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spk00: Good day and thank you for standing by. 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 presentation, there will be a question and answer session. To participate during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Janelle Higa. Please go ahead.
spk04: 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 Holtz, our Chief Financial Officer, Dean Shigemura, and our Chief Risk Officer, Mary Zeller. 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 will be referencing a slide presentation as well as the earnings release. A copy of the presentation and release are available on our website, DOH.com, under Investor Relations. And now I'd like to turn the call over to Peter Hull.
spk03: Peter Hull Great. Thank you, Janelle. Good morning or good afternoon, everyone. Thanks for your interest in Bank of Hawaii. So I think we finished off the year 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'll 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'll be happy to take whatever questions you folks may have. So, next slide. If you look at the slide on employment, what you see here is kind of nice, steady improvement in the unemployment rate from, you know, what was a very distressed level back in April of 2020. I think unemployment now coming in at about 6 percent, most recently in November. And the forecast generally showed continued improvements as 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 the Big Island, trending similarly. But for 2021, you see that on Oahu, single-family homes had a near-record year closed sales up almost 18 percent, median sales price up 19.3 percent, $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 an 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 in the gray lines. That's 2019 in the dark blue, that's our performance over 2021. And I think the two takeaways here are that, you know, kind of X any extreme surge situation, the visitor market performed exceptionally well. So deep into the summer, call it the July-ish timeframe, we almost reached – 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 talk 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, 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?
spk02: Thank you, Peter. Growth from core customers remained solid in the fourth quarter. Core loans net of PPP waivers increased by 327 million, or 2.8% link 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 one-time 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 for $7.9 million and $5.7 million, respectively. Adjusting for the one-time charge and total PPP loan interest income, the fourth quarter's core net interest income was $121.5 million, up $2.6 million, or 2.2% linked quarter. Driven by strong loan growth, assets shift from investments to higher-yielding loans and repricing of our liabilities. This continued the upward trend in core net interest income experienced in 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. Ninety-four percent of our deposits are from core commercial and consumer customers, an increase from 91 percent at the end of 2020. On a year-over-year comparison, our 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 one basis point to six basis points in the quarter. Our low-cost core deposits, in combination with our balance sheet's 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 percent of our loans that are floating or adjustable rate loans provide additional rate sensitivity. In addition, our investment portfolio generates more than $500 million 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 one-time adjustment to the fourth quarter's net interest income Core net interest income increased 2.6 million, or 2.2 percent, link quarter, driven by strong core loan growth, remix 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, of $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 and 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 one-time $1.2 million charge for an additional employee benefit that increased our vacation carryover limits. The third quarter included several one-time items, including a $6.3 million benefit from the sale of property, $3.8 million charge for repo early termination costs, and $1.2 million charge 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 link quarter. The main drivers of the increase were higher medical insurance costs and incentive accruals. Medical costs have increased and are trending toward pre-pandemic historic norms. Incentive accruals increased link 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 percent annualized, less than the 2.8 percent 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 one-time items. These one-time 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 charge 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-time costs comprised of a $6 million increase in the legal reserve and $600,000 in 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 one-time 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 0.8% from an additional one-time inflation adjustment of 2.5% to our normal annual merit increases reflecting the higher cost of living being experienced by our employees. Together with the continued strategic innovation investments, we expect total expenses will increase 5.9% over 2021, 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 percent. The return on common equity was 17.4 percent, and our efficiency ratio was 60.18 percent. Our net interest margin in the fourth quarter was 2.34 percent, an increase of two 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 core loan growth, partially offset by lower PPP loan waivers. Excluding total PPP loan interest income and the one-time charge for the deferred mortgage loan fees mentioned earlier, the core margin was 2.24%, an increase of seven basis points linked quarter. Excluding the impact of PPP loan interest income, we expect continued improvement in core margin with increases of three to five 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 70 cents per common share for the first quarter of 2022. And I'll turn the call over to Mary.
spk01: Mary Gamba Thank you, Dean. Credit metrics remain very strong for the fourth quarter. Net loan and lease charge-offs were 700,000 or two basis points annualized, compared with net charge-offs of 1.2 million or four 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 two 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 eight 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 Euro economic outlook and forecast for our market, coupled with our credit risk profile. The allowance continues to provide for the uncertainty and potential down risk associated with the pandemic. At year-end, customer loan balances on deferral were down 98% from their peak to 0.4% of total loans. As you'll recall, given we had the capacity to do so, we elected to partner with our customers and provide extended relief, primarily through principal deferrals on low-margin real estate. 100% 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.
spk03: Great. Thank you, Mary. So that's our prepared remarks. We're happy to answer whatever questions you folks may have.
spk00: Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. To withdraw the question, press the pound or hash key. We have a question from Andrew Leach with Piper Sandler. Your line is open.
spk07: Hi. Good morning, everyone. Hi, Andrew. Dean, question on the margin guidance, three to five dips per quarter discussion. assuming higher rates. How many rate hikes does that assume in this forecast?
spk02: Yeah, we're assuming three rate hikes starting in March. And then on the long end, you know, looking at about a 2% 10-year.
