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 Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and our instructions will follow at that time. [Operator Instructions].
I would now like to introduce your host for this conference call, Ms. Cindy Wyrick. You may begin, ma'am.
Thank you, Kevin. Good morning, good afternoon, everyone. Thank you for joining us today as we review the financial results for the fourth 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. And while we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected.
And now I'd like to turn the call over to Peter Ho.
Great. Thank you, Cindy. Good morning, everyone. Happy New Year and thanks for joining us today. 2018 was another good year for Bank of Hawaii. We were pleased with our financial results. Our margin expanded and our liquidity and capital levels remain robust. Credit statistics were pristine in 2018. We have great confidence in the credit construction of our loan portfolios at present and into the future.
Assets, loans and deposits all grew during the year with total assets finishing the year at $17.1 billion. Earnings per share increased by 21% to $5.23. loan growth was 6.7% in 2018 with good growth in both our commercial and consumer portfolios. Deposits grew 1% in 2018 and finished the year at $15 billion.
During the year we continued with our stated plan to reduce higher costs local public deposits. Excluding public deposits, our combined commercial and consumer deposits increased 2.8% from last year. We’re especially hardened by this performance given our cost of deposit and deposit beta positions which are of the best in the industry as well as our marketplace.
Now, let me ask Dean to provide you with some additional details on our financial performance for the fourth quarter and our outlook for 2019. Mary will then comment on our credit quality. Dean?
Thank you, Peter. Net income for the fourth quarter was $53.9 million or $1.30 per share compared to $56.9 million or $1.36 per share in the third quarter and $43 million or $1.01 per share in the fourth quarter of 2017.
Our return on assets during the fourth quarter was 1.26%, the return on equity was 17.05% and our efficiency ratio was 57.75%. The decrease compared with the previous quarter was due to a number of unusual expense items during the fourth quarter and the impact of the sale of our Credit Card portfolio.
Our net interest margin in the fourth quarter was 3.10%, up three basis points from the third quarter and up 12 basis points from the fourth quarter of 2017. Net interest income on a reported basis in the fourth quarter increased to $124 million, up $122.9 million from the previous quarter and $118.8 million in the fourth quarter of 2017.
The Credit Card portfolio of sale negatively affected our fourth quarter margin by approximately 2 basis points. Our deposit beta during the fourth quarter of 2018 was 32% compared with 20% in the previous quarter. For 2019, we expect our net interest margin will continue to increase modestly, up 2 to 3 basis points each quarter. As Mary will discuss later, we recorded a credit provision of $2 million this quarter.
Non-interest income totaled $42.1 million in the fourth quarter of 2018 compared with $41.5 million in the previous quarter and $41.9 million in the fourth quarter of 2017. Non-interest income is beginning to stabilize and for 2019 we expect it will remain at approximately $42 million per quarter.
Non-interest expenses in the fourth quarter of 2018 were particularly noisy and unusual for us. Non-interest expenses totaled $95.1 million in the fourth quarter of 2018 compared with $90.5 million in the previous quarter and $92.3 million in the fourth quarter of 2017.
Non-interest expenses in the fourth quarter of 2018 included a true-up of $1.7 million for medical expenses primarily related to a single claim, charges of $1.3 million in legal and operational matters and severance of $1.1 million. There were no significant items in the third quarter expenses.
Non-interest expenses in the fourth quarter of 2017 included one-time employee bonuses totaling $2.2 million. Adjusted for these items, non-interest expenses were up 2% compared with the fourth quarter of 2017 and up 1% from the previous quarter.
Adjusting for unusual and nonrecurring items, non-interest expenses for 2018 were $365 million or 2% above 2017 non-interest expenses. For 2019, we expect non-interest expenses to be up 2% to 3% above our adjusted 2018 expenses of $365 million.
The effective tax rate for the full year of 2018 was 18.73% compared with 31.11% during 2017 as a result of tax reform. Currently, we expect the effective tax rate for 2019 to be between 19% and 21%.
As a result of continued strong loan growth during the quarter, our investment portfolio decreased to $5.5 billion at the end of the fourth quarter. Premium amortization during the quarter was $8.1 million, down from $8.7 million in the previous quarter and $10.1 million in the fourth quarter of 2017.
