Q4 2019 Earnings Call
Ladies and gentlemen, please continue to hold your conference call will begin momentarily.
Bye and welcome to the Bank of Hawaii Corporation fourth quarter 2019 earnings Conference call. At this time all participants are in listen only mode. After the speaker presentation to would be a question and answer session to ask a question. During the session you would need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I'd now like to hand, the conference over to your Speaker today, Cindy work director of Investor Relations. Thank you. Please go ahead Madame.
Thank you Jim 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 Chimera, 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.
As a result, there are a variety of reasons at the actual results may differ materially from those projected and now I'd like to turn the call over to Peter Ho. Thanks, Andy Good morning, everyone.
We do year and thank you for joining us today.
2019 was another good year for bank of why we were pleased with our overall financial results and 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.
[noise] earnings per share for the year reached a new record high of $5.56 per share.
Excluding the early buyout of leverage lease during the fourth quarter, our loan growth was 5.6% and 29 team was solid growth in both our commercial and consumer portfolios deposits grew a healthy 5% in 2019 and finished the year at $15.8 billion.
20 lightweight wasn't busy year for us as we continue to make steady progress in our long term goal of positioning bank with way as a preeminent financial services provider in the island.
This means combining the relationships and trust we've earned from our clients over our 123 year history.
The modern banking convenience is required of 21st century financial services providers.
During the year, we successfully launched simplified mortgage by bags way.
This new online portal held back way retain the number one residential mortgage market share in Hawaii in 29 team.
We also wants dealt a making us the first loss of provider in the marketplace to offer this popular P to P payment platform.
During the year, we also introduced a redesign be waste dot com website, which is now better suited to accommodate ecommerce activity.
On the facilities front, we laid the groundwork for the opening four new branches of the future in 2020.
He also completed our network refreshed refresh to 100% of or hallway marketplace. Our desktops are now fully why fly enabled and are either tablet or laptop configured, giving our teams greater mobility through our marketplace.
Again happy new year, and all last year now to provide you with some additional details on our financial performance for the fourth quarter and our outlook for 2020, following Jean Marie will then comment the quality Dave.
Thank you Peter.
Net income for the fourth quarter of 2019 was $58.1 million were $1.45 cents 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 29 team 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% return on equity was 17.65% and our efficiency ratio was 55.68%.
Our net interest margin into fourth quarter was 2.95% down six basis points from the third quarter.
And 15 basis points for 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 100000 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.
[noise] noninterest income totaled $47.7 million into fourth quarter, 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 the result of a gain of $3.8 million related to the early buyout of the leveraged lease partially offset by a reduction that mortgage banking income and customer derivative activity.
Noninterest income for the full year of 29 team 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.
Non interest 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 and noninterest expense in the fourth quarter of 2019.
The third quarter of 2019 included an increase of $6 million and the legal reserve.
The fourth quarter of 2018 included $3 million and onetime significant items related to the 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 five basis points.
The duration of the available for sale portfolio was 2.98 years at the end of the fourth quarter 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 one capital ratio was 12.18% and our tier one leverage ratio was 7.25%.
During the quarter, we paid out $26.9 million or 46% of net income in dividends and repurchased 336200 shares of common stock for a total of $30 million.
We repurchased an additional 71500 shares between January 2nd in January 24th at a total costs of $6.7 million.
Also our board declared a dividend of 67 cents per share for the first quarter of 2020 and increase the share repurchase authorization by an additional $100 million.
And finally, our capital management strategy, and 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 one leverage ratio, 7% and with the remainder available for share repo.
Purchases.
Now I'll turn the call over to marry sellers. Thank you deem.
Net charge offs for the fourth quarter totaled 3.7 billion 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, 4.15% annualized in the fourth quarter.
Sure if 2018.
Net charge offs for the full year 2018 were 12.7 million or 0.12% of total average loans and leases compared with net charge offs up 14.1 million or 0.14% of total average leases and loans in 2018.
Nonperforming assets were 20.1 billion or 18 basis points at the ended the fourth quarter down from 21.6 million or 20 basis points at the end of that third quarter and up from 12.9 million or 12 basis points at the ended 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 link period and up 1.8 million year over year.
