Q3 2021 Bank of Hawaii Corp Earnings Call
Good day and thank you for attending my welcome to the Bank of Hawaii Corporation third quarter 2021 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 to ask a question. During the session you will need to press star one on your tongue.
The phone.
I would like to hand, the conference over to your Speaker can now he got 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 Chicken, Lora, 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 bill.
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 the earnings release, a copy of the presentation and release are available on our website via which dot com under Investor Relations and now I'd like to turn the call over to Peter Ho.
Great. Thank you, Jim and good morning, everybody or good afternoon.
I'll lead off with a little commentary on what's happening here in the Hawaii market place.
As is our custom turn the call over to Dean who will fill you in on the financials for the quarter generally a pretty clean 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 leading off.
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.
It's a pretty meaningful impact to employment in the state and we were actually kind of surprised to see unemployment come out just recently at six 6%. So continued.
Positive downward trending in unemployment.
Here in the state of all like I said a bit of a surprise and then we go to the next page.
I think what's happening is the nine 'twenty forecast you see an elevated level of forecast unemployment for 'twenty, two and 'twenty three we'll see what happens in the next forecast, but at this point, it's looking like <unk>.
Employments.
Bit of a better space than what we had what we were all thinking coming out of our most recent delta Serge.
Turning to the real estate market.
Like many places in the country.
It's not in the World actually are real estate continues to be hot.
Sales prices median sales prices for single family homes up 19% up seven 4% for condominiums that September on September <unk>.
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 eight months for condominiums.
Air 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.
The ramp up if you will in and 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 that basically we had calmed back too.
2019 levels by the end of July.
And mind, you that was accomplished really with only one of our two primary markets in place so lots of supply in from the from the North America market, mainly in the United States, both east and West coasters and really not much.
In the way of demand and from Asia as that marketplace.
<unk> had to work through its it's vaccine in infection protocols.
Then the Delta hit and.
The number of policies put in place a pretty meaningful downturn in 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 feel.
Feels like.
And talking to some of the hotel he as in town that the winter should be a pretty good season for us again, and so I think absent any.
Recurring surge you know 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 we'll see how this all plays out.
Switching to the.
Covid situation.
I mentioned, we went through a pretty meaningful space.
With a with a delta variant late you know kind of mid late summer things have gotten quite a bit better here in the island. So you see here on.
This chart that we're trending towards the bottom.
The 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.
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.
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 the call over to Dean.
We'll 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 by 276 million, two 4% linked quarter and $542 million year over year or four 8%.
Waivers on PPP loans have accelerated and balances declined by $245 million in the quarter.
Our strong <unk>.
<unk> growth continue.
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.
As a result total deposits increased by $324 million or one 6% linked quarter, and $2 8 billion or 16% year over year.
Our strong and stable deposit base remains a readily available sources 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 we will providing current income and mitigating margin pressures.
Our balance sheets asset sensitivity positions us well for rising rates and greater net interest income.
A 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 two 7% linked quarter and up two 1% from the third quarter of 2020.
Included in the third and second quarters net interest income were $5 9 million and $3 8 million, respectively of accelerated loan fees from the 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 the reported $44 4 million in the second quarter <unk>.
Included in the second quarter were gains of $3 7 million from the sale of investment Securities.
Adjusted for these gains third quarter noninterest income increased by approximately 700000 from higher deposit fees and swap transaction fees.
We expect noninterest income will increase to approximately $42 million in the fourth quarter of increase increasing deposit fees service charges and other transaction fees as we emerge from the negative impact from the Delta Varian and further reopening of the economy.
Yeah.
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 repos allowed us to reduce our noncore funding free up capital and increase 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 quarters 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% $99 million for the fourth quarter were 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.
To the pre pandemic you have 2019, we continued to demonstrate expense discipline.
Expenses on a reported basis increased at an annualized rate of one 5%, which was well below the rate of inflation of two 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% return on common equity was 17.0% to 8% and our efficiency.
Excuse me our efficiency ratio was 50, 738%.
Our net interest margin in the third quarter was $2 three 2% a decline of five 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 remained strong and well positioned.
Well positioned to support continued growth.
Our CET, one and total risk based capital ratios were 12.0% to 2% in 2014, 72%, respectively with a healthy excess over the minimum well capitalized requirements.
During the third quarter, we paid out $28 million or <unk>, 46% of net income available to common shareholders in dividends and $1 million and preferred stock dividends, we repurchased 241000 shares of common stock for a total of $20 million.
And finally, our board declared a dividend of <unk> 70 cents 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, 8% of total loans as Youll recall, we elected to partner with our customers through this unprecedented event.
To provide additional relief primarily two principal deferrals on low margin real estate.
100% of the loans remaining a deferral or 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 loan deferrals continue to pay interest and.
I returned 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 four basis points flat for the linked period nonperforming assets were $20 6 million or 17 basis points up one basis point from the second quarter.
Delinquencies 30 days or more were $28 3 million or 23 basis points at the end of the quarter down two basis points for the linked quarter and criticized loan exposure totaled to three 4% of total loans up 17 basis points for the quarter.
As Tim noted, we recorded a decorative provision for credit losses of $10 4 million. This included a negative provision to the allowance for credit losses of $11 3 million, which was net charge offs of one point to reduce the allowance to $167 million.
139.
9% of total loans and leases or 142% net of PPP balances. The decrease in the allowance reflects the most recent new hero economic outlook and forecast foreign market, coupled with our credit risk profile.
Allowance does continue to provide for the uncertainty and potential downside risk inherent with the pandemic I'll now turn the call back to Jim. Thank you marry. This concludes our prepared remarks, we are now happy to answer any questions you may have.
