Bank of Hawaii Corp (BOH) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bank of Hawaii Corporation First Quarter 2018 Earnings Conference Call. (Operator Instructions) 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.

Thank you, Brian. Good morning, good afternoon, everyone. Thank you for joining us today as we review the financial results for the first quarter of 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.

Thanks, Cindy. Good morning, everyone. Thanks for joining us today.

First quarter of 2018 was another solid quarter for Bank of Hawaii. We had good financial performance with a rising net interest margin, sound asset quality, disciplined expense control and solid balance sheet dynamics. Our loans grew to $9.9 billion 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 second quarter of 2018, an increase of 15.4% from the previous quarter.

Now let me ask Dean to provide you with some additional details on our financial performance this quarter, and then Mary will comment on credit quality. Dean?

Thank you, Peter.

Net income for the first quarter was $54 million or $1.28 per share compared to $43 million or $1.01 per share in the fourth quarter and $51.2 million or $1.20 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 2 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 4 basis points. This adjustment had no impact on our net interest income for the quarter.

Net interest income on a reported basis for the first quarter of 2018 was $119 million, up $0.2 million from the fourth quarter and up $9.1 million from the first quarter of last year. As Mary will discuss later, we recorded a credit provision of $4.1 million this quarter.

Noninterest income totaled $44 million in the first quarter of 2018 compared with $41.9 million in the previous quarter and $55.9 million in the same quarter last year. Noninterest income in the first quarter of 2018 included a $2.8 million distribution from a low-income housing partnership. Noninterest income in the first quarter of 2017 included a gain of $12.5 million from the sale of Visa Class B shares. There were no Visa share sales during the first quarter of 2018. Adjusted for these gains, the decrease in noninterest 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 noninterest income will continue to be a challenge due to the downward trend in overdraft fees and our expectation for lower volumes of salable mortgages.

Noninterest expense totaled $94.4 million in the first quarter of 2018 compared with $92.3 million in the previous quarter and $88.6 million in the same quarter last year. Results for the first quarters of 2018 and 2017 included seasonal payroll-related expenses of approximately $2.5 million. Noninterest expense during the first quarter of this year also included a legal reserve of $2 million and severance of $1 million in addition to $0.5 million related to the implementation of the new minimum wage for the company. Noninterest expense in the fourth quarter of 2017 included onetime employee bonuses totaling $2.2 million. Adjusted for these items, noninterest 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 29.72% in the same quarter last year. The effective tax rate in the first quarter of 2018 was due to the reduction in the federal corporate tax rate and a $2 million favorable adjustment in our low-income housing investments. For the fourth quarter of 2017 -- the fourth quarter of 2017 included a onetime negative adjustment of 20 -- of $3.6 million related to the Tax Reform Bill. Currently, we expect the effective tax rate for the remainder of 2018 to be between 19% and 21%.

As a result of loan growth exceeding deposit growth during the first quarter, our investment portfolio decreased to $6 billion. Premium amortization was $9.6 million in the first quarter of 2018, down from $10.1 million in the previous quarter and $10.6 million in the same quarter last year. We purchased a total of $121.9 million of securities during the quarter which were primarily comprised of treasuries and SBA securities. The reinvestment differential during the first quarter was a positive 6 basis points. The duration of the available-for-sale portfolio was 2.52 years at the end of the first quarter of 2018. The held-to-maturity portfolio duration was 4.23 years and the duration for the total portfolio was 3.6 years. Our total shareholders' equity increased to $1.24 billion at the end of the first quarter. Our Tier 1 capital ratio was 13.37% and our Tier 1 leverage ratio was 7.46%.

During the quarter, we paid out $22.1 million or 41% of net income in dividends and repurchased 165,500 shares of common stock for a total of $13.9 million. We repurchased an additional 60,000 shares between April 2 and April 20 at a total cost of $5 million. And as Peter mentioned, our board declared a dividend of $0.60 per share for the second quarter of 2018.

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

Thank you, Dean.

Net charge-offs for the first quarter totaled $3.5 million or 0.15% annualized of total average loans and leases outstanding as compared with net charge-offs of $3.8 million or 0.15% annualized in the fourth quarter of 2017 and $3.6 million or 0.16% annualized in the first quarter of 2017.

Nonperforming assets were $15.7 million or 16 basis points at the end of the first quarter, down from $16.1 million at the end of the fourth quarter and down from $19 million at the end of the first quarter of last year. Loans past due 90 days or more and still accruing interest totaled $8.2 million or 8 basis points, up $1 million for the linked period and up $2.3 million year-over-year.

