Bank of Hawaii - Earnings Call - Q2 2019

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Bank of Hawaii Corporation Second 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 follow at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Cindy Weirich, Director of Investor Relations.

You may begin.

Speaker 1

Thank you, Gigi. Good morning, everyone, and good afternoon. Thank you for joining us today as we review the 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 and good morning, everyone. Thanks for joining us today. We were very pleased with our overall financial results for the 2019. We had good financial performance, our asset quality remained solid, expenses were well controlled and our liquidity and capital levels remained strong.

Our loans grew to $10,800,000,000 at the end of the quarter, up 2% from the previous quarter with good growth in both commercial and consumer loans. Compared with the second quarter last year, total loans increased 7%. Deposits increased to $15,500,000,000 up 1.5% from the previous quarter and compared with the end of the second quarter last year, total deposits were up 3.7%. Now let me ask Dean to provide you with some additional details on our financial performance this quarter and then Mary will comment on our asset quality. Dean?

Speaker 3

Thank you, Peter. Net income for the second quarter was $56,900,000 or $1.4 per share compared to $58,800,000 or $1.43 per share in the previous quarter and $54,700,000 or $1.3 per share in the second quarter of twenty eighteen. Our return on assets during the second quarter was 1.31%. The return on equity was 17.97% and our efficiency ratio improved to 54.69%. Our interest margin in the second quarter was 3.04, down eight basis points from the 2019 and equal to the net interest margin in the 2018.

Net interest income on a reported basis in the second quarter was $124,100,000 compared with $124,800,000 in the previous quarter and $120,500,000 in the same quarter last last year. The decline in the margin for the 2019 reflects the impact of the lower interest rate environment. Given the current challenging rate environment, we anticipate that the net interest margin in the second half of the year will be approximately the same as the second quarter. As Mary will discuss later, we recorded a credit provision of $4,000,000 this quarter. Non interest income increased to $45,500,000 in the 2019 compared with $43,700,000 in the previous quarter and $41,300,000 in the same quarter last year.

There were no significant items during the 2019. Non interest income in the 2019 included a one time $1,400,000 insurance commission related to products we offer through a third party administrator. Non interest income during the 2018 included a negative adjustment of $1,000,000 related to a change in the Visa Class B conversion ratio. The increase in noninterest income during the 2019 reflects growth in mortgage banking revenue, higher levels of customer derivative activity and a seasonal increase in tax service fees. We currently expect non interest revenue to be approximately $43,000,000 per quarter during the 2019.

Non interest expense totaled $92,700,000 in the 2019 compared with $93,100,000 in the previous quarter and $90,800,000 in the same quarter last year. There were no significant items during the 2019 or the 2018 other than the impact of the annual merit increases. The 2019 also included increased variable expenses related to higher sales and revenue volume. Noninterest expense in the 2019 included seasonal payroll expenses of approximately $2,700,000 For the full year of 2019, we expect non interest expenses to be approximately 2% to 3% above our adjusted 2018 expenses of three sixty five million dollars The higher level of expenses expected in the second half of the year primarily relates to increased compensation due to greater volume growth and continued investments in technology, facilities and our people. Effective tax rate for the 2019 was 21.84 compared with 18.885% during the previous quarter and 18.94% during the same quarter last year.

The 2019 included a tax benefit of $1,900,000 related to the exercise of an early buyout option. We currently expect our effective tax rate for the remainder of 2019 to remain at approximately 22%. Our investment portfolio was $5,600,000,000 at the end of the second quarter, up slightly due to strong deposit growth that exceeded loan growth during the quarter. During the quarter, approximately $1,000,000,000 of investment securities were reclassified from held to maturity to available for sale. Subsequently, approximately $580,000,000 of these securities were sold and proceeds reinvested, resulting in a small gain.

