Bank of Hawaii Corporation (NYSE: BOH) Q3 2021 earnings call dated Oct. 25, 2021
Corporate Participants:
Janelle Higa — Vice President of Investor Relations
Peter S. Ho — Chairman, President and Chief Executive Officer
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Mary E. Sellers — Vice Chair and Chief Risk Officer
Analysts:
Andrew Liesch — Piper Sandler — Analyst
Jeff Rulis — D. A. Davidson & Company — Analyst
Laurie Havener Hunsicker — Compass Point — Analyst
Presentation:
Operator
Good day, and thank you for standing by. Welcome to the Bank of Hawaii Corporation Third Quarter 2021 Earnings Conference Call. [Operator Instructions]
I would like to hand the conference over to your speaker, Janelle Higa. Please go ahead.
Janelle Higa — Vice President of Investor Relations
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 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 that 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 S. Ho — Chairman, President and Chief Executive Officer
Great. Thank you, Janelle. Good morning, everybody, or good afternoon. I’ll lead off with a little commentary on what’s happening here in the Hawaii marketplace, I’ll then as is our custom turn the call over to Dean, who will fill you in on the financials for the quarter, generally a pretty clean, good quarter for us, and then he’ll turn the call over to Mary to touch on credit items and then we’d be happy to take your questions.
So, leading off, talk a little bit about the economy here in the islands that hit pretty hard late in the summer with the Delta variant and our forecast is over Bureaucracy [Phonetic] of Hawaii really had anticipated pretty meaningful impact to employment in the state and we were actually kind of surprised to see unemployment come out just recently at 6.6%. So continued positive downward trending in unemployment here in the State. Like I said, a bit of a surprise. And then we go to the next page. I think what’s happening is the 9/20 forecast, you see an elevated level of forecast unemployment for ’22 and ’23. We’ll see what happens in the next forecast, but at this point looking like employments is in a bit of a better space than what we had — what we were all thinking coming out of our most recent Delta surge.
Turning to the real estate market. Like many places in the country, it’s not in the world actually, real estate continues to be hot. Sales prices — median sales prices for single-family homes up 19%, up 7.4% for condominiums, that September on September, and then inventory levels continue to trend downwards. So inventory levels for single-family homes here in the islands are now or here on Oahu actually are now down 1.2 months and 1.8 months for condominiums.
Daily arrivals, really visitors into our marketplace. I think that this is an interesting chart. It shows a couple of things here. What it shows is the ramp-up, if you will in in visitor count into the islands really was on a pretty nice trajectory for most of 2021, right up until about July, you see from the chart that we have up here that basically we had comp’d back to 2019 levels by the end of July. And mind you, that was accomplished really with only one of our two primary markets in place. So lots of supply in from the — from the North American market, mainly the United States, both East and West coasters. And really not much in the way of demand in from Asia as that marketplace continued to work through its vaccine and infection protocols. Then the delta hit and a number of policies put in place and a pretty meaningful downturn in visitor traffic, you see post — like kind of post August. So we’re in a bit of a repositioning phase I think at this point. It feels like and talking to some of the hoteliers in town that the winter should be a pretty good season for us again. And so I think absent any recurring surge here in the islands or nationally speaking, I think we should be in for kind of resumption of that upward trend in arrivals, but we’ll see — we’ll see how this all plays out.
Switching to the COVID situation. I mentioned we went through a pretty meaningful spate with the Delta variant in the late — kind of mid late summer. Things have gotten quite a bit better here in the islands. So you see here on this chart that we’re trending towards the bottom of the country in terms of number of infections, which is a good thing. And then as it relates to vaccination rates, we’re now at 70, almost 71% of the total population we’ve vaccinated. That’s a very good number I think by national standards. And I think the interesting number is that if you look at the number, the percentage of people vaccinated here in the islands that are eligible to be vaccinated, that number is now actually into the 90 plus percent range. And so, hopefully, we’ll see if the under 12-year-old population gets authorization to be vaccinated. Assuming that happens, I think we would anticipate a very, very high percentage of our local, State of Hawaii population to be vaccinated in the not too distant future.
