Q2 2022 Bank of Hawaii Corp Earnings Call
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And consumer loan portfolios remaining predominantly real estate secured.
Deposits increased by $310 million or one 5% linked quarter, providing a solid source of low cost funding in a rising rate environment.
We maintained our deposit pricing discipline during the quarter with average deposit cost of 70 basis points, an increase of just two basis points.
We also maintained our attractive and stable core deposit base with 94% of total deposits and checking and savings accounts.
92% of deposits are from core commercial and consumer customers and the remaining 8% and public deposits are predominantly government operating accounts.
The quality of our deposit base is further demonstrated by the longevity of our deposit relationships with our customers.
Nearly three quarters of our deposit customers have been with us for over 10 years and nearly half for more than 20 years.
Noninterest income in the second quarter was $132 9 million interest income included 500000 from PPP loans, and we recognized $1 1 million in interest recoveries.
Adjusting for these our core net interest income was 131 point.
$3 million up $7 9 million or six 4% from the first quarter.
Compared to the year earlier second quarter core NII increased by $15 3 million or 13, 2%.
Our core net interest margin increased by 13 basis points linked quarter to 244%.
Our robust our robust and consistent loan and deposit growth provides the foundation for sustainable growth in our NII and margin, which are being further bolstered by increasing interest rates.
Our loan to deposit ratio remains low relative to regional and local peers.
This affords us room to continue to grow our assets as well as greater pricing flexibility.
As we continue to grow we maintained our balance sheets asset sensitive position to changes in interest rates and continue to benefit from higher rates.
60% of our earning assets will reprice or turnover in the next two years in.
In addition, sizable cash flows from both loan and deposit portfolios will also enable us to position the balance sheet for evolving interest rate environments.
In the second quarter of 2022 net in net income was $56 9 million and earnings per common share was $1 38.
Net interest income in the second quarter was $132 9 million.
As discussed earlier core net interest income, which excludes PPP loan interest income in the quarter as interest recoveries was $131 3 million up $7 9 million linked quarter, driven by strong core loan growth and rising interest rates.
As Mary will discuss we recorded a negative provision for credit losses of $2 $5 million this quarter.
Noninterest income totaled $42 2 million in the second quarter down $1 4 million from the first quarter.
The decrease was primarily due to lower mortgage banking income and swap revenue, partially offset by higher service charges and other transactional fees.
We expect noninterest income will be approximately approximately $41 million to $42 million in the third quarter as higher transaction fees are expected to offset continued pressures on mortgage banking income and asset management fees.
Included in the third quarter's estimate is a one time negative adjustment of approximately $900000.
Or a change in the visa class B conversion ratio, which is reported as a contra revenue item in investment securities gains and losses.
In the second quarter, we were able to maintain overall expense discipline, while continuing with our innovation investments.
Noninterest expense in the second quarter totaled $102 9 million down $1 million from the first quarter.
Included in the first quarter as expenses were seasonal payroll taxes and benefit expenses of $3 7 million related to annual incentive payouts made during the quarter.
Adjusting for these items the second quarter expenses increased by $2 $7 million linked quarter, primarily due to annual merit increases at <unk> and one time cost of living adjustments, which began on April one as well as one extra workday during the quarter.
Our innovation investments continued during the quarter while we.
We were able to take advantage of opportunities to reduce expenses elsewhere.
For the full year of 2022 expenses will be approximately $415 million as inflation continues to pressure overall expenses.
In addition, the third quarter expenses will be slightly higher than the fourth quarter due to seasonal payroll differences between the quarters.
Our return on assets during the second quarter was 1.0% the return on common equity was $18, one 9% and our efficiency.
<unk> ratio was 58, 8%.
Our net interest margin in the second quarter was $2 four 7% up 13 basis points from the first quarter.
As discussed earlier core margin was 244% also an increase of 13 basis points linked quarter.
The increase in the margin during the second quarter reflects the ongoing impact of strong core loan growth and rising rates.
We expect continued improvement in our core margin with an increase of 6% to seven basis points in the third quarter.
Our capital levels remained strong and we are well positioned to support continued growth.
Our CET, one and total capital ratios were 11, 6%.
And 14, one 4%, respectively with a healthy excess.
Above regulatory minimum well capitalized requirements.
Despite robust loan growth our risk weighted assets relative to total assets are still well below levels of peers, reflecting our lower risk profile and providing us with ample room to continue growing while maintaining strong capital levels.