Premium amortization during the quarter was 5,800,000 down from $6,300,000 in the previous quarter and $9,300,000 in the previous in the same quarter last year. The decrease in amortization is primarily attributable to the reduction in municipal securities as part of the portfolio repositioning, partially offset by higher amortization of premiums on mortgage backed securities. The reinvestment differential for securities purchased during the second quarter was a positive 52 basis points. The duration of the total portfolio was three point two years at the end of the second quarter duration of the held to maturity portfolio was three point five years and the duration for the available for sale portfolio was two point eight years. Our shareholders' equity increased to $1,290,000,000 at the end of the second quarter.

Our Tier one capital was 12.46% and our Tier one leverage ratio was 7.36%. During the second quarter, we paid out $26,600,000 or 47% of net income in dividends and repurchased 433,400 shares of common stock for a total of $34,900,000 We repurchased an additional 84,000 shares between July 1 and July 19 at a total cost of $6,900,000 And finally, Board declared a dividend of $0.65 per share for the 2019. Now I'll turn the call over to Mary Sellers.

Speaker 1

Thank you, Dean. Net charge offs for the second quarter totaled $2,400,000 or 0.09% annualized of total average loans and leases outstanding. ASKMs compared with net charge offs of $3,700,000 or 0.14% annualized in the 2019 and $3,300,000 or 0.13% annualized in the 2018. Nonperforming assets were $21,800,000 or 20 basis points at the end of the second quarter, up from $17,900,000 or 17 basis points at the end of the 2019 and up from $15,200,000 or 15 basis points at the end of the second quarter of last year. The increase for the quarter was primarily driven off $5,500,000 in commercial mortgage exposure to one customer in Guam that was placed on nonaccrual this quarter.

Loans past due ninety days or more and still accruing interest totaled 6,400,000.0 compared with 6,100,000.0 at the end of the 2019 and 13,300,000.0 at the end of the 2018. Restructured loans not included in non accrual loans or loans past due ninety days or more totaled $48,600,000 flat with the prior quarter and down $1,600,000 year over year. Residential mortgage loans modified to assist our customers accounted for $20,400,000 of the total. At the end of the second quarter, the allowance for loan and lease losses totaled $107,700,000 up $1,700,000 from the first quarter. Given net charge offs of $2,400,000 a credit provision of $4,000,000 was recorded.

The ratio of allowance to total loans and leases was 1% 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 and the Hawaii economy over this period as well as the mix and loan growth. The total reserve for unfunded commitments was 6,800,000 at the end of the quarter, unchanged from the 2019 and 2018. I'll now turn the call back to Peter.

Speaker 2

Great. Thanks, Barry. The Hawaii economy continues to perform reasonably. Our statewide unemployment rate in June was 2.8 and remains very low compared to the unemployment rate of the 3.7% nationally. Visitor arrivals continued to increase and for the first May of twenty nineteen were up 3.8% compared to the same period in 2018.

Even with the growth in arrivals, we're seeing a decline in daily spend with total visitor spending down 3.1% compared with the same period in 2018. Oahu residential real estate was a bit of a mixed bag with sales off pricing relatively flat, but inventory levels still remaining tight. For the first six months of twenty nineteen, the volume of single family home sales on Oahu decreased 3.7% and median sales prices were down 0.5% compared with the same period in 2018. The volume of condominium sales during the 2019 on Oahu declined 8.8% with median sales prices down 1.4%. Months of inventory at the end of the quarter were three point six months for a single family home and three point nine months for condominiums.

The median days on market in the 2019 was twenty three days for a single family home and twenty seven days for a condominium. Thanks again for joining us today and now we'd be happy to respond to your questions.

Speaker 0

And our first question is from Ebrahim Poonawala from Bank of America Merrill Lynch. So

Speaker 4

just first question around the margin outlook. You mentioned you expect the margin in the back half to stay stable relative to 2Q. If I was wondering if you could tell us what assumptions you're making around the Fed cutting interest rates in the back half in that guidance And as well as what you expect in terms of the pace of change in the cost of interest bearing deposits relative to the nine basis points that we saw in the second quarter?

