Bank of Hawaii Corp (BOH) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bank of Hawaii Corporation Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Cindy Wyrick, Director of Investor Relations. You may begin.

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

Thanks, Cindy. Aloha, and good morning, everyone. Thanks for joining us today.

We were very pleased with our overall financial results for the second quarter of 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 $10.8 billion 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 $15.5 billion, 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?

Thank you, Peter. Net income for the second quarter was $56.9 million or $1.40 per share compared to $58.8 million or $1.43 per share in the previous quarter and $54.7 million or $1.30 per share in the second quarter of 2018. 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 net interest margin in the second quarter was 3.04%, down 8 basis points from the first quarter of 2019 and equal to the net interest margin in the second quarter of 2018.

Net interest income on a reported basis in the second quarter was $124.1 million compared with $124.8 million in the previous quarter and $120.5 million in the same quarter last year.

The decline in the margin for the second quarter of 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 million this quarter. Noninterest income increased to $45.5 million in the second quarter of 2019 compared with $43.7 million in the previous quarter and $41.3 million in the same quarter last year. There were no significant items during the second quarter of 2019.

Noninterest income in the first quarter of 2019 included a onetime $1.4 million insurance commission related to products we offered through a third-party administrator. Noninterest income during the second quarter of 2018 included a negative adjustment of $1 million related to a change in the Visa Class B conversion ratio.

The increase in noninterest income during the second quarter of 2019 reflects growth in mortgage banking revenue, higher levels of customer derivative activity and a seasonal increase in tax service fees. We currently expect noninterest revenue to be approximately $43 million per quarter during the second half of 2019.

Noninterest expense totaled $92.7 million in the second quarter of 2019 compared with $93.1 million in the previous quarter and $90.8 million in the same quarter last year. There were no significant items during the second quarter of 2019 or the second quarter of 2018 other than the impact of the annual merit increases. The second quarter of 2019 also included increased variable expenses related to higher sales and revenue volume.

Noninterest expense in the first quarter of 2019 included seasonal payroll expenses of approximately $2.7 million. For the full year of 2019, we expect noninterest expenses to be approximately 2% to 3% above our adjusted 2018 expenses of $365 million.

The higher level of expenses expected in the second half of the year primarily relates just to increased compensation due to greater volume growth and continued investments in technology, facilities and our people.

The effective tax rate for the second quarter of 2019 was 21.84% compared with 18.85% during the previous quarter and 18.94% during the same quarter last year. The first quarter of 2019 included a tax benefit of $1.9 million 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 $5.6 billion 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 billion of investment securities were reclassified from held-to-maturity to available-for-sale. Subsequently, approximately $580 million of these securities were sold and proceeds reinvested, resulting in a small gain.

Premium amortization during the quarter was $5.8 million, down from $6.3 million in the previous quarter and $9.3 million 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 3.2 years at the end of the second quarter of 2019. The duration of the held-to-maturity portfolio was 3.5 years. And the duration for the available-for-sale portfolio was 2.8 years.

Our shareholders' equity increased to $1.29 billion at the end of the second quarter. Our Tier 1 capital was 12.46%, and our Tier 1 leverage ratio was 7.36%.

During the second quarter, we paid out $26.6 million or 47% of net income and dividends and repurchased 433,400 shares of common stock for a total of $34.9 million. We repurchased an additional 84,000 shares between July 1 and July 19 at a total cost of $6.9 million.

And finally, our Board declared a dividend of $0.65 per share for the third quarter of 2019.

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

Thank you, Dean. Net charge-offs for the second quarter totaled $2.4 million or 0.09% annualized of total average loans and leases outstanding as compared with net charge-offs of $3.7 million or 0.14% annualized in the first quarter of 2019 and $3.3 million or 0.13% annualized in the second quarter of 2018.

Nonperforming assets were $21.8 million or 20 basis points at the end of the second quarter, up from $17.9 million or 17 basis points at the end of the first quarter of 2019 and up from $15.2 million or 15 basis points at the end of the second quarter of last year. The increase for the quarter was primarily driven off $5.5 million in commercial mortgage exposure to 1 customer in Guam that was placed on nonaccrual this quarter. Loans past due 90 days or more and still accruing interest totaled $6.4 million compared with $6.1 million at the end of the first quarter of 2019 and $13.3 million at the end of the second quarter of 2018.

Restructured loans not included in nonaccrual loans or loans past due 90 days or more totaled $48.6 million, flat with the prior quarter and down $1.6 million year-over-year. Residential mortgage loans modified to assist our customers accounted for $20.4 million of the total.

At the end of the second quarter, the allowance for loan and lease losses totaled $107.7 million, up $1.7 million for the first quarter -- from the first quarter. Given net charge-offs of $2.4 million, a credit provision of $4 million was recorded. The ratio of the allowance to total loans and leases was 1% at the end of the quarter, down 1 basis point for the linked period and down 8 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 $6.8 million at the end of the quarter, unchanged from the first quarter of 2019 and second quarter of 2018.

I'll now turn the call back to Peter.

Great. Thanks, Mary. 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 5 months of 2019 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 a bit, pricing relatively flat, but inventory levels still remaining tight. For the first 6 months of 2019, 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 first half of 2019 on Oahu declined 8.8%, with median sales prices down 1.4%.

Months of inventory at the end of the quarter were 3.6 months for a single-family home and 3.9 months for condominiums. The median days on market for the first half of 2019 was 23 days for a single-family home and 27 days for a condominium.

Thanks again for joining us today, and now we'd be happy to respond to your questions.

(Operator Instructions) And our first question is from Ebrahim Poonawala from Bank of America Merrill Lynch.

