Q1 2023 Bank of Hawaii Corp Earnings Call
Good day and thank you for standing by welcome to the Bank of Hawaii Corporation's first quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone you will then hear an automated message advising you. Your hand is raised to withdraw your question. Please press star one again.
Please be advised that today's conference is being recorded.
Now like to hand, the conference over to your Speaker today, Jennifer Lamb Senior Executive Vice President Treasurer, and director of Investor Relations. Please go ahead.
Thank you 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 Moore, 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. The 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 web.
Side, B O H dot com under Investor Relations and now I'd like to turn the call over to Peter Ho.
Thanks, Jennifer good morning, or good afternoon, everyone.
Thank you for your continued interest in bank of Hawaii.
Despite the drama and challenges of the past month, and a half banking away recorded solid results deposits grew on an average basis, but were down modestly on a spot basis loans.
Loans grew across both commercial and consumer categories.
This reflected the continued inversion of the yield curve.
Because the last few weeks have taught us anything it is that business models matter and backing of the quality of relationship as well as the diversity of relationship with one of the ones client base are both critical a.
Bank of Hawaii, We believe our 125 year commitment to a community bank based model.
She has both key factors, we've been focused on the Hawaii and West Pacific markets for many many years ago. This focus has allowed us to build uniquely long standing relationships with our clientele relationships at work both ways.
Additionally, our community based approach dictates that we focus not on any one sector or concentration, but rather on a whole a community approach. This has enabled us to build both a mass market consumer business as well as the private bank business.
Enabled us to serve very small businesses as well as established long tenure businesses in town.
We also serve not just the state of Hawaii, but also component municipalities throughout the state.
It is this combination of quality and diversity of our relationships in the market. We've been serving for over 100 years that makes us different.
LNG times.
Given keen interest in liquidity and funding source, we thought we'd provide and reiterate critical knowledge, what our operation, which I'd be happy to do in the second.
As is customary at work Maryann will follow with some updates on credit which is a good story and Dean will finish off with the financials and then we'd be happy to take your questions.
So let me begin with just touching on.
Our our community bank approach basically we use our 125 year old coveted brand.
Blend that with a true community bank focus and take advantage of both the broad and deep market penetration that we have here in Hawaii as well as in the west specific to create a diversified logged a diversified long tenured deposit base strong levels of liquidity as well as the diversified lower risk loan assets.
Yes.
Those assets and turn into results, which which create both exceptional credit quality as well as exceptional deposit performance.
Speaking of deposits really through our 125 year history, and the Islands Bank, who has developed an exceptionally season deposit base built one relationship at a time for many years in our neighborhoods and communities we uniquely understand.
To begin with the marketplace.
<unk>.
And to recognize I think many of you on the phone already do.
He is truly a unique deposit marketplace, where five local institutions for 97% of the bank deposits within the market.
Our deposits are widely distributed 98% of our deposits are fully FDIC insured 42% of our deposits.
Our FDIC.
Uninsured or uncollateralized.
Deposit averages on the consumer side or 18000 at 133000 and commercial side.
But a nice diversification with them as deposit base consumer making up just under half of our overall deposits commercial at 41, 9% in public and other municipalities still have the rest and even within those segments. We have diversity looking at the government side or institutional side.
HFC state and county onto the consumer side, a nice blend of not only mass affluent or high net worth but also mass market and then on the commercial side.
A nice mixture.
Industry sectors there.
Our deposits are also highly operational in nature with over 50% of our deposits being demand deposits.
95% of our commercial deposits, having three seven accounts per relationship on average at 71% of our consumer deposits having.
The account relationships with banks.
Okay.
In terms of deposit mix, you see that 31% of our deposits are noninterest bearing that's down from 33% a quarter ago.
I'd note that the average for bank of Hawaii noninterest bearing between 2017 in 2019 was 31, 2%.
In terms of tenure.
Okay.
Thanks Wei has some of the longest tenured deposits in the industry.
51% of our deposits are with relationships over 20 years old.
3% 10 to 20 years old and only 26% under 10 years.
So here on slide 12, which you can see it.
Is that the pilot performance for really the past few year and.
Certainly.
The months of March has been pre.
Pretty darn flat.
Really what you see on the left side is.
Pretty good performance on a year on year basis through the first quarter and then looking more on a more micro basis at two.
The month of March you see basically from.
Period.
With SCB and some other institutions falling into trouble.
Moving from actually a $24 billion to 25 billion of spot.
The end of the year.
By segment, our deposit balances on a linked basis have been pretty steady as well, whether it be consumer commercial or public and other.
And then moving on to deposit beta.