We purchased a total of $39.5 million in securities during the quarter and the reinvestment differential was a positive 145 basis points. The duration of the available-for-sale portfolio was 2.34 years at the end of the fourth quarter of 2018. The held-to-maturity portfolio duration was 3.98 years and the duration for the total portfolio was 3.37 years.
Our shareholders’ equity was $1.27 billion at the end of the fourth quarter, up from $1.25 billion at the end of the previous quarter and up from $1.23 billion at the end of the fourth quarter of 2017. At the end of the fourth quarter, our Tier 1 capital ratio was 13.07% and our Tier 1 leverage ratio was 7.60%.
During the fourth quarter, we paid out $25.9 million or 48% of net income and dividends and repurchased 325,400 shares of common stock for a total of $24.9 million. We repurchased an additional 178,000 shares between January 2 and January 25 at a total cost of $12.9 million. Also, our Board declared a dividend of $0.62 per share for the first quarter of 2019 and increased the share repurchase authorization by an additional $130 million.
And finally, our capital management strategy going forward will remain consistent with our current strategy which is to payout approximately 50% of net income and dividends to maintain adequate capital to support our business growth with the minimum Tier 1 leverage ratio of 7% with the remainder available for share repurchases.
Now I’ll turn the call over to Mary Sellers.
Thank you, Dean. Asset quality remained strong in 2018 given Hawaii’s healthy economic conditions and our continued focus on our customers in our core markets coupled with our continued disciplined approach to underwriting and portfolio management.
Net charge-offs for the full year of 2018 totaled 14.1 million or 0.14% of total average loans and leases. This compares with net charge-offs of 13.8 million or 0.15% of total average loans and leases in 2017.
Adjusting out the Credit Card portfolio, net charge-offs for the full year of 2018 would have totaled 10.5 million or 0.1%, down from 10.8 million or 0.12% in 2017. Net charge-offs for the fourth quarter totaled 4 million or 0.15% annualized of total average loans and leases outstanding compared with 3.3 million or 0.13% annualized in the third quarter of 2018 and 3.8 million or 0.15% annualized in the fourth quarter of 2017.
Again, adjusting out the Credit Card portfolio, net charge-offs for the fourth quarter would have totaled 3.1 million or 0.12% annualized compared with 2.5 million or 0.1% annualized in the third quarter of 2018 and 3.1 million or 0.13% annualized in the fourth quarter of 2017.
At the end of the year, non-performing assets totaled 12.9 million or 12 basis points, down 868,000 or 1 basis point from the third quarter and down 3.2 million or 4 basis points year-over-year.
Loans past due 90 days or more and still accruing interest totaled 6.6 million, down 1.5 million for the linked period and 580,000 from the same period last year. And restructured loans not included in non-accrual loans or loans past due 90 days or more totaled 48.7 million, down 731,000 from the prior quarter and down 6.9 million year-over-year. At the end of '18, residential real estate loans accounted for 20 million of the total.
At the end of 4Q 2018, the allowance for loan and lease losses was 106.7 million, down 2 million from the third quarter of 2018 driven off the sale of the Credit Card portfolio. The ratio of the allowance to total loans was 1.02%, down 4 basis points from the third quarter and down 8 basis points from the fourth quarter of 2017.
This is reflective of the current portfolio mix, quality as well as the strength in our economy. The reserve for unfunded commitments was 6.8 million at the end of the year, unchanged from the third quarter of 2018 and the fourth quarter of 2017.
I’ll now turn the call back to Peter.
Thanks, Mary. The Hawaii economy continues to perform well due to an active construction pipeline, the continued strength of our tourism industry and a strong housing market. Our statewide unemployment rate was 2.5% in December and remains very low compared to the unemployment rate of 3.9% nationally.
Our visitor industry continues to be strong with year-to-date growth in 2018 exceeding the record levels of last year. For the first 11 months of 2018, total visitor arrivals increased 6.1% compared and visitor spending increased 8% compared to the same period in 2017.
All four larger Hawaiian Islands had growth in visitor spending during the first 11 months of 2018, including the big island of Hawaii, despite a slight decline in visitor arrivals due to the volcanic activity of last year.
Real estate also continued to remain robust during 2018. Median sales prices on Oahu continued to increase during the year, although the volume of sales were down compared to 2017. Single-family home sales on Oahu declined 7.7% in 2018 and condo sales were down 2.5%.
