Bank of Hawaii - Earnings Call - Q1 2019

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Bank of Hawaii Corporation First Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference may be recorded. I would now like to turn the conference over to Sydney Wyrick, Director of Investor Relations.

You may begin.

Speaker 1

Thank you, Sonia. Good morning, good afternoon, everyone. Thank you for joining us today as we review our financial results for the 2019. 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. Aloha, everyone, and thanks for joining us today. Bank of Hawaii began 2019 with strong financial performance. Our asset quality remained strong, margin expanded, our expenses were well controlled and our liquidity and capital levels remained robust. Assets, loans and deposits all grew during the quarter.

Outstanding loans increased 1% from the previous quarter and were up 6.4% from the same quarter last year. Deposit growth was particularly strong during the first quarter, up 1.6% from the previous quarter and up 2.1% from the same quarter last year. Total deposits of $15,300,000,000 at the March set a new record high for deposits at Bank of Hawaii. Now I'll ask Dean to provide you with some additional details on our financial performance for this quarter and our outlook for the remainder of 2019. Murray will then comment on credit quality.

Dean?

Speaker 3

Thank you, Peter. Net income for the first quarter was $58,800,000 or $1.43 per share compared to $53,900,000 or $1.3 per share in the previous quarter and $54,000,000 or $1.28 per share in the 2018. Our return on assets during the first quarter was 1.38%. The return on equity was 18.81% and our efficiency ratio improved to 55.22%. Our net interest margin for the first quarter was 3.12, up two basis points from the 2018 and up 12 basis points from the 2018.

Net interest income on a reported basis in the first quarter increased to $124,800,000 up from $124,000,000 in the previous quarter and $119,000,000 in the same quarter last year. During the 2019, we repositioned approximately $400,000,000 investments, largely comprised of municipal securities at no material gain or loss on sale. The reinvestment differential was 114 basis points on a taxable equivalent basis with no material change in duration. The portfolio repositioning as well as overall balance sheet growth is expected to improve net interest income going forward. However, given the current rate environment as well as our strong liquidity position at the end of the first quarter, we anticipate net interest margin may be flat to modestly lower in the second quarter.

As Mary will discuss later, we recorded a credit provision of $3,000,000 this quarter. Noninterest income totaled $43,700,000 in the 2019 compared with $42,100,000 in the previous quarter and $44,000,000 in the same quarter last year. Noninterest income in the 2019 included a onetime $1,400,000 insurance commission related to products we offer through a third party administrator. In addition, we incurred approximately $800,000 of fees related to the ongoing carrying cost of our sold Visa position, not related to the portfolio repositioning. There were no significant items during the 2018.

Non interest income for the 2018 included a gain of $2,800,000 from a low income housing investment sale. Non interest revenue is expected to remain at approximately $42,000,000 per quarter for the remainder of 2019. Non interest expense totaled $93,100,000 in the 2019 compared with $95,900,000 in the previous quarter and $94,400,000 in the same quarter last year. Non interest expense in the 2019 included seasonal payroll expenses of approximately $2,700,000 Non interest expense in the 2018 included a true up of $1,700,000 to medical expenses, primarily related to a single claim and charges of $1,300,000 in legal and operational matters. Non interest expense in the 2018 included seasonal payroll expenses of approximately $2,500,000 and a legal reserve of $2,000,000 For 2019, we expect non interest expenses to be approximately 2% to 3% above our adjusted 2018 expenses of $365,000,000 The effective tax rate for 2019 was 18.85% compared with 20.92% during the previous quarter and 16.19% during the same quarter last year.

The 2019 included a tax benefit of $1,900,000 related to an exercise of an early buyout option. The tax rate during the 2018 included $2,000,000 included a $2,000,000 benefit related to our low income housing investments. As a result of our portfolio repositioning, which reduced our exposure to municipal securities, we expect the effective tax rate for the remainder of 2019 to be approximately 22%. Our investment portfolio was $5,500,000,000 at the end of the first quarter, up slightly due to strong deposit growth that exceeded loan growth during the quarter. Premium amortization during the quarter was $6,300,000 down from $8,100,000 in the previous quarter and $9,500,000 in the same quarter last year.

