminent financial services provider in the islands. This means combining the relationships and trust we've earned from our clients over our 123-year history with the modern banking conveniences required of 21st century financial service providers.

During the year, we successfully launched SimpliFi Mortgage by Bank of Hawaii. This new online portal helped Bank of Hawaii retain the #1 residential mortgage market share in Hawaii in 2019. We also launched Zelle pay, making us the first local provider in the marketplace to offer this popular P2P payment platform. During the year, we also introduced a redesigned boh.com website, which is now better suited to accommodate e-commerce activity.

On the facilities front, we laid the groundwork for the opening of 4 new branches of the future in 2020. We also completed our network refresh to 100% of our Hawaii marketplace. Our desktops are now fully Wi-Fi enabled and are either tablet or laptop configured, giving our teams greater mobility through our marketplace.

Again, Happy New Year, and I'll ask Dean out now to provide you with some additional details on our financial performance for the fourth quarter and our outlook for 2020. Following Dean, Mary will then comment on credit quality. Dean?

Thank you, Peter. Net income for the fourth quarter of 2019 was $58.1 million or $1.45 per share. Our return on assets during the quarter was 1.29%, the return on equity was 17.84% and our efficiency ratio was 54.26%. Net income for the full year of 2019 was $225.9 million or $5.56 per share, which, as Peter mentioned, is a new record high for earnings per share. Our return on assets in 2019 was 1.29%, our return on equity was 17.65% and our efficiency ratio was 55.68%.

Our net interest margin in the fourth quarter was 2.95%, down 6 basis points from the third quarter and 15 basis points from the fourth quarter of 2018. Net interest income on a reported basis in the fourth quarter was $123.9 million, down $1 million from the previous quarter and down $100,000 from the same quarter last year. The decline in the margin and net interest income during the fourth quarter of 2019 reflects the ongoing impact of the lower interest rate environment.

The net interest margin for the full year of 2019 was 3.03%. For 2020, we expect our full year net interest margin to be slightly lower than 2019 but up from the fourth quarter run rate as balance sheet growth and an improved asset mix are expected to offset the lower rate environment. As Mary will discuss later, we recorded a credit provision of $4.8 million this quarter.

Noninterest income totaled $47.7 million in the fourth quarter of 2019 compared with $46.5 million in the previous quarter and $42.1 million in the same quarter last year. The increase in the fourth quarter of 2019 was a result of a gain of $3.8 million related to the early buyout of the leveraged lease, partially offset by a reduction in mortgage banking income and customer derivative activity.

Noninterest income for the full year of 2019 was $183.3 million compared with $168.9 million in 2018. For 2020, we expect the run rate for noninterest income will be approximately $44 million per quarter.

Noninterest expenses in the fourth quarter totaled $93.1 million compared with $100.3 million in the previous quarter and $95.9 million in the same quarter last year. There are no significant items in noninterest expense in the fourth quarter of 2019. The third quarter of 2019 included an increase of $6 million in the legal reserve. The fourth quarter of 2018 included $3 million in onetime significant items related to a onetime medical expense and operational loss and legal expenses.

For the first quarter of 2020, noninterest expenses will include our usual seasonal payroll expenses of approximately $3 million. Noninterest expense for the full year of 2019 was $379.2 million, an increase of 2% compared with $371.6 million in 2018. For 2020, we expect our total noninterest expenses to be 2% to 3% above our 2019 expenses.

The effective tax rate for the full year of 2019 was 20.96% compared with 18.73% in 2018. Currently, we expect the effective tax rate for 2020 to be approximately 22%.

As a result of continued strong deposit growth during the fourth quarter of 2019, our investment portfolio increased to $5.7 billion. Premium amortization during the quarter was $6.7 million, up slightly from $6.4 million in the previous quarter and down from $8.1 million in the same quarter last year. We purchased a total of $627 million of securities during the quarter, which were primarily comprised of mortgage-backed securities. The reinvestment differential was a negative 5 basis points. The duration of the available-for-sale portfolio was 2.98 years at the end of the fourth quarter of 2019, the held-to-maturity portfolio duration was 3.69 years and the duration for the total portfolio was 3.36 years.

Our shareholders' equity was $1.29 billion at the end of the fourth quarter, our Tier 1 capital ratio was 12.18% and our Tier 1 leverage ratio was 7.25%.