Higher interest rates in the third quarter negatively impacted the valuation of our available for sale securities portfolio, resulting in an <unk> adjustment and a reduction in our book and tangible common equity.
However, this had no impact on our regulatory capital.
And capital distribution capabilities.
During the quarter, we paid out 28 million or 51% of net income available to common shareholders in dividends and $2 million and preferred stock dividends.
We repurchased 131000 shares of common stock for a total of $10 million.
And finally, our board declared a dividend of <unk> 70 per common share for the third quarter of 2022.
Now I'll turn the call over to Kent.
Thank you Dean.
Our loan portfolio construct reflects our strategy of lending in markets. We understand people, we know and community as we trust. These underpinnings, coupled with consistent conservative underwriting and disciplined portfolio management resulted in a loan portfolio that is diversified by category is appropriately sized exposures.
And this 80% secured by quality real estate with a combined weighted average loan to value of 56%.
Credit performance continued to improve and remain very strong in the second quarter net loan and lease charge offs were 600000 or two basis points of average loans and leases annualize compared with five basis points in the first quarter and four basis points in the second quarter of last year nonperforming assets totaled $15 five.
$1 billion or 12 basis points at the end of the quarter down four basis points for the linked period and year over year.
Nonperforming assets are secured with real estate with a weighted average loan to value of 58% loans.
Loans delinquent 30 days or more remained stable at 27, 5 million or 21 basis points down to $2 million or basis points year over year.
Criticized loan exposure represented just one 3% of total loans down 30 basis points from the prior quarter driven by continued continued.
Sustained improvement in the financial performance of those customers, who had been most impacted by Covid.
The quality of our loan production in the second quarter remains strong 76% of commercial production was secured with quality real estate modestly leveraged our commercial mortgage production had a weighted average loan to value of 63% and construction production had a weighted average loan to value of 61%.
78% of the quarters consumer protection was secured with real estate again conservatively leveraged residential mortgage and home equity production had weighted average loan to value and combined weighted average loan to values of 65, and 58% respectively, 76% of our home equity production was enough.
First lien position.
Those scores for all our consumer production remains very strong and consistent.
Portfolio monitoring metrics also remain very strong commercial mortgage and construction portfolios have weighted average loan to value.
<unk>, 7% and 63% respectively.
<unk> mortgage and home equity portfolios have weighted average loan to values are combined ltvs are 57% and 52% respectively, 72% of the home equity portfolio is in a first lien position and again monitoring FICO remained very strong.
As Tim noted, we recorded a negative provision for credit losses of $2 $5 million. This quarter. This included a negative provision for the allowance for credit losses of $2 9 million, which with net charge offs reduced CLO allowance by $3 5 million to $148 5 billion or 1.15% of <unk>.
Total loans and leases.
The decrease in the allowance reflects reflects the improving economic outlook and forecast for market, coupled with our credit risk profile, while continuing to consider the broader economic uncertainty and downside risk of a recession. The reserve for unfunded commitments was $5 6 million at the end of the quarter up 400000.
I'll now turn the call back to Peter.
Thanks Barry.
You can see it was another solid quarter for bank of Hawaii, we remain well positioned for whatever market and economic conditions present in the near future.
We remain as always committed to the physical consistency conservatism and capital efficiency as highlighted in the chart on your screen.
And now we'd be happy to take your questions.
Thank you, ladies and gentlemen, as a reminder to ask a question you will need to press Star then one one on your telephone that star one one to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Andrew Leisch with.
Piper Sandler your line is open.
Thanks, Hi, everyone. Thanks for taking the questions.
Peter just wanted to start on the loan side here you referenced.
<unk> housing supply.
Just kind of curious what's driving that growth.
Along with the home equity growth and then.
Where does the pipeline stand on the commercial side is while you continue to put up really good loan growth. So just curious where pipeline stand and what are what is driving this growth that you guys are able to put up.
Yes, so I think.
Through a bit of a comment on my opening remarks around really some of our strategic efforts really I think showing up nicely in this quarter, Andrew So maybe beginning with the commercial side what.
What we saw commercial wise.
All of our growth for the most part came out of our middle market small business units.
I think as you know that's really traditionally bank voice considered more of a large corporate lender and really of the past five years I would say really begin to emphasize building up.
Kind of that mid market small business segment and in this quarter.
Basically large corporate was flat and loan production.
But our small business unit middle market unit generated about 7% loan growth, which kind of got us that 3% number.
So that obviously it was very.
Satisfying to US is we've been building in this area.
