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Bank of Hawaii Corp  (NYSE:BOH)
Q3 2018 Earnings Conference Call
Oct. 22, 2018, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 instructions will follow at that time.

(Operator Instructions)

And as a reminder this conference is being recorded. I will now like to hand the call over to Ms. Cindy Wyrick, Director of Investor Relations. Ma'am, you may begin.

Cynthia Wyrick -- Director of Investor Relations

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 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.

Peter S. Ho -- Chairman, President and Chief Executive Officer

Thanks, Cindy. Good morning, everyone, and thanks for joining us today.

Third quarter 2018 was another good one for Bank of Hawaii. In addition to our strong financial results, asset quality remained quite solid, and our 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 the result of our decision to reduce public deposits as we've discussed over the past couple of calls. Adjusted for the reduction in 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 a 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?

Dean Y. Shigemura -- Vice Chairman and Chief Financial Officer

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 3 basis points from the previous quarter and up 15 basis points for 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 in the third quarters 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 quarters 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 has 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% during 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 2018, we continue 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 and 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 19th, 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.

Mary E. Sellers -- Vice Chairman and Chief Risk Officer

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 million or 13 basis points at the end of the quarter, down $1.4 million or 2 basis points for the link period and down $3.2 million or 5 basis points year-over-year. Loans past due 90 days or more and still accruing interests 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 length 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 a credit provision of $3.8 million was recorded. The ratio of the allowance to total loans was 1.06% , down 2 basis points from the previous period and 6 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 a 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 strategically readjusted our loan mix over the past several years exiting those markets and products with greater volatility by 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.

Peter S. Ho -- Chairman, President and Chief Executive Officer

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. For 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 months 2018. The median sales price of a single-family home on Oahu, our primary market, increased 4.2% and the median price for the condominium increased 5.5% compared with the same period last year.

During the month of September, the median price for a single family home set a new record high of $812,500. Inventories continued to remain tight and the volume of single family home sales on Oahu decreased 3.7% and condominium sales decreased 0.1% during 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.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Jeff Rulis of D. A. Davidson. Your line is open.

Jeff Rulis -- D. A. Davidson & Company -- Analyst

Thanks. Good morning.

Peter S. Ho -- Chairman, President and Chief Executive Officer

Good morning, Jeff.

Jeff Rulis -- D. A. Davidson & Company -- Analyst

You guys continue to have a pretty good success in the auto lending segment. I'm just interested in the success of that category. Is it competition based or are you seeing limited competition there? And what are you hearing from your customers in that pocket?

Peter S. Ho -- Chairman, President and Chief Executive Officer

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 awhile 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 toward the higher end of the quality spectrum and we're also beginning to get a little more active in some markets within our core marketplace where we haven't just been as active as we have in the past. So really the combination of those things has allowed us to perform well for several quarters now.

Jeff Rulis -- D. A. Davidson & Company -- Analyst

Got it. And then, Peter, I'd be interested in your thoughts on just deposit growth for '19, maybe absent the public deposit one-off piece, just commercial and consumer kind of expectations over (ph) the balance of the year?

Peter S. Ho -- Chairman, President and Chief Executive Officer

Yeah, you know I think we have another quarter or so of dealing with the overall aggregate deposit levels in our government book. So we've always talked about this for a couple or three quarters now and team has 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 faced now for the better part of the 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 books looking pretty stable. Consumer, similar story but lagging commercial loan book (ph). So I think, to your question if we look to '19, I would hope that we could hang onto somewhat steady but unspectacular deposit growth throughout the year on a year-on-year basis within that segment of the balance sheet.

Jeff Rulis -- D. A. Davidson & Company -- Analyst

Great. Thanks. Thanks for the comments, Peter. And then maybe one last one for Dean. I guess, year-to-date the tax rate is around 18%, your comments on kind of 19% to 21%. Any reason for the variance there or is it a true-up in Q4 that's expected?

Dean Y. Shigemura -- Vice Chairman and Chief Financial Officer

Yeah, 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 of that forecasted. So we do have true-ups occurring, so it could move a bit, but right now it's 19% to 21%.

Jeff Rulis -- D. A. Davidson & Company -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question is from the line of Ebrahim Poonawala of Bank of America Merrill Lynch. Your line is open.

Ebrahim H. Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning , guys.

Peter S. Ho -- Chairman, President and Chief Executive Officer

Hey, Ebrahim. How are you?

Ebrahim H. Poonawala -- Bank of America Merrill Lynch -- Analyst

Good. 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. Getting to one, is that a fair to 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?

Peter S. Ho -- Chairman, President and Chief Executive Officer

Sure. So I'll start Ebrahim and then 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 are going to be able to hang on to no loan growth as we've guided in the past couple of quarters. So I think we're still looking at 6%, 7%, something like that. We're 7% annualized for this most recent quarter. And, boy, you know, in my mind, good solid deposit growth is call it 2%. So, yeah, 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.