Restructured loans not included in nonaccrual loans or loans past due 90 days or more totaled $56.7 million, up $1.1 million from the prior quarter and up $3.8 million year-over-year. Residential mortgage loans modified to assist our customers accounted for $19.8 million of the total.

As we enter into the ninth year of this credit cycle, our underwriting criteria remain 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 the commercial mortgage portfolio was 54% with -- while the weighted average loan to value for the residential and home equity portfolios was 58% and 63%, respectively.

And in our indirect portfolio, the weighted average monitoring FICO was 709. At the end of the quarter, the allowance for loan and lease losses totaled $107.9 million. Given net charge-offs of $3.5 million, a credit provision of $4.1 million was recorded. The ratio of the allowance to total loans and leases was 1.09% at the end of the quarter, down 1 basis points for the linked period and down 6 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 $6.8 million at the end of the quarter, unchanged from the fourth quarter of 2017 and up $250,000 from the first quarter of 2017.

I'll now turn the call back to Peter.

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 2 months of 2018, total visitor arrivals increased 7.7% and visitor spending increased 8.5% compared with the same period a year ago. For the first 2 months, all 4 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 with the first 2 months of last year. In addition, all 4 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 first quarter of 2018. The median sales price for a single-family home on Oahu, our primary market, increased 2% during the first quarter of 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 months for a single-family home and 2.6 months for condominiums. The median number of days on market during the first quarter of 2018 was 18 days for both condominiums as well as single-family homes. So you can see inventories remained quite tight.

We continue to make solid progress in transforming our branches to our Branch of Tomorrow concept. This concept integrates the 21st century digital banking experience with greater convenience and personal interactions to build an even better relationship with our customers. We've transformed 6 branches to date with the most recent being our Pearlridge branch completed in January. We have several on slate for next year, including our Kohala 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.

(Operator Instructions) And our first question will come from the line of Jeff Rulis with D. A. Davidson.

Just wanted to kind of pair out some of the -- out of the expenses just to see what you would view as onetime or, I guess, seasonal. So you kind of identified the additional seasonal payroll, the legal and severance. That all adds up to about $5.5 million, I guess, in the coming quarters. What I'd expected of that is the -- do you expect to recur?

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 and benefits will not be reoccurring in the second quarter.

Got it. And maybe on the same...

But I also should note that in the second quarter, we do -- increase our -- the compensation for merit increases.

Okay. Got it. And then on the -- just the low-income housing. Is that -- do we view that as also onetime, the $2.8 million? Is that ...

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 from -- that they had gotten pretty competitive. Maybe just as an update on the deposit pricing in your market. Any update there?

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 from the past year, call it, I think certainly, there are pools of deposits still resident on our balance sheet. They 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 of 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: in private banking, in small business, in commercial and large corporate, large wholesale. So yes, you're right. We mentioned last quarter that we -- likely, we're 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 will 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's -- there are additional rate increases out there that's going to give people quite naturally more of an urge or a desire to see what kind of pricing they can get not just at 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 market place here in the island. So we've got an abundance of 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 noninterest bearing. Savings is 36% and time deposits comes in at 12%. So our deposit base, at least by product type, is largely transactional, larger than relationship-based. And I think we take a fair amount of strength into what is going to be a tougher pricing environment. There's no question about that.

And our next question will come from the line of Brett Rabatin with Piper Jaffray.

I 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...

Did they pay you say that, to ask that? I think so, yes. 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, [massed] 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 there's 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 windle down a bit. But C&I was strong, 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 -- had -- kind of had its second tepid quarter in a row, up 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, that the Resi market's 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 is 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, that'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.

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 "the 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. Maybe you can have some growth in trust. Any additional color on that?

Yes. So the -- I would say about a $42 million guidance is -- would be what we will provide for the revenue going forward for the quarters. We do still expect the 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 million is what we would expect.

Kind of the run rate from Q4 is about the run rate we have to see.

And our next question will come from the line of Jackie Bohlen with KBW.

Peter, are you seeing any shift or change in the behavior of your home equity borrowers, either higher drawdowns or perhaps -- I know, it's a competitive market, but a higher interest from people just as rates are increasing?

Well, the -- we are seeing drawdowns. We're pleased with that. We're -- you're always going to have your -- you 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 consumers are not a whole lot different from where they were a year ago.