So, I’ll stop there and turn the call over to Dean, who will update you on our financials for the quarter. Dean?
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Thank you, Peter. Growth on core customers remained solid in the third. Core loans net of PPP waivers increased by $276 or 2.4% linked quarter and $542 million year-over-year or 4.8%. Waivers on PPP loans have accelerated and balances declined by $245 million in the quarter. Our strong deposit growth continue. Core customer and operating account balances grew by $613 million linked quarter. Offsetting this growth was a reduction in non-core public time deposits of $289 million. As a result, total deposits increased by $324 million or 1.6% linked quarter and $2.8 billion or 16% year-over-year.
Our strong and stable deposit base remains a readily available source of liquidity for continued growth in income. Excess liquidity is being deployed in high quality, low-risk investments that can easily be converted into funding if needed, while providing current income and mitigating margin pressures. Our balance sheet asset sensitivity positions us well for rising rates and greater net interest income. Our strong core deposits and low loan to deposit ratio of 59% will allow us to lag rate increases, while maintaining a significant funding source for continued growth. Our mix of floating and adjustable rate loans, ample monthly cash flow and cash balances represent significant flexibility and greater income potential in a rising rate environment.
Net income for the third quarter was $62.1 million and earnings per common share was $1.52. Net interest income in the third quarter was $126.8 million, up 2.7% linked quarter and up 2.1% from the third quarter of 2020. Included in the third and second quarters net interest income were $5.9 million and $3.8 million respectively of accelerated loan fees from PPP loan waivers. Adjusting for PPP loan forgiveness, the third quarter’s net interest income increased by $1.2 million or 1% linked quarter as a lingering impact from lower interest rates, was offset by strong core loan growth and deployment of liquidity. We expect these trends to continue and expect core net interest income will increase by approximately 2% in the fouth quarter, excluding the PPP loan waivers.
As Mary will discuss later, we recorded a negative provision for credit losses of $10.4 million this quarter. Noninterest income totaled $41.4 million in the third quarter compared with a reported $44.4 million in the second quarter. Included in the second quarter were gains of $3.7 million from the sale of investment securities. Adjusted for these gains, the third quarter non-interest income increased by approximately 700,000 from higher deposit fees and swap transaction fees. We expect noninterest income will increase to approximately $42 million in the fourth quarter from increasing deposit fees, service charges and other transaction fees as we emerge from the negative impact from the delta variant and further reopening of the economy.
Non-interest expense in the third quarter totaled $96.5 million, approximately unchanged from the second quarter. The third quarter’s expenses included charges of $3.8 million related to the early termination of repurchase agreements and $1.2 million of severance expenses. These were offset by a $6.3 million benefit from the sale of property. The termination of the repos allowed us to reduce our non-core funding, free up capital and increase net interest income. Adjusting for these items, expenses were higher by $1.3 million linked quarter, primarily due to a very successful marketing program initiated during the quarter that contributed to the quarter’s strong loan growth. The strong loan growth also led to an increase in variable expenses. The marketing and variable expenses represented $1.2 million of the linked quarter expense increase.
Expenses are projected to be between $98 million at $99 million for the fourth quarter or approximately $391 million on a reported basis and $388 million adjusted for onetime items for the full year. When evaluating our expenses over a longer period and comparing with the full year 2021 estimate to the pre-pandemic year of 2019, we continue to demonstrate expense discipline. Expenses on a reported basis increased at an annualized rate of 1.5%, which was well below the rate of inflation of 2.4%. More importantly, our current expense levels and normalized expense run rate already include expenses related to the significant innovation investments that are resulting in balance sheet growth and core expense efficiencies. In 2019, the level of our investment spending has increased by $17 million and we are realizing annual savings of $8 million.
