Bank of Hawaii Corporation (NYSE:BOH) Q1 2024 Earnings Call Transcript April 22, 2024
Bank of Hawaii Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Cindy Wyrick, Director of Investor Relations. Please go ahead.
Cindy Wyrick: Thank you, Marvin. I’d like to welcome everyone and thank you for joining us today as we discuss the financial results for the first quarter of 2024. Joining me today is our CEO, Peter Ho; CFO, Dean Shigemura; our Chief Risk Officer, Brad Shairson; and our IR manager, Chang Park. 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 the investor relations link. And now, I’d like to turn the call over to Peter. Peter?
Peter Ho: Thanks, Cindy. Good morning, or good afternoon, everyone. We appreciate your interest in Bank of Hawaii. Bank of Hawaii produced another solid financial performance for the first quarter of 2024. NIM, while down 2 basis points for the quarter showed significant directional improvement. Fee income and operating expenses were steady for the quarter. Credit quality remains excellent. Loans and deposits were stable for the quarter. Liquidity and capital levels grew. I’ll start off with some commentary on funding and then touch on broader market conditions here in the Islands. I’ll then hand the call over to Brad to discuss credit. Dean will then share with you some more granular color on the financials. Let me begin by touching a little bit on the deposit side.
As you know — as many of you I think know, we consider our deposit franchise to be our crown jewel, built methodically over our 127-year history, one relationship at a time. This base has served us extremely well as market rates and betas have moved up over the current rate cycle. As most of you know, Hawaii is maybe the most unique deposit market in the country with five locally headquartered banks holding 97% of the state’s FDIC reported deposits. You can see here, we have amazing tenure in our deposit base across multiple customer segments. This has enabled us to maintain great stability and balances across what has been a bit of a tumultuous period for the industry. Our deposit franchise has also enabled us to deliver total cost of deposits well below industry norms.
The increase in total cost of deposits in the quarter of 7 basis points is the smallest increase since the second quarter of 2022, helping us to meaningfully improve the trajectory of beta. Liquidity levels remain abundant. The employment picture in the islands remains strong and continues to outperform the broader market. The visitor industry continues to be impacted by the tragic Lahaina fires. Year-to-date, February, total visitor expenditures and arrivals were down 1.9% and 0.6% respectively. These levels ex-Maui, however, were up much greater levels of 6.4% and 7.6%, respectively, reflecting continued growth in U.S. Mainland visitors ex-Maui, and significant growth in the Japan market, which is up 57.8% on expenditures and 84.3% on arrivals from last year.
RevPar remains steady. Residential real estate on Oahu remains stable with median prices up moderately for both single-family homes and condominiums. And now, let me turn the call over to Brad.
Bradley Shairson: Thanks, Peter. Before beginning, I’d like to acknowledge my predecessor, Mary Sellers, who recently retired after leading risk management here at Bank of Hawaii for the last 19 years. Her vision and development of a strong team laid the foundation for continued sound risk management going forward. During her time, Mary oversaw refocusing of the bank’s credit philosophy towards lending in our core markets and to longstanding relationships. This has greatly contributed to the strong performance of our lending book for many years. As Bank of Hawaii takes great pride in serving our community, our loan portfolio is 92% Hawaii, 5% Western Pacific, and just 3% Mainland, and those Mainland loans are supportive of our core client relationships.
As I walk through our current state, you’ll note there really hasn’t been much change from last quarter. The lending philosophy I just mentioned is reflected in our loan growth, which has been steady and organic. From the end of 2019 to the end of last year, we averaged about 6.5% loan growth per year. On the consumer side, which represents 58% of our total loans or $8.1 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 51%. The remaining 15% of the portfolio is a combination of auto and personal loans, where our average FICO scores are 732 and 758, respectively. Moving on to commercial. Our portfolio size is $5.8 billion, or 42% of our loan book.