We've staffed up middle market about 45%.
With lenders and support staff over the past couple of years and have been fortunate to pick up.
A number of real.
Well known lenders in their particular marketplaces, which has had a had a big impact as well so really the strategic growth is as a result of.
Now I'll really having.
Really two businesses a large corporate business that is going to grow and has grown nicely, but just kind of have an off quarter this quarter.
But our middle market business really.
Taking shape and having a great quarter this quarter and hopefully we'll both have good quarters next quarter, but I think the point is if one falls there is a little bit the other way generally tends to pick up and that's that's what we're starting to see in the consistency of our commercial numbers over the past several several quarters.
On the consumer side.
The run up in rates, obviously has had an impact on.
All of our mortgage businesses home equity and residential.
But a lot of the growth you saw.
For Q2 was kind of backlog or pipeline that had been built prior to some of that rate inquiries.
So we think that we will likely see a downturn.
And the application volumes certainly in residential mortgage.
Probably in home equity as well, although I would say that as people are hesitant to refi first mortgages auto on a cash out refi basis that tends to push business too.
Home equity as well as Incent people with existing home equity lines too.
Two to fund up their existing lines.
But overall I think we remain pretty.
Pretty constructive on loan growth at least for the next cut.
All of the quarters out.
<unk> continued loan growth.
Consumer.
Continued loan growth in commercial consumer really being driven by despite kind of some headwinds in the right market.
And the pipeline.
Really being offset if you will by a number of channel improvements that we've made over the past couple of years online wholesale private banking all those are all.
Those are all market vectors that really hadn't been available to us in the past that are really starting to <unk>.
So at some level of scale at this point and giving us nice core growth, despite potentially a drop off because of rate.
Got it that's really helpful. Thanks for that detail.
And then Dean just.
The margin outlook, you mentioned six to seven basis points in the third quarter. What are some of the assumptions behind that does that assume a rate hike next week or I mean later on this week and.
Why wouldn't that extension be stronger given that we just had a 75 basis point rate hike just last month.
Yes, so we're assuming.
<unk> 75 for.
This week and then maybe another 50 after that.
And the third this quarter.
So it is based on kind of a flattish to maybe even a little bit.
Round, 3% under 10 year.
And then continued loan growth. So that's how we got to that number.
Got it are you seeing rising funding costs that Mike.
While the pace of expansion.
A little of that but mainly it's going to be kind of a flattish on the long end.
But we're continuing to.
Realized some benefits from that but the benefits from that will just continue.
Throughout the next several quarters and years the short end is a little bit more.
Instantaneous so that's how we got to the six to seven.
Sure.
Got it alright, well. Thank you for taking the question I will step back.
Alright, Thank you guys.
Thank you.
Please standby for our next question.
Our next question comes from the line of Kelly Motta with Bank of America. Your line is open.
Hi, This is Kelly motta with <unk>.
Yes, I know, who you're working with.
Okay.
Thanks for the question great quarter.
Wondering if maybe a question for Mary.
And Peter you mentioned in the prepared remarks, you know credit metrics across the board are good.
And Criticising delinquency.
Wondering if there's anything that you may be watching a bit more closely that isn't showing up now.
Necessarily in reported credit metrics yet.
Actually no we're not really seeing any early signs of any deterioration of course, we have our eye on our consumer book, given the impact of rising rates and in place.
Everything still looks good there and our commercial portfolio our client base is.
Very strong financially and ask you to open the metrics have a lot of financial capacity in depth to weather this but.
We're continually.
Really streaming through that to see if theres any segment, we should be concerned about.
Got it thanks for the color.
And then turning to funding cost back to funding costs.
With the increase you saw this quarter it looks like there was also an increase in.
Public deposits can you just remind me what the seasonality with those.
Well as you guys kind of personality in those.
A bit higher cost to replace a bit faster.
What that means.
How are your core deposit base.
In terms of.
Change in cost this quarter.
Yes so.
Just to kind of start at the top of the seasonality in public deposits, we do have.
Bump in February and August and that's mainly due to property tax receipts.
Those come to US, mostly and then in terms of costs, we did increase some of the.
Balances on our public side, what we saw is that the with the rising rates market rates, we were able to pick up some public deposits.
At a lower cost than our funding costs. So we thought that was an attractive move for.
For that.
And overall, what we're seeing is still a pretty muted.
Deposit rate environment locally.
The kind of them.
No one has.
Increase of public work.
Published rates I should say.
Locally there are some movements at the very top end of the market, but that's to be expected.
