Q4 2024 Bank of Hawaii Corp Earnings Call
Good day and thank you for standing by. Welcome to Bank of Hawaii Corporation fourth quarter 2024 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 11 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chang Park, Director of Investor Relations. Please go ahead.
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Chang Park: Good morning and good afternoon. Thank you for joining us today for our fourth quarter 2024 earnings conference call.
Speaker Change: Joining me today is our Chairman and CEO Peter Ho, President and Chief Banking Officer Jim Polk, CFO Dean Shigemura, Chief Risk Officer Brad Shairson, and our Deputy CFO Brad Sattenworth.
Speaker Change: Before we get started, let me remind you that today's conference call will contain some forward-looking statements.
Speaker Change: And while we believe our assumptions are reasonable, there are a variety of reasons that actual results may differ materially from those projected.
Speaker Change: During the call today, we'll be referencing a slide presentation as well as the earnings release. Both of these are available on our website, boh.com, under the Investor Relations link. And now I'll turn the call over to Peter.
Peter: Thanks, Chang. Good morning or good afternoon, everyone. Thanks for joining the call.
Peter: Bank of Hawaii posted yet another solid quarter to end 2024. Net interest income and net interest margin both improved, this for the third consecutive quarter.
Peter: That interest income grew just over 2% on a linked basis to $120.2 million.
Peter: Non-interest income excluding an adjustment to our Visa Class B shares was up modestly on a linked basis.
Expenses were controlled quarter over quarter.
Peter: Average deposits and average loans grew 1.3% and 1.1% on a linked basis to $20.8 billion and $14 billion, respectively.
Average non-interest bearing deposits were up modestly in the quarter.
Peter: Criticized loans improved from 2.42% last quarter to 2.1% this quarter.
Capital levels have improved substantially from a year ago.
Peter: I'll now take a moment to discuss the franchise and market conditions. Brad will then briefly touch on credit conditions, which, as I mentioned, look quite strong. And finally, Dean will dig a little deeper into the financials, and then we'd be happy to take your questions.
Speaker Change: The Bank of Hawaii brand continues to perform well in our unique Hawaiian market, holding the number one position in market share as shown in the latest FDIC Annual Summary of Deposits as of June 2024. Bank of Hawaii leads in the deposit market share growth on both a short-term and long-term basis.
Speaker Change: Deposit growth remained measured in the quarter. Importantly, non-interest-bearing demand plus other low-yield deposits stabilized nicely, trending positively in December on a rolling three-month average basis for the first time since June of 2022.
Speaker Change: Deposit funding costs fell for the first time this rate cycle on both an interest-bearing and total deposit cost basis.
Speaker Change: Economic conditions remain stable in Hawaii. Unemployment remains well below the national average.
Speaker Change: The visitor market remains stable but continues to be impacted somewhat by the Maui market.
Residential O'ahu Real Estate Friends remain positive.
Now let me turn the call over to Brad.
Brad: The majority of our loan book is the long-standing relationships with about 60% of our clients on both the commercial and consumer sides.
Brad: having been with us for over 10 years. This combination has greatly contributed to our strong credit performance for many years and has resulted in a loan portfolio that is 93% Hawaii, 4% Western Pacific, and 3% Mainland, where we support our clients that do business in both Hawaii and on the mainland.
Brad: As I walk through our credit portfolio's fourth quarter performance, you can see that it has remained strong and is consistent with prior quarters.
Brad: Our loan book is balanced between consumer and commercial, with consumer representing a little over half of total loans at 56% or $8 billion.
Brad: We lend predominantly on a secured basis against real estate. 85% of our consumer portfolio is either residential mortgage or home equity, with a weighted average LTV of just 48% and a combined weighted average FICO score of 800.
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Brad: Moving on to commercial, our portfolio size is $6.1 billion or 44% of total loans.
Brad: The largest share of commercial is commercial real estate with $4 billion in assets, which equates to 29% of total loans. This book is well diversified across industries and carries a weighted average LTV of only 55%.