Here, you see that while deposit betas have moved up I think at 15, 9% represent pretty well relative to the industry as a whole.
And on to deposit costs deposit costs are rising.
And what appears to be a steady and measured manner at this point.
Okay.
So finally, the centers finish off in.
In addition to a granular diversified deposit base, we also maintain healthy liquidity backup lines totaling eight 2 billion.
With additional loans available for sale or securitization report or pledging of just under $2 billion.
For additional liquidity backup.
So now let me turn the call over to Mary sellers with touch on credit and other assets. Thank you Peter.
Serving our communities for 125 years said served us to conservatively manage the assets of the organization. Accordingly, our investment portfolio is invested in high quality Securities primarily U S Government agency and U S government sponsored agencies.
We take a similar approach to lending we lend in markets, we know to relationships, we understand and our loan portfolio reflects this with 94% of our portfolio in Hawaii, and the west specific and 6% mainland based representing credit exposure for those relationships.
First of all I'd assets or operations beyond Hawaii.
We coupled this with prudent underwriting and disciplined portfolio management and we have a portfolio that is built on long tenured relationships diversified by asset class.
Appropriately sized exposures is 80% secured with real estate with a combined weighted average loan to value of 55% and has higher risk categories that are well contained.
Our commercial real estate portfolio, which represents 28% of the total portfolio is diversified across various asset types with office accounting for just 3% of total loans.
The portfolio built unrelated chips with demonstrated experience and financial capacity as conservative weighted average loan to values across all asset types in our portfolio weighted average loan to value of 56%.
Our office portfolio is diversified by asset class across our markets and carries a weighted average loan to value of 56%.
5% of the portfolio.
Polio is primarily class a properties in the Honolulu Central business District. This segment has a 63% weighted average loan to value and 47% of our exposure is further supported by repayment guarantees.
<unk>, 3% of loans in the office segment, our maturing through 2024.
Tail risk in the commercial real estate portfolio remains modest.
92%, having an LTV greater than 80%.
Our consistent conservative approach to underwriting is reflected in our consistently strong quality of our consumer loan portfolio.
And in turn portfolio.
And our same consistent conservative approach is also reflected in our consistently strong quality of our commercial loan production and portfolio.
Asset quality remained strong in the first quarter with net charge offs of $2 7 million or eight basis points annualized of total average loans and leases outstanding up $800000 for the linked period and up $1 2 million year over year nonperforming assets were $12 1 million down 500000.
Year end and down $7 9 million from the first quarter of 'twenty. Two all npa's are secured with real estate with a weighted average loan to value of 57%.
Loans delinquent 30 days or more have remained stable on both the linked period and year over year at 23 basis points.
Criticized loans as a percentage of total loans were 131% at the end of the quarter remaining modestly below pre pandemic levels.
At the end of the quarter the allowance for credit losses was $143 6 million down 900000 from the linked quarter and the ratio of the allowance to total loan and leases outstanding was one <unk> percent down two basis points. The reserve estimate utilize two heroes March 2023 forks.
<unk>, which continues to call for economic slowing, but no recession in Hawaii.
The reserve. However, does continue considered the downside risk of a recession as well as the impacts of inflation and rising rates.
Reserve for unfunded commitments was $7 million at the end of the quarter up 200000, principally period.
Now I'll turn the call over to Dean.
Thank you Mary.
Net interest income was 136 million in the first quarter.
Negatively impacting the quarter's net interest income with two fewer days in the quarter, which reduced net interest income by approximately $1 6 million.
Early buyouts on leases, which reduced net interest income by 300000.
Adjusting for these items, our normalized net interest income for the first quarter was $137 8 million a decrease of $2 9 million linked quarter.
And then increase of $12 7 million from the first quarter of 2022.
The linked quarter decrease was primarily due to higher funding costs, partially offset by loan growth and higher asset yields.
Increased from the first quarter of 2022 was primarily due to loan growth and increases in our asset yields partially offset by higher funding costs.
The inverted yield curve continues to pressure, our net interest income and margin.
We expect deposit betas will continue to rise from the 15, 9% in the first quarter driven in part by further mix shift from noninterest bearing to interest bearing savings and time deposits and the generally more competitive rate environment.
To address these challenges from the higher short term rates beginning in the fourth quarter, we increased our term funding by 800 million at a weighted average rate of three point, 93%.
It also increased our longer term time deposit balances by $730 million.
At a weighted average rate of 384%.
In addition, we continue to remix our loans are shifting to greater floating and variable rate exposure, which comprised the majority of new originations in the quarter.
Allowing our investment portfolio to run off and holding more cash on the balance sheet.