The duration of the total portfolio was three point two six years at the end of the 2019. The held to maturity portfolio duration was three point seven years and the duration for the available for sale portfolio was two point four years. Our shareholders' equity increased to 1,270,000,000 at the end of the first quarter. Our Tier one capital ratio was 12.75%, and our Tier one leverage ratio was 7.46%. During the first quarter, we paid out $25,600,000 or 44% of net income and dividends and repurchased 513,400 shares of common stock for a total of $39,900,000 We repurchased an additional 114,000 shares between April 1 and April 18 at a total cost of $9,200,000 And finally, our Board declared a dividend of $0.65 per share for the 2019, an increase of 5% from the first quarter dividend of $0.62 per share.

Now I'll turn the call over to Mary Sellers.

Speaker 4

Thank you, Dean. Net charge offs for the first quarter totaled $3,700,000 or 0.14% annualized of total average loans and leases outstanding as compared with net charge offs of 4,000,000 or 0.15% annualized in the 2018 and $3,500,000 or 0.15% annualized in the 2018. Non performing assets were $17,900,000 or 17 basis points at the end of the first quarter, up from $12,900,000 or 12 basis points at the end of the fourth quarter and up from $15,700,000 or 16 basis points at the end of the first quarter of last year. The increase for the quarter was primarily driven off the $3,900,000 balance of a commercial mortgage loan that was placed on non accrual this quarter after a $1,600,000 charge down. Loans past due ninety days or more and still accruing interest totaled $6,100,000 compared with $6,600,000 at year end and $8,200,000 at the end of the 2018.

Restructured loans not included in non accrual loans or loans past due ninety days or more totaled $448,600,000 down $160,000 from the prior quarter and down $8,200,000 year over year. Residential mortgage loans accounted for $19,600,000 of the total. At the end of the quarter, the allowance for loan and lease losses totaled $106,000,000 down $700,000 from the 2018. Accordingly, given net charge offs of $3,700,000 a credit provision of $3,000,000 was recorded. The ratio of the allowance to total loans and leases was 1.01% at the end of the quarter, down one basis point for the linked period and down eight basis points year over year.

The allowance reflects the continued strength in the company's asset quality as well as the Hawaii economy over this period and the mix in loan growth. The total reserve for unfunded commitments was 6,800,000 at the end of the quarter, unchanged from the 2018. I'll now turn the call back to Peter.

Speaker 2

Great. Thank you, Mary. The Hawaii economy continued to perform steadily during the first quarter. Our statewide unemployment rate was 2.8% in March and remains very low compared to the unemployment rate of 3.8% nationally. Visitor stats year to date February were a bit mixed.

For the first '2 months of twenty nineteen, total visitor arrivals increased 1.8%, although visitor spending did decline by 2.4 due to a reduction in daily spending. The real estate market on Oahu remained stable during the 2019 despite a moderate decrease in volume of home sales. Median sales price of a single family home increased 2%, while condominium sales prices decreased 3.2% compared with the first quarter last year. At the March, months of inventory of single family homes and condominiums on Oahu were three point four months and three point six months, respectively. Thanks again for joining us today, and now we'd be happy to respond to your questions.

Speaker 0

Thank Our first question comes from Jeff Rulis of D. A. Davidson. Your line is now open.

Speaker 5

Thanks. Good morning.

Speaker 2

Good morning, Jeff.

Speaker 5

Peter, maybe just a broader question on credit. It sounds like the addition was one property. But I guess broadly speaking on credit, just the early warning signs for you, do you look more to the consumer side or real estate that would indicate further softening is happening? Or what do you guys discuss internally?

Speaker 2

Yes. So obviously a lot more of those discussions of the recent past. We actually look at both factors. I'll kind of kick this answer off and Mary, maybe you could kind of clean up whatever I don't get taken care of. But we're looking at monitoring scores, FICO.

We're looking at LTVs. We're looking at intrinsic real estate values underneath both our consumer and commercial real estate books. We're looking for classified and credit trends on the commercial portfolios. And I guess the way that I would characterize it is I'm somewhat a believer that we are certainly trending closer to the turn in the cycle. Although I would say that there is precious little from a quantitative standpoint, from an analytical standpoint, at least in our portfolios, and at least in what we see in the local economy that would prove that out at this point.

Mary, do want to add anything?

Speaker 1

No, I would agree.