The median sale price of a single-family home in 2018 increased by 4.6% and the median sales price of a condominium increased 3.7% compared with 2017. Months of inventory at the end of the year 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 Jeff Rulis with D. A. Davidson.
Thanks. Good morning.
Hi, Jeff.
Peter, just looking at the consumer segment and the net production, pretty strong even with the credit card sale there. I guess any color on what’s occurring within that segment and I’ll leave it at that. Thanks.
You’re talking on the loan side, Jeff?
Correct. Sorry.
Yes, okay. Yes, it was a good year both commercial as well as consumer. I would say that the Hawaiian consumer remains in a pretty good position. We saw continued good performance down the indirect line and good performance down the installment loan side. So consumption seems to be in a good space here. I would say that both resi and eco were – they were good markets for us. I think interest rates dampened volumes a bit. A lot of our production is moving to for-sale or purchase activity on the resi side as refi activity has slowed down a bit. We’re faced with a little tighter aggregate growth there and it’s an awfully competitive space. So I would say we were pleased with the growth there but remain a bit cautious as we look forward on what '19 holds for us.
How about thoughts on the commercial side in '19?
Yes. Commercial’s a little bit to the other direction. Frankly, we had a nice quarter Q4, up 2.1% linked, just under 6% for the year; so seeing a bit of a revival in commercial activity. That performance on the linked basis was despite one of our heavier payoff quarters in Q4, about 38% of our payoffs or pay-downs occurred in our C&I portfolio for the quarter and about 30% for the commercial mortgage book. So despite that somewhat heavier payoff activity, still good performance. And I’m hoping to see that push through into 2019. So if you take both sides together, Jeff, I think if we could hit the same level of aggregate loan growth in '19 that we did in '18, we consider that a pretty reasonable year’s work.
Got it, okay. And one last one on Dean you mentioned expectations for fee income in '19. I’m trying to get a little more specific. Would that assume if we’re kind of flattish also the mortgage banking line is in the range of kind of what we’ve seen, would you say that’s correct?
Yes. I think that they’ve kind of been hovering around that 2.1 million per quarter income range and I think that’s kind of where we expect them to be in this year.
Okay. Thank you.
Thank you.
Our next question comes from Aaron Deer with Sandler O’Neill.
Hi. Good morning, everyone.
Good morning, Aaron.
Just following up on the loan activity, the construction was down a bit in the quarter. I’m guessing that that reflected completions on various projects. But you mentioned in your commentary that construction – the pipeline is looking strong. I’m just wondering what product types you’re seeing that in and is that product types that you expect to be participating in?
Yes, Aaron, while the civil side has been pretty consistent for a couple of years now, several years now actually and I think we’re going to continue to see that off into this year, perhaps the next. So that’s somewhat the first pillar. On the housing development side, still a ways off on single family. I think there’s going to be a lag before we hit that opportunity. But the phase that I think is surprising us a bit is the vertical after taking a bit of a pause post the run-up in ultra high end down along the Kakaʻako area. We’re seeing a lot of activity around more midmarket types of vertical condo development, some apartment. So we’ve got a bit of a lag in our numbers right now. But I would say I’m probably more optimistic around that particular segment for '19 and '20 than I had been, call it a year ago.
Okay, that’s encouraging. And then, Dean, maybe with – looking at the securities book over the past year, you’ve been letting that kind of bleed a little bit lower. As you look out at the current rate environment and what the deposit flows look like, what’s your expectations for your plans for the securities book in the year ahead?
Well, I think we do – depending on our deposit growth, but we do have opportunities to kind of maybe stabilize a bit on the balances here. In terms of duration, kind of where we are right now is kind of in the mid three years is what we’re looking at, maybe it could be a tad higher, but generally in that same area.
Okay. And then just a quick one on the tax outlook, you gave the guidance 19 to 21. Just curious, if I recall in past years we’ve seen a little bit of variance in the individual quarters based on I’m guessing stock compensation benefits. Is there any particular quarters that you expect to see that in the year ahead?
Well, generally what drives the variant, the volatility are the discrete items. And to the extent that we have these one-off things that come through in a particular quarter, it could vary. But I would say the first quarter could be the low point but beyond that I think – because right now it’s kind of stable throughout the year pending any kind of discrete items that come through.
