Ladies and gentlemen, thank you for standing by, welcome to the Bank of Hawaii Corporation fourth quarter 2019 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Cindy Wyrick, Director of Investor Relations. Thank you. Please go ahead, madam.
Thank you, Dylan. Good morning, good afternoon, everyone. Thank you for joining us today. Also with me is our Chairman, President, and CEO, Peter Ho, our Chief Financial Officer, Dean Shigemura, 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. While we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected. Now I'd like to turn the call over to Peter Ho.
Thanks, Cindy. Good morning, everyone. Happy New Year, and thank you for joining us today. 2019 was another good year for Bank of Hawaii. We were pleased with our overall financial results and with the progress we made on our key strategic initiatives. Assets, loans, and deposits all grew during the year, with total assets finishing the year at a record $18.1 billion. Earnings per share for the year reached a new record high of $5.56 per share. Excluding the early buyout of a leveraged lease during the fourth quarter, our loan growth was 5.6% in 2019, with solid growth in both our commercial and consumer portfolios. Deposits grew a healthy 5% in 2019 and finished the year at $15.8 billion.
2019 was a busy year for us as we continued to make steady progress in our long-term goal of positioning Bank of Hawaii as the preeminent financial services provider in the islands. This means combining the relationships and trust we've earned from our clients over our 123-year history with the modern banking conveniences required of 21st century financial services providers. During the year, we successfully launched Simplify Mortgage by Bank of Hawaii. This new online portal helped Bank of Hawaii retain the number one residential mortgage market share in Hawaii in 2019. We also launched Zelle Pay, making us the first local provider in the marketplace to offer this popular P2P payment platform. During the year, we also introduced a redesigned boh.com website, which is now better suited to accommodate e-commerce activity.
On the facilities front, we laid the groundwork for the opening of four new branches in the future in 2020. We also completed our network refresh to 100% of our Hawaii marketplace. Our desktops are now fully Wi-Fi enabled and are either tablet or laptop configured, giving our teams greater mobility through our marketplace. Again, Happy New Year. I'll ask Dean now to provide you with some additional details on our financial performance for the fourth quarter and our outlook for 2020. Following Dean, Mary will then comment on credit quality. Dean?
Thank you, Peter. Net income for the fourth quarter of 2019 was $58.1 million, or $1.45 per share. Our return on assets during the quarter was 1.29%. The return on equity was 17.84%, and our efficiency ratio was 54.26%. Net income for the full year of 2019 was $225.9 million, or $5.56 per share, which, as Peter mentioned, is a new record high for earnings per share. Our return on assets in 2019 was 1.29%. The return on equity was 17.65%, and our efficiency ratio was 55.68%. Our net interest margin in the fourth quarter was 2.95%, down six basis points from the third quarter and 15 basis points from the fourth quarter of 2018. Net interest income on a reported basis in the fourth quarter was $123.9 million, down $1 million from the previous quarter and down $100,000 from the same quarter last year.
The decline in the margin and net interest income during the fourth quarter of 2019 reflects the ongoing impact of the lower interest rate environment. The net interest margin for the full year of 2019 was 3.03%. For 2020, we expect our full year net interest margin to be slightly lower than 2019, but up from the fourth quarter run rate as balance sheet growth and an improved asset mix are expected to offset the lower rate environment. As Mary will discuss later, we recorded a credit provision of $4.8 million this quarter. Non-interest income totaled $47.7 million in the fourth quarter of 2019, compared with $46.5 million in the previous quarter and $42.1 million in the same quarter last year.
The increase in the fourth quarter of 2019 was a result of a gain of $3.8 million related to the early buyout of the Leveraged Lease, partially offset by a reduction in mortgage banking income and customer derivative activity. Non-interest income for the full- year of 2019 was $183.3 million, compared with $168.9 million in 2018. For 2020, we expect the run rate for non-interest income will be approximately $44 million per quarter. Non-interest expenses in the fourth quarter totaled $93.1 million, compared with $100.3 million in the previous quarter and $95.9 million in the same quarter last year. There were no significant items in non-interest expense in the fourth quarter of 2019. The third quarter of 2019 included an increase of $6 million in the legal reserve.
The fourth quarter of 2018 included $3 million in one-time significant items related to a one-time medical expense, an operational loss, and legal expenses. For the first quarter of 2020, non-interest expenses will include our usual seasonal payroll expenses of approximately $3 million. Non-interest expense for the full year of 2019 was $379.2 million, an increase of 2% compared with $371.6 million in 2018. For 2020, we expect our total non-interest expenses to be 2%-3% above our 2019 expenses. The effective tax rate for the full year of 2019 was 20.96%, compared with 18.73% in 2018. Currently, we expect the effective tax rate for 2020 to be approximately 22%. As a result of continued strong deposit growth during the fourth quarter of 2019, our investment portfolio increased to $5.7 billion.
