Good day, ladies and gentlemen. Welcome to the Bank of Hawaii Corporation first quarter 2018 earnings conference call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we will host a question answer session. Our instructions will be given at that time. If during the conference you require operator assistance, please press star then zero. An operator will be happy to assist you. As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to hand the conference 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. 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. 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 I'm going to ask Dean to provide you with some additional details on our financial performance this quarter. 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 saleable 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 $500,000 related to the implementation of the new minimum wage for the company.
Noninterest expense in the fourth quarter of 2017 included one-time 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%-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% during 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, included a one-time negative adjustment 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 six 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 and 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 2nd and April 20th at a total cost of $5 million. 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 total $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. Non-performing 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 eight basis points, up $1 million for the linked period and up $2.3 million year over year.
Restructured loans not included in non-accrual 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 remained 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%, while the weighted average loan-to-value for the residential and home equity portfolios was 58% and 63%, respectively. 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 one basis point for the linked period and down six 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 two months of 2018, total visitor arrivals increased 7.7%, and visitor spending increased 8.5% compared to the same period a year-ago. For the first two months, all four 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 to the first two months of last year. In addition, all four 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 of 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.
Month 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. You can see inventories remain quite tight. We continue to make solid progress in transforming our branches to our Branch of Tomorrow concept. This concept integrates a 21st century digital banking experience with greater convenience and personal interactions to build an even better relationship with our customers. We've transformed six branches to date, with the most recent being our Pearlridge branch, completed in January. We have several on slate for next year, including our Kahala 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.
Thank you, sir. Ladies and gentlemen, at this time, if you would like to ask a question over the phone lines, please press star and then one on your telephone keypad. If your questions have been answered, or you simply wish to move yourself in the queue, please press the pound key. Once again, that is star and then one to ask a question. Our first question will come from the line of Jeff Rulis with D.A. Davidson. Your line is now open.
Thanks. Good morning.
Hey, Jeff.
Just wanted to kind of pare out some of the expenses just to see what you would view as one-time or, I guess, seasonal. 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 expected of that do you expect to recur?
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.
Yeah. That could be more episodic. Certainly, the legal reserve, the bump in the payroll taxes and benefits will not be reoccurring in the second quarter.
Got it. Thanks. Maybe on that same
I also should note that in the second quarter, we do increase the compensation for merit increases.
Okay. Got it. On just the low-income housing, do we view that as also one time, the $2.8 million?
Yes.
Okay. All right. Maybe one last one maybe for Peter. You guys had mentioned you sort of had backed off the public deposit arena, that it had gotten pretty competitive. Maybe just an update on the deposit pricing in your market. Any update there? Thanks.
Sure. Yeah. I think we're thinking about pricing against 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. As rates have begun to rise over the past year, call it, I think certainly there are pools of deposits still resident on our balance sheet that frankly represented somewhat lazy deposits, if you will, that ultimately are going to seek a yield home. As we look at it, we're pretty clearly convinced that the industry is really on a journey of repricing. It's important to understand that there is a pretty broad spectrum of outcomes out there.
Anywhere from, as you mentioned, the governmental side, all the way down to our mass market retail side and everyone in between, and private banking and small business and commercial and large corporate and large wholesale. Yeah, you're right. We mentioned last quarter that we likely were 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. That would 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.
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 are additional rate increases out there. That's going to give people quite naturally more of an urge or desire to see what kind of pricing they can get, not just at Bank of Hawaii, but elsewhere. 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 marketplace here in the islands.
We've got an abundance of liquidity, if you will. We love the diversity in our deposit base. We're just over 51% consumer, just over 39% commercial. Our public book, and frankly, the book that's probably the hottest at this point is 9.3% of our overall deposits. Then finally, by product type. Again, I think a good story there. 52% of our deposits are demand deposits, both interest-bearing and non-interest-bearing. Savings is 36%, and time deposits comes in at 12%. Our deposit base, at least by product type, is largely transactional, largely relationship based. I think we take a fair amount of strength into what's going to be a tougher pricing environment, there's no question about that.
Great. Thanks.
Yep. Thanks, Jeff.
Thank you. Our next question will come from the line of Brett Rabatin with Piper Jaffray. Your line is now open.
Hi. Good morning, everyone.
Hey, Brett.
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?
Did you pay to say that? To ask that? Yeah. CRE, 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 masked 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 they're 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 winnow down a bit. C&I was strong at 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. On balance, commercial 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. Frankly, about where we think they were going to show up. As you might imagine, Brett, the refi market's been mucked up a bit by higher rates. 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. Resi at 1% up is about what we thought. Our other consumer products I think performed pretty well. 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, it'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. 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? 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?
Yeah. I would say about a $42 million guidance would be what we would provide for the revenue going forward for the quarters. We do still expect overdraft fees to be under pressure. On the mortgage banking side, just with the rate environment, that's a little bit tricky at this point. About $42 million is what we would expect.
Kind of the run rate from Q4 is about the run rate we would see.
Okay. Great. Thanks for the color.
Yep. Take care, Brett.
Thank you. Our next question will come from the line of Jacquelynne Bohlen with KBW. Your line is now open.
Hi, good morning, everyone.
You're always going to have your 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. 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. Whereas we were pretty aggressively building market share over the past couple of years, we've been met by some pretty strong competition. I think if I think about it, or as we think about it, that's probably kind of the biggest difference in our growth trajectory within home equity.
I think the consumer is not a whole lot different from where they were a year ago.