From an earning asset perspective, net interest income and margin are being supported by strong cash flow and overall asset repricing at higher rates.
With $2 9 billion of annual cash flows from maturities and Paydowns of loans and investments, we have ample opportunity to redeploy funds into higher yielding assets, including cash.
In addition to the strong cash flow.
Another approximately $3 6 billion in assets are repricing annually, which provides additional rate sensitivity.
In particular, the yield on maturities and Paydowns on loans and investments in the first quarter was four 1% and two 1% respectively.
These cash flows were reinvested predominantly into new loans, which yielded approximately five 9%.
Runoff may also be held in cash, which is yielding more than the runoff, thus providing an attractive alternative while preserving liquidity.
Noninterest income totaled $48 7 million in the first quarter.
Included in the results was a $600000 charge related to a change in the visa class B conversion ratio, which is reported as a contra revenue item in the <unk>.
<unk> securities gains losses.
I should note that the remaining amount in the securities gains losses is due to the ongoing fee paid to counterparties.
Prior visa class B sales.
Security sales, which there were none in the quarter.
Adjusting for this item noninterest income was $41 3 million, an increase of $100000 linked quarter.
And lower by $2 2 million from the first quarter of 2022.
The decrease from the first quarter of 2022 was primarily due to lower revenue from mortgage banking customer derivative activity.
Noninterest income is expected to be $40 million to $41 million per quarter for the remainder of the year.
During the first quarter as is our practice, we managed our expenses in a disciplined manner as economic conditions remain unclear.
In the first quarter of 2023, and 2022 were seasonal payroll taxes and benefits expenses from incentive payouts, which totaled $4 million and $3 7 million respectively.
In addition, first quarter expense also included severance expenses of $3 1 million.
It should be noted that this will result in a $3 3 million.
Annual savings.
Adjusting for the seasonal payroll and benefits expense in both years and severance expense in the first quarter of 2023 normalized expenses in the first quarter were $104 9 million, an increase of $2 $1 million linked quarter.
$4 7 million from the first quarter of 2022.
The increase linked quarter was primarily due to the industry wide increase in FDIC insurance, which accounted for $1 5 million and an increase of 500000 in the statutory rate.
The Hawaii state unemployment tax.
Notably the remaining increase after accounting for these factors with just $100000 in the quarter.
Compared to the first quarter of 2022, the increase of normalized expenses was due to the aforementioned.
FDIC insurance increase which accounted for $1 7 million as well as the increase in the unemployment tax of 500000.
The remaining expense increase of $2 million from the first quarter of 2022 was well under the annual rate of inflation.
For the full year of 2023, we continue to expect expenses will increase by approximately 3% over the 2022 normalized base of $415 million.
While inflation continued to pressure expenses other actions are being taken that moderate expense growth through the rational rationalization of operations and slowing of hiring.
To summarize the remainder of our financial performance in the first quarter of 2023 net income was $46 8 million and earnings per common share was $1 40.
Our return on common equity was $15, 79% and our efficiency ratio was 63, 34%.
We recorded a credit provision of $2 million this quarter.
The.
The tax rate for the first quarter was 25, 4%.
The increase in the effective tax rate on a linked quarter basis was due to the nonrecurring benefit from the leverage lease terminations received in the fourth quarter net unfavorable discrete tax item in the first quarter.
The year over year increase was primarily due to lower benefits from tax credit investments.
<unk> tax rate in the first quarter of 2022 also included benefits from leverage leases and have that happen.
<unk> been terminated.
The tax rate for the full year of 2023 is expected to be approximately 24, 5%, which does not include the recognition of low income housing tax credit benefits expected in 2023 due.
Due to the uncertainty around the timing of the recognition of such credits.
Our capital remains well above regulatory well capitalized guidelines.
Our CET one tier one capital ratios were 10, 9% to 12, 1%, respectively with a healthy excess above the regulatory minimum well capitalized requirements.
During the first quarter, we paid out $28 million to common shareholders in dividends and $2 million and preferred stock dividends.
We repurchased 150000 shares of common stock for a total of $9 9 million.
And finally, our board declared a dividend of <unk> 70 per common share for the second quarter of 2023.
Now I'll turn the call back over to Peter.
Great. Thank you Dean.
Thanks again for listening in that we'd be happy to take your questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question Press Star One again, please standby, while we compile the Q&A roster.
We have a question from Andrew Liesch from Piper Sandler Your line is open.
Hey, good morning, how are you guys.
Yes, Peter how are you.
Good thanks.
No.
Just curious dean.
How should we be thinking about the margin from here it seems like the.