The largest share of commercial is commercial real estate with $3.7 billion in assets, which equates to about 27% of total loans. This book is well diversified across industries and carries a weighted average LTV of only 56%. Given CRE is getting a lot of attention in the industry, let’s take a deeper look at our portfolio, which does differ from the Mainland. 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 0.64% versus its 10 year average of 1.75%. At 13.45%, office vacancy is slightly less than a percent higher than its 10 year average. Office conversions and a long-term trend of office space reduction will likely continue to temper vacancy rates there.
Retail and multi-family vacancies remain on par with historical averages. A big part of the story here in Hawaii relates to a lack of available land for new construction, which has caused this long history of limited supply across all property types. Looking at industrial, square footage has increased by only 1.2 million square feet, or 0.3% annually over the last 10 years. Similar stories for both retail and multi-family, which have increased 0.7% annually over that same time period. Office space has actually come down 1.5 million square feet, or 1.1% annually for a total 10% reduction over the last 10 years, and that trend continues with conversions from office to condo or even hotel. The limited inventory across all property types makes for greater opportunities for re-purposing real estate when supply and demand balances shift.
Additionally, that lack of new construction prevents overbuilding and creates resiliency and durability. You just don’t see a cyclical nature here to CRE supply in Hawaii, which on the Mainland has been known to lead to boom and busts. Turning to our lodging market. You can see that the same story on inventory applies to hotel space with no additional square footage over the past 10 years, in fact, a slight decline of 0.03% annually. Additionally, RevPAR and occupancy rates have been trending solidly upward as international visitors, including those from Japan have continued to recover from the pandemic. Our CRE is well-diversified amongst property types with no sector being greater than 6.5% of total loans. Our conservative underwriting has been applied consistently across those different property types with all weighted average LTVs below 60%, and our scheduled maturities have no maturity wall with only 5.1% of loans due to mature this year and 9.7% next year and more than half of our loans are 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 $37 million, or just 1% and if we move that metric up to 82%, our CRE portfolio has less than $10 million of exposure, and that’s less than a third of a percent (ph). Our office exposure remains low and manageable with only 1.1% of the portfolio in criticized and only 6% of office loans have LTV greater than 80%. Our maturities over the next two years total less than 4% or $14 million of our total outstanding office exposure. Additionally, just 23% of office space is located in Downtown Honolulu, with average LTVs of 60% and 44% of those carry guarantees. Turning to our multi-family portfolio. Only 0.6% of the book, or about $5 million has LTV greater than 80%, and this is a market where the severely limited supply, combined with the high cost of ownership, drives consistent strong rental demand.
Scheduled maturities over the next two years are less than 20% and more than 65% of book does not mature until 2030 or later. Looking at our credit metrics overall, this past quarter compared to linked quarter, metrics remain quite stable and asset quality remains strong. Net charge-offs were $2.3 million at 7 basis points annualized, up 2 basis points from Q4, but down slightly from a year ago. Non-performing assets have remained stable at around 9 basis points for the last year. All non-performing assets are secured with real estate with a weighted average loan to value of 58%. Delinquencies and criticized loans are also stable, with delinquencies flat at 0.31% from prior quarter and criticized loans up 4 basis points from the prior quarter to 1.97%.
And the allowance for credit losses on loans and leases was $147.7 million at the end of the quarter, that’s up $1.3 million for the link period and up $4.1 million year-over-year. The ratio of our ACL to outstanding’s was 1.07% at the end of the quarter and that’s up 2 basis points from the prior quarter and up 3 basis points year-over-year. I’ll now turn this over to Dean for an update on our financials.
Dean Shigemura: Thank you, Brad. In the first quarter, we maintained our hedging program with $3 billion of notional pay fixed receipt float interest rate swaps and we continue to direct investment portfolio runoff into cash at attractive yields. These actions have increased our floating and adjustable rate asset exposure to 45% from 27% at the end of 2022 and positioned us well for this uncertain environment in a range of interest rate outcomes. Net interest income was $113.9 million in the first quarter, a decrease of $1.8 million linked quarter. Repricing from asset cash flows contributed $4.7 million of additional net interest income linked quarter, while continued deposit mix shift and repricing, as well as a smaller balance sheet from lower deposit balances subtracted $5.5 million.
