Bank of Hawaii Corporation

Good day and thank you for standing by. Welcome to Bank of Hawaii Corporation 4th Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chang Park, Director of Investor Relations. Please go ahead.

Good morning and good afternoon. Thank you for joining us today for our fourth quarter 2024 earnings conference call. Joining me today is our Chairman and CEO, Peter Ho. President and Chief Banking Officer Jim Polk, CFO Dean Shigemura, Chief Risk Officer Brad Shearson, and our Deputy CFO Brad Sattenberg. 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 actual results may differ materially from those projected. During the call today, 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'll turn the call over to Peter.

Thanks, Chang. Good morning or good afternoon, everyone. Thanks for joining the call. Bank of Hawaii posted yet another solid quarter to end 2024. Net interest income and net interest margin both improved, this for the third consecutive quarter. That interest income grew just over 2% on a linked basis to $120.2 million. Non-interest income, excluding an adjustment to our Visa Class B shares, was up modestly on a linked basis. Expenses were controlled quarter over quarter. Average deposits and average loans grew 1.3% and 1.1% on a linked basis to $20.8 billion and $14 billion, respectively. Average non-interest-bearing deposits were up modestly in the quarter. Credit quality remained pristine in the quarter, with net charge-offs and NPAs improving to 9 basis points and 14 basis points, respectively. Criticized loans improved from 2.42% last quarter to 2.1% this quarter. Capital levels have improved substantially from a year ago. I'll now take a moment to discuss the franchise and market conditions. Brad will then briefly touch on credit conditions, which, as I mentioned, look quite strong. And finally, Dean will dig a little deeper into the financials, and then we'd be happy to take your questions. The Bank of Hawaii brand continues to perform well in our unique Hawaii market, holding the number one position in market share as shown in the latest FDIC Annual Summary of Deposits as of June 2024. Bank Foy leads in the deposit market share growth on both a short-term and long-term basis. Deposit growth remained measured in the quarter. Importantly, non-interest-bearing demand plus other low-yield deposits stabilized nicely, trending positively in December on a rolling three-month average basis for the first time since June of 2022. Deposit funding costs fell for the first time this rate cycle on both an interest-bearing and total deposit cost basis. Economic conditions remain stable in Hawaii. Unemployment remains well below the national average. The visitor market remains stable but continues to be impacted somewhat by the Maui market. Residential Oahu real estate friends remain positive. Now let me turn the call over to Brad.

Thanks, Peter. So the Bank of Hawaii prioritizes serving our community, lending in our core markets where our expertise enables us to make sound credit decisions. The majority of our loan book is to long-standing relationships with about 60% of our clients on both the commercial and consumer sides, having 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 93% Hawaii, 4% Western Pacific, and 3% mainland, where we support our clients that do business in both Hawaii and on the mainland. As I walk through our credit portfolio's fourth quarter performance, You can see that it has remained strong and is consistent with prior quarters. Our loan book is balanced between consumer and commercial with consumer representing a little over half of total loans at 56% or $8 billion. We lend predominantly on a secured basis against real estate. 85% of our consumer portfolio is either 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 consumer consists of auto and personal loans, where our average FICO scores are 733 and 760 respectively. Moving on to commercial, our portfolio size is $6.1 billion, or 44% of total loans. The largest share of commercial is commercial real estate, with $4 billion in assets, which equates to 29% of total loans. This book is well diversified across industries and carries a weighted average LTV of only 55%. Looking at the dynamics for Hawaiian real estate in Oahu, the largest market, you'll see that a combination of consistent vacancy rates and little change in inventory supports a stable real estate market. Within the different segments, vacancy rates for industrial, retail, and multifamily are all lower than their 10-year average, and office is less than 1% above its 10-year average. Total office space has decreased about 10% over the past 10 years, driven by conversions. This long-term trend of office space reduction will likely continue to temper vacancy rates. Breaking down our CRE portfolio, it 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 LTBs between 50 and 60%. Overall, it's a diverse portfolio with low average loan sizes. And our scheduled maturity is spread well into the future 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 only 2% of CRE with only 0.2% over 85% LTV. Turning to our credit metrics, this past quarter compared to linked quarter, metrics remain quite stable and asset quality remains strong. Net charge-offs were $3.4 million at 10 basis points annualized, down one basis point from Q3, and up five basis points from a year ago. Non-performing assets are flat at 14 basis points quarter over quarter. Delinquencies have also been stable, taking up three basis points to 34 basis points this quarter. Criticized assets dropped to 2.1% of total loans, with 76% being real estate secured with a 56% LTV. On last quarter's earnings call, I noted that we'd received a payoff after quarter end that had lowered our criticized ratio to 2.19% from quarter end of 2.42%. Criticized assets levels dropped an additional nine basis points since then. As an update on the allowance for credit losses on loans and leases, the ACL ended the quarter at $148.5 million. That's up 1.2 million for the linked period and up 2.1 million year over year. The ratio of our ACL to outstandings was 1.06%, unchanged from prior quarter and up one basis point year over year. I will now turn this over to Dean for an update on our financials.

