Bank of Hawaii Corp
NYSE:BOH
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Bank of Hawaii Corp
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Good day, and thank you for standing by and welcome to the Bank of Hawaii Corporation Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Janelle Higa. Please go ahead.
Thank you, Carmen, and good morning, good afternoon, everyone. Thank you for joining us today. On the call with me this morning is our Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean Shigemura; and our Chief Risk Officer, Mary Sellers.
Before we get started, let me remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons the actual results may differ materially than those that are provided. During the call, we are -- we'll be referencing a slide presentation as well as the earnings release. A copy of the presentation and release are available on our website, boh.com, under Investor Relations.
And now, I'd like to turn the call over to Peter Ho.
Great. Thank you, Janelle. Good morning, or good afternoon, everyone. Thanks for your interest in Bank of Hawaii. So, I think we started or we finished off the year, excuse me, with a pretty solid quarter that we're pleased to share with you over the next few moments.
I'll begin as usual, by giving you just a backdrop on the local marketplace and economy. I will then flip the call over to Dean, who will get into the financials. We'll finish off with Mary on the credit side, although I will tell you that looks very good right now, and should be a pretty short report. And then we'd be happy to take whatever questions you may have.
So next slide. If you look at the slide on unemployment, what you see here is kind of nice, steady improvement in the unemployment rate from what was a very distressed level back in April of 2020, I think. Unemployment now coming in at about 6%, most recently in November. And the forecast generally showed continued improvements as we move out from some of the impacts of both the Delta and Omicron viruses or variants.
On the next slide, you see real estate was a very good story in the islands in 2021. This is Oahu only information. The neighbor islands Maui, Kauai and Big Island trending similarly. But for 2021, you see that on Oahu, single-family homes had a near record year, close sales up almost 18%.
Median sales price up 19.3%, $990,000 for the year. I'd note that we pierced the million-dollar level for median single-family home sales prices in December of 2021. And there you see down in days on market, so just effective proxy for inventory looking pretty tight.
On the condominium side, their performance was as good not quite as good as single families, but volumes up 53% for the year, prices up 9% and inventory levels similarly constrained as the single-family home market.
I'll finish with a little discussion on the visitor industry. Here you see daily arrivals in the gray bars or the gray lines that's 2019 and the dark blue that's our performance over 2021. And I think the two takeaways here are that kind of ex any extreme surge situation, the visitor market performed exceptionally well. So deep into the summer, call it the July-ish timeframe, we almost reached -- actually, we did reach parity in terms of arrivals with 2019 levels, which is really quite remarkable given that we still really haven't seen the resumption of international travel yet.
Deeper into the fourth quarter towards Christmas -- in general, Christmas, the Christmas holiday season was a good one for the islands, but we have been impacted of late over the past month or so by Omicron. And you see kind of that redispersion of outcome as we get into more surge like environments. So, our hope for '22 is that we'll be certainly less impacted by surges as well as we hope to begin seeing the return of the international traveler towards the back half of next year.
And so most folks that I talked to within the industry feel pretty good. They felt great about the holiday season, great ADRs, great occupancy, fair amount of optimism looking into '22. Again, a lot of that predicated on the return of the international visitor towards the back half of the year, but a lot of sense that domestic visitors are eager to travel to Hawaii, and increasingly used to just operating in kind of this viral environment. So that's it for me on color from the marketplace.
And now let me turn the call over to Dean. Dean?
Thank you, Peter. Growth on core customers remained solid in the fourth quarter. Core loans net of PPP waivers increased by $327 million, or 2.8% linked quarter and by $710 million year-over-year or 6.2%. Waivers on PPP loans slowed in the fourth quarter and balances declined by $142 million, $127 million in PPP loans remained at the end of the year.
Net interest income in the fourth quarter was $126.4 million. Included in the fourth quarter, net interest income was a onetime reduction of $900,000 for an adjustment to deferred mortgage loan fees. In the third and fourth quarters, total PPP loan interest income, which includes normal interest, and amortized and accelerated loan fees were $7.9 million, $5.7 million, respectively.