And that's well within our plan.
Yes, Kevin we see that I mean.
With Mega right.
Increase one in the books.
Pretty good discipline in the marketplace as Dean indicated youre always going to have some extraordinary large depositors, who quite rightfully are going to ask for more yield and that's to be expected I think but but in general the broader deposit marketplace is feeling pretty good we've got likely another 70.
Five basis point increase coming through shortly.
And our hope is that you know kind of likely yields will have to lift a bit but still hopefully in a disciplined manner.
Got it I appreciate all the color here I will step back.
Thank you Kelly.
Thank you.
A moment for our next question.
Okay.
Our next question comes from the line of Laurie Hunsicker with Compass point Your line is open.
Yeah, Hi, Thanks, good morning.
Sorry.
Just sticking with where Kelly wisdom public deposits.
Six or seven how much of that was one time and then if you have a comparable number in terms of last quarter was $1 billion.
Thanks, a lot for him and for Atlas.
And public time alright.
Yes.
Yes, so it's kind of lumpy as dean alluded to.
But this quarter public time was for 'twenty.
Last quarter public time was 25.
And.
The quarter last year, so $630 41.
<unk> was $3 48.
Yeah.
Okay got it and then do you have a you have a blended cost on your all of your public deposits and you could share with us.
We do but I don't know if we have it.
Right.
Okay.
Tax rate, how should we be thinking about that that jumps around a little bit how should we be thinking about that for next year.
I think 23% is still a good number.
Did tick up a little bit this quarter or second quarter due to some discrete items.
But right now we're looking at for the full year 23, this year and probably into next year.
Okay, Okay, great and then.
Just more macro.
This was really for all three of you could give us a refresher on where we are the signals are starting to question, where we are in two categories often in leveraged lending in any detail.
You could provide us just refreshing us on those docs.
How much is Hawaii versus.
Anything that you can care as far as office Ltvs.
Yeah, I'll ask program.
Yes, I'll, just say office and leverage our very small portfolios for us very good.
Details on the sure in terms of leverage as we disclosed at two 4% of total C&I at the end of the second quarter.
It includes seven borrowers with average exposure of about $4 6 million. We don't have any criticized exposure in that portfolio mainland represents about 20%, 7% of total leverage or seven basis points of C&I.
The mainland exposure is a global base kitchen ownership in timeshare company with a significant presence here, we enjoy an eight figure deposit relationship and their leverage is roughly around four times at this.
Hawaii is the ballot.
Alright, sorry, you said, 20%, 27% with mainland.
Yes, I'm sorry.
Okay.
Clarifying Keybanc go ahead.
Okay.
Hawaii is the balance of that or about 1.35% up total C&I.
Largest exposure there accounts for 54% of that or one 3% of total C&I. It is a company that operates a sundry and convenience store here and is owned by a long established family with significant financial capacity in depth also enjoy a large relationship and their current leverage.
It is about one six times.
Yes.
The offer freight and then.
That's super helpful. Do you have the office.
Sure sure. It is the smallest segment in our commercial mortgage portfolio to represent 11% of the.
Total commercial mortgage book the weighted average LTV on the portfolio is 57% average loan is $1 8 million in terms of.
Geographic dispersion, 15% is mainland and that's extended to a couple of key relationship customers, who have diversified portfolios their collateral pools generally tend to be ink supply constrained submarket and have an LTV of 45%.
The 85% balance on.
In Hawaii is predominantly in Hawaii.
Is in Hawaii with 5% in Guam, 59% is on Oahu.
22% of that is class a office downtown space with a 66% weighted average LTV.
Have been changing dynamics in the class a space a number of properties have been converted into other use so vacancy is really at its lowest rate in the last 10 years.
And in terms of other kind of segmentation there we've got about 20% that isn't medical government type tenant.
Opposite.
Got it.
20% I'm, sorry, so just to clear up 20% overall in medical government.
Yes.
Okay, that's great and then when you.
Go ahead.
I'm sorry go ahead.
I was just going to say when you said.
When you said some of it is getting repurposed converted into other units do you mean some of the office space is getting converted into condos that is that what you meant or what you asked me about that.
That's been happening in the downtown area, which has.
Created more limited supply and help to stabilize vacancy and rent.
Got it perfect. Okay, great. Thanks for that color I appreciate it.
Sure.
Thank you.
Please standby for our next question.
Our next question comes from the line of Jeff Lewis with D. A Davidson your line is open.
Thank you good morning.