spk07: Got it. Okay. That's helpful. And then on slide nine, the adjustable mix at 10% of the loan portfolio is I guess what's the timing of that repricing? Is it after 90 days, six months? How does that break out?
spk02: It varies over several years, but the average is roughly about three years. There's about $400 million two years and less.
spk07: Okay. Got it. And then I got a similar question on the fixed rate loans. I mean, how many of those, that 65%, how many of that reprices in the first year?
spk02: That's embedded in the cash flow. So that's about, I would estimate about, let's see, about $1.5 billion or $2 billion. Got it.
spk07: 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?
spk02: Could you repeat that again?
spk07: So the reported fee income number for the fourth quarter was $42.6 million, and you said for the first quarter something similar. Is that the number we should be using, the $42.6? Yes, yes. Sorry. Okay. Okay. Got it. That covers all my questions. Thanks so much. Thank you.
spk00: Our next question comes from Kelly Motta with KBW. Your line is open.
spk05: Hi. Thank you so much for the question. I think just piggyback off of Andrew's 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 cost, just given that Hawaii continues to lag there?
spk02: Yeah, I would say that the way we have it modeled is the overall betas are about 20% over the complete cycle. And just given our construction of our deposit base, you know, we're going to be lagging initially out of the gate. So it's probably towards the middle part of the year, if anything, where we'll be seeing deposit increases after the second rate hike.
spk03: Yeah, I'd say, just to add to Dean's thought, there are probably several layers to our deposit betas. So number one, you know, I think everyone recognizes that Hawaii is one of the best sort of It's really one of the better deposit marketplaces in the country. So that's going to give us some stickiness, us and our competitive set. The other thing I'd point to is that we've got, you know, our loan-to-deposit ratio now sits at 60%. So, you know, 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 or even, you know, hold deposits per se. So, that will obviously play into our pricing decisions. And then, finally, when you look at the composition of our deposit base, you know, I think 95 percent of the base is core checking and savings, and a similar number are in consumer and commercial versus public types of client bases. that too will help us maintain pricing over the intermediate term.
spk05: 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, you know, part of your effort to roll off maybe some higher-cost funding?
spk03: Yeah, that was – we are, you know, 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, you know, 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.
spk05: Got it. That's super helpful. I'll step back. Thanks so much for the question.
spk03: You're welcome.
spk00: Thank you. And as a reminder, if you have a question, simply press star 1 on your telephone. Our next question is from Laurie Hensiker with CompassPoint. Your line is open.
spk06: Hi, thanks. Good morning. I wondered, Dean, if you could take us back to expenses. I really appreciate how you laid out everything and you laid out core 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 of 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, are you going to be back to that two, two and a half percent trigger, or are you more apt to repeat the 5.9% growth that you're expecting in 2022?
spk02: Yes. So in 2023, you know, we haven't spent much time there, but in looking at how we broke down 22, you know, the 2.3%, it seems to be a reasonable starting point. But we also are intending to continue with our strategic investments into 23.
spk03: Yeah, Laurie, I'd add to what Dean's shared. I would say that our expense billed for 22 is really three pieces, right? It's a core component of 2.4 percent, 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 a 5 percent 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 good shape as 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, you know, call it 74 basis points on the 5.9 percent increase. And then, From an initiative standpoint, we've got a pretty aggressive slash healthy agenda on initiatives. And they all, you know, 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 bloodstream 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 percent or 10.9 million is, you know, 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 one-time inflation plus up, right? And initiatives are going to come in at half to a third less. Core, maybe, hopefully, you know, depending on what inflation does, but call it 2.4%, call that flat. And I think we end up with call it a kind of an estimated, you know, back of the envelope, 23 of call it, three and three quarters to four and a quarter percent increase or something for the year, something like that. Does that make sense to you?
spk06: Yep, very, very helpful. And then do you have any branch rationalizations planned for next year or the year after? How are you thinking about that?
spk03: Yeah, we took a big one last year. So you'll 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 for 21 days.
spk02: Partially in 2020 and then the rest of it in 2021.
spk03: 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 issues. opportunities in the branches through just ways to digitize versus being physically present, those types of things. And I think we've got a number of efficiency efforts across the organization and external to the branches.
spk06: Great. Very helpful. Dean, question for you on tax rate. Obviously, you know, low at 17%. It was noisy. came in at 22% for the full year. How should we be thinking about 2022?
spk02: Yeah, the tax, I would say it's going to be 23% as an estimate.
spk06: Okay, that's helpful. And then just last question, I just wanted some clarification. Slide 7, where you lay out the PPP tax, How much of the $7.9 million of PPP income that came in in the third quarter was from PPP gains? I'm assuming the $7.9 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?
spk02: So in the third quarter, I think you're 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.
spk06: Perfect. Great. Thanks for taking my question.
spk00: 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.
spk04: I'd 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 of the topics discussed today. Thank you so much, everyone.
spk00: And this concludes today's conference call. Thank you for participating, and you may now disconnect.
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