During the quarter, we paid out $26.9 million or 46% of net income in dividends and repurchased 336,200 shares of common stock for a total of $30 million. We repurchased an additional 71,500 shares between January 2 and January 24 at a total cost of $6.7 million. Also, our Board declared a dividend of $0.67 per share for the first quarter of 2020 and increased the share repurchase authorization by an additional $100 million.

And finally, our capital management strategy in 2020 will remain unchanged, which is to pay out approximately 50% of net income in dividends to maintain adequate capital to support our business growth with a minimum Tier 1 leverage ratio of 7% and with the remainder available for share repurchases.

Now I'll turn the call over to Mary Sellers.

Thank you, Dean. Net charge-offs for the fourth quarter totaled $3.7 million or 0.13% annualized total average loans and leases outstanding, as compared with net charge-offs of $3 million or 0.11% annualized in the third quarter of 2019 and $4 million or 0.15% annualized in the fourth quarter of 2018. Net charge-offs for the full year of 2019 were $12.7 million or 0.12% of total average loans and leases compared with net charge-offs of $14.1 million or 0.14% of total average leases and loans in 2018.

Nonperforming assets were $20.1 million or 18 basis points at the end of the fourth quarter, down from $21.6 million or 20 basis points at the end of the third quarter and up from $12.9 million or 12 basis points at the end of the fourth quarter of last year.

Loans past due 90 days or more and still accruing interest were $8.4 million, up $2.3 million for the linked period and up $1.8 million year-over-year.

At the end of the fourth quarter, restructured loans not included in non-accrual loans or loans past due 90 days or more were $63.1 million, up $16.9 million from the third quarter of 2019 and $14.4 million from the fourth quarter of 2018.

Residential real estate loans modified to assist our customers accounted for $19.3 million of the total. The allowance for loan and lease losses totaled $110 million at the end of the fourth quarter, up $1.1 million from the third quarter. Given net charge-offs of $3.7 million, a credit provision of $4.8 million was recorded. The ratio of the allowance to total loans and leases was 1% at the end of the quarter, unchanged for the linked period and down 2 basis points year-over-year.

The total reserve for unfunded commitment was $6.8 million at the end of the quarter, unchanged from the third quarter and the fourth quarter of 2018. The bank's loan and lease portfolio remains well positioned, with strong asset quality metrics and a portfolio composition which reflects our core Hawaii and Guam markets. At the end of the fourth quarter, 51% of total loan balances outstanding were supported by consumer real estate with a weighted average loan to value of 58%, and 23% of total loan balances outstanding were supported by commercial real estate with a weighted average loan to value of 55%.

I'll now turn the call back to Peter.

Great. Thank you, Mary. The Hawaii economy remains steady during the fourth quarter of 2019. Statewide unemployment remains low at 2.6% compared to the national unemployment rate of 3.5%. General excise tax receipts grew 5.4% in 2019. Growth of the visitor industry moderated with preliminary visitor spending growing 0.5% and visitor days growing 2.7% year-to-date in 2019. This moderation was not unanticipated given the meaningful growth rates achieved in both 2017 and 2018.

Housing remains stable with median prices for single-family homes declining slightly by 0.1% and condominiums rising slightly at 1.2% on average for 2019. Inventory levels remained low at 2.5 months for single-family homes and 3.4 months for condominiums.

Thanks again for joining us today. And now we'd be delighted to field any questions you might have.

(Operator Instructions) And so our first question comes from Jackie Bohlen from KBW.

Just a question on compensation. Understanding that there will be the difficult seasonal payroll increase in the quarter. This quarter, it looks like it was a little light just due to share-based comp, incentive comp and insurance expenses coming in from the third quarter. How much of that is a lower level to the run rate versus a higher level in 3Q? And where I'm getting at with my question is just trying to see in addition to that $3 million bump up in 1Q, what other kind of increase there might be as those expenses normalize?

I would say that, yes, we -- in the fourth quarter, we do our true-up, so to speak, on all our reserves and accruals. So I would not say the whole difference is a run rate differential. Probably about half of that.

Okay. Okay. That's helpful. And then looking specifically to the occupancy and equipment line items in combination that you have trended up over the past year. And I'm just wondering, how much of that is related to ongoing investments you have just as you continue to develop your digital strategy and new products versus how much maybe just normal increase in the course of business?

