Bank of Hawaii Corporation (NYSE:BOH) Q4 2022 Earnings Call Transcript
Bank of Hawaii Corporation (NYSE:BOH) Q4 2022 Earnings Call Transcript January 23, 2023
Operator: Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation Fourth Quarter 2022 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jennifer Lam, Senior Executive Vice President, Treasurer and Director of Investor Relations. Please go ahead.
Jennifer Lam: Thank you. Good morning, good afternoon, everyone. Thank you for joining us today. On the call with me this morning is our Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean 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 from those projected. During the call, we'll be referencing a slide presentation as well as the earnings release. A copy of the presentation and release are available on our website, boh.com, under Investor Relations. And now, I'd like to turn the call over to Peter Ho.
Peter Ho: Thank you, Jennifer. Good morning or good afternoon, everyone. We appreciate your interest in Bank of Hawaii. The bank achieved another solid quarter of performance to end the year. Loans grew 2.4% on a linked basis and 11.3% year-on-year, reflecting balanced growth across our corporate, commercial and consumer businesses. Deposits were down 1.3% from the prior quarter, but up 1.3% from a year ago. At quarter-end, our total deposit beta was 11.5% cycle-to-date, reflecting the diversified granular and seasoned nature of our deposit base. By segment, our deposits are 50% consumer, 42% commercial and 8% public. The only half or 47% of our consumer and commercial deposits come from accounts under $0.5 million in account size, and 73% of our deposits have a tenure of 10-plus years or more with Bank of Hawaii.
Expenses were well controlled. Credit quality remains excellent. Return on average common equity was 21.3% for the quarter. As is our custom, I will now walk through local market conditions, and then hand the call over to Dean, who will delve deeper into the financials, and then Mary Sellers will touch on credit for the company. At that point, we'd be happy to entertain your questions. Now, moving on to Slide 3. You can see that the economy, and namely employment, continues to improve in the islands. November state unemployment rate was 3.3%, marking the second straight month that it's outperformed national unemployment as a whole. Prior to October, state of Hawaii unemployment had been higher than the national average for 29 consecutive months.
The visitor sector continues to perform well. While arrivals remain down from pre-pandemic levels as a result of the continued lag in the international and, in particular, Japanese visitor segments, overall visitor days are nearly at par to pre-pandemic levels, as visitors are visiting longer overall and the mix shift of visitors is tilting towards traditionally longer-staying segments. On Slide 5, you can see that RevPAR is performing well ahead of pre-pandemic levels, which has helped push overall visitor expenditures 40% higher than pre-pandemic levels on a year-to-date basis. Finally, values in the Oahu housing market remain stable, with the median home price of a single family home running flat at $1 million in December, while condominium prices were up modestly in December at $503,000.
Inventory levels remained tight despite a meaningful slowdown in sales. And now, let me turn the call over to Dean. Dean?
Dean Shigemura: Thank you, Peter. Our solid loan growth continued in the fourth quarter. Total loans increased by $324 million or 2.4% linked quarter and by $1.4 billion or 11.3% year-on-year. In 2022, we realized double-digit growth across both commercial and consumer loan portfolios with year-over-year growth of 10% and 12.2%, respectively. As Mary will discuss, loans continued to be predominantly real estate secured with low LTVs. The double-digit annualized growth trend has led to significant market share gains in our primary lending market where we hold the largest market share. Our deposits remain a source of strength and value. Nearly 75% of our deposit customers have been with us for 10 years or more and nearly half for 20 years or more.
92% of our deposits are from core commercial and consumer customers and the remaining 8% consists of public deposits that are predominantly government-operating accounts. 92% of our deposits are in core checking and savings accounts with 33% in noninterest-bearing and only 8% in time deposits. As expected, during the quarter, our deposit mix shifted modestly to higher-yielding deposit products with increases in our TDA and savings balances. Despite this, our total deposit costs remained well managed with an average rate of 46 basis points in the quarter. Despite a modest decrease on a linked quarter basis, total deposits increased by $256 million or 1.3% in 2022, while our total deposit betas were well controlled at 11.5% cycle-to-date, which demonstrates our ability to maintain liquidity at a reasonable cost.
From an earning asset perspective, net interest income and margin are being supported by strong cash flows and overall asset repricing at higher rates. In particular, the yields on maturities and paydowns of loans and investments in the fourth quarter were 3.8% and 2%, respectively. These cash flows were reinvested predominantly into new loans, which yielded approximately 5.2% in the quarter. With nearly $3 billion of annual cash flows from maturities and paydowns of loans and investments, we have ample opportunity to redeploy funds into higher-yielding assets, particularly with reinvestment into loans, which has been the recent experience. In addition to strong cash flow, another $3.4 billion in assets are repricing annually, which provides additional rate sensitivity.