Premium amortization during the quarter was $6.7 million, up slightly from $6.4 million in the previous quarter and down from $8.1 million in the same quarter last year. We purchased a total of $627 million of securities during the quarter, which were primarily comprised of Mortgage-Backed Securities. The reinvestment differential was a negative five basis points. The duration of the Available-for-Sale portfolio was 2.98 years at the end of the fourth quarter of 2019. The Held-to-Maturity portfolio duration was 3.69 years, and the duration for the total portfolio was 3.36 years. Our shareholders' equity was $1.29 billion at the end of the fourth quarter. Our Tier 1 Capital Ratio was 12.18%, and our Tier 1 Leverage Ratio was 7.25%. During the quarter, we paid out $26.9 million, or 46% of net income in dividends and repurchased 336,200 shares of common stock for a total of $30 million.
We repurchased an additional 71,500 shares between January 2nd and January 24th at a total cost of $6.7 million. Our board declared a dividend of $0.67 per share for the first quarter of 2020 and increased the share repurchase authorization by an additional $100 million. Our capital management strategy in 2020 will remain unchanged, which is to pay out approximately 50% of net income in dividends to maintain adequate capital to support our business growth with a minimum Tier 1 leverage ratio of 7% and with the remainder available for share repurchases. Now I'll turn the call over to Mary Sellers.
Thank you, Dean. Net charge-offs for the fourth quarter totaled $3.7 million, or 0.13% annualized of total average loans and leases outstanding, as compared with net charge-offs of $3 million or 0.11% annualized in the third quarter of 2019, and $4 million, or 0.15% annualized in the fourth quarter of 2018. Net charge-offs for the full year of 2019 were $12.7 million or 0.12% of total average loans and leases, compared with net charge-offs of $14.1 million or 0.14% of total average leases and loans in 2018. Non-performing assets were $20.1 million or 18 basis points at the end of the fourth quarter, down from $21.6 million or 20 basis points at the end of the third quarter, and up from $12.9 million or 12 basis points at the end of the fourth quarter of last year.
Loans past due 90 days or more and still accruing interest were $8.4 million, up $2.3 million for the linked period and up $1.8 million year-over-year. At the end of the fourth quarter, restructured loans not included in non-accrual loans or loans past due 90 days or more were $63.1 million, up $16.9 million from the third quarter of 2019 and $14.4 million from the fourth quarter of 2018. Residential real estate loans modified to assist our customers accounted for $19.3 million of the total. The allowance for loan and lease losses totaled $110 million at the end of the fourth quarter, up $1.1 million from the third quarter. Given net charge-offs of $3.7 million, a credit provision of $4.8 million was recorded.
The ratio of the allowance to total loans and leases was 1% at the end of the quarter, unchanged for the linked period and down two basis points year-over-year. The total reserve for unfunded commitments was $6.8 million at the end of the quarter, unchanged from the third quarter and the fourth quarter of 2018. The Bank of Hawaii's loan and lease portfolio remains well-positioned with strong asset quality metrics and a portfolio composition which reflects our core Hawaii and Guam markets. At the end of the fourth quarter, 51% of total loan balances outstanding were supported by consumer real estate with a weighted average loan-to-value of 58%. 23% of total loan balances outstanding were supported by commercial real estate with a weighted average loan-to-value of 55%. I'll now turn the call back to Peter.
Great. Thank you, Mary. The Hawaii economy remained steady during the fourth quarter of 2019. Statewide unemployment remains low at 2.6%, compared to the national unemployment rate of 3.5%. General excise tax receipts grew 5.4% in 2019. Growth in the visitor industry moderated with preliminary visitor spending growing 0.5% and visitor days growing 2.7% year to date in 2019. This moderation was not unanticipated given the meaningful growth rates achieved in both 2017 and 2018. Housing remained stable with median prices for single family homes declining slightly by 0.1%, and condominiums rising slightly at 1.2% on average for 2019. Inventory levels remain low at 2.5 months for single family homes and 3.4 months for condominiums. Thanks again for joining us today. Now we'd be delighted to field any questions you might have.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. I show our first question comes from Jackie Bohlen from KBW. Please go ahead.
Hi. Good morning, everyone.
Hi, Jackie.