Kind of add some caution around rising deposit costs, but longer term, it's still from asset repricing. So how do you think that margin is going to.
React over the course of the next year.
Yeah, right now we're expecting the fed to increase rates next week.
And then possibly another one but pause from that point on but when you look at that compared to what the futures are expecting we're actually looking at are higher for longer rate environment.
And then Virgin carrying through to sort of the middle of next year. So based on that we're looking at the margin coming down in the second quarter.
And then really bottoming up towards the end of this year.
Before increasing in the next year, assuming the rates do.
You come down on the short end towards the tail end of 2024.
Got it.
The level of where that could.
We expect its going to tail out there where do you think it will bottom.
We're looking at right now.
In the second quarter.
<unk> decline as we saw in the first quarter.
And then from there it'll it'll start to.
Certainly.
And then I've just got a question on the short term borrowings that you are that you added it looks like those came on.
Maybe earlier in the quarter just based on the average balance I'm just curious what was the rationale for adding Dallas just to add some liquidity.
Any color behind that would be helpful.
So we did take down some longer term funding and again thats part of our.
Kind of mitigate if you will against the higher for longer rates.
And then second the second of all we did want to hold a little bit more liquidity on the balance sheet.
Yes.
Both of them.
In terms of fed funds sold.
Got it alright.
Thanks to that that covers my questions I'll step back.
Thank you.
Thank you one moment for our next question.
We have a question from Kelly Motta from <unk>. Your line is open.
Hi, Thanks, so much for the question.
I was hoping to.
A bit more color on the securities portfolio I think it's extended out.
But could you provide us with.
Expected duration.
The available for sale and HTM Securities at this time.
Yes.
In total the portfolio is about five four years duration DFS is three eight.
HTM as six four.
And to kind of give you more color.
The increase in rates the cash flows and kind of prepayments have already in effect bottomed out and so we're really effectively at the contractual payment level. So we don't expect any more slowdown or extension in the portfolio from.
Great movements higher.
And therefore, there is if rates were to move lower now that those cash flows could increase in short durations.
Got it understood.
And obviously a lot.
On this quarter.
It looks like you repurchased.
Maybe a little bit of shares this quarter just wondering.
How you feel about capital at these levels and.
The outlook is for.
Managing capital going ahead.
Yes, Kelly I think that given the environment.
That we find ourselves in at this point as well as.
Some level of uncertainty around where regulatory levels will push out in the kind of intermediate term I think we are going to be pretty judicious around capital that's not to say that we've suspended in a form of capital programs at all but I think from a guideline standpoint, we're probably going to be more judicious.
So not around capital management.
Got it.
Maybe last question for me and then I'll step back and let others, but.
Saw the Moody's downgrade just wondering if this is something that <unk> been in discussion with them and how that works and any.
Any implications of that is if they're already to how you run your business.
We don't anticipate any implications to that obviously, we were disappointed to see the downgrade, especially after having just been affirmed on January 12 through the double H re rating.
But we look we took a one.
Level downgrade on our long term dip.
Posit rating from <unk> to a one with a stable outlook. So.
Not what we had previously but still a high mark for us. So we don't anticipate any operational.
Meaningful operational outcomes from that.
Certainly one one more if I can just sneak in on just tacking on to that.
Is there a level of deposit rating where were you born.
Obviously, Europe Europe , very high levels still right now but that.
That would.
You know start to create greater conversations with some of your depositors.
Yes.
Yeah.
Hasnt ever looked at those ratings.
I'm, just trying to understand it a little bit better.
Tough to say.
Yes generally.
Ratings discussions haven't come into play in dealing with our with our with our depositors. So.
No not not not not in our <unk> practice now.
Great. Thanks, I'll step back I appreciate all the color. Thank you Kelly.
Thank you and we have a question from.
Jeff <unk> with D. A Davidson your line is open.
Thanks, Good morning, Dean I wanted to follow up on.
Let me get back to you mentioned your expectations for the <unk>.
Exceed.
15, nine just wanted to kind of see if you've got an updated through the cycle expectation.
As part of his question one and then the second part of that is just have you seen customer rate requests have those ease.
And as we've proceeded into April .
Thanks Al.
It there.
Yes in terms of our betas historically we.
We're at 20% and this cycle understanding the magnitude and the velocity of the increases we can see that the beta is could rise between 20% to 25%.
It's kind of what were thinking there would be in terms of exceptions.
I don't see any real changes I mean, we still do get exception requests for deposits and Thats all incorporated into the.
And what we're expecting in terms of betas.
Got it.
Dean while I've got you do you have a march.