Okay. 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. If you could just speak to what, if any, and this may be a question for Mary, impact you anticipate from the recent floodings in Kauai.
That's, yeah, Mary.
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. We haven't gotten too much feedback yet. We do note that the Loan-to-Value 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.
Yeah. Kind of an interesting area, Jackie. Hanalei's got a lot of very high-end properties. Also a fair number of just kind of market-level residences. First of all, our team is in great shape. None of them were terribly impacted by the storm. Secondly, we're going to look to support the people of Kauai as best we can. As Mary mentioned, from a credit standpoint, not really much to report there.
Okay, great. Thanks for the update, and glad to hear that all your team members are safe.
Yep.
Thank you. Our next question will come from the line of Aaron Deer with Sandler O'Neill. Your line is now open. Mr. Deer, your line is now open. Please check your mute button.
Hey, good morning, everyone. Sorry about that. Peter, you had mentioned in your answers to another analyst, the splitting 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?
Sure. Yeah. 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? If you look at our year-over-year performance in the first quarter, it was 8.8%.
Okay.
Then all I was saying is, I think that if you're trying to figure out what we're looking at growth-wise, we're probably right in between those two numbers.
Got it.
That's what I was saying. Yeah.
Okay. You've given some pretty good guidance generally. One question, though, just in terms of individual line item on the mortgage banking. Looking at the first quarter results, just a little over $2 million, is that level pretty much just the level that you earn 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. The rest of it would be related to sales.
Okay. Maybe just one last question, kind of margin related. With respect to the loan book, can you give us an update in terms of what percentage of that reprices immediately and reprices within one year, if you have that available?
Yeah. In terms of just kind of our floating rate loans, it's roughly about 25%. There's probably another, maybe I would call it 5%, that would reprice within a year.
Okay. Okay, that's helpful. Thanks for taking my questions.
Thanks, Aaron.
Thank you. Just as a friendly reminder, ladies and gentlemen, if you would like to ask a question over the phone lines, please press star and then one on your telephone keypad. Our next question will come from the line of Laurie Hunsicker with Compass Point. Your line is now open.
Great. Hi, good morning.
Laurie.
Just wondered on the funding side, if we can go back to the public deposit space. I see your public deposits are $1.4. Do you have a breakdown of how much is the time included in that number?
Sure, we do. Public time, other is $818 million. It's down from $838 million last quarter.
Great. Thanks. Okay.
We want to anticipate that to continue to come down.
Thank you. Just going back to C&I here. Was your growth this quarter all originated, or was some of it purchased?
We don't purchase. You're talking about purchasing shared national credits?
Exactly.
From banks and things?
Yes.
Yeah, no, we're not in that business, Laurie.
Okay. In round numbers, you've got about $50 or so million of SNC. Is that still the same number within the $1.3 book?
It's actually more than that. What is it?
Right now, we've got about $274 million in outstanding SNCs, although 68% is Hawaii, 21% on the mainland.
Yeah. The 68% are largely loans that we are agent on, and so they're more than two, and they're greater than 20. That's SNC by definition, although I think the definition's changed.
Definition moved up to.
Yeah, definition has moved up. Yeah. Okay. $274 under the old. What about the leveraged leasing total? Do you have that?
The leveraged leasing total is $121 million, about $40 million of which is defeased or supported by securities.
Okay. That's helpful. Just last question, going back to your expenses. I appreciate your color on all the one-time items. 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.
Yeah. It's really a one-fourth of that because it's kind of spread out. It's showing up in two line items. One would be the salary line, which is the minimum wage component. 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.
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?
Yes.
It was. Okay, perfect.
Yeah.
Thank you very much.
Thank you. Our next question will come from the line of Brett Rabatin with Piper Jaffray. Your line is now open.
Hi. I just had a follow-up on the branches and the kind of the next generation branch profile. Can you maybe remind us how much that saves per branch? Then, I think you mentioned you got a couple that you were 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. As of now, we're kind of 10% complete. I think what we have on slate for next year is not quite six, but several. So we're going to kind of move methodically. The majority of our branches, Brett, are leased facilities. So our activity in some ways is subordinate to those renewal dates. The basic strategy behind these new branches is multifold. Number one, our branches, in general, are older. I mean, pretty darn old. We've got a requirement to reface these facilities to begin with. What the new format allows us to do is to do that with less square footage. I'll give you for example. Our headquarters branch several stories 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 & Main in downtown Honolulu. It's a great location, and we just don't have the need for a 12,000 square foot, or didn't have the need for a 12,000 square foot main branch anymore. It was too big, and not only was it too big, it was de-energized because it was so broad. 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. 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 on the operating side, as well as on the occupancy side.
In the case of this branch, 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 out first and the not so good ones later. The cumulative return on that's well into the double digits. We think we're getting a good investment. We think we're getting a facility that reflects the 21st century brand. Frankly, we'd have to refresh most of these branches anyway.
Okay. That's a great color. I guess the other thing I wanted 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 CECL is going to mean for us. 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, that was kind of the first quarter under the new tax regime using somewhat of an old capital model. We think with the new dividend, that should begin to revert out a bit. From a repurchase standpoint, our activity is going to be, I think, from a strategy standpoint, the same as you've always experienced with us.
Okay. I appreciate the additional color.
Okay.
Thank you. I'm showing no further questions in the queue at this time. 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 and 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 need further clarification on any of the 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 our program, and we may all disconnect. Everybody have a wonderful day.