Bank of Hawaii Corp
NYSE:BOH
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Bank of Hawaii Corp
Earnings Call Analysis
Q2-2024 Analysis
Bank of Hawaii Corp
The Bank of Hawaii Corporation reported a solid financial performance for Q2 2024 against a backdrop of challenging economic conditions. The bank's net interest income increased to $114.8 million, a rise of $0.9 million from the previous quarter. Notably, the net interest margin also improved by 5 basis points, reaching 2.15%. This marks the first time in several quarters that both metrics have shown positive movement, indicating resilience in the bank's income-generating capacity.
Average loan and deposit levels remained stable during the quarter, with a modest loan growth expected for the second half of 2024. The bank anticipates mid to lower single-digit annualized growth, which, while not breathtaking, reflects an optimistic outlook for future expansion. The deposit levels appear relatively flat as the bank takes a disciplined approach in pricing, which will be crucial as the bank prepares for a potential pivot to a lower rate environment.
The bank enhanced its capital position significantly through a successful $165 million preferred share offering, which was well oversubscribed. This capital raise resulted in a Tier 1 capital ratio of 13.99% and a total capital ratio of 15.05%, well above peer averages. Moreover, the bank's allowance for credit losses stood at $147.5 million, reflecting prudent risk management practices. The overall credit quality remains strong, with nonperforming assets stable at approximately $15 million.
Noninterest income totaled $42.1 million, slightly down from the first quarter but expected to improve in the latter half of the year as market conditions stabilize. The management has taken rigorous measures to control expenses, reporting core expenses at $105.3 million. Notably, expenses related to a one-time FDIC special assessment were included in this total, but ongoing operations are expected to maintain a growth of only 1-2% in normalized expenses from 2023 levels.
Despite recent challenges such as the Lahaina Fires impacting tourism, the broader Hawaiian economy shows resilience. Visitor spending and arrivals faced declines, but outside of Maui, there were increases. The residential real estate market remained stable, with median prices for single-family homes rising by 3.3% and 2.0% for condominiums in the first half of the year compared to last. This stability bodes well for the bank’s lending practices and overall financial health.
Moving into the second half of 2024, the bank anticipates modest improvements across various financial metrics, including a slight increase in net interest margins and noninterest income. The management’s focus will include capitalizing on investment opportunities in underserved markets and enhancing their wealth management services. They expect to navigate potential interest rate cuts effectively, which could provide a further tailwind to net interest income as asset repricing kicks in positively.
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Good day, and thank you for standing by. Welcome to Bank of Hawaii Corporation's Second Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note that today's conference may be recorded.
I will now hand the conference over to your speaker host, Chang Park, Senior Vice President, Investor Relations Director. Please go ahead.
Thank you. Good morning and good afternoon. Thank you for joining us today as we discuss the financial results for the second quarter of 2024. Joining me today is our Chairman and CEO, Peter Ho; CFO, Dean Shigemura; and Chief Risk Officer, Brad Shairson.
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 that the actual results may differ materially from those projected. During the call this morning, we'll be referencing a slide presentation as well as the earnings release. Both of these are available on our website, boh.com, under Investor Relations link. And now I would like to turn the call over to Peter.
Thanks, Chang. Hello, everyone. We appreciate your interest in Bank of Hawaii. Before we get started, I'd like to welcome Senior Executive Vice President, Brad Satenberg, to the team and to the call. Brad is our new Deputy Chief Financial Officer and joins us from Luther Burbank Bank, where he held the role of CFO. Brad will be working closely with Dean over the coming months. Welcome, Brad.
I'd also like to welcome to the call Jim Polk. Jim is a 25-year member of the Bank of Hawaii team, most recently as Vice Chair and Chief Banking Officer. This past Friday, Jim was promoted to President and Chief Banking Officer. Jim will continue with his responsibilities for commercial banking and wealth management and now adds our retail banking operation as well. I will continue as Chairman and CEO, and Jim will continue to report directly to me.