Just a question on compensation. Understanding that there'll be the typical seasonal payroll increase in the quarter. This quarter, it looks like it was a little light just due to share-based comp, incentive comp, and insurance expenses coming in from the third quarter. How much of that is a lower level to the run rate versus a higher level in three Q? Where I'm getting at with my question is just trying to see, in addition to that $3 million bump up in one Q, what other kind of increase there might be as those expenses normalize?
I would say that, in the fourth quarter, we do our true up, so to speak, on all our reserves and accruals. I would not say the whole difference is a run rate differential. Probably about half of that.
Okay. That's helpful. Thank you. Looking specifically to the occupancy and equipment line items. In combination, those two have trended up over the past year, and I'm just wondering how much of that is related to ongoing investments you have just as you continue to develop your digital strategy and new products versus how much may be just normal increase in the course of business.
Jackie, this is Peter. I'll answer that. It's a combination of both. I think the increases that you've been seeing over the past couple of years have, on the front end of that period, been predominantly what I would call infrastructure types of expenditures to get our security and our network postures where we need them to be. Probably for the past year or so, the ramp has been really more shifted to strategic initiatives and business opportunities, either from a revenue standpoint or from an expense efficiency standpoint. Yeah, you likely will consider to see those numbers rise, probably not at the same slope, if you will. Slightly more moderate slope moving forward as a lot of the deferred stuff has been taken care of. It probably will be an upward trend.
Frankly, that's something that we're doing intentionally, and hopefully, that's going to drive to better business outcomes with our customers.
Okay. Thanks, Peter. That's helpful. Just one last one for me, then I'll step back. More of a housekeeping item. I wondered if someone could clarify the tax treatment on the lease buyout that took place in the quarter. I know the original 8-K had indicated a $1.8 million tax benefit associated with that. I just wanted to see if that's the complete tax benefit with the $3.8 million or if there was some offset to that as well.
That would be the benefit.
Okay. If I look at the gain from the quarter, it would be the $3.8 million plus the $1.8 million, and then there's no offsetting tax on the gain?
Right. Well, there would be your normal income tax rate on the 3.8. The 1.8 was not a net number. It was a release of some reserves associated with the lease.
Oh, okay. That's helpful. Okay. Thank you.
Yep.
Thank you. Our next question comes from Ebrahim Poonawala from Bank of America Securities. Please go ahead.
Good morning, guys.
Morning.
Morning.
I was just wondering if you could drill into the margin guidance that you gave, Dean, in terms of it sounds like you implied that margins should begin to expand from the 2.95% in the fourth quarter. Just if we don't see a big change in the rate environment, how much expansion do you think the margin can get? And talk to us in terms of the dynamics. Do you think the decline in the funding cost should offset the decline in the asset yields going forward? Just what your expectations are around that would be helpful.
Yeah. Okay. I have to caveat my guidance because of the last several days, that the rates had dropped quite a bit.
Sure.
The guidance had assumed that we are stable on rates going forward, and there is a balance sheet growth. That's going to give us the margin as well as net interest income expansion. In terms of kind of the yields between the assets or loans and the deposit side, we do believe that there's opportunities to continue to reduce our deposit cost, subject to the competition. We do believe there's still room there that would offset the decrease in the asset yields, if any, going forward.
Got it. Just in terms of on deposits, very strong year, I guess 5% year-over-year growth on period end. Do you expect this level of strength when you think about deposit growth in 2020?
Well, we don't really see a reason why we ought not to see results similar to that. I would tell you, Ebrahim, that 5% probably certainly is at the upper end of what my anticipation would have been. I think another 3%, 4%, 5% deposit growth year for us in 2020 is certainly within the realm of possibility, subject to what happens out here in the economy and the global economy.
Got it. Is there anything off the fourth quarter growth where you see seasonally some outflows in the first quarter or not?
The deposits have held in pretty remarkably well here in the quarter current. You're right, usually fourth quarter is a bit of a temporary spot as at year-end, probably less so that phenomena this year.
Got it. Just moving in terms of capital TCE at 6.95. Just talk to us, Peter, Dean, in terms of how you think about capital levels, like binding constraint, where you're managing capital, and how we think about buybacks going forward.
Yeah, per my comments, we're continuing with our capital management program. We are going to plan on paying out about 50% in dividends. Of course, as we grow the business, we're going to retain some of that capital, and then what's remaining will be for share repurchases, subject to certain minimums on our capital levels, in particular, the leverage ratio at 7%. We're at a 7.25% right now.
Yeah. Ebrahim, if you were to chart our buyback activity over the past, call it several years, what you'd see is, in a general year, we're probably buying back or dividending out upwards of 80% of our earnings.