Together, our assets provide a balance between short-term and long-term repricing characteristics. Net interest income in the fourth quarter was $140.7 million, up $14.3 million or 11.4% from the fourth quarter of 2021. Excluding non-core PPP loan interest income, the year-over-year increase in NII was $19.1 million or 15.7%. Compared to the pre-pandemic fourth quarter of 2019, our NII has improved by $16.9 million or 13.6%. The NII improvement over the years is driven by continued strong core loan growth, rising interest rates and managed deposit rates. Linked quarter net interest income was lower by $900,000 or less than 1%. In addition to the impact of the inverted yield curve, we have entered the period where deposit rates and betas are accelerating and deposit balances are decreasing across the banking industry, both of which impacted our net interest income.
During the quarter, we added wholesale funding at an attractive rate to supplement our current funding and to provide long-term fixed rate funding to mitigate the risk of higher for longer short-term rates. As we look forward, conditions that we experienced in the fourth quarter remain, continued loan growth and asset repricing will be accretive, while the persistence of the inverted yield curve and higher deposit costs will be dilutive. The outlook for deposit balances and deposit betas remain uncertain. However, as described earlier, the composition of our deposit base affords us greater flexibility to manage our funding costs through the uncertainty. During the quarter, as is our practice, we managed our expenses in a disciplined manner as economic conditions remain unclear.
Noninterest expense in the fourth quarter totaled $102.7 million, down $3 million linked quarter. As a reminder, included in the third quarter expenses were severance expenses of $1.8 million. Adjusting for the severance in the third quarter, expenses decreased by $1.2 million linked quarter. This was a result of ongoing efficiencies in a number of areas, which enabled us to reduce the pace of hiring, while continuing to invest in the business. Notably, our investment -- our innovation spend in the quarter was reduced, but did not end, as we continue to position the company for the future. Our practice of disciplined expense management will continue in 2023. For the full year of 2023, expenses are expected to increase by approximately 3%, despite the expectation of continued elevated inflation.
An industry-wide increase of FDIC assessment and annual merit increases each represent 1% of the 3% increase. Another 1% has been allocated to our continued investment in the company, albeit at a pace slower than in prior years. Although inflation expectations are still elevated, efficiencies gained from operations and prior investments are expected to offset inflationary increases. As part of this ongoing efficiency effort, we continue to rationalize operations and we'll be reducing staffing in several areas. These actions will result in a $2.9 million severance expense in the current quarter, which is in addition to the 3% core expense guide. It is important to note that these actions will result in annualized savings of $3.3 million. As a reminder, seasonal payroll taxes and benefits expense bump from incentive payouts will be included in the first quarter expenses.
This year, the estimated seasonal impact is $4 million compared to the $3.7 million in the first quarter of 2022. This amount is included in the full year expense guidance for 2023. To summarize our financial performance, in the fourth quarter of 2022, net income was $61.3 million, an increase of $8.5 million linked quarter or 16%. Fourth quarter earnings per common share was $1.50, an increase of $0.22 or 17.2%. For the full year of 2022, net income was $225.8 million and earnings per common share was $5.48. As Mary will discuss, we recorded a provision for credit losses of $200,000 this quarter. Noninterest income totaled $41.2 million in the fourth quarter. As a reminder, the third quarter's income was negatively impacted by one-time $6.9 million charge related to the loss on sale of leased equipment and a $900,000 charge related to a change in the Visa Class B conversion ratio, which is reported as a contra revenue item in investments securities gains and losses.
Adjusting for these third quarter items, noninterest income increased by $2.7 million linked quarter, primarily due to higher customer derivative and foreign exchange revenue. We expect noninterest income will average approximately $39 million per quarter in 2023, as market volatility and uncertainty continue to weigh on asset management income and higher mortgage rates will continue to suppress mortgage banking income. In the first quarter, there will also be a contra revenue item of $600,000 for an additional Class B -- Visa Class B conversion ratio adjustment, which will be reflected as part of investment securities gains and losses. Our return on assets in the fourth quarter was 1.05%. The return on common equity was 21.28%. And our efficiency ratio was 56.46%.