Please go ahead.
Dean just to follow up on the on the margin I guess, the reported up 13 basis points.
Part of that.
What portion of that was from interest recoveries.
Was about two basis points.
Okay.
The $2 44 core excludes that does that.
Alright.
Okay.
Two basis points from the interest recovery one from PPP loans.
Yes right.
Thank you.
Do you have a do you have a June monthly margin.
What the margin was for the month of June .
We do but we don't normally disclose on a monthly basis.
Safe to assume the trends.
Was upward throughout the quarter.
Yes. It was it was.
Got it.
Maybe Peter.
A question on the on the international visitors.
Any thoughts on kind of resumption of activity there.
I guess you could throw out.
<unk>.
The domestic spend.
Locally what what are the kind of the headwinds there and what are the expectations for some.
The numbers are great and coming back, but we still haven't seen the international side as much so any thoughts on that.
It's going to be.
It may be a while Jeff.
No.
Canada.
And Korea.
And it's kind of a smattering of other countries make up the international segment.
That together generates about 35% of arrivals at 35% of spend.
And what we have happening right now is that number is less than half of what it is what it has been traditionally.
Headlined by the Japanese who are down over 90%.
Brands were down not quite as bad as that but a pretty bad.
Kind of offsetting that.
Canadians are.
Effectively a bounce back at this point, so thats positive in Australia, as a kind of newly able to leave their country and we're seeing good traction there so.
I think that.
Japan and Korea.
Kind of anybody's guess I think it's a combination of both.
Kind of health issues and conditions.
And I understand Japan, it's kind of again starting to have some some viral issues COVID-19 issues.
I also think it's also just policy right.
I can only imagine.
Although domestic Japanese visitor industry quite appreciates, having all of their residents.
In house, if you will.
I don't know I mean, I think eventually the business will come back that's for sure we know that.
Kind of predicting which quarter.
Might be a little bit more of a fool's error than perhaps we thought previously.
What I talked to.
The hotel.
Professionals.
<unk> of them are kind of thinking.
Beginning.
First quarter next year.
And I think probably the sentiment had previously been kind of summer to later 'twenty two so that's a bit of a push out.
But kind of if if we kind of zoom out a bit and take a look at the macro environment. We've got so much domestic traffic right now.
It almost is.
Somewhat of a blessing that we don't have.
The international market back as strong as obviously eventually we want because I'm just not sure where we would put all of those people now.
92%.
In June .
By arrivals and over 100% by by visitor spend.
So the way I look at it is.
The international market is going to get back I can only imagine that certainly the Japanese visitor is really anxious to get back to Hawaii, which as you know they've got a deep long standing love affair with.
Potentially as we start to see a little.
Little softening in the U S domestic side that might be kind of a nice bolt on for us as we move forward.
Yes.
Some sense. Thanks, Peter Yeah. Thank you.
Thank you for a moment for our next question.
Yeah.
Okay.
We have a follow up question from the line of Andrew Your line is open.
Thanks, So much yeah, just a question here on capital and the buyback and I know that.
The regulatory ratios, where you focused the most on but with the TCE ratio of below 5%, what's the appetite to continue buying back shares here.
Yes, the buyback still continues to be an important part of our capital management program.
Right now the even though we've taken another deduction in our capital because of the LCI component.
It still hasn't affected our capital distribution plans.
<unk> to expect kind of a modest repurchase program going forward.
Similar to the levels that we had in the last several quarters.
Gotcha.
Yes, thank you for taking the follow up.
Thanks, Ed.
Thank you one moment.
Our next question.
We have a follow up question from the line of Kelly <unk> with J B W.
Hi, Thank you so much for the follow up just a really small housekeeping item.
With your fee guidance.
I caught that it excludes the <unk>.
Lisa class C share adjustment.
Last quarter.
I think it was 42% to 43 I assume I assume that also was excluding the visa adjustment, but I just wanted to clarify.
That out.
Yes.
When you say exclude it.
<unk> 41 to 42 includes the adjustment. So therefore on a normalized basis. It would be 42 to 43, so roughly the same guidance that we had.
Previous quarters.
Okay got it thank you very much.
Hello.
Thank you.
I'm showing no further questions in the queue I would now like to turn the call back over to Jennifer <unk> for closing remarks.
Thank you I'd like to thank everyone for joining us today and for your continued interest in <unk>.
Please feel free to contact me if you have additional questions or need further clarification on any of the topics discussed today. Thank you everyone.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Yes.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Yeah.
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