So Jackie, this is Peter. I'll answer that. It's a combination of both. The -- I think the increases that you've been seeing over the past couple of years have, on the front end of that period, been predominantly what I would call infrastructure types of expenditures to get our security and our network postures where we need them to be. And probably for the past year or so, the ramp has been really more shifted to strategic initiatives and business opportunities, either from a revenue standpoint or from an expense efficiency standpoint. So yes, you likely will consider to see those numbers rise, probably not at the same slope, if you will. A slightly more moderate slope moving forward as a lot of deferred stuff has been taken care of. But it probably will be an upward trend. And frankly, that's something that we're doing intentionally and hopefully that's going to drive to better business outcomes with our customers.

Okay. Okay. That's helpful. And then just last one for me and then I'll snap back. More of a housekeeping item. I wonder if someone could clarify the tax treatments on the lease buyout that took place in the quarter. I know the original 8-K had indicated a $1.8 million tax benefit associated with that. And I just wanted to see if that's the complete tax benefit with the $3.8 million or if there was some offset to that as well?

That would be the benefit.

Okay. So if I look at the gain from the quarter, it would be the $3.8 million plus the $1.8 million, and then there's no offsetting tax on the gain?

Right. But -- well, there would be your normal income tax rate on the $3.8 million. It's -- the $1.8 million was not a net number. It was a release of some reserves associated with the lease.

Our next question comes from Ebrahim Poonawala from Bank of America Securities.

I was wondering if you could get into the margin guidance that you gave, Dean, in terms of it sounds like you implied that margins should begin to expand from the 2.95% in the fourth quarter. Just -- I mean, I guess, if we don't see a big change in the rate environment, like how much expansion do you think the margin can get? And talk to us in terms of the dynamics, like do you think the decline in the funding cost should offset the decline in the asset yields going forward? Just what your expectations are around that would be helpful.

Yes. Okay. So I have to caveat my guidance because of the last several days that the rates had dropped quite a bit. But we -- the guidance had assumed that we are stable on rates going forward and there is balance sheet growth, so that's going to give us the margin as well as net interest income expansion.

In terms of kind of the yields between the assets or loans and the deposit side, we do believe that there's opportunities to reduce -- or continue to reduce our deposit cost subject to the competition. But we do believe there's still room there that would offset the decrease in the asset yields, if any, going forward.

Got it. And just in terms of -- on deposits, a very strong year. I guess 5% year-over-year growth on period end. Do you expect this level of strength when you think about deposit growth in 2020?

Well, we don't really see a reason why we ought not to see results similar to that. I would tell you, Ebrahim, that 5% probably -- certainly is at the upper end of what my anticipation would have been. But I think another 3%, 4%, 5% deposit growth year for us in 2020 is certainly within the realm of possibility, subject to what happens out here in the economy and the global economy.

Got it. And is there anything of the fourth quarter growth where you see seasonally some outflows in the first quarter or not?

Deposits have held in pretty remarkably well share in the quarter current. You're right, usually, the fourth quarter is a bit of a temporary spot as at year-end, and probably less so that phenomenon this year than last.

Got it. Got it. And just moving in terms of capital, DCE at 6.95. Just talk to us, Peter or Dean, in terms of how about capital levels, like binding constraint, where you're managing capital and how we think about buybacks going forward?

Yes. I mean, per my comments, we're continuing with our capital management program. So we are going to plan on paying out about 50% in dividends. Of course, as we grow the business, we're going to retain some of that capital and then what's remaining will be for share repurchases, subject to certain minimums on our capital levels, in particular, the leverage ratio at 7%. So we're at 7.25% right now.

Yes. Ebrahim, if you were to chart our buyback activity over the past, call it, several years, what you'd see is, in a general year, we're probably buying back or dividending out upwards of 80% of our earnings. The balance held for -- to support growth. '19 was a bit of an anomaly, frankly, because I think we exceeded that number pretty substantially. But that was really as a result of a capital build that we had intentionally put in place to support really 2 factors: one, the change in capitalized lease obligations on the balance sheet. And obviously, going into that, we didn't quite have a clear or a crystal clear understanding -- I think we did directionally, but not a crystal clear understanding how that would impact us; and then secondly, CECL, which is not concluded, but we feel like we have a much better position on that as well. Both of those items seem at this stage to be -- well, at least, capital lease side to take care of CECL is kind of yet to be determined. But at this stage, things -- both of those items seem to be pretty innocuous to us. And so we went ahead and allowed for that additional capital build to melt down, if you will, in '19. But obviously, that won't go forward into '20.

