Good day, ladies and gentlemen, welcome to the Bank of Hawaii Corporation first quarter 2019 earnings conference call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If anyone should require operator assistance, please press star then zero on your touch-tone telephone. As a reminder, this conference may be recorded. I would now like to turn the conference over to Cindy Wyrick, Director of Investor Relations. You may begin.
Thank you, Sonia. Good morning. Good afternoon, everyone. Thank you for joining us today as we review our financial results for the first 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. While we believe our assumptions are reasonable, there are a variety of reasons the actual results may differ materially from those projected. Now I'd like to turn the call over to Peter Ho.
Thanks, Cindy. Aloha, everyone, thanks for joining us today. Bank of Hawaii began 2019 with strong financial performance. Our asset quality remained strong, margin expanded, our expenses were well controlled, our liquidity and capital levels remained robust. Assets, loans, and deposits all grew during the quarter. Outstanding loans increased 1% from the previous quarter and were up 6.4% from the same quarter last year. Deposit growth was particularly strong during the first quarter, up 1.6% from the previous quarter and up 2.1% from the same quarter last year. Total deposits of $15.3 billion at the end of March set a new record high for deposits at Bank of Hawaii. I'll ask Dean to provide you with some additional details on our financial performance for this quarter and our outlook for the remainder of 2019. Mary will then comment on credit quality. Dean?
Thank you, Peter. Net income for the first quarter was $58.8 million, or $1.43 per share, compared to $53.9 million, or $1.30 per share in the previous quarter, $54 million or $1.28 per share in the first quarter of 2018. Our return on assets during the first quarter was 1.38%, the return on equity was 18.81%, our efficiency ratio improved to 55.22%. Our net interest margin for the first quarter was 3.12%, up two basis points from the fourth quarter of 2018, up 12 basis points from the first quarter of 2018. Net interest income on a reported basis in the first quarter increased to $124.8 million, up from $124 million in the previous quarter and $119 million in the same quarter last year.
During the first quarter of 2019, we repositioned approximately $400 million in investments, largely comprised of municipal securities, at no material gain or loss on sale. The reinvestment differential was 114 basis points on a taxable equivalent basis, with no material change in duration. The portfolio repositioning, as well as overall balance sheet growth, is expected to improve net interest income going forward. Given the current rate environment as well as our strong liquidity position at the end of the first quarter, we anticipate net interest margin may be flat to modestly lower in the second quarter. As Mary will discuss later, we recorded a credit provision of $3 million this quarter. Noninterest income totaled $43.7 million in the first quarter of 2019, compared with $42.1 million in the previous quarter and $44 million in the same quarter last year.
Noninterest income in the first quarter of 2019 included a one-time $1.4 million insurance commission related to products we offer through a third-party administrator. We incurred approximately $800,000 of fees related to the ongoing carrying cost of our sold Visa position, not related to the portfolio repositioning. There were no significant items during the fourth quarter of 2018. Noninterest income for the first quarter of 2018 included a gain of $2.8 million from a low-income housing investment sale. Noninterest revenue is expected to remain at approximately $42 million per quarter for the remainder of 2019. Noninterest expense totaled $93.1 million in the first quarter of 2019, compared with $95.9 million in the previous quarter and $94.4 million in the same quarter last year. Noninterest expense in the first quarter of 2019 included seasonal payroll expenses of approximately $2.7 million.
Noninterest expense in the fourth quarter of 2018 included a true-up of $1.7 million to medical expenses, primarily related to a single claim, and charges of $1.3 million in legal and operational matters. Noninterest expense in the first quarter of 2018 included seasonal payroll expenses of approximately $2.5 million and a legal reserve of $2 million. For 2019, we expect noninterest expenses to be approximately 2%-3% above our adjusted 2018 expenses of $365 million. The effective tax rate for 2019 was 18.85%, compared with 20.92% during the previous quarter and 16.19% during the same quarter last year. The first quarter of 2019 included a tax benefit of $1.9 million related to an exercise of an early buyout option. The tax rate during the first quarter of 2018 included a $2 million benefit related to our low-income housing investments.