In addition, net interest income was also impacted by one less interest earning day in the quarter, as well as $200 million of our fixed-to-float investment securities resetting during the fourth quarter, which reduced portfolio interest income by approximately $700,000 on a linked quarter basis. As a result, net interest margin declined by 2 basis points linked quarter. As noted earlier, our assets continue to reprice higher, supporting net interest income and the margin even as fed funds remain unchanged. In the first quarter, cash flow from maturities and prepayments was $806 million. We continue to enjoy greater than 3% spread on cash flow from fixed and adjustable loans being reinvested into like assets and investment securities, cash flows, being reinvested into cash while maintaining healthy yields on reinvested floating rate loans.
We continue to forecast annual cash flows from maturities and paydowns of loans and investments to be $3 billion, which will provide an ongoing supplement to the $7.2 billion in assets, which include our interest rate swaps, that reprice annually. As a result, of these cash flows repricing, our assets higher, our overall asset yields have steadily increased and are expected to continue to increase as new asset yields are well in excess of run-off yield. As Peter mentioned, the rate of growth in our deposit costs have slowed significantly in the first quarter through disciplined pricing, which is expected to continue, as well as through growth of lower cost and more granular consumer deposits, which increased $109 million linked quarter. However, as the outlook for rates has shifted from six rate cuts to a higher for longer rate scenario, we expect continued pressure on our deposit mix and pricing to result in slightly higher overall deposit costs.
Non-interest income totaled $42.3 million in the first quarter, unchanged from the fourth quarter, as market conditions and transaction volumes were steady. We expect core non-interest income to be slightly lower in the second quarter, due to recent market volatility. During the first quarter, as is our practice, we managed our expenses in a disciplined manner as inflationary conditions continue. Expenses in the first quarter were $105.9 million, which included $2.2 million of seasonal payroll taxes and benefits related to incentive payouts and restricted stock vesting. In addition, we recognized $500,000 of severance expenses in the quarter. Thus, the adjusted core expense level in the first quarter was $103.2 million. Core expenses in the fourth quarter were $102.9 million, when adjusted for the industry wide FDIC special assessment that resulted in a $14.7 million charge, as well as $1.7 million of expense savings, not expected to recur.
Thus the adjusted core expense level in the first quarter was $300,000 or 0.3% higher linked quarter. We continue to evaluate expense levels and have revised our expected normalized expenses in 2024 to increase 1% to 2% from 2023 normalized expenses of $419 million, and this is lower than our prior guidance. In the second quarter, we expect to recognize an additional non-recurring industry-wide FDIC special assessment. The FDIC has indicated that we will be informed of the actual amount in June. In addition, I want to note that the annual merit increases took effect at the beginning of April and are included in the expense guidance. To summarize the remainder of our financial performance in the first quarter of 2024, net income was $36.4 million and earnings per common share was $0.87, increases of $6 million and $0.15 per share, respectively.
Our return on common equity was 11.2%. We recorded a provision for credit losses of $2 million this quarter. The effective tax rate in the first quarter was 24.7%. The tax rate in 2024 is expected to be approximately 24.5%. As has been the experience since the first quarter of 2023, we continue to organically grow our capital from prior quarters and we continue to maintain healthy excesses above the regulatory minimum well-capitalized requirements. Our risk weighted assets to total assets ratio are well below peer median, reflecting the low-risk nature of our asset mix. During the first quarter, we paid out $28 million to common shareholders in dividends and $2 million in preferred stock dividends. We did not repurchase shares of common stock during the quarter under our share repurchase program.
And finally, our Board declared a dividend of $0.70 per common share for the second quarter of 2024. Now, I’ll turn the call back over to Peter.
Peter Ho: Great. Thank you, Dean. That concludes our prepared remarks. We’d be happy to entertain your questions at this time.
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