Bank of Hawaii - Earnings Call - Q1 2018
April 23, 2018
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Bank of Hawaii Corporation First Quarter twenty eighteen Earnings Conference Call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we will host a question and answer session and our instructions will be given at that time. As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to hand the conference over to Ms.
Cindy Wyrick, Director of Investor Relations. Ma'am, you may begin.
Speaker 1
Thank you, Brian. Good morning, good afternoon, everyone. Thank you for joining us today as we review the financial results for the 2018. Joining me today 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 the actual results may differ materially from those projected. And now I'd like to turn the call over to Peter Ho.
Speaker 2
Thanks, Cindy. Good morning, everyone. Thanks for joining us today. 2018 was another solid quarter for Bank of Hawaii. We had good financial performance with the rising net interest margin, sound asset quality, disciplined expense control and solid balance sheet dynamics.
Our loans grew to $9,900,000,000 at the end of the quarter, an increase of 1.2% from the previous quarter with growth in both our commercial and consumer loan portfolios. Compared with the first quarter last year, total loans increased 8.8%. Total deposits were also up compared with the previous quarter due to continued strength in the consumer deposits area. Compared with the first quarter last year, total deposits increased 3.3%. In addition to the strong financial results, I'm pleased to announce that our Board has declared a dividend of $0.60 for the 2018, an increase of 15.4% from
Speaker 3
the previous quarter. Now let me ask Dean to provide you with some additional details on our financial performance this quarter and then Mario will comment on credit quality. Dean? Thank you, Peter. Net income for the first quarter was $54,000,000 or $1.28 per share compared to $43,000,000 or $1.01 per share in the fourth quarter and $51,200,000 or $1.2 per share in the first quarter last year.
Our return on assets during the first quarter was 1.29%, the return on equity was 17.74% and our efficiency ratio was 57.91%. Our net interest margin for the first quarter was 3%, up two basis points from the fourth quarter and up 11 basis points from the same quarter last year. As a result of the tax reform bill, which required a revision in our tax equivalent adjustment, the net interest margin for the first quarter was reduced by four basis points. This adjustment had no impact on our net interest income for the quarter. Net interest income on a reported basis for the 2018 was $119,000,000 up $200,000 from the fourth quarter and up $9,100,000 from the first quarter of last year.
As Mary will discuss later, we recorded a credit provision of $4,100,000 this quarter. Non interest income totaled $44,000,000 in the 2018 compared with 41,900,000.0 in the previous quarter and CAD 55,900,000.0 in the same quarter last year. Non interest income in the 2018 included a CAD 2,800,000.0 distribution from a low income housing partnership. Non interest income in the 2017 included a gain of $12,500,000 from the sale of Visa Class B shares. There were no Visa share sales during the 2018.
Adjusted for these gains, the decrease in non interest income compared with the previous quarters were largely due to lower mortgage banking income and a continuation of the decline in overdraft fees. Going forward, the growth in non interest income will continue to be a challenge due to the downward trend in overdraft fees and our expectation for lower volumes of salable mortgages. Non interest expense totaled $94,400,000 in the 2018 compared with $92,300,000 in the previous quarter and $88,600,000 in the same quarter last year. Results for the 2018 and 2017 included seasonal payroll related expenses of approximately $2,500,000 Non interest expense during the first quarter of this year also included a legal reserve of $2,000,000 and severance of $1,000,000 in addition to $500,000 related to the implementation of the new minimum wage for the company. Non interest expense in the 2017 included one time employee bonuses totaling $2,200,000 Adjusted for these items, non interest expense was down 2% from the previous quarter and up 2.7% from the same quarter last year.
For the full year of 2018, we expect expenses to be about 2.5% to 3.5% above our 2017 expenses. The effective tax rate for 2018 was 16.19% compared with 32.93% in the previous quarter and twenty nine point seven two percent during the same quarter last year. The effective tax rate in the 2018 was due to the reduction in the federal corporate tax rate and a $2,000,000 favorable adjustment in our low income housing investments. For the 2017 2017 included a onetime negative adjustment of $3,600,000 related to the tax reform bill. Currently, we expect the effective tax rate for the remainder of 2018 to be between 1921%.