Speaker 3

Yes. Right now, we have two rate cuts built in, 25 each, at the end of this month being the first and perhaps around September or the November meeting the second. So that's included in the guidance on the margin. In terms of the deposit pricing, what we did see on a monthly basis, if you look at our when we looked at our monthly data, June was kind of decelerated in terms of the increases. So that kind of gives us a little bit of confidence that some of the actions we've been currently taking, which is to reduce some of the higher, more expensive deposits, is having an effect, and we're going to continue that.

And we expect that the deposit rates will start to flatten out and start turning down later in the year.

Speaker 4

And just that yes, that's helpful. I was just wondering if you take that a step forward, do you think the margin is give or take around this where it was in the second quarter is fairly defendable if we get more than just two rate cuts for the next year? Like if you could just talk to like the pressure points around the yield curve that could lead to more meaningful margin compression over the next year?

Speaker 3

If the Fed does cut rates further, that would have probably affect our margin guidance. It would probably be lower. In addition to just general deposit competition in the local market could also affect the margin somewhat.

Speaker 4

Got it. And I guess just moving to just growth outlook and just credit quality and obviously just to one credit. Peter, I would just your thoughts around how you're looking at the market in terms of both approach of loan growth expectations around that and if you're seeing anything troubling on the credit front?

Speaker 2

Well, I think that the forward look from a growth perspective is beginning to verge ever so slightly, Ebrahim. I would say that environmentally, clearly, we're beginning to see signs, I think, not different from what a lot of people are reporting on a national basis, growth flattening out and really somewhat reflective of a 10 expansion. So I don't think that there's cause for alarm there. But when you look at housing price point performance, what's happening in our visitor industry, what's happening in the broader market, it's pretty clear that we are filling out a bit and frankly, that's what we would anticipate at this point in the cycle. How that's translating into our forward view on growth performance, however, I think we still feel very comfortable with the idea of loan growth in the mid to upper single digit range and deposit growth in the mid single digit range.

Our pipelines and forecasts and just discussions with our frontline people, think, have us pretty confident in that view at this point. Describe the credit and consumer side is still we are beginning to see that runoff credit situation with some of our smaller commercial clients.

Speaker 4

Got it. Thanks for taking my

Speaker 2

questions. Thank

Speaker 0

you. Our next question from Jeff Rulis from D. A. Davidson. Just

Speaker 5

a question on the fee income line. I believe you had guided last quarter to the $42,000,000 a quarter. You put up 45,000,000 plus this quarter then back down to $43,000,000 Maybe just talk about the pieces that are kind of guiding, obviously, maybe mortgage and the trust side were heavier contributors, what within that back it down to 43 maybe lightens up over the balance of the year?

Speaker 2

Yes, Jeff, thanks for asking the question. The number has been moving around a bit. I think probably the best place to the way to look at it is, obviously, we were very pleased with Q2 non interest income levels. Q1 non interest income levels were buoyed up a bit by $1,000,000 kind of one time fee income that we generated off our insurance business. So if you were to back that out, kind of I think where Dean is going with kind of the 43 plus level is we think that we're probably going to nestle moving forward in between Q1 and Q2 from a dollar level standpoint.

The re fi boom, let's call it, that we've experienced of late has been positive. We still have great volumes on the mortgage side, but maybe not as strong as what we experienced early in the second quarter when rates really fell pretty dramatically. Qs three and four, we're not going to get the seasonal benefits of our seasonal tax business that we got in the second quarter. And finally, I'd say that the swap income, which has been a great story for us from a commercial standpoint, but was probably really at the very upper rungs in Q2. And we would anticipate continued opportunity with that product category, but maybe not at the same levels of Q2.

Speaker 5

Okay. That's great. Thank you. And then Peter, just guess on the broad kind of visitor spending numbers, I just don't know if you kind of alluded to it. I don't know if this is a product of, again, a macro trend of long in the tooth on a recovery, that spending being down, is that also a factor of kind of visitor mix or kind of what would you if you could wrap words around what do you think has happened on the spending side?