Yep.
With the balance held to support growth. 2019 was a bit of an anomaly, frankly, because I think we exceeded that number pretty substantially. That was really as a result of a capital build that we had intentionally put in place to support really two factors. One, the change in capitalized lease obligations on the balance sheet, and obviously going into that, we didn't quite have a clear or a crystal clear understanding. I think we did directionally, not a crystal clear understanding how that would impact us. Secondly, CECL, which is not concluded, but we feel like we have a much better position on that as well. Both of those items seem at this stage to be, well, at least the capital lease side is taken care of. CECL is kind of yet to be determined.
At this stage, both those items seem to be pretty innocuous to us. We went ahead and allowed for that additional capital build to melt down, if you will, in 2019. Obviously that won't go forward into 2020.
That's helpful. Thanks for taking my question.
Thank you. Our next question comes from Aaron Deer from Piper Sandler. Please go ahead.
Good morning, everyone.
Aaron.
Maybe to begin, if you could just give kind of an update on where the pipeline stands today and what your expectations are for loan growth heading into 2020.
A great outcome I thought in 2019 given all sorts of challenges out there. We had good balance growth in 2019, both on the consumer front as well as on the commercial front. It appears that construction lending is becoming constructive again versus a bit dilutive in prior periods. We would anticipate to continue to see that happening mostly through affordable projects. C&I book is going to be, I'm not sure that we'll get much growth there, the CRE book has got a nice pipeline behind it. We generated great market share and showed great strength late into the year on our resi side, at least I'm quite hopeful to continue that momentum. The only consumer product that was challenged for us in the year, Aaron, was home equity.
That was really as a result of, I think some substitution impact as rates came down from home equity into resi mortgage which as long as we were getting the resi mortgages was fine with us. We also did see or have been seeing some pretty aggressive pricing on the teaser side, the short-term kind of two-year kind of stuff. That we frankly were hesitant to follow into the marketplace. Hopefully that cleans itself up in this year, and if it does, maybe we'll have a better result there. I think the bottom line, to answer your question, is that 2020 feels awfully similar to 2019, and if we got a similar result to 2019, I'd be pretty happy with that.
That's great. Thank you. Dean, going back to the margin and some of the dynamics there, I'm just curious, as you're looking at where your current yields are coming on and where deposit pricing stands, any sense in terms of the timing of the expected inflection? I mean, can we maybe see the margin start trending higher right away here in the first quarter? Or is it maybe going to take a quarter or two before we start seeing the benefit of the improvements that you're expecting?
Yeah, I would say it would take maybe a quarter or two to see the increase here. We may be flat to we could be slightly up in the first quarter, but second through fourth quarter is where we'll see a more meaningful pickup.
Okay. Peter, from your comments, it sounded like you guys are still not expecting any adjustment to the allowance based on CECL adoption.
Let me have Mary answer that.
I think as Peter indicated, we're in the process of finalizing all our assumptions and inputs for the day one impact, but it continues to be very modest.
Okay, great. Thanks.
A benefit or
Likely a modest benefit.
Modest benefit, yeah. To us.
To us.
Terrific. Thank you for taking my question.
Okay, Aaron.
Thank you. Our next question comes from Jeff Rulis from D.A. Davidson. Please go ahead.
Hey, good morning. This is Levi Posen on for Jeff Rulis.
Hi, Levi.
Hey. I just wanted to ask, you mentioned a couple of metrics on tourism, and if 2020 were to see an inflection of some of those spends and days visited from international tourism, what kind of fluctuations might you expect to see in your business?
I think that what we saw on the visitor side, and in particular on the international side, was a moderation in a couple of markets. The domestic market, which is, call it two-thirds of our visitor base, performed exceptionally well, kind of mid-single digit spend as well as arrivals. International, not as strong. Japan was a little weaker, really it was Canada, Australia, and New Zealand that were probably the weakest sisters of what we generally call the other category. There, I've done some asking around into that space, and I think the thing to recognize is that those economies while not in recession, are certainly flattening out, having their challenges, number one. Number two, certainly as it relates to the Australian dollar, there has been kind of this serial depreciation in their currency versus the U.S. dollar for a few years now.
The general sentiment is that's just kind of winding its way into both arrivals and certainly into spending here in the islands.
Okay, thank you. I just had one quick question on the expense side, specifically related to professional fees. Although one of the smaller line items there, a meaningful increase in this quarter, I was just curious if there was one-time project-related activity there or what we can kind of look at as a base going forward?