As a result of loan growth exceeding deposit growth during the first quarter, our investment portfolio decreased to $6,000,000,000 Premium amortization was $9,600,000 in the 2018, down from $10,100,000 in the previous quarter and $10,600,000 in the same quarter last year. We purchased a total of $121,900,000 of securities during the quarter, which were primarily comprised of treasuries and SBA securities. The reinvestment differential during the first quarter was a positive six basis points. The duration of the available for sale portfolio was two point five two years at the end of the 2018. The held to maturity portfolio duration was four point two three years and the duration for the total portfolio was three point six years.
Our total shareholders' equity increased to 1,240,000,000 at the end of the first quarter. Our Tier one capital ratio was 13.37% and our Tier one leverage ratio was 7.46%. During the quarter, we paid out $22,100,000 or 41 percent of net income and dividends and repurchased 165,500 shares of common stock for a total of $13,900,000 We repurchased an additional 60,000 shares between April 2 and April 20 at a total cost of $5,000,000 And as Peter mentioned, our Board declared a dividend of $0.60 per share for the 2018. Now I'll turn the call over to Mary Sellars.
Speaker 4
Thank you, Dean. Net charge offs for the first quarter totaled $3500000.0.0.15 percent annualized of total average loans and leases outstanding as compared with net charge offs of $3,800,000 or 0.15% annualized in the 2017 and $3,600,000 or 0.16% annualized in the 2017. Non performing assets were $15,700,000 or 16 basis points at the end of the first quarter, down from $16,100,000 at the end of the fourth quarter and down from $19,000,000 at the end of the first quarter of last year. Loans past due ninety days or more and still accruing interest totaled $8,200,000 or eight basis points, up $1,000,000 for the linked period and up $2,300,000 year over year. Restructured loans not included in non accrual loans or loans past due ninety days or more totaled $56,700,000 up $1,100,000 from the prior quarter and up $3,800,000 year over year.
Residential mortgage loans modified to assist our customers accounted for $19,800,000 of the total. As we enter into the ninth year of this credit cycle, our underwriting criteria remained stronger than during the last quarter as we look to capitalize on our experience during that time to optimize our performance. Accordingly, at the end of the first quarter, the weighted average loan to value for commercial mortgage portfolio was 54%, while the weighted average loan to value for the residential and home equity portfolios was 5863% respectively. And in our indirect portfolio, the weighted average monitoring FICO was seven zero nine. At the end of the quarter, the allowance for loan and lease losses totaled $107,900,000 Given net charge offs of $3,500,000 a credit provision of $4,100,000 was recorded.
The ratio of the allowance to total loans and leases was 1.09% at the end of the quarter, down one basis points for the linked period and down six basis points year over year. The allowance continues to reflect the strength in the company's asset quality and the Hawaii economy over this period as well as the mix in loan growth. The total reserve for unfunded commitments was $6,800,000 at the end of the quarter, unchanged from the 2017 and up $250,000 from the 2017. I'll now turn the call back to Peter.
Speaker 2
Thanks, Mary. The Hawaii economy continues to perform solidly. Our unemployment rate in March was 2.1% for the sixth consecutive month and remains low compared to an unemployment rate of 4.1% nationally. Our visitor industry continues to grow from the record levels of last year. For the first two months of 2018, total visitor arrivals increased 7.7% and visitor spending increased 8.5% compared to the same period a year ago.
For the first two months, all four of Hawaii's largest visitor markets, which includes The U. S. West, The U. S. East, Japan and Canada are showing strong growth in spending compared to the first two months of last year.
In addition, all four Hawaiian Islands saw growth in visitor arrivals and spending in February compared to a year ago. Airlift is up about 10% over a year ago. Real estate remained strong during the 2018. The median sales price of a single family home on Oahu, our primary market increased 2% during the 2018, while the median price of condominiums increased 9% compared to the same period last year. The median sales price of a condo was $435,000 in March, a new record for the Island Of Oahu in condominiums.