As a result of our portfolio repositioning, which reduced our exposure to municipal securities, we expect the effective tax rate for the remainder of 2019 to be approximately 22%. Our investment portfolio was $5.5 billion at the end of the first quarter, up slightly due to strong deposit growth that exceeded loan growth during the quarter. Premium amortization during the quarter was $6.3 million, down from $8.1 million in the previous quarter and $9.5 million in the same quarter last year. The duration of the total portfolio was 3.26 years at the end of the first quarter of 2019. The held-to-maturity portfolio duration was 3.7 years, and the duration for the available-for-sale portfolio was 2.4 years. Our shareholders' equity increased to $1.27 billion at the end of the first quarter. Our Tier 1 capital ratio was 12.75%, and our Tier 1 leverage ratio was 7.46%.
During the first quarter, we paid out $25.6 million, or 44% of net income in dividends, and repurchased 513,400 shares of common stock for a total of $39.9 million. We repurchased an additional 114,000 shares between April 1st and April 18th at a total cost of $9.2 million. Finally, our board declared a dividend of $0.65 per share for the second quarter of 2019, an increase of 5% from the first-quarter dividend of $0.62 per share. Now I'll turn the call over to Mary Sellers.
Thank you, Dean. Net charge-offs for the first quarter totaled $3.7 million, or 0.14% annualized of total average loans and leases outstanding, as compared with net charge-offs of $4 million, or 0.15% annualized, in the fourth quarter of 2018 and $3.5 million, or 0.15% annualized, in the first quarter of 2018. Non-performing assets were $17.9 million or 17 basis points at the end of the first quarter, up from $12.9 million or 12 basis points at the end of the fourth quarter, and up from $15.7 million or 16 basis points at the end of the first quarter of last year. The increase for the quarter was primarily driven off the $3.9 million balance of a commercial mortgage loan that was placed on nonaccrual this quarter after a $1.6 million charge-down.
Loans past due 90 days or more and still accruing interest totaled $6.1 million, compared with $6.6 million at year-end and $8.2 million at the end of the first quarter of 2018. Restructured loans, not included in nonaccrual loans or loans past due 90 days or more, totaled $48.6 million, down $160,000 from the prior quarter and down $8.2 million year-over-year. Residential mortgage loans accounted for $19.6 million of the total. At the end of the quarter, the allowance for loan and lease losses totaled $106 million, down $700,000 from the end of 2018. Accordingly, given net charge-offs of $3.7 million, a credit provision of $3 million was recorded. The ratio of the allowance to total loans and leases was 1.01% at the end of the quarter, down one basis point for the linked period and down eight basis points year-over-year.
The allowance reflects the continued strength in the company's asset quality, as well as the Hawaii economy over this period and the mix in loan growth. The total reserve for unfunded commitments was $6.8 million at the end of the quarter, unchanged from the fourth and first quarters of 2018. I'll now turn the call back to Peter.
Great. Thank you, Mary. The Hawaii economy continued to perform steadily during the first quarter. Our statewide unemployment rate was 2.8% in March and remains very low compared to the unemployment rate of 3.8% nationally. Visitor stats year to date February were a bit mixed. For the first two months of 2019, total visitor arrivals increased 1.8%, although visitor spending did decline by 2.4% due to a reduction in daily spending. The real estate market on Oahu remained stable during the first quarter of 2019, despite a moderate decrease in volume of home sales. Median sales price of a single-family home increased 2%, while condominium sales prices decreased 3.2% compared with the first quarter last year. At the end of March, months of inventory of single-family homes and condominiums on Oahu were 3.4 months and 3.6 months, respectively.
Thanks again for joining us today. Now we'd be happy to respond to your questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Jeff Rulis of D.A. Davidson. Your line is now open.
Thanks. Good morning.
Morning, Jeff.
Peter, maybe just a broader question on credit. It sounds like the addition was one property. I guess broadly speaking on credit, just the early warning signs for you, do you look more to the consumer side or real estate that would indicate further softening is happening? What do you guys discuss internally?