Okay. And just one last one just on the deposit environment. In past quarters you’ve commented that there has been some aggressive pricing by some of your competitors on deposits, particularly on the public funds where you guys have backed off from. Commentary from other banks and other parts of the country so far this earning season has suggested that some of those pressures have abated. Are you also seeing that in the Hawaiian market where maybe there’s a little bit less pricing competition?
Yes, I would say that there is some similarity to those statements, Aaron.
Okay, great. Thanks for taking my questions.
Yes.
Our next question comes from Jackie Bohlen with KBW.
Hi. Good morning, everyone.
Hi, Jackie.
Sticking with the public funds, Peter, are those at a level where you’re comfortable now or do you expect additional declines in 2019?
It really is a function of what kind of pricing pops up. Most recently kind of to the last question, we’ve seen some relief in pricing in that segment. To the extent that that’s the case, Jackie, I think we are close to declaring victory on kind of public deposit levels which will be great because I think it will give us the opportunity to show through on the good work happening on the consumer and commercial front. But if those segments get – if that segment gets hot again, then we’ll see. We may still have in that environment another couple of $100 million sort of runoff. But for now we’re reasonably optimistic in that particular book of business.
Okay. That’s helpful. Thank you. And then with regards to the guidance for 2 to 3 basis points of quarterly NIM expansion in 2019, what rate outlook does that assume?
That assumes a bit higher on the long end, so a little bit steeper curve. So the way I would look at it is if we stay relatively flat, it would obviously be on the lower end. If we steepen out from here on the curve, it would be on the upper end of that guidance.
Okay. And are there any additional Fed fund increases embedded in that or is it more a function of the steepness at the curve that drives the guidance?
We had one kind of midyear.
Okay. Thank you.
Our next question comes from Laurie Hunsicker with Compass Point.
Hi. Thanks. Good morning.
Hi, Laurie.
Just to go back over for public deposits for a moment, do you have the amount that’s the public time of the 1.2 billion?
Our public time?
Yes.
As of quarter end was 6.29.
Okay, great.
Down from 8.38 a year ago.
Okay. And then just on margin, can you help us think about where you have premium amortization modeled in that guide?
Well, it’s probably – given where rates have moved recently, it might tick-up a little bit here. Back in the fourth quarter even though rates at the end of the quarter had dipped down, for most of the quarter it was a little bit higher. So we could see premium amortization tick up a little bit, but I wouldn’t expect it to be much higher than what we had in the fourth quarter.
8.1, okay. And so again just thinking about that, if we look linked quarter we strip out that premium AM [ph], your core margin widened only a basis point plus the 2 basis points on credit card, so taking us to 3. And if we see premium AM uptick a little bit, we could be at the higher end of your guidance potentially.
Potentially.
Okay. And then credit and certainly your credit is very pristine, but Mary can you just hit the highlights on the commercial real estate? There was a slight uptick there in non-performers, the non-performers sitting at 2 million from 650,000 last quarter, what that was and any details there?
It was just the number of smaller real estate loans for owner occupants within our mortgage portfolio, nothing material.
Okay. And then just directionally if we look at your loan loss provision, it didn’t cover charge-offs even stripping out the credit card book, the 2 million didn’t cover the 3.1 million of total charge-offs. How should we be thinking about that going forward?
Well, I think we’re well positioned as we’ve talked about from credit metrics and quality within our portfolio. In absolute terms in terms of charge-offs, as we’ve expanded the balance sheet I would expect some dollar increases within actual charge-offs but very modest. And really the provision will be a function then of that performance along with growth in the segments that we see that growth in as well as the economic outlook.
Okay. But again just to clarify, so will we see your loan loss provision match your charge-offs in 2019 or will we continue to see that --?
It’s really impossible, Laurie, to predict that because it really is a function then of how much growth we have, where it is, how the portfolio performs and really the underlying economic situation.
Okay. And then just one more question around that, so your reserves to loans are sitting at 1.02. I guess asked a different way, how should we be thinking about that number?