Thanks, Brad. We expanded our net interest income and net interest margin for the third consecutive quarter. Net interest income for the fourth quarter was $120.2 million, an increase of $2.6 million, or 2.2%, from the previous quarter, and net interest margin expanded to 2.19%. During the quarter, our NIM initially decreased in October, primarily due to the negative short-term impact of the 50 basis point Fed funds rate cut in September. Also negatively impacting the margin were higher cost commercial and public deposits that were carried over from the third quarter and ran off in October and November. NIM improved to 2.26% by December, driven by repricing of asset cash flows a decrease in average costs of total deposits to 1.67%, and slowing of our NIVD and low-cost deposit remix. With regard to cash flow repricing, in the fourth quarter, our earning assets with fixed rates generated $518 million of cash flows for maturities and prepayments. Assuming that all of these cash flows from loans were reinvested into like products, and cash flows from securities were reinvested into cash, such reinvestment generated incremental net interest income of approximately $2.8 million in the quarter from higher reinvestment yields. Spreads on new loans improved after bottoming in October as mid- and longer-term interest rates increased. We expect the wider loan spreads to continue into the first quarter. At the same time, deposit makeshift has continued to slow, with average non-interest-bearing and low-yield interest-bearing deposit balances declining by 105 million link quarter. This compares to the decline of 627 million and 315 million in the same period of 2023 and link quarter, respectively. Assuming the majority of these balances shifted into higher-yielding interest-bearing deposits, Such mixed shifts negatively impacted net interest income by $900,000 in the fourth quarter, down from the negative $2.6 million impact in the third quarter. The cumulative impact of fixed-rate asset cash flow repricing over 2024 has added nearly $16 million to quarterly net interest income as of the fourth quarter of 2024, while the cumulative costs of deposit remix over the same period has decreased quarterly net interest income by 10 million, but at a slowing pace. The income spread between asset and deposit repricing are expected to continue to compound over the next several years, thus widening the cumulative impact and incrementally growing net interest income and margin. Total deposit costs decreased by 10 basis point link quarter. When measuring the deposit costs from the start of the Fed funds cuts in September, Deposit rates had fallen by 24 basis points by the end of the quarter, and further reductions are expected in the first quarter as the full impact of the fourth quarter Fed funds rate reductions are realized. We have reduced deposit rates across all interest-bearing products and are well positioned to reprice our time deposits and improve our margin as 71% of total time deposits are scheduled to mature in the next six months. and 95% of total time deposits are scheduled to mature in the next 12 months. We continue to strategically position our balance sheet for a range of rate outcomes. We have reduced our rate-sensitive assets to $7 billion, while our rate-sensitive interest-bearing deposits remain at $10 billion. We intend to continue to closely manage the interest rate sensitivity of our balance sheet to ensure that we are well-positioned for a variety of rate environments. In the fourth quarter, we actively managed our interest rate swaps and securities portfolio to take advantage of opportunities as interest rates shifted. This included repositioning our swap portfolio by terminating $1 billion notional shorter maturity swaps with relatively higher fixed rates and executing $200 million notional starting swaps at lower rates. The repositioning reduced our active pay fixed received flow interest rate swaps by $800 million to $2 billion notional and reduced the fixed rate of 4.29% to 4.03%. We also maintained the $300 million of forward starting pay fixed received flow interest rate swaps that were executed in the third quarter. These forward starting swaps have an average fixed rate of 3.03% that will become active in 2025 and 2026. During the quarter, we purchased an additional $233 million of floating rate securities that have a positive 98 basis point spread to Fed funds, improving our interest income and margin. Our fixed rate asset exposure is 57% at the end of the quarter, down from 73% at the end of 2022. Net interest income and margin are expected to continue to increase as a result of the balance sheet actions, together with the continued asset cash flow repricing, slowing deposit remix, and benefits from lower Fed funds rates. Non-interest income totaled 43 million in the fourth quarter, which included a previously disclosed 2.4 million of a one-time charge related to the Visa Class B conversion ratio change. Adjusting for this charge, fourth quarter non-interest income was $45.4 million, an increase of $300,000 in quarter as revenue from trust services, customer derivatives, and deposit service charges improved. In 2025, non-interest income is expected to be $44 to $45 million in the first quarter, an increase over the year as revenues from trust services, merchant services, and other transaction volume continue to steadily improve. Expenses were 107.9 million in the fourth quarter. This compares to expenses of 107.1 million in the third quarter. The increase was primarily due to higher medical costs that are not expected to repeat. For the full year of 2024, expenses were well managed. Normalized expenses were $426 million after adjusting for one-time extraordinary expenses of $3.1 million, an increase of just 1.7% from 2023 normalized expenses. Expenses will continue to be a focus in 2025, with core expenses projected to increase 1% to 2% from 2024. In addition, we've allocated an additional 1% of expenses to invest in revenue-enhancing initiatives. Thus, the total expenses are expected to increase 2% to 3% from 2024. As a reminder, the first quarter's expenses will include the seasonal bump in benefits and payroll taxes from the payment of incentives investing in restricted stock, currently estimated at $2.5 million. To summarize the remainder of our financial performance, in the fourth quarter, net income was $39.2 million and earnings per common share was $0.85. Our return on common equity was 10.3%. Adjusting for the previously mentioned Visa conversion ratio change, earnings per common share was $0.90 and return on common equity was 10.9%. We recorded a provision for credit losses of $3.8 million this quarter. The effective tax rate for the fourth quarter was 24%, and the tax rate on the full year of 2024 was 24.19%. The effective tax rate in 2025 is expected to be approximately 24%. We continue to maintain healthy excesses above regulatory minimum well-capitalized requirements. Our tier one capital ratio was 13.95% and total capital ratio was 15%. Our risk weighted assets to total assets ratio continues to be well below peer median, reflecting the low risk nature of our asset mix. During the fourth quarter, we paid out 28 million to common shareholders and dividends and 5.3 million in preferred stock dividends. As a reminder, the dividends paid on the Series B preferred shares in the fourth quarter was a full quarter's distribution, an increase of $1.8 million from the third quarter's partial quarter amount. 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 first quarter of 2025. I'll turn the call back over to Peter.

Thanks, Dean. This concludes our prepared remarks. Now we'd be happy to entertain whatever questions you might have.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jeff Bruleys from D.A. Davidson.

Thanks. Good morning.

Good morning, Jeff. Dean, if I could, a lot of color on the margin, appreciate it. I guess that 226 for December, is that a pretty good jump-off point? You know, if we kind of start there, any kind of one-timers, or is that a good rate and then – adjust for sort of the positive influences that you talked about that bleed into this year?

Yeah, the fourth December margin of 226 was a pretty clean number. And as you say, it is a good jumping off point for the first quarter. So in addition to that, we'll be seeing the asset repricing to continue and actually some benefits from the last repricing on, or Fed funds cut, you know, as it reprices our deposits.

Right. It sounded as if you were active in some deposit rate, lowering that so far this year as well.

Yeah.

Yeah. Okay. Got it. Okay. Thank you. Next topic, just wanted to just check in on, on kind of the loan growth pipeline and I, you know, any, anyone, can hop in, I guess, Peter, kind of interested in not only just a pipeline update and your thoughts, but also any sort of ripple effect of any M&A that's occurred on the island and the ASB sale, maybe pretty early, but if you could feather that into the pipeline discussion, that'd be great. Maybe no effect at all as well.

Sure. So we were reasonably... okay with loan growth for the quarter, really headlined by commercial growth, as you can see, Jeff. You know, consumer was just kind of moving sideways, frankly. And I think that's probably likely to be the case this year, unless we get a little relief around rates, which I think might have the potential to boost levels. The good news is the back book on commercial remains strong, so we would not be surprised to see a performance in the next quarter or so similar to what we saw in the fourth quarter. As it relates to what's happening in the marketplace, we're not really seeing any active change in how competition is forming out here, so probably way too early to notice anything, to be frank. But frankly, we're also not really anticipating much change either.

Okay.

Thanks, Peter. I'll step back.

Thank you. One moment for our next question. Our next question comes from the line of Jared Shaw from Barclays.

Hey, good morning, everybody. Hey, Jared. I guess a few things. Maybe when you look at the movement on the hedges this quarter, are you still targeting sort of a 60% fixed rate mix in that fix-to-float, or is that coming down with these moves?

No, I think where we ended the quarter at about 57% is where we're, at least in the near term, looking to remain. Obviously, if rates do shift quite significantly, we could change it, but right now it is at 57%.

Okay, so that's a good level then to keep going. Yeah. And then just looking at the office book, you have 36% of that coming due next year. Any level of conversation with those borrowers? What's the expectation for when those come due? Is that likely to be renewed? Are you seeing people put more equity in? What's the outlook there?

So I'll just really quickly say that we're not seeing any issue with any of those renewals. So at this point, everything looks really good and strong on office. And really just, I guess, to speak about credit in general, as you can tell, it was kind of a boring quarter, which I guess is a good thing. But we're really seeing just good stability overall. both on commercial and consumer, and that includes our CRE portfolio and, of course, that includes office space. So no real issues there.

And I think that the maturity is, by my recollection, I think it's 39% by 2027. So it's not quite as concentrated as what you quoted there, Jared. But still, I mean, we do have some payoffs coming up in the next couple of years. And as Brad mentioned, we're feeling pretty good about that.

Okay. All right. Thanks. And then just, I guess, finally for me, you know, looking at capital continues to be very robust on the regulatory side. What would have to happen, I guess, for you to be more active with the buyback here?

A little cleaner line of sight into credit, the economy, and rates, I'd say. So I think, you know, I think we're quite satisfied with the capital build over the past year. And I think levels where they are are appropriate to kind of the environment that we see. But having said that, Jared, I would also probably throw in there that we think that there's a fair amount of opportunity for what I'd say is heightened variability across all of those factors. And I think as long as that continues to trend we're probably likely to hold off on the buyback for the foreseeable future.

So if we don't see changes in credit economy or rates, then capital ratios are likely to still build through 25?

Yeah, through retained earnings is probably accurate.

Let's do it. Okay. Great. That's what I had. Thank you.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our next question comes from the line of Andrew Leash from Piper Sandler Companies.

Hey, good morning, everyone. Thanks for taking the questions here. Just a follow-up on... The revenue enhancing initiatives that you've mentioned in the expense section and the expense outlook, I mean, what sort of initiatives might this include?

I don't want to get into the specifics, but it is directed at our commercial and wealth areas, but definitely accretive to the earning stream this year and then into next.

Is it like software upgrades just to make them more efficient and then enhance revenue that way?

Yeah, let me take a stab at that. So as I think you know, we've been really putting an emphasis on building a wealth operation up to the same market scale capability as our consumer and commercial businesses. And we've had good success over the past couple of years. I think in the fourth quarter, Year on year, our trust in broker sales revenues were up just over 9%. So pleased with that. And Dean alluded to we do have what I term interesting things planned for 2025 that I think are going to enhance that improvement even more so. But nothing really to report specifically at this point. But we are excited about the space.

Got it. Got it. You've covered all my other questions. I'll step back. Thanks.

take care thank you one moment for our next question our next question comes from the line of andrew tyrrell from stevens hey good morning andrew um if i can go back to some of the margin just quickly um for the for the two billion of swaps that are active and remaining can you just remind us um that the share between the securities portfolio? How much is allocated to the securities portfolio versus how much against the loan portfolio?

In terms of the allocation, it's... Sorry, I should know this. It's about $600 million against... $700 million against the AFS and $1.3 billion against the loan portfolio.

Got it. Okay.

And then if I go back to just some of the repricing benefits, and I appreciate all the color there, but if I just think about, you know, what you guys have experienced over the past year, call it that 16 million of quarterly repricing. Margin-wise, you know, that's right at 30 basis points of NEM. So I guess if we're expecting that to continue, plus you should have, you know, some deposit repricing benefits, carrying forward into 1Q, you're starting margins at a good level. Do you think you can exit 2025 and call it a 2.5% or better type margin?

Andrew, it's Peter here. That is a trend possibility, I would say. A lot of things have to go right for that to happen, but I would say that from an NII standpoint, we're pleased with what we see in terms of the diversity of opportunities to build that number. The balance sheet turnover, as you know and understand, is a good story and a cumulative accreting story. And we are – I'd say with the interest rate cuts that we did get towards the back half of last year, we're really pleased with both market reaction as well as kind of the pricing that we're seeing in our own book. So, yeah, I don't want to throw – I don't want to put a –

a line of the sand out there but directionally i think that's reasonably accurate but as i mentioned a number of things have got to go right for that to happen yeah no certainly and i can i can appreciate that um on the the cd portfolio i think in the presentation you guys called out it was close to half of the the time deposits repriced or matured in the first quarter or will mature in the first quarter. It's called that 410 cost or so. What's the current offering rate for you guys right now, and what would you expect these CDs to reprice to in the first quarter?

So the current offering is around 3%.

Actually, we want to come down, but obviously you can appreciate that we're not going to get specifically into direct pricing, Andrew.

Okay, fair enough.

Last, did you just have the medical costs in fourth quarter, the dollar amount that you guys called out in the release?

$1.4 million. Yeah. I'm sorry, $2.2. 1.5. It's 1.5, sorry. The increase was about 1.5.

Okay, thank you for taking the questions.

Thank you. One moment for our next question. Our next question comes from the line of Kelly Mota from KBW.

Hey, good morning. Maybe switching back to the loan side of things, you've now had two nice quarters of growth. Wondering what you guys are seeing in terms of the pipelines, and it sounds like you're very optimistic about your expectation for NII growth through next year. Wondering how much of that is based on, excuse me, is factors in any sort of growth on the loan side?

So maybe I'll tackle it. This is Jim. I'll tackle the pipeline side. Excuse me. We actually began to see a lot of growth in the commercial pipelines around Q2 of last year, which led to a good Q3 and a particularly strong Q4. That was the strongest production quarter we've had since 2002. Deal flow continues to be active, and I think we see the opportunity for continued growth in the commercial loan space. So I think we feel pretty good. And maybe I just add for some color, it was really a good mix of CNI and CRE and a bunch of different asset classes to core clients with, you know, really good credit underwriting statistics. So I think we feel really good about that. Kind of keep us on path for sort of that mid-single digit growth as we look for, you know, this next year.

Yeah, I guess I would add, Kelly, that, you know, obviously we're hopeful of continued loan growth that would be accretive to NII, but But really, the thing that we're really focused on in the NII space is the diversity of opportunities in that space. So loan growth, definitely contributory to the extent that we get it. But really, just deposit growth, given where the slope of the yield curve has moved to in a reasonably short period of time, would be highly accretive for us. And then kind of back to the balance sheet turnover, And just the overall reduction of Fed funds, the ability to create some margin out of that, gives us a pretty interesting diversity of options around NII.

Got it. That's helpful. And I think you may have – please correct me if I'm wrong, but I think you may have some FHLB maturing potentially this year. Wondering how you guys are thinking about managing that, if potentially deposit growth could help NII. pay down some of that or potentially taking on some new sale funding as a replacement?

Yeah, we don't have any maturities this year. The first maturities are in next year, 2026.

We do have the opportunity to prepay to the extent we wanted to.

Right, yeah, and that's something we actively look at because the current rates are 413, I believe, so still accretive to NII. So as we get closer, you know, we may choose to reposition that. But right now, the first maturity is in 2026.

Got it. Thank you. I will step back. Nice quarter, guys. Yeah, thank you.

Thank you. At this time, I would now like to turn the conference back over to Chang Park for closing remarks.

Thank you for joining us today. And as always, please feel free to reach out to me if you have any additional questions. Thank you.

this concludes today's conference call thank you for participating you may now disconnect