At the ended the fourth quarter restructured loans not included in non accrual loans or loans past due 90 days or more were 63.1 billion up 16.9 million from the third quarter 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 a 4.8 million was recorded.
The ratio a deal allowance to total loans and leases was 1% at the ended the quarter unchanged for the link period and down two basis points year over year.
The total reserve for unfunded commitment.
It was 6.8 million at the ended 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 ended the fourth quarter, 51% of total loan balances outstanding where support supported by consumer real estate with a weighted average loans.
The value of 58% and.
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 that Peter.
Great. Thank you Mary.
The Hawaii economy remained steady during the fourth quarter and 29 to.
Statewide unemployment remains low at 2.6% compared to the national unemployment rate of 3.5%.
[noise] General excise tax receipts grew 5.4% in 2019.
[noise] 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 on anticipated given the meaningful growth rates achieved both 2017 at 28 team.
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 29 team.
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 feel any questions you might have.
Thank you as a reminder to ask a question Youve a need to press star one on your telephone.
So your question press the pound key.
Standby, we've compiled acumen a roster.
I sure first question comes from Jackie Bohlen from KBW. Please go ahead.
Hi, good morning, everyone.
Hi, Jackie.
Hi.
And on compensation.
Standing that they'll be that the typical seasonal payroll increased in the quarter on 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 threeq you on the weren't getting out. It was my question is just trying to see in addition to that 3 million bump up in one Q, what other kind of increase there might be as those expenses normalized.
I would say that yeah, we in the fourth quarter, we do our.
Okay true up so to speak on all our reserves and accruals so.
So I would not say the whole differences is a run rate differential probably about half of that.
Okay.
Okay. That's helpful. Thank you.
And then looking specifically to that the occupancy and equipment line items on in combination they do 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.
It's a combination of both.
The.
I think but 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.
Probably from the past few years. So the ramp has been really more shifted to.
Strategic initiatives and business opportunities either from a revenue standpoint or from the ore 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 slightly more moderate slow moving forward as a lot of the deferred stuff has been taken care of but but it probably won't be an upward trend to frankly, that's something that were out that were.
Doing intentionally and hopefully thats going to drive better.
Business outcomes with their customers.
Okay. Okay. Thanks, Peter that's helpful. And then just one last one from me and then I'll step back on more of a housekeeping item.
Hey, I'm someone could clarify that tax treatment on the the lease buyout that took place in the quarter I know the original 8-K had indicated a 1.8 million I tax benefit associated with that and I just wanted to see if that's the complete tax benefit with the 3.8 or if there was some offset to that as well.
Oh that would be the the.
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 but while they're there would be or normal.
Income tax rate on the 3.8 is the 1.8 was not a net number was a release of some reserves associated with Oh, okay.
Okay. Okay. That's helpful.
Okay. Thank you.
Yep.
Thank you My next question comes from Ebrahim.
A lot from Bank of America Securities. Please go ahead.
Good morning, guys.
Morning.
Oh, just wondering if you go door.
Good into though margin guidance that you gave dean in terms of it sounds like.
Your implied margin should begin to expand from the 295 into force fourth quarter.
Just I mean, I guess, if we don't feel big change in the rate environment like how much expansion getting the margin can good and booked wasn't going to the dynamics like do you think the decline in the funding cost should offset the decline in day after deals going forward and.
Just wanted your expectations out along that would be helpful.
Yeah, Okay. So I have to a caveat my guidance because of the last several days you know 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 a balance sheet growth.
So that's going to give us the margin as well as net interest income expansion.
In terms of.
The yields between the assets or loans and the deposit side. We do believe that there are opportunities to reduce our continue to reduce our deposit costs.
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 do some don't have all on deposits very strong year I get high for us and year over year growth on Peter Dan.
Do you expect this level of trend to anything 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 up but I think another three four or 5% deposit growth year for us in 2020 is certainly within the realm of possibility subjects or what happens out here on the economy in the global economy.
Got it and it hit anything off the fourth quarter growth, where you see seasonally from Oh outflows in the fourth quarter or not.
Deposits have held in pretty remarkably well.