Obviously, a lot more of those discussions of the recent past. We actually look at both factors. I'll kind of kick this answer off, and Mary, maybe you could kind of clean up whatever I don't get taken care of. We're looking at monitoring scores, FICO, we're looking at LTVs, we're looking at intrinsic real estate values underneath both our consumer and commercial real estate books. We're looking for classified and credit trends on the commercial portfolios. I guess the way that I would characterize it is I'm somewhat a believer that we are certainly trending closer to the turn in the cycle. Although I would say that there is precious little from a quantitative standpoint, from an analytical standpoint, at least in our portfolios, and at least in what we see in the local economy, that would prove that out at this point.
Mary, you want to add anything?
No, I would agree. I think what we've seen to date in the commercial mortgage that went on nonaccrual was kind of an idiosyncratic asset-
Yeah
Not really endemic of the entire book. As Peter mentioned, we continue to see stronger metrics, in both originations and monitoring across the portfolio, and clearly well below what we were seeing kind of in 2007. We're seeing better quality in our book prior to that.
Yeah.
I think we're trying to take a thoughtful approach and watch what we see happening.
Yeah. Q1 monitoring FICOs were higher this quarter than they were a year ago.
Yes.
Consumer still seems to be in pretty good shape. Although our sales are off a bit. I talked a little bit about the residential housing market being a little softer volume wise. We're watching closely, but so far so good.
Okay. Thanks for that. Maybe just a question on the margin. You talked about flat to down maybe next quarter, but I guess if we've got an extended pause with the Fed, any preliminary thoughts on the second half of the year margin or a little further out on direction?
Yeah. At this point, we're looking at if rates kind of stay unchanged from where they are, flat to maybe even up a bit depending on our balance sheet growth.
Okay. That's further out than 2Q?
Okay.
Yeah. I also would want to emphasize that our net interest income forecast is still positive going out through the rest of the year.
Mm-hmm. Okay. Thanks, Dean.
Thank you. Our next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch. Your line's now open.
Good morning, guys.
Morning.
Just one follow-up on the margin. If you would just break down in terms of where the securities yield was at following the restructuring and kind of where the NIM would have been, x the liquidity impact. Just trying to get a sense of the boost received from doing the restructuring and how we should think about the securities yield going forward.
The securities yield, I quoted the differential at 114. That's on a taxable equivalent basis.
If you did versus the reported yield, it would be about a 155 basis points. The difference would show up in our tax rate, which is why we have a slightly higher tax rate. Based on that, the margin benefit would be about, I would say about maybe three basis point or four basis points.
Got it. Just switching to the other side in terms of deposits. Cost of interest bearing deposits went up nine basis points quarter-over-quarter. Do you see that kind of declining from here? Can you just talk a little bit about the pricing competition in the market?
Yeah. I think that if in fact we see a pause in rate increases at the short end, I think thematically we'll begin to be observing a somewhat lighter deposit pressure rate-wise. Having said that, the beauty of our deposit book is there's a fair amount of latency built into the system. Even though it appears that the Fed has taken a pause at the short end, that's not to say that we don't still have very low-level depositors, low-rate depositors coming forward and asking for somewhat better rate. These aren't people that have been following the market day to day. These are people that have been kind of out of the market for six months to a year plus. I guess my answer, Ebrahim, would be, I think if we've got a flat rate environment, we should see some pricing relief intermediate term.
That's not to say that in the process of getting there's still some latent demand, I think, coming across the transom.
Understood. I assume that part of sort of the guidance Dean gave in the back half of 2019 for the margin implies that you might see loan-to-deposit ratio trend a little bit higher, continue to trend higher.
Good. Yes
Just on that, in terms of loan growth, we saw loan growth about 1% sequential growth. I heard your comments just in terms of cycle and your thoughts around that. Should we expect loan growth to mirror what we've seen in 1Q, or I believe, in January, I think the expectation was that it would be more like 2018, where loan balances grew about 7% year-over-year.
Yeah. I think that the year-on-year number at 6.4%, I think that's a pretty good proxy for 2019. We had some early buyout activity in our lease portfolio. You saw that the construction book was a little bit light. We hopefully should pick up some of that towards the back of the year. Gee, the first quarter was just a disaster, residential mortgage-wise, volume-wise. As of the past month with rates doing what they've done, there seems to be a real resurgence in that business. I think those factors would push me, Ebrahim, more towards looking towards the year-over-year percentage versus the linked Q1 percentage.