Our next question comes from Aaron Deer from Piper Sandler.

Maybe to begin, if you could just give kind of an update on where the pipeline stands today? And what your expectations are for loan growth heading into 2020?

Yes. So a great outcome, I thought, in 2019, given all sorts of challenges out there. But we had good, balanced growth in '19, both on the consumer front as well as on the commercial front. It appears that construction lending is becoming constructive again versus a bit dilutive in prior periods. We'd anticipate to continue to see that happening mostly through affordable projects.

C&I book is going to be -- I'm not sure that we'll get much growth there, but the CRE book is kind of a nice pipeline behind it. We generated great market share and showed great strength late into the year on our resi side. And at least I'm quite hopeful to continue that momentum. And the only consumer product that was challenged for us in the year, Aaron, was home equity, and that was really as a result of, I think, some substitution impact as rates came down from home equity into resi mortgage, which, as long as we were getting the resi mortgages, was fine with us. But we also did see, or have been seeing, some pretty aggressive pricing on the teaser side, the short term kind of 2-year kind of stuff that we frankly were hesitant to follow into the marketplace. So hopefully, that cleans itself up this year, and if it does, maybe we'll have a better result there. But I think the bottom line, to answer the question, is 2020 feels awfully similar to 2019. And if we got a similar result to '19, I'd be pretty happy with that.

That's great. And then, Dean, going back to the margin and some of the dynamics there. I'm just curious, as you're looking at where your current yields are coming on and where deposit pricing stands, any sense in terms of the timing of the expected infection? I mean can we maybe see the margins start trending higher right away here in the first quarter? Or is it maybe going to take a quarter or 2 before we start seeing the benefit of the improvements that you're expecting?

Yes, I would say it would take maybe a quarter or 2 to see the increase here. So we may be flat to maybe even -- we could be slightly up in the first quarter, but second through fourth quarter is where we'll see a more meaningful pickup.

Okay. And then, Peter, from your comments, it sounded like you guys are still not expecting any adjustment to the allowance based on CECL adoption?

Let me have Mary answer that.

I think as Peter indicated, we're in the process of finalizing all our assumptions and inputs for the Day 1 impact, but it continues to be very modest.

Modest what? A benefit or?

Likely a modest benefit.

A modest benefit. Yes. To us.

To us.

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

This is Levi Posen on for Jeff Rulis. I just wanted to ask, you mentioned a couple of metrics on tourism. And if 2020 were to see an inflection of some of those spends and days visited from international tourism, what kind of fluctuations might you expect to see in your business?

Well, I think that what we saw on the visitor side, and in particular, on the international side, was a moderation in a couple of markets. So the domestic market, which is, call it 2/3 of our visitor base, performed exceptionally well, kind of mid-single-digit spend as well as arrivals. International, not as a strong. Japan was a little weaker. But really, it was Canada, Australia and New Zealand that were probably the weakest sisters of what we generally call the other category. And there, I've done some asking around into that space. And I think the thing to recognize is that those economies, while not in recession, are certainly flattening out having their challenges, number one. Number two, certainly as it relates to the Australian dollar, there has been kind of the serial depreciation in their currency versus the U.S. dollar for a few years now. And the general sentiment is that's just kind of winding its way into both arrivals and certainly into spending here in the islands.

Okay. Then I just had one quick question on the expense side specifically related to professional fees, although one of the smaller line items there. A meaningful increase in this quarter. I was just curious if there was onetime project-related activity there, or what we can kind of look at as a base going forward?

Yes. There's a number of items there, and I guess I will break it down into 3 kind of categories: One is the normal fourth quarter bump in professional fees related to audits and kind of the year-end activity; the second thing, our projects, we do have a number of projects going on that involve consultants; and the third is kind of related to that, but on the CECL side, there was a bump there, too, in preparation for the CECL implementation.