Margin average what that means for the month of March.
The margin.
I do have it.
Okay.
It was.
37.
Okay I appreciate it.
One last one.
Peter.
Yes.
Turning to in here I guess, just some noise about.
Regulators changing treatment of unrealized losses is that.
Alter your strategy at all or do you really give that any attention.
Any thought on just addressing that part of the <unk>.
Unrealized loss treatment.
I guess.
Jeff.
We certainly have a heightened awareness around.
Maybe the differences.
<unk> treatment for smaller banks versus larger banks and.
The prospects of <unk>.
Smaller banks, having potentially to migrate to that level.
And I think where we stand on that is kind of not knowing where things stand there we likely will begin to think through various scenarios on how we could if forced to move to that level get there. Our preliminary view is that we would be able to do that organically over a period of time.
Kind of given.
Operating assumptions that we think are reasonable at this point so nothing.
Obviously nothing has been set in stone a fair amount of discussion around the topic.
I guess, we're trying to stay as flexible as possible.
And that discussion.
And on that front.
In addition to the deposit balance and I appreciate that.
Almost by weaker.
Month of March balanced and certainly hasn't been impacted didn't actually up since FCB I don't know if you've had any customers that can take that.
Link and look at that if you had any customers or larger maybe public deposits look at the the potential securities losses have you had to address data walk people through the outcomes there.
Thanks.
I would say in general.
When people are interested in is more the deposit stability of the franchise.
And obviously the purpose of putting there.
Kind of the discussion around.
Unrealized losses, and the like is a little bit.
More esoteric certainly for the majority of our deposit base and generally when we have a discussion with more sophisticated levels I think there's a reasonable level of understanding there. So no I mean, the topic itself has not resulted in meaningful deposit outflow for us okay.
Okay, great. Thanks, Peter.
Cool.
Thank you one moment.
We have a follow up from Andrew Liesch with Piper Sandler Your line is open.
Hi, Thanks for taking the follow up question here.
Clarify something on the expense guide, 3% on that $415 million.
207, 427 does that include the severance this quarter. So on a more run rate basis is actually lower than that.
Yes. It would include the severance.
Got it.
That's all I had thanks, so much alright, thanks Sandra.
Thank you and we also have a follow up one moment.
Okay.
With Kelly Motta from <unk> Your line is open.
Hi, Thanks for letting me jump back and I apologize if I missed this.
Part of his prepared commentary.
Your fee guidance.
To be slightly better.
Then what you had in January what what's the drivers of that better fee outlook.
<unk> ahead, just trying to understand.
Yes.
Generally a more stable outlook in the economy, we are seeing.
Some transactional volumes increase.
In general kind of market conditions.
The stability in the markets I think is helping us.
Achieve a better.
Outcome on the fee side.
Got it.
And then also your loan growth with Dell.
Considering like very healthy this quarter wondering what youre seeing in your markets.
How you are balancing that.
The funding aspect of things with.
What the drivers of loan growth should be going forward.
Yes, well.
What really augments our has augmented the loan growth Kelly has been base.
Basically amortization off the Securities book.
Basically can accommodate.
Growth in the mid <unk>.
Single digit level.
I would suspect that.
The annualized rate that we saw in the first quarter, where loan growth might be a high watermark as we move forward for a couple of reasons one feels like commercial borrowers are beginning to.
Pull back a little bit just kind of with the I think heightened uncertainty in the marketplace and spectra recession.
And then obviously I think as rates have kind of taken hold.
The consumer front I think as.
<unk> been as well so.
I guess I would say that.
Loan growth.
Still would be potentially in the mid single digit range, but probably ranging towards the lower end of the mid single digits at this point and that is.
Pretty adequately supported by.
Securities runoff.
Thank you thanks for the color appreciate it.
We also have a follow up from Jeff <unk> with D. A Davidson your line is open.
Thanks, one more for Mary.
The criticized.
Pick up linked quarter.
Any color as to where that was I think you've mentioned that 80% of the total criticized as in CRE just wanted to see what that linked quarter addition to that balance.
Wes.
Jeff It was actually across a number of customers generally what we saw were various idiosyncratic issues, either they'd be supply chain or permitting delays they had.
Slower repositioning post COVID-19 or they were just looking at higher operating expenses are latching component does continue to be the biggest piece of that we did get some upgrades this quarter, but we still have several large exposures there where they are really dependent on Japanese some international travelers returning.
Okay. Thank you.
Okay.
Thank you and I'm showing no other questions in the queue I would like to turn the call back to management for any closing remarks.
I would 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.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Yes.
Okay.
Okay.
Okay.
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