Thank you and as a reminder to ask a question you will need to press star one on your telephone.
With your other questions Mr Pan or hash key please standby, while we compile the Q&A roster.
Yes.
Okay.
We have a question from Andrew Liesch with Piper Sandler Your line is open.
Hi, good morning, everyone.
Morning, Andrew.
Just wanted to talk on the margin guide here to be.
Up slightly does that include any improvement in the earning asset mix continue to have pretty good deposit inflows just kind of curious how you would see that.
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 thats, how we got to the how I got to the number.
Okay, because it looks like you've over the last few quarters, you've been pretty I wouldn't say aggressive, but consistent with the adding of the securities portfolio. So is that still.
The plan.
The statements of the yield curve are you even more inclined to want to add to the book.
Yeah.
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 a kind of a storage of liquidity for us we tend to adjust the balances based on deposit and loan growth. So you would kind of be the net outcome from both of those.
<unk>.
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 use going into next year, but then maybe layering on some <unk>.
Increases in the seasonal payroll taxes in the first quarter.
Yeah.
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 <unk> seen in the past.
Got it.
Okay very helpful. Thanks for taking the question.
Thanks, Andrew.
Thank you. Our next question comes from Jeff release with D. A Davidson your line is open.
Thanks, Good morning.
Jeff.
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 I might my guess is that <unk>.
Provision and reserve levels or more.
Led by.
Unemployment projections corrected versus less about what you're actually seeing.
606 number that you quoted but is that correct that it's more on the projections that leads that number.
Yes, absolutely.
Okay.
So I guess intuitively.
Yes.
Projections more closely aligned with lower actual we could read that.
Continued recapture as is possible I suppose it's oversimplified, but.
Okay.
You've got there.
Okay got it alright.
Thank you and Peter just on the loan growth side I mean, it continues to be very strong I think in quarters past you've done it.
You've done a thorough job of sort of pegging.
By segment, where you think you had some tailwind some that might have some some headwind. So just if you wouldn't mind kind of rattling through the book and where you see in terms of not only Q4, but 'twenty two where were you are optimistic and where some areas that that may 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 five 4%.
Basis for the quarter really driven by you know we've made some some some great investments in people over the past couple of years.
And those individuals' have helped us build market share and in a few markets sub markets here in the islands. So I think C&I has an opportunity to grow into 'twenty, two probably not at the 5% linked level, but.
A reasonably healthy growth rate there.
CRE was up one 7% in the quarter on a linked basis and we.
We think we think there is.
Good amount of room in that space as well both both in a granular what we call our fast track product, which is smaller commercial mortgages.
Smaller investors and mom and pop types, but also in the institutional space I think clearly.
<unk>.
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.
We certainly need that here in this marketplace switched.
Switching over to the.
Consumer side Rosie.
<unk> was was.
Flat for the quarter on a linked basis production was down about 30% as rates.
As rates started to pick up.
But the good news is that was offset by really great production and just about all of our other consumer categories. So heckle was up very smartly indirect even was up despite the inventory challenges of that of that industry and our other consumer which is basically installment.
It 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 have pulled back a bit on that programming through the pandemic and so I think I think that was that created some some pent up demand in the book, but <unk>.
A very good result, and I think the other interesting thing on the consumer side is we're seeing a good uptake in our digital channels. So 18% of our production for the quarter was was through our digital channels up 62% year on year.
Okay I appreciate it a lot of detail sounds pretty.
Pretty good momentum in <unk> and in 'twenty, two I suppose maybe one last one just.
Dean.
Maybe maybe it seems 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.
Okay. Okay. Thank you.
Yeah take care.
Thank you.
Once again, ladies and gentlemen, if you have a question simply press star one on your telephone to get into queue.
We have a question from Laurie Hunsicker with complex Compass point. Please go ahead.
Yeah, Hi, Thanks, good morning.
Can you refresh us on how much in PPP fees are obviously remaining.
Yes, we have approximately $7 seven remaining.
Okay, and then I just wanted to make sure that you're right. It was about $2 9 million that was reflected in this quarter.
That was the accelerated fees.
Yes forgiveness.
Right.
Okay.
If I'm stripping that out to your margin then was 221.
Relative to <unk> ex PPP gains last quarter I guess can you.
Help us think a little.
A bit about your.
Comments about potential margin widening and I'll also maybe.
There'll be borrowings that were prepaid in the quarter when were they repaid and how much.
What were the 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 two 6%.
Two 4% sorry, two 4%.
And then the.
In terms of the margin I think I get to the same numbers that you did on the PPP waivers.
Quiddity impacted us.
Quarter over quarter by about 11 basis points and then.
Our growth in deployment of assets added back about two basis points.
Okay, Great and then just one last question around that do you anticipate doing any <unk>.
Growing prepays in this 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 when it look pass.
Positive from various fronts, we will do it.
But right now I guess nothing planned here for.
For the quarter.
Okay, Great and then.
Two more once you may just want to make sure I got this right. So the preferred this quarter with one point out Jack.
Next quarter, we'll see the full impact that'll be 1.969 am I doing the math on that right.
For the fourth quarter, you will see approximately $2 million in preferred dividend.
Okay Perfect and then just last one for me how should we think about tax rate going forward.
For the fourth quarter.
The estimate is about 24%.
Okay, and what about for next year.
Whatever is happening in Washington, and how should we think about that.
I think for now a 24% is also a good number.
Okay perfect. Thanks for taking my question.
Thanks Laurie.
Thank you and I'm not showing any further questions.
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 clarification 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.
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