I’ll take a stab at it. The 1.02 is less a function of charge-off and provisioning and really take it up a level and more a function of our macro environment as well as the direction of our activity within the loan portfolio. So in other words, a higher proportion of lower volatility, lending activity is going to drive one outcome and a different outcome if we have somewhat more volatile activity in some of our other portfolios. So it’s tough to say, Laurie.
Okay. Thanks. I’ll leave it there.
Thank you.
Our next question comes from Matthew Keating with Barclays.
Great. Thank you. My question – I appreciate the color on how vibrant or strong the tourism market is within Hawaii. Looking at the Department of Bureau of Economic and Development’s forecast, but if you have that growth moderating a bit in 2019, I’m just curious for your perspective on how much moderation in growth is still positive, right, in terms of visitor expenditures I think up about 4% versus up about 9% last year. What sort of impact does that have on your business? Is it just a good thing that is still going up? If you can just provide some color, it’d be great? Thanks.
Yes, it’s a good question. I think that we’ve all frankly been surprised at how robust the numbers are. Having positive comps on year-over-year-over-year record outcomes is a great thing but mathematically speaking at some point things have to flatten out. I think that’s in part with DBED is forecasting. I would say that in periods of spending frothiness there’s probably less that sticks to the bottom line of the local economy than you might imagine. Because if you think about the average visitor comes here and has a great experience, goes to a luau, rents a car, goes to the shopping center and does that, that creates one level of spend. Where we see big peaks often times is where international visitors are purchasing high luxury goods. And we like that activity as well, but obviously that doesn’t have as much proportionality impact on our local economy. Put another way, I think that as long as we have consistency and reasonable growth within the visitor segment, that’s going to be just plain good for our marketplace. And where we have big bump ups, it’s nice to see but frankly I’m not sure how much of that actually sticks to the bottom line.
That’s great color. Thanks, Peter. And then, Dean, on the expense growth, the 2% to 3% core expense growth for 2019. Is most of that going to be coming in terms of people costs with any particular projects if you think about sort of the line items? Obviously, this year you have the benefit from the FDIC assessment; fee is going down, but anything unusual in terms of line item on expenses that you’d contemplate for 2019? Thanks.
Why don’t you go ahead, Dean?
Yes. I wouldn’t say unusual. I think it has continued from what we’ve been seeing recently. But we do have merit increases built in. And then the rest of it is generally going to be for our strategic initiatives that we’ve been working on.
Yes. So really for a couple of years now, Matthew, we’ve had a fair amount of investment into the bloodstream for our expense base around digital initiatives, obviously around security and network hardening initiatives as well as just general efficiency creation initiatives that we’re pretty heartful around, but at least in the near term is creating a little elevation in our expense base. So we had that last year, maybe even the year before and we’re likely to have that again certainly this year and perhaps in the next. But net-net, we think that’s going to be a positive for our financial performance moving forward.
Great. Thank you.
Our next question comes from Ebrahim Poonawala with BofA Merrill Lynch.
Good morning, guys.
Good morning.
I’m sorry if I missed this, I joined a little later. But wonder if, Peter, if you’ve already talked about in terms of the outlook for deposit growth as we think about how that should impact your balance sheet growth. We’ve seen balance sheet I guess average earning assets stay relatively flat over the last couple of years and I’m wondering is that kind of what we should expect as we have some of this mix shift from securities to loans continuing or do we see anything where net-net deposit growth could actually pick up over the next few quarters?
Yes. Ebrahim, it’s a good question. I think about it really two ways; from an aggregate growth standpoint really for the past call it six quarters, our deposit growth has been retarded somewhat by our stated strategy in our public book. So in other words the run up from the public is hitting reasonable growth in commercial and consumer. We would anticipate that that would continue, one. And two, at some point we’re just going to stabilize out that public book which is kind of minority of all of our portfolios size wise. Having said that, we’re running at the very lower end of cost to deposits here in this market. If you take a look at the competitive landscape and given where we are from loan to deposit standpoint, I’m not sure we have a lot of pressure to grow that deposit base much more than we have been simply because our L to D is running on the lower end as it stands right now.
Understood. That’s all I had. Thank you.
And I’m not showing any further questions at this time.
I’d like to thank all of you for joining us today 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 we have discussed today. Thanks everyone again and have a great day.
Ladies and gentlemen, this concludes today’s presentation. You may now disconnect and have a wonderful day.