Bank of Hawaii produced yet another solid financial performance for the second quarter of 2024. As was anticipated, net interest margin and net interest income advanced in the quarter for the first time in a number of quarters. Average loan and deposit levels were stable, albeit off nominally in the quarter. Credit quality remained and remains pristine. Capital levels were aided significantly by our successful June preferred raise. I'll start off with some commentary on the balance sheet and then touch on broader market conditions in Hawaii. I'll then hand the call over to Brad Shairson for some brief, but positive credit comments, and Dean will then share with you some more granular color on the financials.
As I mentioned, deposits and loan levels were stable in the quarter. Looking forward, we see evidence of modest improvement in loan growth for the second half of 2024. Deposit levels look to be relatively flat as we focus on taking a disciplined approach to pricing levels and prepare for a potential pivot to a lower rate environment. Capital levels advanced meaningfully as a result of last month's $165 million preferred capital raise, which was well oversubscribed with over 90% institutional interest.
Turning to deposits. We continue to use our brand and market position in what is truly a unique deposit market to maintain a consistent and stable deposit base at substantially lower cost than our national peer set. Further, noninterest-bearing deposits continue to stabilize with average noninterest-bearing deposits in May, June and now into July, flat at $5.3 billion.
The Hawaiian economy from a jobs perspective continues to outperform the broader market and UHERO forecast continued stability. The visitor market continues to be impacted by the tragic Lahaina fires. Visitor spending and visitor arrivals were down 4-plus percent in both categories in May year-over-year, but are up 6% and 4% in each category ex Maui. The Japan market, which as you know, has been slow to recover, was up 26% on spend in May and up 35% on arrivals in May, but still down well over 50% from pre-pandemic levels.
As you can see, hotels continue to perform steadily from a RevPAR perspective. Residential real estate out of Oahu remained steady with median sale prices for both single-family homes and condominiums up 3.3% and 2.0% in the first half of the year from a year ago. Median days on market remained below a month for both single-family homes and condominiums. Inventory conditions remain tight. And now let me turn the call over to Brad Shairson. Brad?
Thanks, Peter. The Bank of Hawaii takes great pride in serving our community. And this aligns to our long-standing credit philosophy, which has been to lend primarily in our core markets where our expertise enables us to make sound credit decisions. Additionally, the majority of our loan book is to long-standing relationships, where about 60% of our clients on both the commercial and consumer side have 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 92% Hawaii, 5% Western Pacific and just 3% Mainland where we support our clients that do business in both Hawaii and on the Mainland.
As I walk through our current state, you'll note there has been very little change from last quarter. The lending philosophy, I just mentioned, is reflected in our loan growth, which has been steady and organic. From 2019 to this past quarter, we averaged about 6% loan growth.
On the consumer side, which represents 58% of our total loans or $8 billion, we are predominantly lending on a secured basis against real estate. 85% of our portfolio is comprised of residential mortgage or home equity with a weighted average LTV of just 48% and a combined weighted average FICO score of 800. The remaining 15% of the portfolio is a combination of auto and personal loans where our average FICO scores are 734 and 759, respectively.
Moving on to commercial. Our portfolio size is $5.8 billion, which is 42% of our total loan book. The largest share of commercial is commercial real estate with $3.7 billion in assets, which equates to 27% of total loans. This book is well diversified across industries and carries a weighted average LTV of only 55%. Given that I covered CRE in great depth last quarter, I'll just take a few minutes to cover key highlights of our portfolio today. Starting with the stability of our real estate market in Oahu, vacancy rates remain stable, reflective of the Hawaiian economy and history of limited supply. Industrial vacancy has continued to hover around its historic low, currently just 0.76% versus a 10-year average of 1.75%. And at 13.56%, office vacancy is slightly more than 1% higher than its 10-year outage. Office conversions and long-term trend of office space reduction will continue to temper vacancy rates here.
Retail and multifamily vacancies remain on par with historical averages. And as I covered last quarter, inventory remains constrained with 10-year growth rates around 0% for all major property types with office space even coming down about 10% over the past 10 years. Our CRE 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 LTVs between 50% and 60%. Overall, it's a diverse portfolio with low average loan sizes.
And our scheduled maturities have no maturity [indiscernible] with only 4.6% of loans due to mature this year and 10% next year with more than half of our loans maturing in 2030 or later.
Looking at the distribution of LTVs, the tail risk in our CRE portfolio for any loans with greater than 80% LTV totals $31 million, which is under 1%. And if we move that metric up to 85%, our CRE portfolio has less than $4 million of exposure.
Looking at our credit metrics overall this past quarter, compared to linked quarter, metrics remained quite stable and asset quality remained strong. Net charge-offs were $3.4 million at 10 basis points annualized, up 3 basis points from Q1 and 6 basis points from a year ago. Nonperforming assets have remained stable, increasing slightly to 11 basis points, roughly $15 million and delinquencies have also been stable, ticking down slightly to 29 basis points this quarter. Criticized assets remain low at 2.23% of total loans with 74% real estate secured with a 56% LTV.
As an update on the allowance for credit losses on loans and leases, the ACL ended the quarter at $147.5 million, down $200,000 for the linked period and up $2.1 million year-over-year. The ratio of our ACL to outstandings was 1.07%, and that's unchanged from prior quarter and up 3 basis points year-over-year. I'll now turn this over to Dean for an update on our financials.
Thanks, Brad. Net interest income was $114.8 million in the second quarter, an increase of $0.9 million linked quarter and the net interest margin increased by 5 basis points linked quarter to 2.15%. Repricing from cash flows contributed $4.6 million of additional net interest income linked quarter, will continue deposit mix shift and repricing as well as a smaller balance sheet from lower deposit balances subtracted $4 million.
In addition, net interest income was positively impacted by an interest recovery, which increased net interest income by approximately $300,000 on a linked-quarter basis. During the quarter, our assets continued to reprice higher, supporting net interest income and the margin. In the second quarter, cash flows from maturities and prepayments of our fixed and adjustable rate assets was $593 million. We continued to enjoy greater than 3% spread on the cash flow from these fixed and adjustable rate loans being reinvested into like assets and investment securities cash flows being reinvested into cash. The annual cash flows from maturities and paydowns for the fixed rate and adjustable rate assets are expected to be approximately $2.4 billion.
In the second quarter, both our net interest income and net interest margin improved from the first quarter. While continued pressure on our deposit mix and pricing resulted in slightly higher overall deposit costs, the rate of growth in deposit costs slowed significantly and asset cash flows continued to reprice our assets higher. As a result of our asset repricing higher, our overall yields have steadily increased, and as discussed earlier, are expected to continue to increase as new asset yields are well in excess of runoff yields.
Noninterest income totaled $42.1 million in the second quarter, down $200,000 from the first quarter as market conditions and transaction volumes were steady. We expect core noninterest income to be slightly higher in the second half of the year as market conditions improve. In the second quarter, we continued to manage our expenses in a disciplined manner. Expenses in the second quarter were $109.2 million, which included a $2.6 million onetime industry-wide FDIC Special Assessment. In addition, we recognized $800,000 of severance expenses in the quarter, which will result in $1.4 million of annual pretax expense reductions. And finally, $600,000 of other expenses in the quarter are not expected to reoccur in 2024. Thus, the adjusted core expense level in the second quarter was $105.3 million.
Core expenses in the first quarter were $103.2 million when adjusted for $2.2 million of seasonal payroll taxes and benefits related to incentive payouts and restricted stock vesting and $500,000 of severance expenses. Thus, the adjusted core expense level in the second quarter was $2.1 million or 2% higher linked quarter, primarily due to the annual merit increases, which took effect on April 1. We continue to evaluate expense levels and expect normalized expenses in 2024 to increase 1% to 2% from 2023 normalized expenses of $419 million.
To summarize the remainder of our financial performance in the second quarter of 2024, net income was $34.1 million and earnings per common share was $0.81, a decrease from linked quarter of $2.3 million and $0.06 per share, respectively. Our return on common equity was 10.41%. We recorded a provision for credit losses of $2.4 million this quarter. The effective tax rate in the second quarter was 24.77%. The tax rate for the full year of 2024 is expected to be approximately 24.5%.
In the second quarter, we successfully raised $165 million in connection with a preferred share offering. As a result, our Tier 1 capital ratio increased to 13.99% and the total capital ratio to 15.05%. Our risk-weighted assets to total assets ratio continued to be well below peer median, reflecting the low-risk nature of our asset mix.
During the quarter, we paid out $28 million to common shareholders in dividends and $2 million in preferred stock dividends. We did not repurchase common shares during the quarter under our share repurchase program. And finally, our Board declared a dividend of $0.70 per common share for the third quarter of 2024. Now I'll turn the call back over to Peter.
Thanks, Dean. This concludes our prepared remarks. Now we'd be happy to take your questions.
[Operator Instructions] And our first question coming from the line of Jeff Rulis with D.A. Davison.
Dean, on the margin, with what looks like peaking deposit costs, your expectation for further earning asset yield repricing. I wanted to get a sense for the margin expectations. I guess if we net, maybe, the interest recovery out, how do you see the sort of the second half play out?
Yes. We expect very modest -- flat to slightly higher net interest margin in the second half of the year looking at our pricing on the asset side repricing mix continuing to occur, and that's about $4.5 million to $5 million per quarter. And then on the deposit side, we still see some deposit remix occurring. But to the extent that will slow down, we would see a better margin improvement. But right now, it looks to be a very modest increase in margin in the second half.
Yes. So just to be clear, Jeff, against reasonably conservative assumptions on deposit remix and fixed asset cash flow grind forward, we would anticipate NIM to grow a few basis points per quarter and NII to pick up, call it, $1 million. There is upside to that to the extent that we can arrest some of the deposit remix. But for now, we're pretty comfortable with kind of where we've set things out, and that would be our expectation moving forward.
And are you assuming the current expectation on rate cuts? Or is that in a vacuum and maybe comment on what rate cuts -- what impact that would have, if any?
We do anticipate rate cuts towards the back half of this year and then into next year. The impact of a 25 basis point reduction for us, as we look at it, reasonably conservatively could be a push. And if we get a little more draconian on the deposit repricing, call it down $1 million plus per quarter. So even with a pretty draconian deposit reprice built into rate reductions, Jeff, we still think NII would be maybe down a little bit. And then as that repricing begins to be more of a tailwind, we get the benefit of that a couple of quarters out.
Appreciate it. And maybe, Brad, just a couple of questions on credit. We're coming off a real tiny base. But I guess the increase in nonaccruals in -- it looks like mostly C&I. Any sort of similarities or by industry type there? And then I'll just maybe leave it at that for that first question?
Yes. No, that's a good observation, in that it's a really low number. So coming off such a low number, any little movements drive that number a little further either direction. That bit of deterioration has just come from a handful of one-off credits, and we're not seeing any negative trends in any particular area. So nothing systemic or broad-based and we're actively working with our borrowers, and we do see opportunities actually over the next several quarters for some refinancings and upgrades as well.
And Brad, again, making a big deal out of small numbers here, but the year-over-year office vacancy being down -- I guess the better question is just the overall feel of office on Oahu. And any kind of detail that you can give, if you think that's somewhat of a head bake or vacancies being down? Or I guess, overall demand on Oahu on the office side would be helpful?
Yes. So our office portfolio in general is performing really well. Only 2.4% is criticized, and our borrowers tend to have strong financial wherewithal, particularly for any of our larger exposures. And the reality of how office space has come down 1.2 million square feet in just the last 5 years and the forecast is for another 400,000 square feet to come off in the next 3 years. So with that reality, and there is natural repurposing of office space to a natural change in supply and demand dynamics where there is demand for multifamily. So we see conversions from office to multifamily and that taking off the office exposure has really played well for the islands of Hawaii.
A lot of the office exposure is, of course, in downtown Honolulu, and there have been just such repurposings here in downtown. So not seeing any concern here in office space.
Yes. Jeff, it's a pretty stable market. There's not a lot of inflow of demand. And so historically, there's not been much building from an office market perspective out here. And as Brad described, what we're seeing kind of, for the long term, is a trickle trend towards housing off from some of this office stock, which is helping to drive down supply.
Got you. Okay. So it sounds like a pretty steady demand, but maybe nibbling away, the repurposing has helped those numbers. Fair enough.
And our next question coming from the line of Andrew Liesch with Piper Sandler.
Loan growth here on the commercial side was pretty solid. Is there anything specific you can point to for C&I or CRE with demand?
Yes, you're right. Loan growth was up 0.7% on a linked basis. And headlined by C&I -- and it was really kind of a bunch of small stuff, right, Jim? Yes, nothing in particular, which is a good thing. And then on the CRE side, it's kind of similarly. I mean no mega deals, nothing that really drove the needle from a single credit perspective. So just kind of a good all-around effort.
Got it. And how is the pipeline looking here for the next couple of quarters?
Yes. Actually, I think pipeline has grown quite nicely since the beginning of the year. And I think we feel pretty good about opportunities on the commercial side into Q3 and potentially into Q4 at this point.
Got it. And then on consumer loans, I mean you still see declines in residential, home equity, auto. Any reason to think that, that downward trend won't continue?
Yes. So on the consumer side, a little bit of a different story as you can tell from the numbers. I think that resi and home equity is, that's going to be rate dependent. And so hopefully, if and as rates come down in that space, there could be at least flattening and hopefully a little bit of an uptick.
The indirect book is a little bit different. We're seeing a little softness in the marketplace and a good amount of competition, particularly from the credit union space. So that's been competitively as well as I think organically, a little bit of a tougher situation than previously.
And then finally, on the installment side, a little bit of self-inflicted issues there. I think we probably got a little overly conservative on our underwriting and likely, we'll be winding that back a little bit as we step forward. So I'm hoping that we'll get at least kind of a flat result there. So you add all of that up, Andrew, both commercial and consumer. And we're hopeful to see modest growth in the back half of this year when you combine commercial and consumer. I mean nothing that's going to take your breath away. But call it, mid, lower single-digit annualized growth for the back half.
Great. That's very encouraging. Good year. And then just a housekeeping question on expenses. On the FDIC insurance, even if I take out the one-timer special assessment, that line was up a little bit. Is there a new fee rate there? Or was this still just a little bit of an outsized quarter?
Yes, it was a little bit of an outsized quarter, but also what happened was we did get the -- the bill is in arrear. So it's a little bit of a true-up for the first quarter, what's included in the second quarter.
That's very helpful. I will step back here.
[Operator Instructions] And our next question coming from the line of Kelly Motta with KBW.
I was hoping to follow up a bit on your fee income outlook for that to grow in the second half of the year. Just wondering where are you seeing good traction on that? Any particular drivers that inform that expectation that we should be keeping in mind? And as the second part, there was a decrease in fees exchange and other service charges in 2Q, and I think that's usually a seasonally strong quarter. Wondering if there's any puts or takes in that line item there as we think about that?
Mainly based on market conditions and transaction volumes, we see it slightly better in the second half of the year. And then actually, there was some seasonal revenue in the second quarter. There were some seasonal impacts. Traditionally or historically, the Merchant Services has a very good first quarter. So it did come down slightly in the second quarter and then kind of offsetting that in the -- was on the trust side, we do have a strong tax quarter in the second quarter as well. So those two kind of offset. So going into the second half, we do see a trend upwards.
Yes. Kelly, we're hoping to hang on to the really strong performance that we're seeing in our wealth businesses. So the trust in private banking team is doing a really nice job. We're getting good traction on the broker-dealer side. The exciting thing is we've got a good amount of investment to put into these businesses because we think we can grow them faster than our more traditional businesses. So opportunity there, we'll see. As you know, we've been a little hamstrung on some of our other fee areas. Mortgage banking, for instance, is pretty much in the doldrums. Swap income has been down the past couple of quarters as CRE transactions just haven't been at the same volume levels as previously. To the extent that we can get some activity driven off of rate relief, we'll see what happens in that space.
So I'd say that we kind of remain reasonably conservative in our view on the fee side. But I would say that, that could be impacted positively by rate-induced volume opportunities.