Sure in the quarter current you're right, usually the fourth quarter as a bit of a.
Bit of a temporary spot as as at year end and probably less so that that phenomenon this year than.
Got it coding.
This morning in terms of capital D.C. at 6.95, just talk to US Peter Dean in terms of how do we think about capital levels like binding constraint radio managing capital then how we think about buybacks going forward.
Yeah I mean.
For my comments, you know, we're continuing with our or capital management program. So we are going to.
Plan on paying out about 50% in dividends of course as as we grow the business, we're going to retain some of that capital and then what's remaining well before share repurchases subject to certain minimums on our capital levels in particular, the leverage ratio at 7%. So we're at a seven.
In the quarter percent right now.
Yes, maybe around zero to chart, our buyback activity over the past call. It several years.
Did you see is.
In a general year, we're probably.
Buying back we're dividending out.
Yes upwards of 80% of earnings the balance held for to support growth.
19 was a bit of anomaly frankly, because I think we exceeded that number pretty substantially but that was really as result of capital build that we had intentionally put in place to support really two factors one.
The the change in capitalized lease obligations on the balance sheet and you know obviously going into that we didn't quite have a clear or a crystal clear understanding that we the directionally, but not a crystal clear understanding how that would impact us and then secondly, Cecil which you know 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 always capital lease sides take care of seasonal is kinda yet to be determined but at this stage things those both those I didn't seem to be pretty innocuous through 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.
That's helpful. Thanks for taking my questions.
Thank you.
Next question comes from Aaron Deer from Piper Sandler. Please go ahead.
Hi, good morning, everyone.
Sure.
Maybe to begin.
If you could just give kind of an update on where the pipeline stands today and what's your expectations are for loan growth heading into 2020.
Yeah. So a.
Great.
Outcome I thought in 2019.
Given all sorts of.
Challenges out there.
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.
The dilutive in prior periods.
I would anticipate to continue to see that happening mostly through affordable projects.
See I book is going to be no I'm not sure that will get much growth there, but to see our E book is got a nice pipeline behind it.
We generated great market share and showed great strength.
Late into the your honor resi side and at least I'm quite hopeful.
With that momentum.
The only the only consumer products that was was challenged for us through the year and was a home equity.
It was really as result of I think some substitution impact as rates came down from home equity into resi mortgage which as long as we were going to the resin mortgages was fine with US. We also did see we're happy to see some pretty aggressive pricing on the teaser side of the short term had a two year kind of stuff that.
We frankly, we're hesitant to follow into the marketplace.
So hopefully that Queens itself up this year and if it does maybe we'll have a better result, there, but I think the bottom line to answer. Your question was 2020 seals off with similar to 2019 and if we got a similar results to 90 that'd be pretty happy with that.
That's great. Thank you and then.
Dino again going back to the.
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 stance. It any sense in terms of the timing of of the expected inflection I mean can we clean maybe see the you know the margin start trending higher right away here in the first quarter is maybe going to take a quarter to before you start seeing the benefit of.
Of the improvements for that you're expecting.
Yeah, I would say it would take a a maybe a.
Quarter to 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 quarters, We'll we'll see a more meaningful pickup.
Okay.
And then Peter from your comments it sounded like.
You guys aren't are still not expecting any adjustment to the to the allowance based on seasonal adoption.
Let me, let me have Mary answer that.
I think as Peter indicated we're in the process of finalizing all our assumptions and input for the day, one impact, but it continues to be very modest.
Okay, great. Thanks.
A benefit or.
Likely a modest modest benefit to us to us.
Terrific. Thank you for taking my question.
Fair.
Thank you. Our next question comes from Jeff Rulis from D.A. Davidson. Please go ahead.
Hey, Good morning. This is leave Ipos going on for Jeff Rulis.
Hi, highly right.
Hey.
I wanted to ask you mentioned a couple of.
Metrics on a tourism and if 2020 would it be inflection of some of those spends and they visited from international tourism kind of fluctuations might you expect to senior business.
Well I think that.
What we saw 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 two thirds of our visitor base performed.
Exceptionally well kind of mid single digit.
Spend as well as arrivals.
International not not as strong.