Months inventory at the end of the quarter was 2.1 for a single family home and two point six months for condominiums. The median number of days on market during the 2018 was eighteen days for both condominiums as well as single family homes. So you can see inventories remain quite tight. We continue to make solid progress in transforming our branches to our branch of tomorrow concept. This concept integrates a twenty first century digital banking experience with greater convenience and personal interactions to build an even better relationship with our customers.
We've transformed six branches to date with the most recent being our Pearl Ridge branch completed in January. We have several on slate for next year, including our Kahala branch, which should begin construction early next year. Thanks again for joining us today and now we'd be happy to respond to your questions.
Speaker 0
Thank you, sir. And our first question will come from the line of Jeff Rulis with D. A. Davidson. Your line is now open.
Speaker 5
Thanks. Good morning.
Speaker 2
Hey, Jeff.
Speaker 5
Just wanted to kind of pair out some of the out of the expenses just to see what you would view as one time or I guess seasonal. So you kind of identified the additional seasonal payroll, the legal and severance that all adds up to about $5,500,000 I guess in the coming quarters, what expected of that is to do you expect to recur?
Speaker 3
So all of the items that you mentioned, we don't expect to reoccur for the rest of the year. Severance Severance could pop in and out. Yes. So that could be more episodic. But certainly, the legal reserve, the payroll the bump in the payroll taxes benefits will not be reoccurring in the second quarter.
Speaker 5
Got it. Thanks. And maybe on the
Speaker 3
But same I also should note that in the second quarter, we do increase our the compensation for merit increases.
Speaker 5
Okay. Got it. And then on the the low income housing, do we view that as also one time, the $2,800,000 Is that what? Yes. Okay.
All right. And then maybe one last one, maybe for Peter. Just you guys had mentioned you sort of had backed off the public deposit arena that it gotten pretty competitive. Maybe just an update on deposit pricing in your market, any update there? Thanks.
Speaker 2
Sure. Yes. So I think we're thinking about pricing against, I think some meaningful contextual situations here in our current environment. We're coming off of a truly extended and historic period of effectively zero interest rates. So as rates have begun to rise over the past year, call it, I think certainly there are pools of deposits still resident on our balance sheet that frankly represented somewhat lazy deposits if you will, that ultimately are going to seek a yield home.
So as we look at it, we're pretty clearly convinced that the industry is really on a journey of repricing. And it's important to understand that there's a pretty broad spectrum outcomes out there. So anywhere from as you mentioned the governmental side, all the way down to our mass market retail side and everyone in between private banking and small business and commercial and large corporate, large wholesale. So yeah, you're right. We mentioned last quarter that we likely were going to sit on the sidelines so long as public time deposits were pricing where they were.
There hasn't been a lot of relief, maybe a touch of relief there, but still pretty expensive money and stuff that we just don't need to be funding into. So that would be one example. I'll tell you on the core commercial and on the core consumer side, our betas are still looking quite attractive, if you will. Those will continue to rise as rates rise, but I think against historical perspectives, certainly the commercial and the consumer segment feels pretty good for us at this point, although albeit it's a competitive market out there. I guess, as we look out longer term on the deposit front, we'll see what happens.
It's feeling like there are additional rate increases out there that's going to give people quite naturally more of an urge or desire to see what kind of pricing they can get, not just a Bank of Hawaii, but elsewhere. And we're going to do our best to make sure that we maintain the deposit base that we'd like to have for the balance sheet construction that we have. The one thing we feel good about though is I think we're well positioned. We've got a loan to deposit ratio of 66%, which I think is leading the marketplace here in the island. So we've got an abundance liquidity, if you will.
We love the diversity in our deposit base. So we're 51%, just over 51% consumer, just over 39% commercial and our public book and frankly the book that's probably the hottest at this point is 9.3% of our overall deposits. And then finally by product type, again, I think a good story there. 52% of our deposits are demand deposits, both interest bearing and non interest bearing. Savings is 36% and time deposits comes in at 12%.
So our deposit base at least by product type is largely transactional, largely relationship based. And I think we take a fair amount of strength into what's going to be a tougher pricing environment. There's no question about that.
Speaker 5
Great, thanks.
Speaker 2
Yeah, thanks Jeff.
Speaker 0
Thank you. And our next question will come from the line of Brett Revan with Piper Jaffray. Your line is now open.
Speaker 6
Hi, good morning, everyone.
Speaker 2
Hey, Brett.
Speaker 6
Wanted to, I guess, first talk about the loan growth outlook and just ask one, was there any payoffs in the commercial real estate book this quarter? And then
Speaker 2
say that? Pass that. Yes, CRE had a pretty for them a pretty tough quarter down 0.3%. They had really somewhat of an explosion of scheduled payoffs and transaction maturities in the quarter, which frankly masked a pretty good production quarter for them. We would anticipate that they revert back.
I'm not going to say to their old ways, but I think that they're still going to be a growth contributor for us. Construction on the other hand, I think kind of continues down the path that we've described for the past couple of quarters now, just as a lot of those luxury high rise projects have topped up and are concluded, we should see construction numbers continue to winnow down a bit. But C and I was strong at up 3.8%. That's really just a lot of different things, some fundings up on existing relationships and a few new transactions as well. So on balance commercial was kind of had its second tepid quarter in a row of 0.7% on a linked basis.
Resi was in at 1.1% growth on a linked basis, about frankly about where we think they were going to show up. As you might imagine, Brett, refi markets been mucked up a bit by higher rates and purchase activity is impacted by just a tight inventory situation here in the islands, somewhat exacerbated on a comparative basis by the fact that there's just a lot fewer project types of transactions that are going to occur in 2018 versus what occurred in 2017. So resi at 1% up is about what we thought. Then our other consumer products, I think performed pretty well. So to get to your question, if you annualize the quarter's performance, that's 4.8.
If you look at where we were on a year on year basis, it's 8.8%. I think if you split the baby there, that's probably about where we would think loan growth forecasting wise is looking like for us for the balance of the year.
Speaker 6
Okay. And then the other thing I just want to make sure I understood was the commentary around fee income and just the lower overdraft fees. Is that a trend that you expect to continue? And then just thinking about growth of total fee income being a challenge, would that sort of mean that some of the other segments might not aid a little better numbers than 1Q levels, I. E.
Mortgage banking comes back a little bit? And maybe you can have some growth in trust, any additional color on that?
Speaker 3
Yes. So the I would say about a $42,000,000 guidance would be what we would provide for the revenue going forward for the quarters. We do still expect overdraft fees to be under pressure. And then on the mortgage banking side, just with the rate environment, that's a little bit tricky at this point. But about $42,000,000 is what we would expect.
Speaker 2
Kind of the run rate from Q4 is about the run rate we would see.
Speaker 6
Great. Thanks for the color.
Speaker 2
Yes. Take care, Brett.
Speaker 0
Thank you. And our next question will come from the line of Jackie Bohlen with KBW. Your line is now open.
Speaker 7
Hi, good morning, everyone.
Speaker 2
You're always going to have your rate shoppers that are going to jump from special to special to special. We try to stay away from that as best we can. I would say probably the biggest change in the marketplace is it's become a much more crowded space than it has say in the past couple of years. So I think as equity values here in the islands have continued to move up in a very steady fashion that's kind of opened up the market opportunity. And whereas, we were pretty aggressively building market share over the past couple of years, we've been met by some pretty strong competition, which I think if I think about it or as we think about it, that's probably the biggest difference in our growth trajectory within home equity.
I think the consumer is not a whole lot different from where they were a year ago.
Speaker 7
Okay. And the competition and the increase to the market that you're seeing, is that from local banks, from credit unions or from other players?
Speaker 2
Mostly local banks and credit unions. Okay.
Speaker 7
And then if also if you could just speak to what if any and this may be a question for Mary impact you anticipate from the recent floodings in Kauai?
Speaker 2
Sure.
Speaker 4
The majority of the damage that we've been able to assess thus far has really been in the Hanalei area. In that area, we have about 15 mortgage loans and home equity facilities, about $16,000,000 in outstanding. About $12,000,000 were in a flood zone with flood insurance. We really haven't been contacted by our customers and we've been out trying to visit them and reach out to them to see if there are any challenges. I think their initial focus really though is on cleaning out and safety and so we haven't gotten too much feedback yet.
We do note that the loan to values that we have in that area are very low and so they should have some financial capacity to help us help them as they need to rebuild.
Speaker 2
Yes, kind of an interesting area, Jackie. Hana Leh has got a lot of very high end properties, but also a fair number of just kind of market level residences. And so, first of all, our team is in great shape, none of them were terribly impacted by the storm. And then secondly, we're going to look to support the people of Kauai as best we can. But as Mary mentioned, from a credit standpoint, not really much to report there.
Speaker 7
Okay, great. Thanks for the update and glad to hear that all your team members are safe.
Speaker 2
Yes.
Speaker 0
Thank you. And our next question will come from the line of Aaron Deer with Sandler O'Neill. Your line is now open. Mr. Deer, your line is now open.
Please check your mute button.
Speaker 8
Hi, good morning everyone. Sorry about that. Peter, you had mentioned in your answers to another analyst, the splitting the difference on a couple of numbers to kind of in terms of guidance for loans. I wasn't sure what numbers you were referring to there. Can you maybe repeat that?
Speaker 2
Sure. Yes. What referring I to Aaron is if you annualize our first quarter results on a linked basis that gets you to 4.8% annualized, right. And if you look at our year over year performance in the first quarter, it was 8.8%. Now I was saying is I think that if you look trying to figure out what we're looking at growth wise, we're probably right in between those two numbers.
Speaker 8
Got it.
Speaker 2
That's what I said, yeah.
Speaker 8
Okay. And you've given some pretty good guidance generally. One question though just in terms of individual line item on mortgage banking. Looking at the first quarter results, just a little over $2,000,000 is that level pretty much just the level that you earn on servicing? Is that what that is?
Or was there any sales in the first quarter?
Speaker 3
No, there were sales. The servicing income is nearly $2,000,000 It's about $1,800,000 So the rest of it would be related to sales.
Speaker 8
Okay. And then maybe just one last question kind of margin related. On the with respect to the loan book, can you give us an update in terms of what percentage of that reprices immediately and reprices within one year if you have that available?
Speaker 3
Yes. In terms of the just kind of our floating rate loans, it's roughly about 25%. And then there's probably another maybe, I will call it, percent that would reprice within a year.
Speaker 8
Okay. Okay, that's helpful. Thanks for taking my questions.
Speaker 2
Thanks, Aaron.
Speaker 0
Thank you. And our next question will come from the line of Laurie Hunsicker with Compass Point. Your line is now open.
Speaker 9
Great. Hi. Good morning.
Speaker 3
Good morning.
Speaker 9
I'm just wondered on the funding side if we can go back to the public deposit space. I see your public deposits are 1.4. Do you have a breakdown of how much is the time included in that number?
Speaker 2
Sure, we do. Time other is $818,000,000 down from $838 last quarter.
Speaker 9
Great, thanks.
Speaker 2
Okay. We want to expect then that to continue to come down.
Speaker 9
Okay, thank you. Okay. And then just going back to C and I here, was your growth this quarter all originated or was some of it purchased?
Speaker 2
We don't purchase. You're talking about like purchasing shared national leverage credits? Exactly. From banks and things? Yes.
Yes, no, we're not in that business, Laurie.
Speaker 9
Okay. But you've in round numbers, you've got about 50 or so million of SNC. Is that still the same number within the one
Speaker 2
plus It's read actually more than that one.
Speaker 4
Right now we've got about $274,000,000 in outstanding SNCs, although 68% is Hawaii, 21% on the Mainland.
Speaker 2
Yes, so the 68% are largely loans that we are agent on and so they're more than two and they're greater than 20. So that's SNC by definition. Although I think the definition changed.
Speaker 4
Definition moved up to a Yeah, definition
Speaker 9
has moved up. But yeah, okay, so two seventy four under the old. And then what about the leverage leasing total? Do you have that?
Speaker 4
The leverage leasing total is $121,000,000 about $40,000,000 of which is defused or supported by securities.
Speaker 9
Okay. That's helpful. Okay. And then just last question going back to your expenses, and I appreciate your color on all the onetime items. But just wondered if you could help us a little bit.