Net interest margin was 2.60%, unchanged from the third quarter. The effective tax rate in the fourth quarter was 22.4%, and the tax rate in 2023 is expected to be approximately 23%. Our capital management -- our capital levels remain strong. Our CET1 and total capital ratios were 10.92% and 13.17%, respectively, with a healthy excess of our regulatory minimum well-capitalized requirements. Our risk weighted assets relative to total assets remain well below the levels of our peers, reflecting our lower risk profile and providing us with ample room to continue growing while maintaining strong capital levels. During the fourth quarter, we paid out $28 million or 46% of net income available to common shareholders in dividends and $2 million in preferred stock dividends.
We repurchased 192,000 shares of common stock for a total of $15 million. In addition, our Board increased authorization under the share repurchase program by an additional $100 million, bringing the total remaining authorization to approximately $136 million. And finally, our Board declared a dividend of $0.70 per common share for the first quarter of 2023. Now, I'll turn the call over to Mary.
Mary Sellers: Thank you, Dean. Our loan portfolio construct with 97% in Hawaii and Guam assets continues to reflect our strategy of lending in markets we understand and to people we know. These underpinnings, coupled with consistent conservative underwriting and active portfolio management, result in a loan portfolio that is diversified by category, has appropriately sized exposures, and is 80% secured by quality real estate with a combined weighted average loan to value of 56%. Credit performance remained very strong in the fourth quarter. Net loan charge-offs were $1.9 million or 5 basis points of average loan and leases annualized, compared with 3 basis points in the third quarter and 2 basis points in the fourth quarter of last year.
For the full year, net loan and lease charge-offs were $6 million or 5 basis points, compared with $5.1 million or 4 basis points from '21. Non-performing assets totaled $12.6 million or 9 basis points at the end of the quarter, down 1 basis point for the linked period and down 6 basis points year-over-year. All non-performing assets are secured with real estate with weighted average loan to value of 58%. Loans delinquent 30 days or more totaled $31 million or 23 basis points, up from 18 basis points in the third quarter and flat with the fourth quarter of '21. And our criticized loan exposure represented just 1.09% of total loans, down 3 basis points from the prior quarter and 111 basis points year-over-year, as we continue to see sustained improvement in the financial performance of those customers who had been most impacted by COVID.
Our consistent conservative approach to underwriting is reflected in the consistently strong quality of our loan production and portfolio. In 2022, 67% of commercial production was secured with quality real estate conservatively leveraged. Commercial mortgage production had a weighted average loan to value of 59% and construction production had a weighted average loan to value of 64%. 76% of 2022 consumer production was secured with real estate, again, conservatively leveraged. Residential mortgage and home equity production had weighted average loan to values and combined weighted average loan values of 65% and 59%, respectively. 71% of our home equity production was in first lien position. Similarly, FICO scores for all our consumer production remains strong.
Portfolio monitoring metrics also remain very strong. Our commercial mortgage and construction portfolios have weighted average loan to values of 56% and 63%, respectively. Residential mortgage and home equity portfolios have weighted average loan to values or combined weighted average loan to values of 57% and 52%, respectively. 72% of our home equity portfolio is in a first lien position. And monitoring FICOs remained very strong. At the end of the quarter, the allowance for credit losses was $144.4 million, down $2 million for the linked quarter, and the ratio of the allowance to total loans and leases outstanding was 1.06%, down 4 basis points from the prior quarter. The decrease this quarter was driven off UHERO's December 2022 forecast, which reflected lower unemployment rates for '23 and '24 than in their prior September forecast.
UHERO's outlook is based upon actual lower unemployment rates realized in '22 and continued strength in tourism with any softening in domestic demand due to a recession to offset by a continued recovery in our commercial visitor base, particularly Japan, coupled with strength in construction given the number of planned federal and state infrastructure projects. The reserve does continue to consider downside risk of a recession, the impacts on inflation and rising interest rates. The reserve for unfunded credit commitments was $6.8 million at the end of the quarter, up $300,000 for the linked period. I'll now turn the call back to Peter.
Peter Ho: Thanks, Mary. As we enter into 2023, the forward view on the economy is somewhat cloudy. Economic conditions, while buoyant currently, they possibly be tested in the coming days by the continued effects of tighter Fed policy. Asset values may also be challenged by higher rates. Bank of Hawaii remains well geared for potentially choppier waters. Our credit portfolio is the beneficiary of conservative underwriting standards not just of late, but over the course of many years. Our deposit base is a great source of strength, diversified, granular and long tenured. Our investment assets are both abundant, high quality and highly liquid. And now, we'd be happy to respond to your questions.
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