Our next question comes from Laurie Hunsicker from Compass Point.

Just wanted to stay on Levi's question on expenses here. So Dean, maybe if you could help us think about your expense guide of 2% to 3%, what adjusted figure were you using for full year '19?

So that would be off the reported number. Yes.

Okay. Okay. So I mean -- so you had -- I mean, round numbers, you had 6 million, 7 million within that figure that was somewhat nonrecurring, so that's a larger jump. Are you thinking in terms of -- you -- I mean you mentioned the 4 new branches. Are there more tech and IT expenditures coming? Or can you talk a little bit about the jump in expenses in terms of why that's a little bit higher?

Yes. I'll jump in here, Laurie. Yes, there's likely a little bump up in depreciation. We already talked about data services coming up a little bit. And those -- that certainly is as a result of the initiatives both on the facilities front as well as on the technology front that we're pushing forward and excited about. But really, as we thought about whether to quote a as-stated or as-adjusted number, what's also going into 2020 are some anticipated, somewhat extraordinary new items. So we've got some, what I would call, outsized severance payments coming through as we adjust some of our senior ranks here in the company. And so as we kind of did the takes and puts, it kind of just appeared to us to make more sense just to simply say, "We expect the 2% to 3% jump on as-stated. But you're right, there are some ins and outs. Fundamentally, though, I think that the bottom line is the expense story kind of continues to be pretty solid for us going forward.

Okay. And then the new branches coming on, do you have roughly the timing of when those 4 branches come on? And on average, what the expense per branch is associated? And how you're thinking about the breakeven on those?

Yes. So they will roll on -- the first one is coming on this quarter. Although I just drove by it yesterday, and I can't believe it's coming on this quarter. And then the rest of them will kind of flow out throughout the year. We're anticipating depreciation to clip up a couple of million dollars, in part because of that, in part because of some other things we're doing. And then what is offsetting that is that all of those -- if you think of those 4 branches in totality, there is a -- there are a number of, I'll say, efficiency/closure opportunities around the cluster of those new branches that will offset -- or create efficiencies kind of in the -- I'm not so sure this year but into the following years. And frankly, I can't really give you too much detail around that because of -- for regulatory purposes, we need to disclose those exact sites to our regulators first, and I'm sure you appreciate that.

Got it. Okay. And then premium am at $6.7 million. So if I'm adjusting that, then your NIM adding back, the premium am is $3.11 million. And I just wondered, around your margin guidance, how are you thinking about premium am for 2020? In other words, what's in your model? As you're guiding to reported margin, what are you -- and I realize that's a lumpy line item, but if you could help us think about how you have modeled it, that would be really helpful.

Well, the way we modeled it is we kind leave that in, so the -- I don't have the exact forecast for the premium am for the full year. But just looking at the trend, we had been -- we did come up in the fourth quarter, and the portfolio is a little bit larger. So I would have to say, given the rate environment, that we may trend slightly lower over the full year, but it would be kind of similar levels on a quarterly basis to where we are.

Okay. Great. So if we're assuming premium am is probably running -- I mean it was 16 basis points this quarter, so maybe like a 14, 15 basis points or so?

Yes. I think that will do.

Our last question comes from Aaron Deer from Piper Sandler.

Sorry, just one quick follow-up. The other noninterest income line, if you back out the $3.8 million gain, was down probably about $1 million to $1.5 million from the run rate, and it sounds like that was derivative -- a lower derivative activity from your customers. Just wondering if you expect that to bounce back up to kind of the previous run rate? Or if there was maybe some outsized activity in the prior quarters?

So Aaron, I would say that -- and I mentioned that the CRE book looks pretty good this year. But having said that, these are really bumpy types of revenue opportunities. And directionally, I'd say it should be another good year, derivative-wise, for us, both from a rate as well as volume standpoint. But having said that, '19 was also pretty extraordinary. So if we were a little behind '19, I'd still feel pretty good about the results.

I show no further questions in the queue. At this time, I'd like to turn the call over to Cindy Wyrick, Director of Investor Relations, for closing remarks.

I'd like to thank everyone again for joining us today and for your continued interest in Bank of Hawaii. As always, please feel free to contact me if you have additional questions or any further clarification on any of the topics discussed today. Thanks again, everyone, and have a great day.

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