Speaker 4

I think what we've seen to date in the commercial mortgage that went on non accrual was kind of an idiosyncratic asset and not really endemic of the entire book. As Peter mentioned, we continue to see stronger metrics in both originations and monitoring across the portfolio and clearly well below what we were seeing kind of in 02/2007. So we're seeing better quality in our book prior to that. But I think we're trying to take a thoughtful approach and watch what we see happening.

Speaker 2

Yes. I mean Q1 monitoring FICOs were higher this quarter than they were a year ago. So consumer still seems to be in pretty good shape. Although, I mean, sales are off a bit. I talked a little bit about the residential housing market being a little softer volume wise.

So we're watching closely, but so far so good.

Speaker 5

Okay. Thanks for that. And maybe just a question on the margin. You talked about flat to down maybe next quarter. But I guess if we've got an extended pause with the Fed, any preliminary thoughts on the second half of the year margin or a little further out on direction?

Speaker 3

Yes. We at this point, we're looking at if rates kind of stay unchanged from where they are, flat to maybe even up a bit depending on our balance sheet growth.

Speaker 5

Okay. So that's further out than Okay.

Speaker 3

Yes. But I also would want to emphasize that our net interest income forecast is still positive going out through the rest of the year.

Speaker 0

And our next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch. Your line is now open.

Speaker 6

Good morning, guys.

Speaker 2

Good morning.

Speaker 6

Just one follow-up on the margin. If you would just break down in terms of the where the securities yield was at following the restructuring and kind of where the NIM would have been ex the liquidity impact? Just trying to get a sense of the boost received from doing the restructuring and how we should think about the securities yield going forward?

Speaker 3

The securities yield, you know, I quoted the differential at 114. That's on a taxable equivalent basis.

Speaker 0

But if

Speaker 3

you did versus the reported yield, it would be about 155 basis points. And the difference would show up in our tax rate, which is why we have a slightly higher tax rate. So based on that the margin benefit would be about I would say about maybe three basis points or four basis points.

Speaker 6

Got it. And just switching to the other side in terms of deposits, cost of interest bearing deposits went up nine bps quarter over quarter. Do you see that kind of declining from here? Can you just talk a little bit about the pricing competition in the market?

Speaker 2

Yes. I think that if in fact we see a pause in rate increases at the short end, I think thematically we'll begin to be observing a somewhat lighter deposit pressure rate wise. Having said that, there's the beauty of our deposit book is there's a fair amount of latency built into the system. And so even though it appears that the Fed has taken a pause at the short end, that's not to say that we don't still have very low level depositors, low rate depositors coming forward and asking for somewhat better rate. These aren't people that have been following the market day to day.

These are people that have been kind of out of the market for six months to a year plus. So I guess my answer, Ebrahim, would be, I think if we've got a flat rate environment, we should see some pricing relief intermediate term. But that's not to say that in the process of getting there, there's still some latent demand, I think, coming into the coming across the trends. Understood.

Speaker 6

And I assume that part of sort of the guidance Dean gave in the 2019 for the margin implies that you might see loan to deposit ratio trend a little bit higher continue to trend higher?

Speaker 5

Good, yes. Yes.

Speaker 6

And then just on that in terms of loan growth, so we saw loan growth about 1% sequential growth. I heard your comments just in terms of cycle and your thoughts around that. Should we expect loan growth to mirror what we've seen in 1Q? Or I believe in Jan, I think the expectation was that it would be more like 2018 where loan balances grew about 7% year over year?

Speaker 2

Yes. I think that the year on year number at 6.4%, I think that's a pretty good proxy for 2019. We had some early buyout activity in our lease portfolio. You saw that the construction book was a little bit light. We hopefully should pick up some of that towards the back of the year.

And then, the first quarter was just a disaster residential mortgage wise, volume wise. But as of the past month with rates doing what they've done, there seems to be a real resurgence in that business. So I think those factors would push me, Ebrahim, more towards looking towards the year over year percentage versus the linked Q1 percentage.

Speaker 6

Understood. Helpful. Thanks for taking my questions.

Speaker 0

Thank you. And our next question comes from Aaron Deer of Sandler O'Neill and Partners. Your line is now open.

Speaker 7

Hey, good morning everyone. Just curious on the tax line, you guided toward a higher number there. It sounds like tied to the repositioning. Is that I guess presumably then a smaller muni book going forward? Is there any other items in the first quarter other than the highlighted item that affected the tax rate?

