Bank of Hawaii Corp
NYSE:BOH
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Bank of Hawaii Corp
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Good day, ladies and gentlemen. And welcome to the Bank of Hawaii Corporation Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session and our instructions will follow at that time. [Operator Instructions]
And as a reminder, this conference is being recorded. I would now like to hand the call over to Ms. Cindy Wyrick. Director of Investor Relations. Ma'am, you may begin.
Thank you, Amanda. Good morning or good afternoon, everyone. Thank you for joining us today as we review the results for the third quarter of 2018. With me today is 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 today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons the actual results may differ materially from those projected.
And now I'd like to turn the call over to Peter Ho.
Thanks Cindy. Good morning, everyone. And thanks for joining us today. Third quarter of 2018 was another good one for Bank of Hawaii. In addition to our strong financial results, asset quality remains quite solid and liquidity and capital levels remained robust.
Loans increased to $10.2 billion at the end of the quarter, up 1.8% from the previous quarter with good growth in both commercial and consumer loans. Compared with the third quarter last year, total loans increased 6.9%. Deposits decreased from the previous and prior year quarters primarily result of our decision to reduce public deposits, as we've discussed over the past couple of calls.
Adjusted for the reduction of public deposits, deposits were flat with the previous quarter and up 1.5% compared with the same quarter last year. Notably our core consumer and commercial average deposits are up 0.7% and 3.1% on linked and year-over-year basis.
We also remain quite satisfied with our deposit betas and in particular our deposit betas in our consumer and commercial areas.
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 third quarter of 2018 was $56.9 million or $1.36 per share, compared to $54.7 million, or $1.30 per share in the second quarter and $45.9 million, or $1.08 per share in the third quarter last year. Our return on assets during the third quarter was 1.33%, the return on equity was 18.06% and our efficiency ratio was 55.07%.
Our net interest margin in the third quarter was 3.07%, up three basis points from the previous quarter and up 15 basis points from the same quarter last year. Net interest income on a reported basis for the third quarter of 2018 was $122.9 million, up $2.4 million from the second quarter and up $6.6 million from the third quarter of last year. Our deposit beta improved during the third quarter of 2018, decreasing to 20% compared to 28% in the previous quarter. As Mary will discuss later, we recorded a credit provision of $3.8 million this quarter.
Non-interest income totaled $41.5 million in the third quarter of 2018, compared with $41.3 million in the previous quarter and $42.4 million in the same quarter last year. There were no significant items in non-interest income during the third quarter of 2018 or 2017.
Non-interest 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 decrease in non-interest income is largely due to trust and mortgage banking income. We currently expect non-interest income to be approximately $42 million in the fourth quarter of 2018.
Non-interest expense totaled $90.5 million in the third quarter of 2018, compared with $90.8 million in the previous quarter and $88.6 million in the third quarter of last year. There were no significant items in non-interest expense during the third or second quarter of 2018. Non-interest expense in the third quarter of 2017 included $2.1 million in severance which was partially offset by a reduction of $0.9 million in share based compensation.
The fourth quarter normally had some seasonal expenses and for the full year of 2018, we expect expenses to be about 2.5% to 3.5% above our 2017 expenses. The effective tax rate for the third quarter of 2018 was 18.75%, compared with 18.94% in the previous quarter and lower than the 30.62% in the same quarter last year, as a result of Tax Reform. Currently, we expect the effective tax rate for the fourth quarter of 2018 to be between 19% and 21%.
Our investment portfolio was $5.7 billion at the end of the third quarter. Premium amortization during the quarter was $8.7 million down from $9.2 million in the previous quarter, and $10.1 million in the same quarter last year. We purchased a total of 348 million of securities during the quarter which were primarily comprised of treasuries and mortgage-backed securities. The reinvestment differential during the third quarter was a positive 94 basis points. The duration of the available-for-sale portfolio was 2.47 years at the end of the third quarter of 2018. The held to maturity portfolio duration was 4.22 years and the duration for the total portfolio was 3.58 years.
As Peter mentioned, we had loan growth of 1.8% during the third quarter. For the full year of 2018, we continued to expect our loan growth to remain in the mid to upper single digits. Deposit growth is expected to remain fairly flat as growth in our consumer and commercial deposits may continue to be offset by declines in our public time deposits. Our total shareholders equity was $1.25 billion at the end of the third quarter. Our Tier 1 capital ratio was 13.19% and our Tier 1 leverage ratio was 7.55%.
During the quarter, we paid out $25.2 million or 44% of net income in dividends and repurchased 296,500 shares of common stock for a total cost of $24.6 million. We repurchased an additional 72,000 shares between October 1st and October 19 at a total cost of $5.7 million. And finally, our Board declared a dividend of $0.62 per share for the fourth quarter of 2018.
Now, I'll turn the call over to Mary Sellers.