I know that round numbers you were expecting a $3,000,000 tax windfall reinvestment back into the expense line. How much of that was baked in the first quarter?
Speaker 3
Well, go ahead. Yes. So I would I mean, it's really a one third of one fourth of that because it's kind of spread out and it's showing up in two line items. One would be the salary line, which is the minimum wage component and the other would be in our incentives where it's effectively our profit sharing where we're increasing that to match the growth in the net income.
Speaker 9
Right. So round numbers of the $750,000 or so per quarter run rate that you expect, was most of that then already into the March or
Speaker 3
Right. Yes.
Speaker 9
It was. Okay. Perfect. Thank you very much.
Speaker 2
Thank
Speaker 0
you. And our next question will come from the line of Brett Rabin with Piper Jaffray. Your line is now open.
Speaker 6
Hi, I just had a follow-up on the branches and the kind of the next generation branch profile. Can you maybe remind us how much that saves per branch? And then I think you mentioned you got a couple that you were doing this year. How many might you do over the next couple of years in terms of what you have left?
Speaker 2
Well, we've got 66 branches here in the islands. So as of now, we're kind of 10% complete. I think what we have on slate for next year is not quite six, several. And so we're going move methodically. The majority of our branches, Brett, are leased facilities.
And so our activity in some ways is subordinate to those renewal dates. The basic strategy behind these new branches is multifold. Number one, our branches in general are older, I mean, like pretty darn old. So we've got a requirement to reface these facilities to begin with. And what the new format allows us to do is to do that with less square footage.
So I'll give you a for example. Our headquarters branch, several stories below us is about a 12,000 square foot floor plate. It's retail space on the Ground Floor, it's on kind of the corner of Main And Main and Downtown Honolulu. So it's a great location. And we just don't have the need for a 12,000 square foot or didn't have the need for a 12,000 square foot main branch anymore.
I mean, was just it was too big and not only was it too big, was de energized because it was so broad. And so what we were able to do was basically cut that branch in half and really build what I think is a quite beautiful facility that reflects the twenty first century and gives us the ability to run more efficiently with our FTEs within the branch. So what you end up with is kind of the right size branch, the right fit and finish for what's appropriate to our brand and savings that you pick up just on the operating side as well as on the occupancy side. In the case of this branch, we're I'm not going to give you the exact numbers, but the returns on just the transaction are well into the double digits. When we look at the overall return on capital on everything that we have a vision on that number, obviously the best ones come out first and the not so good ones later.
But the cumulative return on that's well into the double digits. So we think we're getting a good investment. We think we're getting a facility that reflects the twenty first Century brand. Frankly, we'd have to refresh most of these brands in any way.
Speaker 6
Okay. That's great color. And then I guess the other thing I wanted to ask was you increased the cash dividend, but you might still have a little bit of capital ratios moving higher with the higher level of profitability. Do you intend to be more aggressive with the share buyback or are you thinking about capital differently with the higher level of profitability?
Speaker 2
Well, we've got the lease conversion on the balance sheet still coming up. We're going to have to figure out ultimately what CECL is going to mean for us. So those are some touchstones out there that frankly we're setting aside a little extra for. I would agree with you at seven point five percent. We've done a bit of a build.
Part of that was you saw the profitability in the first quarter. And so that was kind of the first quarter under the new tax regime using somewhat of an old capital model. So we think with the new dividend that should begin to revert out a bit. And then from a repurchase standpoint, our activity is going to be, I think from a strategy standpoint, the same as you've always experienced with us.
Speaker 6
Okay. I appreciate the additional
Speaker 2
color. Okay.
Speaker 0
Thank you. And I'm showing no further questions in the queue at this time. So at this point, I would like to hand the conference back over to Mr. D. Wyrick, Director of Investor Relations for some quick closing comments or remarks.
Speaker 1
I'd like to thank everyone for joining us today and also for your continued interest in Bank of Hawaii. As always, please feel free to contact me if you have any additional questions or need further clarification on any of the topics discussed today. Thanks everyone and have a great day.
Speaker 0
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.