Adjusting for the onetime charge and total PPP loan interest income, the fourth quarters core net interest income was $121.5 million, up $2.6 million or 2.2% linked quarter driven by strong loan growth asset shift from investments to higher yielding loans and repricing of our liabilities. This continued the upward trend in core net interest income experienced at the third quarter.
Our strong and stable base of low-cost deposits remain a readily available source of liquidity and will enable us to lag rising rates and continue growing our net interest income. 94% of our deposits are from core commercial and consumer customers, an increase from 91% at the end of 2020. On a year-over-year comparison or non-interest-bearing demand balances increased 26.5% and comprise 36% of our total deposits.
In addition, less rate sensitive operating account balances as represented by total non-interest bearing and interest-bearing demand accounts are nearly 60% of all deposits. In contrast, our time deposit balances decreased by 40% and now represent 5% of total deposits. Total deposit costs dropped 1 basis point to 6 basis points in the quarter.
Our low-cost core deposits in combination with our balance sheet asset sensitivity, low loan to deposit ratio of 60% and strong cash flow positions us well to take advantage of rising rates, while maintaining current income and funding sources for continued growth. The 35% of our loans that are floating or adjustable-rate loans provide additional rate sensitivity. In addition, our investment portfolio generates more than $500 million of per quarter of cash flow available to be reinvested at higher rates.
In 2021, Bank of Hawaii achieved record net income of $253.4 million and record earnings per common share of $6.25. Net income for the fourth quarter was $63.8 million and $1.55 per common share. Net interest income in the fourth quarter was $126.4 million. As discussed earlier, adjusting for interest income on PPP loans and the onetime adjustment to the fourth quarter's net interest income, core net interest income increased $2.6 million or 2.2% linked quarter, driven by strong core loan growth, free mix of assets into higher earning loans from investments and continued repricing of liabilities.
As Mary will discuss later, we recorded a negative provision for credit losses of $9.7 million this quarter. Non-interest income totaled $42.6 million in the fourth quarter, up $1.2 million from the third quarter. The increase was due to higher deposit fees, service charges and other transaction fees from increased economic activity.
We expect the first quarter's non-interest income will be approximately the same as the fourth quarter, an increase to approximately $44 million by the end of the year. Mortgage banking income is expected to be lower due to higher interest rates and lower gain on sales spread offset by improving service charges and transaction fees throughout the year.
Non-interest expense in the fourth quarter totaled $101.7 million, up from $96.5 million in the third quarter. Included in the fourth quarter expenses was a onetime $1.2 million charge for an additional employee benefit that increased our vacation carryover limits.
The third quarter included several onetime items, including a 3 -- $6.3 million benefit from the sale of property, $3.8 million charge for repo early termination costs, and $1.2 million charged in extraordinary severance costs for a net reduction of $1.3 million in expenses.
Adjusting for these items in both quarters, normalized non-interest expenses in the fourth quarter was $100.5 million, an increase of $2.7 million over the linked quarter. The main drivers of the increase were higher medical insurance costs and incentive accruals.
Medical costs have increased and are turning toward pre-pandemic historic norms. Incentive accruals increased linked quarter to bring the full year incentives back to 2019 levels. Comparing the full year 2021 normalized expenses to the pre-pandemic year of 2019, we continue to demonstrate expense discipline.
Normalized expenses between 2019 and 2021 were up $16 million or 2.1% annualized, less than the 2.8% annualized inflation rate over that period. To provide some additional clarity on how we're thinking about those normalized expenses, in 2021, normalized expenses were $390 million after adjusting for $3.7 million in expenses from onetime items. These onetime items included $7 million of early termination costs for repos; $3 million for extraordinary severance expenses; $1.9 million related to our mass issuance of contactless debit cards, and the aforementioned $1.2 million charged for the increase in our vacation rollover, partially offset by $9.4 million benefit from the sale of two properties.