Brad: Looking at the dynamics for Hawaiian real estate in Oahu, the largest market, you'll see that a combination of consistent vacancy rates and little change in inventory supports a stable real estate market.
Brad: Within the different segments, vacancy rates for industrial, retail, and multifamily are all lower than their 10-year average, and office is less than 1% above its 10-year average.
Brad: Total office space has decreased about 10% over the past 10 years, driven by conversions. This long-term trend of office space reduction will likely continue to temper vacancy rates.
Brad: Breaking down our CRE portfolio, it is well diversified amongst property types with no sector being greater than 7% of total loans. Our conservative underwriting has been applied consistently with all weighted average LTBs between 50 and 60%. Overall, it's a diverse portfolio with low average loan sizes.
Brad: And our scheduled maturity is spread well into the future with more than half of our loans maturing in 2030 or later.
Unknown Speaker 0
Speaker Change: Looking at the distribution of LTVs, the tail risk in our CRE portfolio for any loans with greater than 80% LTV totals only 2% of CRE with only 0.2% over 85% LTV.
Speaker Change: Turning to our credit metrics, this past quarter compared to linked quarter, metrics remain quite stable and asset quality remains strong.
Speaker Change: Net charge-offs were $3.4 million at 10 basis points annualized, down 1 basis point from Q3, and up 5 basis points from a year ago.
Speaker Change: Non-performing assets are flat at 14 basis points quarter over quarter. Delinquencies have also been stable taking up three basis points to 34 basis points this quarter.
Speaker Change: criticized assets dropped to 2.1% of total loans with 76% being real estate secured with a 56% LTV.
Speaker Change: On last quarter's earnings call, I noted that we had received a payoff after quarter end that had lowered our criticized ratio to 2.19% from quarter end of 2.42%. Criticized assets levels dropped an additional 9 basis points since then.
Speaker Change: As an update on the allowance for credit losses on loans and leases, the ACL ended the quarter at $148.5 million.
Speaker Change: That's up 1.2 million for the link period and up 2.1 million year over year. The ratio of our ACL to outstandings was 1.06%, unchanged from prior quarter and up one basis point year over year. I will now turn this over to Dean for an update on our financials.
Dean: Thanks, Brad. We expanded our net interest income and net interest margin for the third consecutive quarter.
Dean: Net interest income for the fourth quarter was $120.2 million, an increase of $2.6 million or 2.2% from the previous quarter, and net interest margin expanded to 2.19%.
Dean: Also negatively impacting the margin were higher cost commercial and public deposits that were carried over from the third quarter and ran off in October and November.
Dean: NIM improved to 2.26% by December, driven by repricing of asset cash flows, a decrease in average cost of total deposits to 1.67%, and slowing of our NIBD and low-cost deposit remix.
Dean: With regard to cash flow repricing, in the fourth quarter, our earning assets with fixed rates generated $518 million of cash flows for maturities and prepayments.
Dean: Assuming that all of these cash flows from loans were reinvested into like products and cash flows from securities were reinvested into cash, such reinvestment generated incremental net interest income of approximately 2.8 million in the quarter from higher reinvestment yields.
Dean: Spreads on new loans improved after bottoming in October as mid and longer term interest rates increased. We expect the wider loan spreads to continue into the first quarter.
Dean: At the same time, deposit makeshift has continued to slow, with average non-interest-bearing and low-yield interest-bearing deposit balances declining by 105 million link order.
Dean: This compares to the decline of $627 million and $315 million in the same period of 2023 and link order, respectively.
Dean: Assuming the majority of these balances shifted into higher-yielding, interest-bearing deposits.
Dean: Such mix shift negatively impacted net interest income by $900,000 in the fourth quarter, down from the negative $2.6 million impact in the third quarter.
Dean: The cumulative impact of fixed rate asset cash flow repricing over 2024 has added nearly $16 million to quarterly net interest income as of the fourth quarter of 2024.