Yeah. There's a number of items there, and I guess I would break it down into three kind of categories. One is the normal fourth quarter bump in professional fees related to audits and kind of the year-end activity. The second thing, our projects. We do have a number of projects going on that involve consultants. The third is kind of related to that, but on the CECL side, there was a bump there too in preparation for the CECL implementation.
Okay. That's helpful. Helps me think about it. That's it for me then. Appreciate the color.
Thank you.
Thank you. Our next question comes from Laurie Hunsicker from Compass Point. Please go ahead.
Yeah, hi. Thanks. Good morning.
Laurie.
Just wanted to stay on Levi's question on expenses here. Dean, maybe if you could help us think about your expense guide of 2%-3%, what adjusted figure were you using for full year 2019?
That would be off the reported number.
Okay.
Yeah.
Okay. I mean, round numbers, you had $6 million, $7 million within that figure that was somewhat non-recurring. That's a larger jump. Are you thinking in terms of, I mean, you mentioned the four new branches. Are there more tech and IT expenditures coming, or can you talk a little bit about the jump in expenses in terms of why that's a little bit higher?
I'll jump in here, Laurie. There's likely a little bump up in depreciation. We already talked about data services coming up a little bit, and that certainly is as a result of the initiatives both on the facilities front as well as on the technology front that we're pushing forward and excited about. Really, as we thought about whether to quote a as stated or as adjusted number, what's also going into 2020 are some anticipated somewhat extraordinary items. We've got some, what I would call, outsized severance payments coming through as we readjust some of our senior ranks here in the company. As we did the takes and puts, it kind of just appeared to us to make more sense just to simply say, "Expect a 2%-3% jump on as stated.
Got it.
You're right, there are some ins and outs. Fundamentally, though, I think that the bottom line is the expense story kind of continues to be pretty solid for us, going forward.
Okay, thanks. Then the new branches coming on, do you have roughly the timing of when those four branches come on and on average, what the expense per branch is associated and how you're thinking about the break-even on those?
Yeah. They will roll on. The first one's coming on this quarter. Although I just drove by it yesterday, and I can't believe it's coming on this quarter. The rest of them will kind of flow out throughout the year. We're anticipating depreciation to clip up $2 million, in part because of that, in part because of some other things we're doing. What is offsetting that is that all of those, if you think of those 4 branches in totality, there are a number of, I'll say, efficiency/closure opportunities around the cluster of those new branches that will offset or create efficiencies kind of in the-- I'm not so sure this year, but into the following years.
Frankly, I can't really give you too much detail around that because for regulatory purposes, we need to disclose those exact sites to our regulators first, and I'm sure you appreciate that.
Got it. Okay. Premium am at $6.7 million. If I'm adjusting that, your NIM adding back the premium am is 3.11%. I just wondered around your margin guidance, how are you thinking about premium am for 2020? In other words, what's in your model? As you're guiding to reported margin, I realize that's a lumpy line item, but if you could help us think about how you have modeled it, that would be really helpful. Thanks.
Well, the way we modeled it is we kind of leave that in. I don't have the exact forecast for the premium am for the full year. Just looking at the trend, we did come up in the fourth quarter. The portfolio is a little bit larger. I would have to say, given the rate environment, that we may trend slightly lower over the full year, but it would be kind of similar levels on a quarterly basis to where we are.
Okay, great. Thanks. If we're assuming premium am is probably running, I mean, it was 16 basis points this quarter, maybe like a 14, 15 basis points or so?
Yeah. I think that'll be it.
Okay, great. Thanks. I'll leave it there.
Thank you. Our last question comes from Aaron Deer from Piper Sandler. Please go ahead.
Hey, guys. Sorry, just one quick follow-up. The other non-interest income line, if you back out the $3.8 million gain, was down probably about $1 million-$1.5 million from the run rate. It sounds like that was lower derivative activity from your customers. Just wondering if you expect that to bounce back up to kind of the previous run rate or if there was maybe some outsized activity in the prior quarters.
Aaron, I'd say that, and I mentioned that the CRE book looks pretty good this year. Having said that, these are really bumpy types of revenue opportunities. Directionally, I'd say it should be another good year derivative-wise for us, both from a rate as well as volume standpoint. Having said that, 2019 was also pretty extraordinary.
Okay
if we're a little bit high in 2019, I still feel pretty good about the results.
Okay. Good stuff. Thanks again for taking the extra question here.
Yep.
Thank you. I show no further questions in the queue. At this time, I'd like to turn the call over to Cindy Wyrick, Director of Investor Relations, for closing remarks.
I'd like to thank everyone again for joining us 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, this concludes today's conference call. Thank you for participating. You may now disconnect.