So just first question around the margin outlook. You mentioned you expect the margin in the back half to stay stable, if we're looking at Q2. 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 9 basis points that we show in the second quarter.

Yes. Well, right now, we have 2 rate cuts built in, 25 each, at the end of this month being the first and perhaps around September, with 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, that 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.

In this guide -- yes. That's helpful. I was just wondering if you'd take that a step forward, do you think the margin, just give or take around this rate it was in the second quarter, is fairly defendable if we get more just than 2 rate cuts for the next year. Like if you can just talk to like the pressure points around the yield curve that could actually lead to more meaningful margin compression over the next year?

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

Got it. And I guess just moving to just growth outlook and just credit quality, I mean, obviously just to one credit. But Peter, I would appreciate 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.

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 were reporting on a national basis of growth flattening out and really somewhat reflective of a 10-year 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 flattening out a bit, and frankly, that's what we will 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 forecast and just discussions with our frontline people I think have us pretty confident in that view at this point.

In terms of credit quality, I would say that still pretty pristine but not completely spotless is the way that I would describe the credit environment right now. The consumer side is still trending very nicely. The commercial side still looks good and very good by historical standards. But as Mary mentioned, we are beginning to see that one-off credit situation with some of our smaller commercial clients.

Our next question is from Jeff Rulis from D.A. Davidson.

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

Yes, Jeff, thanks for asking the question. The number's been moving around a bit. And I think probably the best place to -- the way to look at it is, obviously, we were very pleased with Q2 noninterest income levels. Q1 noninterest income levels were buoyed up a bit by $1.4 million in kind of onetime 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 million-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 refi boom that I'll 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 with when rates really fell pretty dramatically. Qs 3 and 4, 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 the 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.

Okay. That's great. And then, Peter, just I guess on the broad kind of visitor spending numbers. I just don't know if you've 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 the recovery. With that spending being down, is that also a factor of kind of visitor mix? Or kind of what would you -- to get wrapped words around what you think is happening on the spending side...

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 recognize that, that 3% negative comp is coming on the heels of a 2018 May year-to-date comp that was plus 11% 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 high level. I've been doing a lot of asking and research and just talking to our friends here within the industry recently, and they see some things occurring, A lot of the lift that we're getting into the market of recent is -- does skew more to the budget side, which I think helps to explain what's happening on the arrival numbers versus the visitor spending numbers. If you look at the U.S. dollar relative to the euro of late, and if you look at the Japanese yen relative to the euro, there is a little bit of a pricing bias against us for both Japanese visitors and American visitors. Choosing between Europe or Hawaii, Europe is just trending to a better price point right now.

And finally, 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 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 hows and whys of those inputs.

Our next question is from Aaron Deer from Sandler O'Neill.

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

Well, I don't see any potential loss content. Our LTV on the transaction is 60%. It was a long-tenured customer who has 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.

Okay. That's great. And then, Dean, I heard your commentary around the repositioning on the portfolio, but then I 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?

Yes. So we did -- and just to give you some color on the timing, it was around mid-June, but we did move $1 billion worth of securities from held-to-maturity to the available-for-sale portfolio. And after that, we sold about $580 million 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.

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

Yes. So that continued. So I would say, about roughly $900,000 was due to the Visa fees that we pay on the shares that we sold.

Our next question is from Luke Wooten from KBW.

I just want 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 of wanted to hear how that impacts the loan portfolio and how you see that coming in towards the back half of the year.

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. So 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.

Okay. That's helpful. And then just on the -- so 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 -- how much is, in that, is public time deposits right now?

It's about -- little over $700 million public time. Yes, $732 million. It increased by about $100 million quarter-over-quarter.

Our next question's from Laurie Hunsicker from Compass Point.

Just wondered in the net interest income, can you talk how much was premium amortization this quarter?

Yes. So the premium amortization was $5.8 million. However, I just need to also clarify that a lot of the change in the -- a lot of the amortization was due to the sale of some of our municipal securities. So the decrease was caused by that.

Okay. So I mean if I strip that out, then your core margin looks like was down 10 basis points versus your reported, it was down 8. How should we be thinking about premium then in the back half of the year?

The -- it -- 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.

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 CRE in the $4 million?

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 increase in growth in our portfolio for the quarter.

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 as pristine but not completely spotless? How should we be thinking about that?

Well, I think you're right on point, Laurie. Really, the effector of what our loan growth is, the portfolio, is that growth comes in, coupled with what we see within credit performance, which has been fairly consistently benign until this point.

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

Yes, well, it's -- Laurie, it's Peter. It's -- yes. So your comments are kind of backward, lookback-oriented, and the provision by definition has got to be forward-looking. So based on our historic trend, I think you've got a pretty good sense for directionally where the provision would end up. But the ultimate decision is going to be based on what we see at the end of the next quarter or the following.

Sure. Okay. Onto noninterest income, and I know that you had mentioned there was no significant item, obviously, but the other, other seemed a little bit elevated. Can you just talk about if there was anything noninterest-bearing in that $6.385 million?

In other, other is the swap revenue. That's where it comes in.

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

It's about $2 million.

Okay. Okay. And then I guess onto your comments on noninterest expense, Dean, maybe you can just help me a little bit. Just sort of extrapolating off your forward guide, it is looking like that number would be then running in the $94 million-plus 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?

Well, the $94 million would be at the higher end, so if you took, I guess the 3%. There -- in the second half, we do continue to have investments, like I mentioned, in a lot of projects, technology and the 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.

(Operator Instructions) At this time, I'm showing no further questions. I would like to turn the call back over to Cindy Wyrick for closing remarks.

I'd like to thank all of 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 need further clarification on any of the topics discussed today. Thanks again, everyone, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.