Is there anything related to stock compensation that might have been elevated in the first quarter that also pushed that down from your full year expectation?

Speaker 3

There is a bid on the first quarter that's seasonal related to the incentives, the vesting of some of our RSGs. But primarily it's going to be related to the muni book as well as that early buyout item that we cited.

Speaker 7

Okay. And any other expectations for any events on the expense line in the back half of the year where you guys are going to be doing any staff changes or branch reductions that could help out on that front or cause some onetime items through the year?

Speaker 2

You mean in terms of severance costs and things like that, Eric?

Speaker 7

Severance costs or consolidations?

Speaker 2

I think that you're probably going to see in the space of severance numbers kind of a similar trend to what you've seen in the past couple of years. They kind of episodically come in and out. Expense wise, I think we're I think I'm pleased with Q1. And I think the balance of the year is looking pretty nicely controlled. That's including some of those items that you described.

Speaker 7

Okay, very good. Thanks for taking my questions.

Speaker 5

Sure.

Speaker 0

Thank you. And our next question comes from Casey Haire of Jefferies. Your line is now open. And Casey, your phone is on mute, please unmute.

Speaker 8

Sorry about that. Casey. Good morning, guys. How are you? Sorry about that.

So Peter, just wanted to keep on the expense front for a little bit. So it sounds like you guys are keeping the guide at up 2% to 3% on the year. You're tracking well below that in the first quarter here. Just wondering what's going to drive that or that what's going to be a pretty decent expense ramp in the back half of year. Was there anything special in the first quarter, I guess?

Speaker 2

Well, okay. So I think that there is I'd say on the front end, we're pretty hard on some of our comp plans that as we kind of push towards midyear here, I think we need to widen out a bit. So that could come into play in the latter quarters, Casey. But I think you're right. I think you're stressing on it.

2% to 3%, I think, is reasonable. But I think given where we are year to date, the two is looking pretty somewhat attainable. Let me just put it that way. Got you.

Speaker 3

And I should also add that we do have our merit increases, the year over year merit increases that start in April.

Speaker 8

Okay, right. Yes. Okay. So that will come and apply for sure. All right.

And then like the net occupancy and the other lines I thought Was there anything are those sort of the new run rates going forward? Or was there anything pulling those down this quarter?

Speaker 2

Those are running towards the new run rates. We've been as you know, we've been very active in managing our retail square footage. And I'm really pleased with some of the results that I've seen of late. And those should be long term systemic types of impacts for us.

Speaker 8

Okay, great. And just one last one for me, another one on the NIM. With the Fed on hold, what do you guys see in terms of loan yields going forward? I know it depends on mix, but can you hold this sort of 4.2 level you saw in the first quarter? Or is competition going to chip at that?

Speaker 2

I'll tell you, there's a ton of competition out there. So it is all over the place pricing wise and beginning to trend towards terms and conditions as well. So we're feeling late cycle ish competitively here. To answer your question, I think that yields are going to be challenging. Just to try to land the business we know we ought to be landing, think there's going be a lot of price pressure to get that.

Speaker 5

Great. Thank you. Yes.

Speaker 0

Thank you. And our next question comes from Jackie Bohlen of KBW. Your line is now open.

Speaker 9

Hi, everyone. It's Jackie.

Speaker 5

Hey, Jackie.

Speaker 9

I just wanted to follow-up on fee income and understood about the one time nature of the insurance commission that happened in the quarter. Previously I've gotten my notes that you had talked about $42,000,000 as a run rate. And even if I strip that out we were still a bit above that. So kind of two parts. Number one, was there anything else that was you consider unusual in 1Q?

And then number two, how do you feel about that level going forward?

Speaker 2

So you're right. We're levitating a bit above that because primarily because we had a very good quarter for interest rate derivative activity as well as foreign exchange derivative activity. And so is there a possibility that we'll have that kind of income in the coming quarters? Possible. Actually, we do have a pretty heavy book funding wise on the commercial front.

So that bodes well for at least the interest rate side. But Jackie, that stuff's pretty episodic and it's tough to tell. But maybe. I guess what I would say is 42 is feeling more like a floor these days than a ceiling. Yeah.

Speaker 9

Okay. That's helpful. And in relation to the Insurance Product Commission, is that something and understanding that it's unique, is it repeatable or was it just truly something that came up and you were able to take advantage of?