Our return on assets during the third quarter was 1.07%, the return on common equity was 17.08%, and our efficiency, excuse me, our efficiency ratio was 57.38%. Our net interest margin in the third quarter was 2.32%, a decline of 5 basis points from the second quarter. The decline in the margin in the third quarter reflects the ongoing impact from the strong deposit growth, partially offset by core loan growth, deployment of liquidity and PPP loan waiver. Excluding the impact of further PPP loan waivers, we expect the margin will increase by low single-digits in the fourth quarter over the third quarter, primarily due to continued loan growth and stable interest rates.
Our capital levels remain strong and will position — and will position to support continued growth. Our CET1 and total risk-based capital ratios were 12.02% and 14.72% respectively, with a healthy excess over the minimum well capitalized requirements. During the third quarter, we paid out $28 million or 46% of net income available to common shareholders and dividends and $1 million in preferred stock dividends. We repurchased 241,000 shares of common stock for a total of $20 million, and finally our Board declared a dividend of $0.70 per common share for the fourth quarter of 2021.
Now, I’ll turn the call over to Mary.
Mary E. Sellers — Vice Chair and Chief Risk Officer
Thank you, Dean. Customer loan balances on deferral are down 95% from their peak to 0.8% of total loans. As you recall, we elected to partner with our customers through this unprecedented event to provide additional relief, primarily through principal deferrals on low margin real estate. A 100% of the loans remaining on deferral are secured with our consumer deferrals having a weighted average loan to value of 70% and our commercial deferrals having a weighted average loan to value of 37%. A 100% of the commercial loans on deferral continue to pay interest, and our return to payment performance remained strong with less than 1% of these customers delinquent 30 days or more.
Credit metrics remained strong and stable in the second quarter. Net charge-offs were $1.2 million or 4 basis points flat for the linked period. Non-performing assets were $20.6 million or 17 basis points, up 1 basis point from the second quarter. Loans delinquent 30 days or more were $28.3 million or 23 basis points at the end of the quarter, down 2 basis points for the linked quarter. And criticized loan exposure totaled 2.34% of total loans, up 17 basis points for the quarter.
As Dean noted, we recorded a negative provision for credit losses of $10.4 million. This included a negative provision to the allowance for credit losses of $11.3 million, which with net charge-offs of $1.2 million, reduced the allowance to $167 million, 1.39% of total loans and leases or 1.42% net of PPP balances. The decrease in the allowance reflects the most recent UHERO economic outlook and forecast where market and forecast for our market coupled with our credit risk profile. The allowance does continue to provide for the uncertainty and potential downside risk inherent with the pandemic.
I’ll now turn the call back to Janelle.
Janelle Higa — Vice President of Investor Relations
Thank you, Mary. This concludes our prepared remarks. We are now happy to answer any questions you may thank you.
Questions and Answers:
Operator
Thank you. [Operator Instructions] We have a question from Andrew Liesch with Piper Sandler. Your line is open.
Andrew Liesch — Piper Sandler — Analyst
Hi, good morning, everyone.
Peter S. Ho — Chairman, President and Chief Executive Officer
Good morning, Andrew.
Andrew Liesch — Piper Sandler — Analyst
So, I’d talk on the margin guide here to be up slightly, does that include any improvement in the earning asset mix? You continue to have pretty good deposit inflows, just kind of curious how you see the — the level of cash shifting around here?
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Yeah, I think the — the guidance assumes a little bit of balance sheet growth and as well as continued loan growth and a little bit more of investing of the excess liquidity. So that’s how we got to the — Hawaii got to the number.
Andrew Liesch — Piper Sandler — Analyst
Okay, got it. It looks like you’ve, over the last few quarters you’ve been pretty, I wouldn’t say aggressive, but you’ve been consistent with adding the securities portfolio. So is that still the plan? And I guess the statements of the yield curve are even more inclined to add to the book.
Peter S. Ho — Chairman, President and Chief Executive Officer
We are, but Keep in mind that the way we’ve handled the investment portfolio in the past is, it’s really because it’s a kind of a storage of liquidity for us, we tend to adjust the balances based on deposit and loan growth. So it would kind of be the net outcome from both of those lines.