Understood. Helpful. Thanks for taking my questions.
Yep.
Thank you. Our next question comes from Aaron Deer, Sandler O'Neill + Partners. Your line is now open.
Good morning, everyone.
Aaron.
Curious on the tax line, you guided toward a higher number there. It sounds like tied to the repositioning. I guess presumably, a smaller muni book going forward. Is there any other items in the first quarter other than the highlighted item that affected the tax rate? Is there anything related to stock compensation that might have been elevated in the first quarter that also pushed that down from your full year expectation?
There is a bit on the first quarter that's seasonal related to the incentives, the vesting of some of our RSUs. Primarily, it's going to be related to the muni book as well as that early buyout item that we cited.
Okay. Any other expectations for any events on the expense line in the back half of the year where you guys are going to be doing any staff changes or branch reductions that could help out on that front or cause some one-time items through the year?
You mean in terms of severance costs and things like that, Aaron?
Severance costs or consolidations.
I think that you're probably going to see in the space of severance numbers kind of a similar trend to what you've seen in the past couple of years. They kind of episodically come in and out. Expense-wise, I'm pleased with Q1, and I think the balance of the year is looking pretty nicely controlled. That's including some of those items that you described.
Okay. Very good. Thanks for taking my questions.
Sure.
Thank you. Our next question comes from Casey Haire of Jefferies. Your line is now open. Casey, if your phone is on mute, please unmute.
Sorry about that.
Hey, Casey.
Good morning, guys. How are you? Sorry about that.
Good.
Peter, just wanted to keep on the expense front for a little bit. It sounds like you guys are keeping the guide at up 2%-3% on the year. You're tracking well below that in the first quarter here. Just wondering what's going to drive that. What's going to be a pretty decent expense ramp in the back half of the year? Was there anything special in the first quarter, I guess?
Well, okay. I'd say on the front end, we were pretty hard on some of our comp plans. That as we kind of push towards mid-year here, I think we need to widen out a bit. That could come into play in the latter quarters, Casey. I think you're right. I think you're stressing on it. Two to three I think is reasonable, but I think given where we are year to date, the two's looking somewhat attainable. Let me just put it that way.
Gotcha.
I should also add that we do have our merit increases, the year-over-year merit increases that start in April.
Okay. Right. Yep. Okay. That'll come into play for sure. All right. Then like the net occupancy and the other lines I thought were low. Are those sort of the new run rates going forward, or was there anything pulling those down this quarter?
Those are running towards the new run rates. As you know, we've been very active in managing our retail square footage, and I'm really pleased with some of the results that I've seen of late. Those should be long-term systemic types of impacts for us.
Okay, great. Just one last one from me, another one on the NIM. With the Fed on hold, what do you guys see in terms of loan yields going forward? I know it depends on mix, but can you hold this sort of 420 level you saw in the first quarter, or is competition going to chip away at that?
I'll tell you, there's a ton of competition out there. It is all over the place pricing wise, and beginning to trend towards terms and conditions as well. We're feeling late cycle-ish competitively here. To answer your question, I think that yields are going to be challenging. Just to try to land the business we know we ought to be landing, I think there's going to be a lot of price pressure to get that.
Great. Thank you.
Yep.
Thank you. Our next question comes from Jacquelynne Bohlen of KBW. Your line is now open.
Hi, everyone. It's Jackie.
Hi, Jackie.
I just wanted to follow up on fee income, and understood about the one-time nature of the insurance commission that happened in the quarter. Previously, I've got in my notes that you had talked about $42 million as a run rate, and even if I strip that out, we were still a bit above that. Kind of two parts. Number 1, was there anything else that you'd consider unusual in 1Q? Number 2, how do you feel about that level going forward?
You're right. We're levitating a bit above that primarily because we had a very good quarter for interest rate derivative activity as well as foreign exchange derivative activity. Is there a possibility that we'll have that kind of income in the coming quarters? Possible. Actually, we do have a pretty heavy book funding wise on the commercial front, so that bodes well for at least the interest rate side. You know Jackie, that stuff's pretty episodic and it's tough to tell, but maybe. I guess what I would say is 42 is feeling more like a floor these days than a ceiling.