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?

Mostly, local banks and credit unions.

Okay. And then if -- also if you could just speak to what, if any, and this is maybe a question for Mary, impact you anticipate from the recent floodings in Kauai?

That's -- know very well for that?

Sure. 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 16 home equity facilities, about $16 million in outstanding. About $12 million 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.

Yes. Kind of an interesting area, Jackie. Hanalei has got a lot of very high-end properties, but also a fair number of just kind of market-level residences. And so our -- and 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.

And our next question will come from the line of Aaron Deer with Sandler O'Neill.

Peter, you had mentioned in your answers to another analyst's feed, the split in 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?

Yes. Sure. Yes. What I was referring 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, that was 8.8%. And now what 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 2 numbers. That's what I'd say. Yes.

Got it. Okay. And you've given some pretty good guidance, generally. The -- one question though just in terms of individual line item on the mortgage banking, the -- looking at the first quarter results, just a little over $2 million. Is that level pretty much just the level that you earned on servicing. Is that what that is? Or was there any sales in the first quarter?

No. There were sales. The servicing income is nearly $2 million. It's about $1.8 million. So the rest of it would be related to sales.

Okay. And then maybe just one last question kind of margin-related. On the -- with respect to loan book, can you give us some update in terms of what percentage of that reprices immediately and reprices within one year if you have that available?

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 would call it, 5% that would reprice within a year.

(Operator Instructions) And our next question will come from the line of Laurie Hunsicker with Compass Point.

Just wondered on the funding side if we can go back to the public deposit space. I see your public deposits are $1.4 million. Do you have a breakdown of how much is the time included in that number?

Sure. We do. Time, other is $818 million, down from $838 million last quarter.

Great. Okay. And then...

And we would anticipate that to continue to come down.

Okay. And then just going back to C&I here. Was your growth this quarter all originated? Or was some of it purchased?

Oh, we don't purchase. You're talking about, like, purchasing shared national leveraged products from banks and things.

Exactly. Yes

Yes. No, we're not in that business, Laurie.

Okay. But you've -- in round numbers, you've got $50-or-so million of SNC. Is that still the same number within the [loans growth] book?

It's actually more than that one...

Great. Now we've got about $274 million in outstanding SNCs, although 68% is Hawaii, 21% on the mainland.

Yes. So the 68% are largely loans that we are agent on. And so they’re more than 2, and they’re greater than 20%. So that's SNC by definition, although I think that definition has changed.

Definition moved up to $100 million…

Yes. The definition has moved up. But, yes. Okay. So $274 million under the old. And then what about the leverage leasing total? Do you have that?

The leverage leasing total is $121 million, about $40 million of which is the fees or supported by securities.

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 million tax windfall reinvestment back into the expense line. How much of that was baked in the first quarter?

Well, go ahead.

Yes. So I -- I mean, it's really a 1/3 of -- 1/4 of that because it's kind of spread out and it's showing up in 2 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.

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 quarter or...

Right.

Yes.

And our next question will come from the line of Brett Rabatin with Piper Jaffray.

I just have a follow-up on 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 are doing this year. How many might you do over the next couple of years in terms of what you have left?

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 6, but several. And so we're going to kind of move methodically. The majority of our branches spread 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 1, 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, service floor is below us, is about a 12,000 square foot floor plate. Its retail space is on the ground floor. It's on kind of the corner of Main and Main in downtown of 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 a need for a 12,000 square foot main branch anymore. I mean, it was just -- it was too big. And not only was it too big, it was deenergized 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 21st 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 -- as -- on the operating side as well as on the occupancy side. In the case of this branch, we're -- we can't -- 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 up first and the not-so-good-ones later. But the cumulative return on that, well into the double digits. So we think we're getting a good investment. We think we're getting a facility that reflects the 21st century brand. And frankly, we'd have to refresh most of these branches anyway.

Okay. That's great color. And then I guess the other thing I want 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?

Well, we've got the lease conversion on the balance sheet still coming up. We're going to have to figure out ultimately what the [CECIL] 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 7.5%, 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 for a repurchase standpoint, our activity is going to be, I think, from a strategy standpoint, the same as you've always experienced with us.

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 Ms. Cindy Wyrick, Director of Investor Relations, for some quick closing comments or remarks.

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 any further clarification on any other topics discussed today. Thanks, everyone, and have a great day.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and we may all disconnect. Everybody, have a wonderful day.