Andrew Liesch — Piper Sandler — Analyst
Got it. Okay, that’s very helpful. And then on the expense front with your guide of $98 million to $99 million, is that a good run rate to you going into next year, but then maybe layering on some merit increases and then the seasonal payroll taxes in the first quarter?
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
It will serve as a base. We do have those items that you mentioned, but we intend to continue to make strategic investments especially in our innovation kind of area like we’ve seen in the past.
Andrew Liesch — Piper Sandler — Analyst
Got it. Okay, very helpful. Thanks for taking the question.
Peter S. Ho — Chairman, President and Chief Executive Officer
Thanks, Andrew.
Operator
Thank you. Our next question comes from Jeff Rulis with D.A. Davidson. Your line is open.
Jeff Rulis — D. A. Davidson & Company — Analyst
Thanks, good morning.
Peter S. Ho — Chairman, President and Chief Executive Officer
Hey, Jeff.
Jeff Rulis — D. A. Davidson & Company — Analyst
Question for, maybe for Mary, and I don’t want to get too into the weeds here, but trying to get a sense of that provision recapture, my guess is the provision and reserve levels are more led by like unemployment projections corrected versus less about what you’re actually seeing the 66% number that you quoted. But, is that correct that it’s more on the projections that leads that number?
Mary E. Sellers — Vice Chair and Chief Risk Officer
Yes, absolutely.
Jeff Rulis — D. A. Davidson & Company — Analyst
Okay. And so I guess, intuitively if projections more closely align with lower actuals we could read that continued to recapture is possible I suppose, it’s oversimplified, but…
Mary E. Sellers — Vice Chair and Chief Risk Officer
You’ve got it.
Jeff Rulis — D. A. Davidson & Company — Analyst
Okay, Got it. All right. Thank you. And Peter, just on the loan growth side, I mean it continues to be very strong, I think in quarters past you’ve done — you’ve done a thorough job of sort of pegging by segment, where you think you have some tailwind, some that might have some some headwinds. So just if you wouldn’t mind kind of rattling through the book and where you see in terms of not only Q4, but ’22 where where you’re optimistic and where some areas that might come?
Peter S. Ho — Chairman, President and Chief Executive Officer
Sure. So we had good growth in both commercial as well as consumer on a core basis, Jeff. C&I, actually if you net out the PPP out of C&I, that was up 5.4% on a linked basis for the quarter, really driven by — we’ve made some, some great investments in people over the past couple of years and those individuals have helped us build market share and in a few markets — some markets here in the islands. So I think C&I has an opportunity to grow into ’22, probably not at the 5% linked level, but a reasonably healthy growth rate there. CRE was up 1.7% in the quarter on a linked basis and we think — we think there is a good amount of room in that space as well, both in our granular, what we call our fast track product which is smaller commercial mortgages to smaller investors and mom and pop types, but also in the institutional space. I think clearly the market has recognized the durability of Hawaii assets at the institutional level and we’re seeing kind of renewed interest after taking a pause through the pandemic.
Construction, I think should be strong as well, that was up pretty nicely in the quarter and really led by hopefully affordable housing output because that is — we certainly need that here in this marketplace. Switching over to the consumer side, resi was was about flat for the quarter on a linked basis, production was down about 30% as rates as rate started to pick up. But the good news is that was offset by really great production in just about all of our other consumer categories, so HELOC was up very smartly, indirect even was up despite the inventory challenges of that — of that industry, and our other consumer which is basically instalment was up $36 million or just under 10% for the quarter on a linked basis, really driven by — we kind of restarted that program as we took a bit, pulled back a bit on that programing through the pandemic. And so I think — I think that was, that created some pent-up demand in the book, but still a very good result. And I think the other interesting thing on the consumer side is we’re seeing a good uptake in our digital channels. So 18% percent of our production for the quarter was through our digital channels, up 62% year-on-year.
Jeff Rulis — D. A. Davidson & Company — Analyst
Okay, appreciate it. A lot of details, sounds pretty, pretty good momentum into ’22, I suppose. Maybe one last one, just, Dean, and maybe it’s Dean’s question. Just the PPP, could we kind of assume that’s largely cleaned up by year end, is that — is that fair to say?