Thank you, Dean. Net charge-offs for the third quarter totaled $3.3 million or 0.13% annualized of total average loans and leases outstanding, consistent with the second quarter of 2018. Comparatively, the third quarter of 2017, net charge-offs were $3.5 million or 0.15% annualized. Non-performing assets were 13.8 or 13 basis points at the end of the quarter, down $1.4 million or two basis points for the linked period and down $3.2 million or five basis points year-over-year.
Loans past due 90 days or more and still accruing interest were $8.1 million at the end of the third quarter, compared with $13.3 million at the end of the second quarter of 2018 and $6.7 million at the end of the third quarter in 2017.
Restructured loans not included in non-accrual loans or loans past due 90 days or more were $49.5 million at the end of the third quarter, down $749,000 for the linked period and down $5.6 million year-over-year. Residential mortgage loans modified to assist customers accounted for $20 million of the total at quarter end.
At the end of the quarter, the allowance for loan and lease losses totaled $108.7 million given net charge-offs of $3.3 million and credit provision of $3.8 million was recorded. The ratio of the allowance to total loans was 1.06%, down two basis point from the previous period and six basis points from the same quarter last 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 quality in loan growth.
The total reserve for unfunded commitments was $6.8 million at the end of the quarter, unchanged from the second quarter of 2018 and the third quarter of 2017. We remain focused on our Hawaii and West Pacific markets and disciplined approach to lending as we continue to see leverage levels and credit structures continuing to ease.
And as you'll recall, based on our experience through the last credit cycle, we've strategically readjusted our loan mix over the past several years, exiting those markets and products with greater volatility while calibrating loan underwriting to optimize performance. Accordingly, we remain well-positioned to continue to meet our customers' credit needs as we move through the next several years.
I'll now turn the call back to Peter.
Thank you, Mary. The Hawaii economy continues to perform well due to stable construction, continued strong performance of Hawaii's tourism market and steady but rising real estate prices. Our statewide unemployment rate in September was 2.2% which remains very low compared to the unemployment rate of 3.7% nationally. Our visitor industry continues to grow from the record levels of last year. The first eight months of 2018, total visitor spending increased 8.8%. And visitor arrivals increased 7.2% compared with the same period in 2017.
Year-to-date through August, all four larger Hawaiian Islands saw growth in both visitor spending and visitor arrivals. Real estate also continues to remain strong during the first nine month of 2018. The median sales price of a single-family home on Oahu, our primary market increased 4.2% and the median price of a condominium increased 5.5% compared with the same period last year. During the month of September, the median price for a single-family home saw the new record high of $812,500.
Inventories continue to remain tight and the volume of single-family home sales on Oahu decreased 3.7% and condominium sales decreased 0.1% for the nine-month period compared with 2017. Months of inventory at the end of the quarter were 2.8 months for single-family homes and 2.9 months for condominiums.
Thanks again for joining us today. And now we'd be happy to respond to your questions.
[Operator Instructions]
Our first question comes from the line of a Jeff Rulis of D. A. Davidson. Your line is open.
Thanks. Good morning. You guys continue to have pretty good success on that in the auto lending segment. I'm just interested in the success of that category. Is it competition based? Are you seeing limited competition there? And what are you hearing from your customers in that market?
Well, it's a business that we've been in for quite a while through the cycles. I'd say we probably have the best leadership and management team that we've had in quite a while. That's allowing them to pick up market share frankly. We've been successful in thinking through various ways to attack the market from a pricing standpoint, skewing frankly towards the higher end of the quality spectrum. And we're also beginning to get a little more active in some markets within our core market place where we haven't just been as active as we have in the past.
So the combination of those things has allowed us to perform well for several quarters now.
Great. And then Peter I'd be interested in your thoughts on just deposit growth for 2019, maybe absent the public deposit runoff piece just commercial and consumer kind of expectations maybe the balance of the year.
Yes. I think we have another quarter or so of dealing with the overall aggregate deposit levels in our government book. So we've talked about this for a couple three quarters now and Dean’s made great progress in getting down, where deposits just weren't helping us from a pricing standpoint or from a volatility standpoint. I think we have a couple $300 million left in the government time-space to burn through off the balance sheet.
And I think once we're through that, Jeff that lifts a pretty substantial headwind that we face now for the better part of a year. The commercial book is performing pretty well. We're putting a lot of emphasis obviously as is everyone in growing good quality, sustainable deposits. Consumer book performing well there as well. Similar story in terms of getting the team and the troops charged up just to try and drive quality deposit growth there. Probably these things work in cycles, so the government book was the first book to really start to move on us from a beta standpoint understandably.
That's going to be what it's going to be. We're frankly not going to stand in the way of market repricing there. The commercial book is-- on the front end, we had a little frothiness that I think we're beginning to overcome. That book's looking pretty stable. Consumer, similar story but lagging commercial a little bit. So I think to your question, as we look to 2019, I would hope that we could hang on to somewhat steady but on spectacular deposit grow throughout the year on a year-on- your basis within that segment of the balance sheet.