Great. That's super helpful. I was hoping to get, as a follow-up, just some color on your preferred rates that happened late in the quarter. I know that, that really bolstered your Tier 1 capital and was oversubscribed. I believe in that perspective, you cited potentially stronger asset growth. Just wondering how you're viewing the capital position and the thought process as to raise capital as you did last quarter?
Yes. Well, what we saw was an opportunity in the marketplace after a few regionals came in to step in with the preferred rate similar to the one that we did just over 3 years ago now, which was highly successful. So from an execution standpoint, we felt very confident that we could be successful in this space in the current environment. We move forward, had great execution. The underwriters did an exceptional job for us. And really, the purpose of the raise was to get our capital levels to the levels that we wish to have them at, kind of in one fell swoop, if you will, as well as to position us to grow further.
And growth has been relatively flat the last 4 quarters or so. But I think, as you can tell by some of the commentary, things seem to be looking up from here, and that was really the purpose behind the race.
Great. Thank you so much for the color. Really quick last one for me, housekeeping item. Dean, can you remind us of the $3 billion of swaps, how much of that is against the loan book?
I guess the loan book, it's $1.7 billion. And in particular, it's against the resi mortgage book.
And at this time, I see no further questions in the queue. I will now -- one moment. I see Kelly just requeued.
Great. I wanted to share the space. If you could -- I'm wondering if -- just on a high level, I know the Lahaina bankruptcy or the Lahaina signing of blame as to who's culpable for the fire is coming up. Just wondering if you could offer your thoughts being much closer on the ground than we are on how that situation is developing?
Yes. Obviously, we're hopeful of a stable and reasonable outcome there, Kelly, but I really don't have any particular insight different from what I think most people are reading in the papers.
And we have a question from Jared Shaw from Barclays.
A couple of things just to tap. In the presentation, it looks like there's a $600,000 nonrecurring expense called out but not in the release. Any color around what that is and where we should be pulling that from?
Yes. Part of it was the FDIC true-up that we had in the second quarter, separate from the special assessment. And there are a number of other items that also were small and hard to differentiate in the line items, but there are like a couple of hundred thousand dollars here and there that were onetime items, smaller items.
Okay. All right. That's good color. And then just going back to your comments around the reinvestment rate on the securities and the pickup there. At the same time, we're seeing the securities portfolio running lower. How should we be thinking about the actual use of cash flow from the securities portfolio as you go through the rest of the year? Should we be reinvesting and keeping balances flat? Should they be growing? Or should we expect them to continue to trend lower?
Well, in the second quarter, you're right, we did allow it to run off. Looking forward, we do see some opportunities to reinvest some of the cash flow and looking at where rates are trending or could trend, looking at possibly some fixed rate investments as well as looking at where on the floating rate side, there's additional spread. So in general, I would say that we are looking to reinvest some of that cash flow.
Yes. I mean I think as Fed fund has been elevated, the transfer into that category has been pretty easy decision. As that category begins to decline in yield likely in the coming quarters, we'll be a little more thoughtful in where we place those funds.
Okay. Okay. And then just finally for me on the credit, again, recognizing that we're talking about smaller numbers here, but what's driving some of the [indiscernible] in C&I, just given the fact that it does feel like the Hawaii economy is moving along pretty well with visitor spend and visitor levels and employment. What's driving those incrementally weaker C&I trends?
Just kind of one-off types of small loans being dealt with. There's no particular category or a broader trend attached to any of them.
So not really an expectation then to see continued growth from here. I guess at 9 basis points, that's pretty tough, but yes.
I think the way I'd look at it is because, to your point, it's such small numbers, the percentages. I know that if you look at it graphically, it looks like a potential trend and I'd just be wary of overanalyzing that and trying to assume that there's a trend there.
You're always going to have activity and when that activity is comping against an extremely small number, you're going to get a big percentage increase and changes.
And I see no further questions in the queue. I will now turn it back to Chang Park for closing remarks.
Thank you, everyone, for joining us today and for your continued interest in Bank of Hawaii. As always, please feel free to reach out to me if you have any additional questions. Thank you.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.