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Yeah, we expect the fourth quarter to pay off most of what’s remaining. But we also do expect some might carry over, but not that material amount.
Jeff Rulis — D. A. Davidson & Company — Analyst
Great. Okay, thank you.
Dean Y. Shigemura — Vice Chair and Chief Financial Officer
Yeah, take care.
Operator
Thank you. [Operator Instructions] We have a question from Laurie Hunsicker with a complex Compass Point. Please go ahead.
Laurie Havener Hunsicker — Compass Point — Analyst
Yeah, hi. Thanks, good morning. Can you just refresh us on how much in PPP fees are actually remaining?
Peter S. Ho — Chairman, President and Chief Executive Officer
Yeah, we have approximately $7.7 million remaining.
Laurie Havener Hunsicker — Compass Point — Analyst
Okay. And then I just want to make sure I heard you right, it was $5.9 million that was reflected in this quarter.
Peter S. Ho — Chairman, President and Chief Executive Officer
That was the accelerated fees.
Laurie Havener Hunsicker — Compass Point — Analyst
Right, the forgiveness.
Peter S. Ho — Chairman, President and Chief Executive Officer
Right.
Laurie Havener Hunsicker — Compass Point — Analyst
Okay, okay, so if I’m — if I’m stripping that out, so your margin then was 221 relative to 230 [Phonetic] ex PPP gains last quarter. I guess, can you help us think a little bit about your your comments about potential margin widening and also maybe the FHLB borrowings that were prepaid in the quarter, when were they repaid and how much and what were those costings? Thanks.
Peter S. Ho — Chairman, President and Chief Executive Officer
Okay, let me take that second one first on the repos. It was towards the end of the quarter, the approximate rate was about 2.6% — 2.4%, sorry, 2.4%. And then the — in terms of the margin, I think I get to the same numbers that you did on the PPP waivers. Liquidity impacted us quarter over quarter by about 11 basis points and then our growth and deployment of assets added back about 2 basis points.
Laurie Havener Hunsicker — Compass Point — Analyst
Okay, great. And then just one last question around that. Do you anticipate doing any borrowing prepays in the coming quarter? Or how are you thinking about that?
Peter S. Ho — Chairman, President and Chief Executive Officer
I think it will depend on the situation. I mean, we’ve done these opportunistically. When it look positive from various fronts, we will do it. But right now I guess nothing planned here for the quarter.
Laurie Havener Hunsicker — Compass Point — Analyst
Okay, great. And then, sorry, just two more ones from me. Just want to make sure I got this right. So the preferred this quarter was $1.006 million, next quarter we’ll see the full impact, that will be $1.969 million, am I doing the math on that right?
Peter S. Ho — Chairman, President and Chief Executive Officer
Yes, for the fourth quarter you will see approximately $2 million in preferred dividends.
Laurie Havener Hunsicker — Compass Point — Analyst
$2 million, Okay, perfect. And then just last one from me. How should we think about tax rate going forwards?
Peter S. Ho — Chairman, President and Chief Executive Officer
For the fourth quarter estimate is about 24%.
Laurie Havener Hunsicker — Compass Point — Analyst
Okay. And what about for next year, ex whatever is happening in Washington, how should we think about that?
Peter S. Ho — Chairman, President and Chief Executive Officer
I think for now 24% is also a good number.
Laurie Havener Hunsicker — Compass Point — Analyst
Okay, perfect. Thanks for taking my questions.
Peter S. Ho — Chairman, President and Chief Executive Officer
Thanks, Laurie.
Operator
Thank you. And I’m not showing any further questions.
Janelle Higa — Vice President of Investor Relations
Okay. I would like to thank everyone for joining us today and for your continued interest in Bank of Hawaii. Please feel to contact me if you have any additional questions or need further clarifications on any of the topics discussed today. Thank you, everyone.
Operator
[Operator Closing Remarks]