Normalized expenses in 2019 were $374 million after adjusting for $5.3 million of one point -- of onetime costs comprised of a $6 million increase in legal -- in the legal reserve, and $600,000 of one-time op losses and impairments, partially offset by $600,000 benefit from the sale of property and a benefit of $800,000 from a onetime excise tax refund.
Continued expense discipline kept our combined core and volume related expenses flat to slightly lower, and the increase in normalized expenses between 2019 and 2021 were primarily driven by significant strategic innovation investments that are resulting in balance sheet growth and market share growth.
In 2022, we are continuing with our strategic innovation investments with an additional 2.8% of total expenses to further our market share and revenue growth. We expect core expenses will increase approximately 2.3%. Expenses will also increase .8% from an additional onetime inflation adjustment of 2.5% to our normal annual merit increases, reflecting the higher cost of living experience by our employees.
Together with the continued strategic innovation investments, we expect total expenses will increase 5.9% over 2021s normalized expenses of $390 million. As a reminder, in the first quarter, we estimate that the seasonal payroll tax and benefit expenses related to the payment of annual incentives will be approximately $3 million compared with the approximately $2 million in the first quarter of 2021.
Our return on assets during the fourth quarter was 1.12%. The return on common equity was 17.4%. Now our efficiency ratio was 60.18%. Our net interest margin in the fourth quarter was 2.34%, an increase of 2 basis points from the third quarter. The increase in the margin during the fourth quarter reflects a more favorable balance sheet mix driven by strong loan -- core loan role, partially offset by lower PPP loan waivers.
Excluding total PPP loan interest income and the onetime charge for the deferred mortgage loan fees mentioned earlier, the core margin was 2.24%, an increase of 7 basis points linked quarter. Excluding the impact of PPP loan interest income, we expect continued improvement in core margin with increases of 3 to 5 basis points per quarter 2022 due to continued loan and deposit growth and higher interest rates.
Our capital level remains strong and is well-positioned to support continued growth. Our CET1 and total risk-based capital ratios were 12.12% and 14.81%, respectively, with a healthy excess above minimum well capitalized requirements. During the fourth quarter, we paid out $28 million or 45% of net income available to common shareholders in dividends and $2 million in preferred stock dividends. We repurchased 87,000 shares of common stock for a total of $7.3 million. And finally, our Board declared a dividend of $0.70 per common share for the first quarter of 2022.
Now I'll turn the call over to Mary.
Thank you, Dean. Credit metrics remain very strong for the fourth quarter. Net loan and lease charge-offs were $700,000 or 2 basis points annualized compared with that charge-offs of $1.2 million, or 4 basis points in the third quarter, and net recoveries of $300,000 in the fourth quarter of 2020.
Non-performing assets totaled $19 million or 15 basis points, down $1.6 million or 2 basis points from the third quarter and flat year-over-year. Loans delinquent 30 days or more were $28.5 million or 23 basis points at the end of the quarter flat for the linked period and down $8 million or 8 basis points year-over-year. And criticized loan exposure represented 2.23% of total loans, down 11 basis points for the linked period and down 40 basis points from the fourth quarter of 2020.
As Dean noted, we recorded a negative provision for credit losses of $9.7 million this quarter. This included a negative provision to the allowance for credit losses on loan and leases of $9.4 million, which with net charge-offs of $700,000 reduce the allowance to $157.8 million, 1.29% of total loans and leases or 1.3% net of PPP balances. The decrease in the allowance reflects the most recent UHERO economic outlook and forecasts for our market, coupled with our credit risk profile. The allowance continues to provide for the uncertainty and potential downside risk associated with the pandemic.
At year end, customer loan balances on deferral were down 98% from their peak to .4% of total loans. As your recall, given we have the capacity to do so, we elected to partner with our customers and provide extended relief primarily through principal deferrals and low margin real estate. [Indiscernible] of the loans remaining on deferral are secured with our commercial deferrals having a weighted average loan to value of 51% and our consumer deferrals having a weighted average loan to value of 66%. 100% of our commercial loans, continue to pay interest, and our return to payment performance remains strong with less than 1% of these customers delinquent 30 days or more.