Japan was a little weaker but really it was Canada, Australia and New Zealand.
We're probably the weakest sisters of what we generally call the other category.
And there I've done some some asking around into that space and I think the same recognize is that those economies well not in recession or certainly flattening out having their challenges number one.
Which is certainly as it relates the Australian dollar there has been kind of the cereal 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. Thank you and I just had one quick question defense side.
Specifically related to professional fees.
One of the smaller line items, there a meaningful increase in this quarter I'm. Just curious if there was one time in project related activity, there or what we can kind of look at the base going forward.
Yeah, there's there's a number of.
Items, there and I guess I would break it down into three three kind of categories. One is the normal fourth quarter bump in Ics 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 in the third is kind of related to that but the under Csos side. There was a bump there too in preparation for the Cecil implementation.
Okay. That's helpful.
Got it.
That's it for me then I appreciate the color.
Thank you.
Thank you. My next question comes from Laurie Hunsicker from Compass point. Please go ahead.
Hi, Thanks, good morning.
Just wanted to stay on I mean last question on expenses here. So.
D., maybe if you could help us think about your your expense guidance, 2% to 3%.
What adjusted figure where are you using for full year 19.
So that would be off the reported number.
Okay.
Yes.
Okay. So I mean to see you had I mean round numbers you had six 7 million.
Within that figure that.
Now with was somewhat nonrecurring. So that's a that's a larger John are you thinking in terms of you I mean, you mentioned that for new branches.
Are there more tax tech and I T expenditures coming or can you talk a little bit about the jump in expenses in terms of of why that's a little bit higher.
Oh Wow.
I'll jump in here Laurie.
Yeah, there's 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 result of.
The initiatives both on the facilities front as well as on the technology front that were that we're pushing forward and excited about but really as we thought about whether it's a quote a.
As stated or as adjusted number.
What is also going into 2020 or some anticipated somewhat extraordinary items.
So we've got some.
What I would call outsized severance payments coming through as we.
We adjust some of our senior 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 as to simply say the expected 2% to 3% jump on as stated.
How much you're right. There are some 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. Thanks, and then the the new branches coming on do you have.
Roughly the timing of when those four branches come on and on average what the.
<unk> expense per branches is associated and how you're thinking about the breakeven on those.
Yeah, So they will roll on the first ones coming on.
This quarter.
Although I just drove by yesterday and I can't believe is coming on this quarter.
And on the rest of them what kind of flow out throughout the year, we're anticipating depreciation to clip up a couple of million dollars.
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. If you think of those four branches in totality there it is a.
There are a number of.
I'll say efficiency slash closure opportunities around the cluster of those new branches that will offset the fish or create efficiencies kind of in the.
Buses for 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 knew this close 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 your NIM, adding back the premium as it's 311.
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 sure 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 that that would be really helpful. Thanks.
Well the.
The way, we modeled as we we kind of leave that in so I don't have the exact forecast for the premium am for the full year.
Just looking at that trend, we had been we did come up in the fourth quarter.
And the portfolio as 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. Thanks, So if we're assuming premium is probably running I mean, it was 16 basis points. This quarter. So maybe like a 14 15 basis points hairstyle.
Yeah, I think though.
Okay, great. Thanks, I'll leave it there.
Thank you.
Oh last question comes from Aaron Deer from Piper Sandler. Please go ahead.
Hi, guys, sorry, just one quick follow up.
The the other noninterest income line, if you back out the 3.8 million gain.
Was it down probably about a million 2 million and half from the the run rate. It sounds like that was derivative lower derivative activity from your customers. Just wondering if if 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'd say that.
Yeah, I mentioned that CRT book looks pretty pretty good this year.
But having said that these are really bumpy.
Types of revenue opportunities and Directionally I'd say, it's 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 was also pretty extraordinary so.
No.
If we were a little boy if were little behind 19, I still feel pretty good above the results.
Okay. Good stuff, thanks, again for taking extra questionnaire.
Yep.
Thank you.
Sure no further questions in the queue at this time I like to turn the call over to Cindy Wyrick direct 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 further clarification on any of the topics discussed today. Thanks again, everyone have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.