Dean Y. Shigemura -- Vice Chairman and Chief Financial Officer

And to answer your question about the margin, you know, in the fourth quarter we're looking at similar to the third quarter, about 3 basis points and looking out into next year if the Fed continues, probably similar results. And if the curve does steep and 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.

Ebrahim H. Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. So you do expect margin to continue to trend higher. And just tied to that, can you talk about deposit competition just on the consumer and the commercial side 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?

Peter S. Ho -- Chairman, President and Chief Executive Officer

Yes, I'd say that the -- 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 is 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.

Ebrahim H. Poonawala -- Bank of America Merrill Lynch -- Analyst

Understood. Thanks for taking my questions.

Peter S. Ho -- Chairman, President and Chief Executive Officer

Yeah.

Operator

Thank you. And our next question is from the line of Aaron Deer of Sandler O'Neill. Your line is open.

Aaron James Deer -- Sandler O'Neill -- Analyst

Hi. Good morning, everyone.

Peter S. Ho -- Chairman, President and Chief Executive Officer

Hi, Aaron. (ph)

Aaron James Deer -- Sandler O'Neill -- Analyst

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?

Peter S. Ho -- Chairman, President and Chief Executive Officer

It will 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 earning asset growth.

Dean Y. Shigemura -- Vice Chairman and Chief Financial Officer

Right.

Aaron James Deer -- Sandler O'Neill -- Analyst

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 -- the modest loss in securities was that just a sale of some kind?

Peter S. Ho -- Chairman, President and Chief Executive Officer

That's all related to the carrying costs for the visa sale.

Aaron James Deer -- Sandler O'Neill -- Analyst

It is. Okay. Very good, thanks. That's all my questions.

Peter S. Ho -- Chairman, President and Chief Executive Officer

Okay, Aaron.

Operator

Thank you. (Operator instructions) Our next question is from the line of Jackie Bohlen of KBW. Your line is open.

Jackie Bohlen -- KBW -- Analyst

Hi. Good morning everyone.

Peter S. Ho -- Chairman, President and Chief Executive Officer

Hi, Jackie.

Jackie Bohlen -- KBW -- Analyst

Just touching based on the good differential that you had in the securities purchases in the quarter, I know that when we took last quarter on the call, you mentioned that you were 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?

Dean Y. Shigemura -- Vice Chairman and Chief Financial Officer

It was a little bit more balanced. I mean if you look at the overall duration of the portfolio, we are actually pretty flat. So we were able to do -- get -- achieve a better yield through just the higher rates that we see in the market.

Jackie Bohlen -- KBW -- Analyst

Okay. So no shift in purchases or anything, the increase on a linked quarter basis between last quarter's differential and this quarter's differential which is purely the market driven and rate driven?

Peter S. Ho -- Chairman, President and Chief Executive Officer

Pretty much, yeah. Yeah.

Jackie Bohlen -- KBW -- Analyst

Okay. I will step (ph) back on that.

Dean Y. Shigemura -- Vice Chairman and Chief Financial Officer

Yeah, the duration is flat, yeah.

Peter S. Ho -- Chairman, President and Chief Executive Officer

Yeah, duration is flat.

Jackie Bohlen -- KBW -- Analyst

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's your thinking on that?

Peter S. Ho -- Chairman, President and Chief Executive Officer

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 really as a result of what's happening in the rate environment. And what that's done obviously has impacted refinance business.

So I don't see any relief in that space in the near future. I think that kind of analysis income is also getting hit by rising rates as those deposit flows are credited and a higher percentages as rates have moved up. So we're looking to hang onto fee levels 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 and now for the last quarter or so if we can stick within the $41 million $42 million range, that's what we're trying to do.

Jackie Bohlen -- KBW -- Analyst

Okay. And I would assume as you start to lay out some of those plans for future areas of growth you will provide updates on call.

Peter S. Ho -- Chairman, President and Chief Executive Officer

Sure.

Jackie Bohlen -- KBW -- Analyst

Okay, great. Thank you.

Operator

Thank you. 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.

Cynthia Wyrick -- Director of Investor Relations

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.

Operator

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.

Duration: 25 minutes

Call participants:

Cynthia Wyrick -- Director of Investor Relations

Peter S. Ho -- Chairman, President and Chief Executive Officer

Dean Y. Shigemura -- Vice Chairman and Chief Financial Officer

Mary E. Sellers -- Vice Chairman and Chief Risk Officer

Jeff Rulis -- D. A. Davidson & Company -- Analyst

Ebrahim H. Poonawala -- Bank of America Merrill Lynch -- Analyst

Aaron James Deer -- Sandler O'Neill -- Analyst

Jackie Bohlen -- KBW -- Analyst

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