I'll now turn the call back to Peter.
Great. Thank you, Mary. So that's our prepared remarks. We're happy to answer whatever questions you folks may have.
Thank you. [Operator Instructions] We have a question from Andrew Liesch with Piper Sandler. Your line is open.
Hi, good morning, everyone.
Hi, Andrew.
Dean, question on the margin guidance, 3 to 5 bps per quarter, assuming higher rates. How many rate hikes does that assume in this forecast?
Yes, we are assuming three rate hikes starting in March. And then in -- on the long end, looking at about a 2% 10-year.
Got it. Okay. That's helpful. And then on Slide 9, the adjustable mix at 10% of the loan portfolio, I guess what's the timing of that repricing? Is it after 90 days, 6 months? How does that break out?
It's -- it varies over several years, but the average is roughly about 3 years. There's about $400 million 2 years and less.
Okay, got it. And then I guess similar question on the fixed rate loans. I mean, how many of those -- that 55%, how many that reprices in the first year?
That's embedded in the cash flows. So that's about I would estimate about -- to be about $1.5 billion …
Okay.
… or $2 billion.
Got it. Got it. And then just a clarification question on the fee income guide for this quarter building the $44 million in the fourth quarter. Is that a similar level to the total reported, so the $42.6 million including the securities, the net loss on securities or should we be backing that out?
Could you repeat that again?
So, the reported fee income number for the fourth quarter was $42.6 million. You said for the first quarter something similar. Is that the number we should be using the $42.6 million?
Yes, yes. Sorry.
Okay. Got it. That covers all my questions. Thanks so much.
Thank you.
Our next question comes from Kelly Motta with KBW. Your line is open.
Hi. Thank you so much for the question. I think, just to piggyback off of Andrews question on the NIM. Just wondering with deposit costs and the betas embedded in that about how many rate hikes do you think need to come through until you get an impact to your deposit costs, just given that Hawaii continues to lag there?
Yes, I would say that the way we have that model is the -- overall betas are about 20% over the complete cycle. And just given our construction of our deposit base, we're going to be lagging initially out of the gate. So, it's probably towards the middle part of the year, anything where we'll be seeing on deposit increases after the second-rate hike.
Yes, I'd say, I just add to Dean's thought, there are probably several layers to our deposit beta. So, number one, I think everyone recognizes that Huawei is one of the best or certainly one of the better deposit marketplaces in the country. So that's going to give us some stickiness [indiscernible] in our competitive set. The other thing I'd point to, is that we've got, our loan to deposit ratio now sits at 60%. So, we always want to be competitive, we always want to maintain market share, but there's at least as of right now, no compelling need to build. We're even hold deposits, per se. So that's going to -- and that'll obviously play into our pricing decisions.
And then finally, when you look at the composition of our deposit base, I think 95% of the base is core checking and savings, and a similar number are in consumer and commercial versus public types of client basis. So that too will help us maintain pricing over the intermediate term.
Thank you so much for all the color. Just to follow-up on the public deposits with the roll off that happened this quarter. How much of that was maybe seasonal versus part of your effort to roll off maybe some higher cost funding?
Yes, that was -- we are intending to bring down the public book as rates rise. But the $298 million that rolled off in public was mostly kind of transactional. We had some kind of tax payments that were -- that came in at the end of the prior quarter that left shortly after in the fourth quarter, and those types of transactions. So, I would characterize that for your question as more seasonal than structural.
Got it. That's super helpful. I'll step back. Thanks so much for the question.
You're welcome.
Thank you. [Operator Instructions] Our next question is from Laurie Hunsicker with Compass Point. Your line is open.
Hi, thanks. Good morning.
Hi, Laurie.
I wondered, Dean, if you could take us back to expenses, I really appreciate how you laid out everything and you laid out for that's super helpful. I guess, as we roll forward, and we think about 2023, I think most of us are driving our price targets off in 2023. Are we apt to see you go back to somewhat of a slower growth that we've seen you employ in times gone by, or how should we be thinking about that? In other words, you can be back to that 2%, 2.5% CAGR? Or are you more apt to repeat the 5.9% growth that you're expecting in 2022?