Speaker 2

Yes, Sure. So, Jeff, I think you touched on a lot of the items that we're thinking about. I think it's to understand the year to date performance on expenditures of down 3% on the face of it doesn't look great, but I think we also have to and a May year to date 2017 comp that was plus 10%. So yes, we're flattening out from a pretty I think what everyone would agree is a pretty comp that was and kind of again in the category of kind of a fortunate individual's problem. Our ADRs have been expanding and that's been a wonderful thing for the visitor industry and tangentially down to our own economy.

But that upward pressure on price points at some point begins to meet pricing resistance and there is some sentiment that that might be occurring here in the marketplace. So putting all that together, we're seeing a flattening on the expenditure side, but I don't think anyone's terribly concerned at this point. I think we understand kind of the housing wise of those inputs. Got it, Peter. Appreciate your thoughts.

Speaker 3

Yeah.

Speaker 0

Thank you. Our next question is from Aaron Deer from Sandler O'Neill. Your line is now open.

Speaker 6

Hi, good morning, everyone.

Speaker 4

Hi, Aaron.

Speaker 6

Just a quick question going back to the CRE loan in Guam. Mary, just curious, it sounds like it's just a one off issue, but any color you can give in terms of what the situation was there or potential loss content?

Speaker 1

Well, I don't see any potential loss content. Our LTV on the transaction is 60%. It was a long tenor customer, was a portfolio of assets. He overinvested in a couple and tried to get above market rents. I think he's beginning to deal with that now and starting to see some lease up and he sold some additional assets to create some liquidity.

So I think we're in a good spot.

Speaker 6

Okay, that's great. And then, Dina, I heard your commentary around the repositioning of the portfolio, but didn't catch all those details. Can you maybe walk through again just what the size of the repositioning was and what was accomplished as a result in terms of what you're hoping for in terms of the convexity or other natures of the portfolio that was changed as a result?

Speaker 3

Yes, so we did and just to give you some color on the timing, it was around mid June. But we did move $1,000,000,000 worth of securities from held to maturity to the available for sale portfolio. And after that, we sold about $580,000,000 worth of securities and reinvested the proceeds. That's probably going to that did net us a small gain and should help us on the net interest income side going forward.

Speaker 6

Okay. So the I guess, maybe I can find this in the release, I missed it, but sort of the modest negative that you guys had on the modest loss on investment securities then, was that related to some of the legacy Class B stuff?

Speaker 3

Yes, so that continues. I would say about roughly $900,000 was due to the visa fees that we pay on the shares that we sold. Okay.

Speaker 6

That's great. Thanks for taking my questions. Thank

Speaker 0

you. Our next question is from Luke Woolton from KBW. Your line is now open.

Speaker 7

Hi, good morning, guys.

Speaker 5

Just want

Speaker 7

to kind of dig into the margin just a little bit more. Just kind of wanted to see, I know you guys talked about what you guys had for the assumptions of the rate cuts. I just kind wanted to hear how that impacts the loan portfolio and how you see that coming in towards the back half of the year?

Speaker 3

Yes. So we do have about 20% call it 25% of our loan book on what I would call a floating rate basis. And some of that has already been coming down and LIBOR rates have been reduced. Our prime and base rate loans would be readjusted lower, but that's all factored into the guidance that I provided. And then kind of offsetting that is whatever we can do on the deposit side in terms of lower rates.

Speaker 7

Okay, that's helpful. Thank you. And then just on the I saw the public and other balances, it said that there was a seasonally stronger demand for the public demand deposits. Just kind of wanted to hear what the what's how much is in that is public time deposits right now?

Speaker 3

It's about a little over $700,000,000 is public time. Okay. Yes, $732,000,000. Okay. It peaked by about $100,000,000 quarter over quarter.

Speaker 7

Got you. And that's all my questions.