Great, thanks for the comments, Peter. And then yes maybe one last one for Dean. I guess year-to-date on the tax rate is around 18%, your comments on kind of 19% to 21%, any reason for the variance there. Is it a true-up in Q4 that's expected?
Yes. We did have a couple of discrete items in the third quarter that brought the tax rate down, but looking into the fourth quarter, right now we don't have any that forecasted. So we do have true-ups occurring. So it could move a bit, but right now it's 19% to 21%.
Our next question is from the line of Ebrahim Poonawala, Bank of America Merrill Lynch. Your line is open.
Good morning, guys. Just sort of following up on your comments around deposit growth. It does sound like we should expect the loan to deposit ratio to drift higher if loan growth next year resembles what we've seen in 2018. Can you one -- is that a fair assumption? And, if so, Dean can you talk about sort of your expectations around the margin assuming we continue to get rate hikes from the Fed?
Sure. So I'll start it rather than hand it over to Dean. So as you know, we're still --we still have a pretty conservatively geared loan to deposit ratio to begin with. I think you're right. We'll see some erosion in that as I suspect we're going to be able to hang on to loan growth as we've guided the past couple of orders. So, yes, I think we're still looking at 6%, 7% something like that. We're 7% annualized for this most recent quarter and boy in my mind, good solid deposit growth is call it 2%. So, yes, that's a pretty widespread and that's going to begin to erode into our loans and deposit ratio which makes me feel good. We are where we are at this point.
And to answer your question about the margin, fourth quarter we're looking at similar to the third quarter about three basis points, and looking out into next year. If the Fed continues, probably similar results and if the curve does steep in that's where we'll pick up a little bit more than what we've been experiencing in the past in terms of the margin.
Got it. So you do expect margin to continue to trend higher. And I'll just tie to that can you talk about deposit competition just on the consumer and the commercial side in -- on the island like is it picking up? Are you seeing any pressure to raise sort of your offer deposit rates on the retail front?
Yes. I'd say that it depends on the segment that you're talking about. I think both the commercial at this point and consumer lower end segment, so smaller deposit relationships have been priced pretty rationally. But obviously when you get into the larger client types where there's just an awful lot of money at stake, people are bidding on a one-off custom basis for time deposits. We're seeing that in the market.
Thank you. And our next question is from line of Aaron Deer of Sandler O'Neill. Your line is open.
Hi, good morning, everyone. Peter, given your outlook for loan or deposit growth heading into next year I guess that would suggest that you're going to be using cash flows coming off the investment securities to fund loan growth. So if that's the case, what are your expectations I guess for overall earning asset growth in 2019?
It'll be really on the --based on the deposit growth. So if we experience kind of low single digits and deposit growth that's what --would be the expectation for our earning asset growth.
Right.
Okay and then I think you said there were no conversion ratio related expenses on the Class B shares this quarter. Was there any other carrying costs related to those Visa shares this quarter or was that the modest loss and securities was that just a sale of some kind?
That's all related to the carrying cost for the Visa sale.
Our next question is from the line of a Jackie Bohlen of KBW. Your line is open.
Hi, good morning, everyone. Just touching base on the good differential you had in the securities purchases in the quarter. I know that when we spoke last quarter on the call you mentioned that you are working to keep duration short and giving up a little bit of yield to do so. Was that still the case in the third quarter as well?
It was a little bit more balanced. I mean if you look at the overall duration of the portfolio, we're actually pretty flat. So we were able to do --get a-- achieve a better yield through just the higher rates that we see in the market.
Okay, so no shift in purchases or anything if the increase on a linked quarter basis between last quarter's differential and this quarter's differential, which is purely market driven and rate driven.
Pretty much, yes.
Yes, duration is flat.
Duration is flat, yes.
Okay and then secondly, Peter, I wonder if you could just provide an update on how you're thinking about fee income? I know it's been a source of pressure just with regulation and attention to that and everything. So just what is your thinking on that?
Well, I guess the latest casualty of fee income has been probably the mortgage side where we've seen a pretty big hit on production. It really is a result of what's happening in the rate environment and what that's done obviously has impacted refinanced business. So I don't see any relief in that space in the near future. I think that account analysis income is also getting hit by rising rates as those deposit flows are credited at a higher percentage as rates have moved up.
So we're looking to hang on to fee level where they are right now. Jackie. Longer term, we have a few thoughts on how we might be able to move fees up, but I think for the here now for the next quarter or so, if we can stick within the $41 million - $42 million range that's what we're trying to do.
Okay and I would assume as you start to layout some of those plan for future areas of growth, you'll provide updates on call.
Sure.
And at this time, there are no further questions. I'd like to turn the conference back over to Ms. Cindy Wyrick for any closing remarks.
I'd like to thank everyone 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. Thank you everyone. And have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.