Dean: Well, the cumulative cost of deposit remix over the same period has decreased quarterly net interest income by $10 million, but at a slowing pace.
Dean: The income spread between asset and deposit repricing are expected to continue to compound over the next several years, thus widening the cumulative impact and incrementally growing net interest income and margin.
Total deposit costs decreased by 10 basis point link order.
Dean: When measuring the deposit costs from the start of the Fed funds cuts in September, deposit rates had fallen by 24 basis points by the end of the quarter, and further reductions are expected in the first quarter.
We have reduced deposit rates across all interest-bearing products.
Dean: and are well positioned to reprice our time deposits and improve our margin as 71% of total time deposits are scheduled to mature in the next 6 months and 95% of total time deposits are scheduled to mature in the next 12 months.
Dean: We continue to strategically position our balance sheet for a range of rate outcomes. We have reduced our rate-sensitive assets to $7 billion, while our rate-sensitive interest-bearing deposits remain at $10 billion.
Dean: We intend to continue to closely manage the interest rate sensitivity of our balance sheet to ensure that we are well positioned for a variety of rate environments.
Dean: In the fourth quarter, we actively managed our interest rate swaps and securities portfolio to take advantage of opportunities as interest rates shifted.
Dean: The repositioning reduced our active pay fixed receivable interest rate swaps by $800 million to $2 billion notional, and reduced the fixed rate from 4.29% to 4.03%.
Dean: We also maintained the $300 million of forward-starting, pay-fixed, receivable flow interest rate swaps
that were executed in the third quarter.
Dean: These forward starting swaps have an average fixed rate of 3.03% that will become active in 2025 and 2026.
Dean: During the quarter, we purchased an additional $233 million of floating rate securities that have a positive 98 basis point spread to Fed funds, improving our interest income and margin.
Dean: Our fixed rate asset exposure is 57% at the end of the quarter, down from 73% at the end of 2022.
Dean: Net interest income and margin are expected to continue to increase as a result of the balance sheet actions together with the continued asset cash flow repricing, slowing deposit remix, and benefits from lower Fed funds rates.
Dean: Adjusting for this charge, fourth quarter non-interest income was $45.4 million, an increase of $300,000 in quarter as revenue from trust services, customer derivatives, and deposit service charges improved.
Dean: In 2025, non-interest income is expected to be $44 to $45 million in the first quarter, an increase over the year as revenues from trust services, merchant services, and other transaction volumes continue to steadily improve.
Speaker Change: and our special guest, our very own, Dr. William W. Wyrick. Welcome to the University of Michigan's American Medical Center. I'm your host, Dr. William W. Wyrick. It's great to be here. Thank you for joining us. I'm excited to be here. I'm excited to be here. I'm excited to be here. I'm excited to be here. I'm excited to be here. I'm excited to be here. I'm excited to be here.
Dean: Expenses were $107.9 million in the fourth quarter. This compares to expenses of $107.1 million in the third quarter.
Dean: The increase was primarily due to higher medical costs that are not expected to repeat.
For the full year of 2024, expenses were well-managed.
Dean: In addition, we've allocated an additional 1% of expenses to invest in revenue enhancing initiatives.
Dean: Does the total expenses are expected to increase 2-3% from 2024?
Dean: As a reminder, the first quarter's expenses will include the seasonal bump in benefits and payroll taxes from the payment of incentives investing in restricted stock, currently estimated at $2.5 million.
Dean: To summarize the remainder of our financial performance, in the fourth quarter, net income was $39.2 million and earnings per common share was $0.85.
A return on common equity was 10.3%.
Dean: Earnings per common share was 90 cents and return on common equity was 10.9%.
Dean: We recorded a provision for credit losses of $3.8 million this quarter.
Dean: The effective tax rate for the fourth quarter was 24%, and the tax rate on the full year of 2024 was 24.19%.
Dean: The effective tax rate in 2025 is expected to be approximately 24 percent.
Dean: We continue to maintain healthy excesses above regulatory minimum well-capitalized requirements.
Dean: Our Tier 1 Capital Ratio was 13.95% and Total Capital Ratio was 15%.
are wisp-weighted assets.
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Dean: During the fourth quarter, we paid out $28 million to common shareholders in dividends and $5.3 million in preferred stock dividends.
Dean: We did not repurchase shares of common stock during the quarter under our share repurchase program.
Dean: And finally, a board declared a dividend of 70 cents per common share for the first quarter of 2025.
I'll turn the call back over to Peter.
Dean: Thanks, Dean. This concludes our prepared remarks. Now we'd be happy to entertain whatever questions you might have.
Dean: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.
To withdraw your question, please press star 11 again.
Please stand by while we compile the Q&A roster.
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Speaker Change: Our first question comes from the line of Jeff Brulees from D.A. Davidson.
Thanks. Good morning. Morning, Jeff.
Speaker Change: Dean, if I could, a lot of color on the margin, appreciate it. I guess that $226 for December.
Speaker Change: Is that a pretty good jump off point, you know, if we kind of start there with any kind of one timers or is that a good rate and then adjust for sort of the positive influences that you talked about that bleed into this year?
Goodbye.
Speaker Change: Yeah, the 4th December margin of 226 was a pretty clean number and as you say that it is a good jumping-off point for the first quarter. So in addition to that we'll you know be seeing the asset repricing to continue and actually some benefits from the
Speaker Change: Last, repricing on Fed Funds cut, you know, as it reprices our deposits.
Speaker Change: Right, it sounded as if you were active in some deposit rate.
Lowering that so far this year as well.
Speaker Change: Yeah, yeah. Okay. Got it. Okay. Thank you. Next topic, just wanted to just check in on on kind of the loan growth pipeline. And I, you know, any anyone can hop in, I guess.
Peter, kind of interested in.
Speaker Change: Not only just a pipeline update in your thoughts, but also any any sort of ripple effect of of any
M&A that's occurred on the island.
Speaker Change: and the ASB sale, maybe pretty early, but if you could feather that into the pipeline discussion, that'd be great. Maybe no effect at all as well.
Thank you. Thank you.
Speaker Change: So, we were reasonably okay with loan growth for the quarter, really headlined by commercial growth, as you can see, Jeff.
Speaker Change: Moving sideways, frankly, and I think that's probably likely to be the case this year Unless we get a little relief around rates, which I think might have potential
Speaker Change: to boost levels. The good news is the back book on
Commercial remains strong, so.
We would not be surprised to see a
Speaker Change: performance in the next quarter or so, similar what we see, what we saw in the fourth quarter. As it relates to what's happening in the marketplace, we're not really seeing any
Speaker Change: active change in how competition is forming out here. So, probably, you know, probably way too early to, to, to notice anything, to be frank, but frankly, we're also not really anticipating much change either.
OK. Thanks, Peter. I'll step back.
Thank you. One moment for our next question.
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Operator: Our next question comes from the line of Jared Shaw from Barclays.
Hey, good morning, everybody. Hey, Jared.
Jared Shaw: I guess a few things maybe you know when you look at the the movement on the the hedges this quarter are you still targeting sort of a 60% fixed rate mix and that fix the float or is that coming down with with these moves?
Jared Shaw: I think where we ended the quarter at about 57 is where we're, at least in the near term, looking to remain. You know, obviously if rates do shift quite significantly we could change it, but right now it is at 57%.
Jared Shaw: Okay so that's that's a good a good level then you keep going. Yeah.
Speaker Change: And then, you know, just looking at the office, the office book, you have 36% of that coming due next year. What's the what's the any level of conversation with those borrowers? What's the expectation for when those come due that is that likely to be renewed? Are you seeing you know, people put put more equity in what's the
What's the outlook there?
Speaker Change: So I'll just really quickly say that we're not seeing any issue with any of those renewals. So at this point, everything looks really good and strong on office.
Speaker Change: and really just, I guess, to speak about credit in general.
Speaker Change: As you can tell, it was kind of a boring quarter, which I guess is a good thing.
Speaker Change: But we're really seeing just good stability overall, both on commercial and consumer and that includes our CRE portfolio and of course, which then includes office space.
Speaker Change: So no no real issues there. Yeah, and I think that the the maturity is by my recollection I think it's 39 percent by 2027. So it's not quite as concentrated as
Speaker Change: with what you quoted there, Jared. But still, I mean, we do have some payoffs coming up in the next couple of years. As Brad mentioned, we're feeling pretty good about that.
Speaker Change: Okay all right thanks and then just I guess finally for me you know looking at capital continues to be very robust on the regulatory side what what would have to happen I guess for you to be more active with the with the buyback
Speaker Change: A little cleaner line of sight into credit, the economy, and rates, I'd say.
Speaker Change: So I think, you know, we're, I think we're quite satisfied with the capital build over the past year.
Speaker Change: What I'd say is heightened variability across all of those factors, and I think as long as that continues to trend, we're probably likely to hold off on the buyback for the foreseeable future.
Speaker Change: That's like the capital ratios are likely to still build through 25.
Speaker Change: Yes, through retainer is probably probably accurate. Let's do it. Okay.
Great. That was what I had. Thank you.
Thank you. Thank you.
Thank you.
Speaker Change: As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced.
To withdraw your question, please press star 11 again.
Speaker Change: Our next question comes from the line of Andrew Leash from Piper Sandler Companies.
Andrew Leash: Good morning everyone. Thanks for taking the questions here. Just a follow-up on the
Andrew Leash: The revenue enhancing initiatives that you've mentioned in the expense section, the expense outlook, I mean, what sort of initiatives might this include?
Andrew Leash: I don't want to get into the specifics but it is directed at our commercial and wealth areas but definitely accretive to the earning stream this year and then into next.
Andrew Leash: like software upgrades just to make them more efficient and then enhance revenue that way just kind of
Andrew Leash: Marketscale capability as our consumer and commercial businesses and we've had good success over the past
Andrew Leash: A couple of years. This, I think of the fourth quarter.
quarter year on year with our trust and
Andrew Leash: broker sales revenues were up just over 9%. So pleased with that. And Dean alluded to, we do have what I'd term interesting things planned for for 25.
Andrew Leash: that I think are going to enhance that improvement even more so, but nothing really to report specifically at this point, but we are excited about the space.
Speaker Change: Got it. Got it. You've covered all my other questions. I'll step back. Thanks. Take care.
Thank you. One moment for our next question.
Andrew Terrell: Our next question comes in the line of Andrew Terrell from Stevens.
The End
Hey, good morning.
Speaker Change: If I could go back to some of the margin just quickly, for the $2 billion of swaps that are active and remaining, can you just remind us the share between the securities portfolio, how much is allocated to the securities portfolio versus how much against the loan portfolio?
In terms of the allocation, it's
Speaker Change: Sorry, I should know this. It's about $700 million against the AFS and $1.3 billion against the loan portfolio.
Got it. Okay.
Speaker Change: And then if I go back to just some of the repricing benefits, and I appreciate all the color there, but if I just think about, you know, what you guys have experienced over the past year...
Speaker Change: Call it that $16 million of quarterly repricing. Margin-wise, you know, that's right at 30 basis points of NEM.
Speaker Change: So I guess if we're expecting that to continue, plus you should have, you know, some deposit repricing benefits. Carrying forward into 1Q, you're starting margins at a good level. Do you think you can exit 2025 at, call it a 2.5% or better type margin?
Andrews, Peter here.
That is a trend possibility, I would say.
Speaker Change: You know, a lot of things have to go right for that to happen, but I would say
Unknown Executive, Bradley Shairson, Dean Shigemura, Peter Ho
Speaker Change: towards the back half of last year. We're really pleased with both market reaction as well as kind of the pricing that we're seeing on our own in our own book. So, yeah, I don't want to throw I don't want to put a.
Speaker Change: A line of the sand out there, but directionally, I think that's reasonably accurate. But as I mentioned, a number of things have got to go right for that to happen.
Yeah, no, certainly. And I can I can appreciate that.
Speaker Change: On the CD portfolio I think in the presentation you guys called out it was close to half of the time deposits repriced.
Speaker Change: are matured in the first quarter, or will mature in the first quarter. It's called that 410 costs or so. What's the current offering rate for you guys right now? And what would you expect these CDs to reprice to in the first quarter?
Dr. Andrew Liesch, Dr. Andrew Liesch, Dr. Andrew Liesch,
The End
So the current offering is
around
Speaker Change: Okay, fair enough. Last, did you just have the medical costs in fourth quarter, the dollar amount that you guys called out in the release?
1.4 million. Yeah.
I'm sorry, 2.2.
It's 1.5. The increase was about 1.5.
Okay, thank you for taking the questions.
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Thank you. One moment for our next question.
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Speaker Change: Our next question comes from the line of Kelly Mota from KBW.
The End
Hey, good morning.
Speaker Change: Maybe switching back to the loan side of things, you've now had two nice quarters of growth. Wondering what you guys are seeing in terms of the pipelines, and it sounds like you're very optimistic about your expectation for NII growth through next year.
Speaker Change: Excuse me, it factors in any sort of growth on the loan side.
Speaker Change: So maybe I'll tackle, this is Jim. I'll tackle the pipeline side. Excuse me.
Speaker Change: We actually began to see a lot of growth in the commercial pipelines around Q2 of last year, which led to a good Q3 and a particularly strong Q4. That was the strongest production quarter we've had since.
2002
Deal flow continues to be active.
Speaker Change: and I think we see the opportunity for continued growth in the commercial loan space.
Speaker Change: So I think we feel pretty good. And maybe I just add for some color, it was really a good mix of CNI and CRE and a bunch of different asset classes to core clients with, you know, really good credit underwriting statistics. So I think we feel really good about that.
Speaker Change: kind of keep us on path for sort of that mid-single-digit growth as we look for, you know, this next year.
Yeah, I guess I would add, Kelly, that...
You know, we obviously were hopeful of continued long growth.
Speaker Change: that would be accretive to NII. But really the thing that we're
of opportunities in that space. So loan growth, definitely contributory.
Speaker Change: If to the extent that we get it, but really, you know, just deposit growth
Speaker Change: given where the slope of the yield curve has moved to in a reasonably short period of time.
Speaker Change: would be highly accretive for us. And then kind of back to the balance sheet turnover and just the overall reduction of Fed funds, the ability to create some margin out of that gives us a pretty interesting diversity of options around NII.
Speaker Change: Got it. That's helpful. And I think you may have, please correct me if I'm wrong, but I think you may have some FHLB maturing potentially this year. Wondering how you guys are thinking about managing that, if potentially deposit growth could help.
Speaker Change: Paydown some of that or or potentially taking on some new self funding as a replacement.
https://TheBusinessProfessor.com
Speaker Change: Yeah, we don't have any maturities this year. The first maturities are next year, 2026.
Speaker Change: We do have the opportunity to prepay to the extent we want it to. Right, yeah, and that's something we actively look at, because the current rates are $4.13, I believe. So, still accretive to NII.
Speaker Change: So as we get closer, you know, we may choose to reposition that, but right now the first maturity is at 2026.
and many more. Thank you. Thank you.
Speaker Change: Got it. Thank you. I will step back. Nice quarter, guys.
Yeah, thank you.
Chang Park: Thank you. At this time, I would now like to turn the conference back over to Chang Park for closing remarks.
Chang Park: Thank you for joining us today and as always please feel free to reach out to me if you have any additional questions. Thank you.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.