Speaker 3

I'll step back. Thank you. Thank you, Luke.

Speaker 0

Thank you. Our next question is from Laurie Hunsicker from Compass Point. Your line is now open.

Speaker 8

Hi, thanks. Good morning. Just wondered in the net interest income, can you tell us how much was premium amortization this quarter?

Speaker 3

Yes. So the premium amortization was 5,800,000.0 However, I just need to also clarify that a lot of the change in the amount of the amortization was due to the sale of some of our municipal securities.

Speaker 8

Got it, okay.

Speaker 3

So the decrease was caused by that.

Speaker 8

Okay, so I mean, if I strip that out, then your core margin looks like was down 10 basis points versus your reported was down eight. How should we be thinking about premium AM in the back half of the year?

Speaker 3

Well, it will be rate dependent, but in terms of kind of the sensitivity to interest rates, so the mortgage backed securities and some SBAs would be impacted by that. But we did do some of the sales towards the tail end of the quarter. So you may see still some decrease in the amortization just due to the sale of the municipal securities.

Speaker 8

Okay, great. That's helpful. Okay, and then Mary, can you just comment on loan loss provision and I might have missed this. Was there a specific reserve for the Guam Cree in the $4,000,000

Speaker 1

No, there wasn't. We have a 60% loan to value and that's based on updated appraisals. So we see no loss there. Really driving the increase in the reserve was increasing growth in our portfolio for the quarter.

Speaker 8

Got it. Okay. And then certainly, when I look at your loan growth this quarter, super strong 8% annualized, and I think you had said mid single digits. So how should we be thinking about loan loss provision in the back half of the year if we kind of marry that with your comments about credit is pristine, but not completely spotless? How should we be thinking about that?

Speaker 1

I think you're right on point, Laurie. Really, it would be a factor of what our loan growth is, the portfolios that growth comes in, coupled with what we see within credit performance, which has been fairly consistently benign till this point.

Speaker 8

Okay. But if that's tracking maybe still in the low $4,000,000 range or so per quarter, that's probably outside of a credit event. How am I thinking about that the right way?

Speaker 2

Peter. Yes, so your comments are kind of backward, look back oriented and the provision by definition has got to be far ranging. So based on our historic trend, I think you've got a pretty good sense for directionally where the provision would end up. The ultimate decision is going be based on what we see at the end of next quarter and following.

Speaker 1

Sure.

Speaker 8

Okay. On to non interest income, and I know that you have mentioned there was no significant items obviously, but the other other seemed a little bit elevated. Can you just talk about if there was anything non recurring In in that 6,385,000

Speaker 3

otherother is the swap revenue. That's where it comes in.

Speaker 8

Got it. And what was the swap revenue this quarter?

Speaker 2

It's

Speaker 3

about $2,000,000 Okay.

Speaker 8

And then I guess on to your comments on non interest expense, Dean, maybe you can just help me a little bit. Just sort of extrapolating off your forward guide, it's looking like that number would be then running in the $94 plus million range per quarter, which is obviously up from where we were. Is there a directional spend that you're doing or did I mishear that? How should I be thinking about that number?

Speaker 3

Well, 94,000,000 would be at the higher where in the second half, we do continue to have that, as I mentioned, in a lot of projects, technology facilities, we do have a number of executives that are coming on board that have joined us in addition to the fourth quarter just being, for us, a noisy quarter when we do our year end true ups.

Speaker 8

Okay. That's helpful. I'll leave it there. Thank you.

Speaker 3

Thank you.

Speaker 1

At this time, I'm showing no further questions. I would like

Speaker 0

to turn the call back over to Cindy Wyrick for closing remarks. I'd like to thank all of

Speaker 1

you for joining us again today and for your continued interest in Bank of Hawaii. As always, please feel free to contact me if you have additional questions or any further clarification on any of the topics discussed today. Thanks again everyone and have

Speaker 0

a great day. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.

Speaker 8

You may now disconnect.