Yeah.
Okay, that's helpful. In relation to the insurance product commission, is that something, and understanding that it's unique, is it repeatable or was it just truly something that came up and you were able to take advantage of?
It repeats every time we renew the program.
Right.
It's not quarterly for sure. It's not, I don't think even annually.
Yeah.
Every few years.
It's several years.
Yeah.
Okay. Thank you. Everything else I had was already asked.
Okay.
Thank you. Again, ladies and gentlemen, if you would like to ask a question at this time, please press star then one on your touchtone telephone. Our next question comes from Laurie Hunsicker of Compass Point. Your line is now open.
Great. Hi, thanks. Good morning.
Laurie.
I wanted to stay with Jackie's question on net interest income for a moment here. Within the trust and asset management line, can you just help us think about how tax prep is going to play in as we look to this next quarter?
Yeah. We got a little bit of a bump in the first quarter, but we expect some in the second, just given the deadlines. We would think of a little bit higher, or kind of similar to what we had in the first quarter before coming back down on the tax prep side.
Before coming back down. Okay. At the peak, that's running what, $400,000 or $500,000 in there? Is that correct, or?
Yeah. About there.
Okay. Great. Then in terms of deposit costs, can you talk a little bit about your savings accounts represent 38% of your deposits, and it was a pretty big jump linked quarter. You went from those costing 32 basis points to those costing 47 basis points. How should we be thinking about that line and were there specials or?
This is on the saving? What?
Yeah, on the savings. There was a pretty big jump in balances, there was a big jump in cost there.
Yeah. If you look at where our kind of our deposit gathering efforts are kind of a little bit more focused on, that's the area. Going forward, we expect that to maybe trend higher, but maybe not at the same pace that we saw in the first quarter.
Okay. Do you have the amount of your public deposits, the $1.2 billion, do you have the amount that's the public time piece of that?
Sure. Hold on. It is, as of 03/31, $628 million.
Great. Okay.
It's down from 818 a year ago.
Okay.
By the way, in that space, we think that we may be, depending on the rate environment, Laurie, could be kind of flattening out on that line number.
Okay. Yeah, I mean, it's basically flat from last quarter. Okay.
Yeah.
I guess, just again, going back to the deposit costs then, as we think about I mean, obviously CDs were up, but the biggest move there was savings. If we think about directionally where that could be heading as we look in the back half of the year, is it possible that that piece will hold at 50, 55, 60 basis points, or we should be thinking about that at a higher number?
I think it'll drift higher. It won't double. Certainly a little bit higher.
I mean, your cost of deposits relative to mainland banks is so amazing that it's just. Big payments, bigger move. Just putting that together on margin, I just wanted to go back here. Obviously we saw your margin expand two basis points, but with the drop in premium amortization, if we're adding that back, your core margin, just linked quarter going from fourth quarter to first quarter, actually contracted, right? You went from 3.30%-3.28%. When you're talking about a forward guide, how are you thinking about the premium amortization piece, or is your guidance exclusive of that?
The guidance would include any changes in that or expected changes in that.
Can you help us in terms of what maybe you're thinking with respect to that?
Well, what happens is we look at the current rate environment, and there's our prepayment expectations, and that kind of factors into the yield.
Sure. No, that I understand. I'm just trying to directionally understand. In other words, even though your reported margin expanded, your core margin contracted just because of where premium am was in the fourth quarter versus the first quarter. If we're thinking about the modeling, just even as we look toward next quarter, what would we be thinking premium amortization that's in line with where you're suggesting? Are you suggesting I realize that that line item jumps around, but in other words, when you're giving a forward-looking number, are you thinking about a premium am in the same level as we're seeing for the March quarter? Are you thinking about closer to the fourth quarter?
I don't have the exact number, but directionally, I would think it would be a little higher.
Okay, perfect. Thank you very much. I'll leave it there.
Thank you. This does conclude our question and answer session. I would now like to turn the call back over to Cindy Wyrick for any closing remarks.
I'd like to thank everyone today for joining us and for your continued interest in Bank of Hawaii. As always, please feel free to contact me if you have any additional questions or need further clarification on any of the topics discussed today. Thanks everyone, and have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect.