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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation First Quarter 2024 Earnings Conference Call. [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.
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?
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 space 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 of the country with 5 locally headquartered banks holding 97% and 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, 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 remained steady. Residential real estate on Oahu remained stable with median prices up moderately for both single-family homes and condominiums.
And now let me turn the call over to Brad.
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 a refocusing of the bank's credit philosophy towards lending in our core markets and to long-standing 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 in support 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 the 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 1% higher than its 10-year average. Office conversions and the long-term trend of office space reduction will likely continue to temper vacancy rates there. Retail and multifamily 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 of 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 multifamily, 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 a hotel. The limited inventory across all property types makes for greater opportunities for repurposing 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 bust.
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, who 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 at 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 1/3 of a percent. Our office exposure remains low and manageable with only 1.1% of the portfolio and criticized and only 6% of office loans have LTV greater than 80%. Our maturities over the next 2 years totaled 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 multifamily portfolio. Only 0.6% of the book are 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 2 years are less than 20% and more than 65% of the book does not mature until 2030 or later. Looking at our credit metrics overall this past quarter compared to linked quarter, metrics remained quite stable and asset quality remained 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. Nonperforming assets have remained stable at around 9 basis points for the last year. All nonperforming 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 linked period and up $4.1 million year-over-year.
The ratio of our ACL to outstandings 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.
Thank you, Brad. In the first quarter, we maintained our hedging program with $3 billion of notional pay fixed received low 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 and 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 subtractive $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 runoff 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 REITs has shifted from 6 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. Noninterest 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 noninterest 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 have 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 nonrecurring 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 our 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 and 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.
Great. Thank you, Dean. That concludes our prepared remarks. We'd be happy to entertain your questions at this time.
[Operator Instructions] Our first question comes from the line of Jade Shar from Barclays.
Maybe first just starting with margin. As we do look at the securities cash flows continuing to come down, I guess, at the same time, cash came down this quarter. Should we with the expectation that there's still a little bit of tail on deposit costs, how should we be thinking about the trajectory of margin over the next few quarters?
Yes. So when you look at our asset side of the balance sheet and the repricing from our cash flows, we continue to expect approximately, in total, about $5 million of accretion in NII. And then on the liability side, on the deposits, with the higher for longer interest rate environment, we do expect the deposit remix and repricing to continue somewhat but at a much, much lower rate than what we've been experiencing and what we had experienced in 2023.
Yes. We really saw deposit costs flatten pretty meaningfully, not completely, but meaningfully pretty much in the fourth -- late into the fourth quarter, call it, November of '23. And so if you look at '23, January through that November period, average total deposit costs were growing at about 11 basis points per month from that November mark forward. So through the first half of this month, that number slowed to like 2 basis points.
So a big step down, but still plus 2 basis points per month. And it's anyone's guess as to whether or not that 2 basis points turns to 1 basis point or 0. We're hopeful towards that trend, but just too tough to tell. So I think the quarter the tail of the NII for the quarter is going to be, the NII accretion that we get from the fixed asset cash flow against whatever we end up with from a funding cost standpoint for the quarter. And last quarter, I thought we had a pretty reasonable chance at coming out ahead didn't come to pass. There were some one-off items in that number as well. We'll see what happens this quarter. But it's just -- the numbers are getting so tight. It's just too tough to make a call one way or another, I'd say.
Okay. Great color. And then shifting, I guess, to capital. You continue to grow capital, really strong levels there, and you mentioned the buyback authorization. What's the general feeling with buying back stock here? And I guess at what point is capital getting too high given the broader growth profile staying in that, call it, longer-term 6% range.
Yes. So I think a lot to think about on the capital front both from an operational standpoint as well as from a top-down regulatory standpoint or just kind of the broader industry perspective. And so I think kind of from the top down, there's still a fair amount of uncertainty around where banks are going to be pushed to hold capital levels. From the bottom up, it still feels like there's a fair amount of caution, I'd say, in the marketplace. And so we think that growing capital is, thought it was a good idea in the eyes of our shareholders and therefore, probably a better idea than the alternative of stock repurchase for now. Now greater clarity from the top down would be helpful. Improvement and kind of the bottom-up environment would be helpful, and that probably begins to change our trajectory over time.
Thank you. One moment for our next question. Our next question comes from the line of Jeff Rulis at D.A. Davidson.
Peter, just to maybe follow on, if it follows that you talked about deposit costs sort of by month 2 basis points, interested in the spot rates on both interest-bearing and total deposit costs, how do those compare to the full quarter averages.
Sure. So total average deposit cost for -- I can give you the average for March of that was [ 1.77 ]. And average interest-bearing deposit costs. So that's -- yes, average interest-bearing deposit costs for March was [ 2.42 ]. So pretty [indiscernible]
Okay. 3 basis points or so higher than the quarterly. So that's kind of the trend. And like you said, it leveling off. Just wanted to check that figure. Okay. If I were to maybe just hop maybe on the loan pipelines, kind of heard from various inputs that the higher for longer maybe there was a pause earlier in the year in terms of thinking about rate cuts and I guess maybe some customers not giving up on that, but the higher for longer is occurring. Are you in that in your loan pipelines are people settling in on rates where they are that it's actually starting to improve the pipeline picture at all kind of year-to-date?
Yes. Jeff, the pipeline has been interesting. And in spaces where we get some rate relief, we've seen good movement. I'm talking more on the residential lending side some good pickups in volumes. And then as rates begin to crest again as they have most recently, you see that demand fall up pretty quickly. So our resi was down 0.6% for the quarter on an average basis. Home equity was down 1.1% on an average basis. We were hoping for a flattening this quarter. We'll see if we get that depending on how rates fall out. But my outlook, for our outlook for the balance of the year is pretty flat. And that's based on, one, a belief that rates are possibly higher for longer. So not a lot of confidence in rate relief. And then secondly, I think in part that's driving the consumer to be a little bit more cautious, both the consumer as well as, I think, the commercial real estate customer.
Thanks, Peter. Okay. And one last one, if I could. Just really interesting stats. I had no idea that industrial CRE kind of vacancy is that low in supply the lack of growth there. Curious as to the history of conversions on the island on Oahu from office to industrial, and maybe some of the puts and takes there, I'd be interested in just hearing that if there is some.
Yes. Well, so the conversion side, is there's not much conversion from office to industrial for lots of different reasons, just kind of the configuration of where this real estate is and the like. And Hawaii is a very onerous entitlement place. So it would be tough to get those asset classes converted. Where we do see a fair amount of conversion though, is office to multifamily and that's happening pretty meaningfully here in the downtown corridor.
And obviously, we think that's a positive because the office is, it's not a disaster, but it's still a 12%, 13% vacancy market for us, and we're just completely housing constrained. So starting to see more than green shoots into that space, and that's probably more the trend from office to housing versus office to industrial. And the industrial issue is an issue. It's like that kind of vacancy factors, just as you can imagine, for any all sorts of dysfunction operationally in the island.
And I'll just add really quickly that when you look at that graph, you can see that office space has come down a little more in the past 5 years than the previous 5. So it's down 1.2 million square feet in the last 5 years. And there are forecasts out there for it to come down another 400,000 square feet or so in the next 3 years.
Our next question comes from the line of Andrew Liesch of Piper Sandler.
Just curious what you guys are seeing on deposit trends. It sounds like you had some public funds leave and then Lahaina-related fire relief efforts. Deposit [ relief ]. But do you think you've reached a point of stabilization in the mix and you can grow deposits from here? Or I guess, what are you hearing at the individual client level?
Yes. Good question, Andrew. So there was some bumpiness as you saw in the numbers from Q4 to Q1, and really, the way to think about it is Q3 to Q4 to Q1. And so Q3, we were at $20.5 billion average deposits. Q4, we spiked $20.7 billion and then now for this past quarter, we're down $20.5 billion. And that run up in Q4 had a lot of Maui kind of insurance and essential aid type of money that kind of flowed in, in the quarter and then flowed out in the quarter. So I think that probably the number to go off of for the foreseeable future is kind of that $20.5 billion mark. That seems pretty durable. And what we're seeing amongst deposit mix is a pretty meaningful slowdown in mix shift from noninterest-bearing to interest-bearing. So if you look at '23, kind of the first 3 quarters of '23, that runoff in noninterest-bearing was about $98 million per month. And then kind of from Q4 '23 to current, that number is down by it's about 1/3 of that like $33 million. So I'm not sure that we're completely done with kind of runoff in noninterest-bearing. But as you can see, the rate of runoff has slowed pretty dramatically. And frankly, we were thinking that as we got a rate cut or 2, that would have mark the end of that period, but that seems like that may be pushed out a little bit at this point.
Got it. Okay. That's really helpful there. And then, Dean, just on the expense guidance, so the 419, the 1% to 2% growth off that, that does include the seasonal impact that you had in the first quarter at $2.2 million, correct?
Yes. It does include the $2.2 million but would exclude the second special assessment of the FDIC.
Our next question comes from the line of Kelly Motta of KBW.
I might circle back to the margin. Looking at Slide 34 with the call it, $800 million of loans and investment portfolio flows coming, coming on and in Q1, I was surprised to see earning asset yields only increased 4 basis points this quarter. I was just wondering if there is anything unusual or any kind of puts and takes to think about as we think about the dynamics of the repricing of your book as we look ahead in a higher for longer environment?
Yes. One thing to point out is that, as I mentioned, the investment portfolio, we had some securities that repriced fixed to flow that brought down the yield on the investment portfolio. So that had an impact. And then in addition, the loan volume came down, balances came down. So that also had an impact on the overall yields. If we had stayed flatter, the increase would have been greater.
Okay. All right. That's helpful. And then going back into earlier into the Q&A, I think you had said about, you expect about $5 million in NII from earning asset repricing over in the next couple of quarters. Just wanted to clarify if that's over the course of the year or next quarter, I just wanted to kind of close the loop on that commentary to make sure I'm understanding it correctly.
It's per quarter. Yes, per quarter.
Awesome. I guess last question, credit is really a strength of the bank, and I love all the slides on the asset quality. It really highlights how strong things are. I know it's a couple of years out, it looks like there's maybe 1/3 of the office portfolio matures in 2026. I'm just wondering if it's -- you started kind of proactively reaching out to those borrowers and gotten an assessment of how that's going to hold up? I know it's not that large of a piece given how the size overall of office. But just wondering if there's been any sort of proactive work with those borrowers and any early insight you can share with that?
Yes. Well, I mean we're in contact with one of the great things about a bank our size is the quality and intimacy of the relationships we have with our customers are really important to us. And so we're as a matter, of course, in contact and working with our clients at all times on all types of loans. The office sector, we're not seeing a heck of a lot of stress there, Kelly, so there's not too much reason to be thinking about restructuring or how do we fix this loan or that loan at this point. Should conditions change, obviously, we'll begin to have different and more frequent conversations. But for now, we feel pretty good about where that book is despite the title of it being office.
Thank you. This concludes the question-and-answer session. I would now like to turn it back to Chang Park for closing remarks.
Well, thank you, everyone, for joining us today and for your continued interest in Bank of Hawaii. As always, please feel free to reach out to either Cindy or me if you have any questions on any of the topics discussed today. Have a great day.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.