Speaker 2

It repeats every time we renew the So it's not quarterly for sure. It's not I don't think even annually.

Speaker 3

Yes, it's several years.

Speaker 9

Okay. Okay, thank you. Everything else I had was already asked.

Speaker 7

Okay.

Speaker 0

Thank you. And our next question comes from Laurie Hunsicker of Compass Point. Your line is now open.

Speaker 10

Great. Hi, thanks. Good morning. Just I wanted to stay with Jackie's question on uninterest income for a moment here. So within the trust and asset management line, can you just help us think about how tax prep is going to play in as we look to this next quarter?

Speaker 3

Yes. We got a little bit of a bump in the first quarter, but we expect some in the second just given the deadlines. So we would think of a little bit higher or kind of similar to what we had in the first quarter before coming back down on the tax prep side.

Speaker 10

Before coming back down. Okay. And so at the peak that's running what 400 or $500,000 in there. Is that correct or

Speaker 3

Yes, about there.

Speaker 10

Okay. Okay, great. And then in terms of deposit costs, can you talk a little bit about your so your savings accounts represent 38% of your deposits and it was a pretty big jump linked quarter. You went from those costing 32 basis points to those costing 47 basis points. How should we be thinking about that line?

Were there specials or

Speaker 3

This is on the savings?

Speaker 10

Yes, on the savings. And there was a pretty big jump in balances, but there was a big jump in cost there.

Speaker 3

Yes. That's kind of if you look at how where of our deposit gathering efforts are kind of a little bit more focused on, that's the area. Going forward, we expect that to maybe trend higher, but maybe not as at the same pace that we saw in the first quarter.

Speaker 10

Okay. Okay. And then do you have the amount of your public deposits $1.2 do you have the amount that's the public time piece of that?

Speaker 2

Sure. Hold on. It is, as of threethirty one, dollars $628,000,000.

Speaker 10

Great. Okay.

Speaker 2

Down from $8.18 a year ago. Okay. And by the way, in that space, we think that we maybe depending on the rate environment, Lori, could be kind of flattening out on that line number.

Speaker 10

Okay. Okay. Yes, mean it's basically flat from last quarter. Okay. I mean so I guess just again going back to the deposit costs and as we think about I mean obviously CDs were up but the biggest move there was savings.

If we think about you know directionally where that could be heading as we look in the back half of the year, I mean is it possible that that piece will hold at fifty, fifty five, 60 basis points or we should be thinking about that at a higher number?

Speaker 3

I think it'll drift higher. It won't, you know, be it won't double but, you know, certainly a little bit higher.

Speaker 10

Okay. I mean your cost of deposits relative to Mainland banks is so amazing that it's just it

Speaker 3

was

Speaker 10

a bigger move. Okay. And so then just putting that together on margin I just wanted to go back here. So obviously we saw your margin expand two basis points but with the drop in premium amortization, if we're adding that back, your core margin just linked quarter going from fourth quarter to first quarter actually contracted, right? So you went from 3 30 to 3 20 8.

So when you're talking about a forward guide, how are you thinking about the premium amortization piece? Or is your guidance exclusive of that?

Speaker 3

The guidance would include any changes in that or expected changes in that.

Speaker 10

Okay. And so can you help us in terms of what maybe you're thinking with respect to that?

Speaker 3

Well what happens is we look at the current rate environment and there's our prepayment expectations and that kind of factors into the yield.

Speaker 10

Sure. No, no, no. That I understand. I'm just trying to directionally understand. So in other words even though your reported margin expanded your core margin contracted just because of where premium am was in the fourth quarter versus the first quarter.

And so if we're thinking about, you know, the modeling is just even as we look toward next quarter, you know, what would we be thinking premium amortization that's in line with where you're suggesting? Are you suggesting and I realize that that line item jumps around. But in other words, when you're giving a forward looking number, are you thinking about a premium am in the same level as we're seeing for the March? Are you thinking about closer to the fourth quarter?

Speaker 3

I don't have the exact number but directionally I would think it would be a little higher.

Speaker 10

Okay, perfect. Thank you very much. I'll leave it there.

Speaker 0

Thank you. And this does conclude our question and answer session. I would now like to turn the call back over to Sydney Wyrick for any closing remarks.

Speaker 1

I'd like to thank everyone today for joining us and 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 participating in today's conference. This concludes today's program. You may now disconnect.