Yes. So, in 2023, we haven't spent much time there, but in looking at how we broke down '22, the 2.3% it seems to be a reasonable starting point. But we also are intending to continue with our strategic investments into '23.
Yes, Laurie, I'd add to what Dean's shared. I would say that our expense built for '22 is really three pieces, right? It's a core component of 2.4%, which, frankly, is on the high side for us, and I think reflects just kind of inflationary pressures on all different types of expenses, both personnel and otherwise. And then we also built into this year, a decision to -- on a one-time basis plus up our overall employee base by 2.5%. So, our merit for the year, kind of our normal merits call it 2.5%. We made the decision to plus up another 2.5% to give our employees in 2022, a 5% merit increase for obvious reasons, right. I mean, we just think with inflation being a real number out there, we just want our people to be in as [indiscernible] possible fiscally.
We do not intend to do that. Again, next year, we hope not to have to do that again next year, I should say. And that's worth, call it 74 basis points on the 5.9% increase. And then, from an initiative standpoint, we've got a pretty aggressive/healthy agenda on initiatives. And they all -- what I'm really super excited about is they all are types of spend that can get into the revenue and value and experience, customer experience [indiscernible] stream pretty quickly. So, there's not a whole lot of infrastructure built in these, these are all kind of application types of things.
And that 2.8% or $10.9 million is, I would say that's on the heavy side. I think we're going to continue to have initiative spend in '23, but probably not at that same level. And if we do have it at that same level or higher, it certainly will be substantiated by operating performance that we see in real time, right. So, I guess if I reverse that out, what I would say is that probably '23 expenses, you're going to lose the 74 basis points on that onetime inflation plus up, right. And initiatives are going to come in at a half to a third less. Core, maybe hopefully depending what inflation does, call it 2.4%, all that flat, I think we ended up with, call it a kind of an estimated back of the envelope '23 of call it three and 0.75% to [indiscernible] increase or something for the year, something like that. That makes sense to you.
Yes. Very, very helpful. And then do you have any branch rationalization plans for next year or the year after? How are you thinking about that?
Yes, we took a big one last year. So, you recall last year, we took a $5.2 million charge to close out our supermarket branches, which were good performers, but they were highly transactional. And as more of our customers have moved to digital channels, they became I don't want to call them superfluous, but not as necessary as previously historically, right. And so that basically that $5 million charge equates to roughly a $5 million savings annually, and that was in the bloodstream [ph] for '21, Dean?
Partially at 2020 and then the rest of it in '22.
'21. So that was a big chunk. I would say there are opportunities on the margin for further branch rationalization, but I think we're getting close to being comfortable with the square footage we've got out there right now. That's not to say there aren't just overall efficiency opportunities in the branches through just ways to digitize versus being physically present those types of things. I think we've got a number of efficiency efforts across the organization out of external to the branches.
Great. Very helpful. Dean, question for you on tax rate, obviously, low at 17% it was noisy came in at 22% for the full year. How should we be thinking about 2022?
Yes, the tax, I would say it's going to be 23% as an estimate.
23%, okay. That's helpful. And then just last question, I just wanted some clarification. Slide 7, where you lay out the PPP. How much of the $7.9 million of PPP [indiscernible] in the third quarter was from PPP gains? I'm assuming the $7.9 million included just some of that interest income, but just wondering what the actual gain piece was, and then how much is remaining on the unamortized piece?
So, in the third quarter, it was -- I think you are talking about the accelerated component, and that’s $5.9 million in the third quarter, $4.9 million in the fourth quarter and then we have $2.4 million remaining.
Perfect. Great. Thanks for taking my questions.
Thanks, Laurie.
Thank you. And I’m not showing any further questions in the queue. I will pass back the call to Ms. Higa for final 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 clarifications on any other topics discussed today. Thank you so much everyone.
And this concludes today's conference call. Thank you for participating, and you may now disconnect.