Q3 2019 Earnings Call
[laughter], ladies and gentlemen, thank you for standing by welcome to the Bank of Hawaii Corporation third quarter 2019 earnings Conference call.
At this time, all participants monetary now listen only mode. After the speakers presentation. There will be a question answer session to ask a question doing a session you would need to press star one on your telephone.
If you acquire any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today.
Actor of Investor Relations, Cindy Wyrick, Ma'am you may begin.
Thank you Dimitrius. Good morning, good afternoon, everyone. Thank you for joining us today as we review the financial results for the third quarter of 2019.
Joining me today is our chairman President and CEO , Peter Ho, Our Chief Financial Officer didn't you can work and our chief risk officer marries 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 variety of reasons that the actual results may differ materially from those.
Projected and now I'd like turn the call over to Peter Ho.
Thanks, Andy Aloha and good morning, everyone. Thanks for joining us today.
Third quarter 20 lightweight was yet another strong quarter for bank of why we had good financial performance our asset quality remains solid expenses were well controlled and our liquidity and capital levels remain strong.
Our loans grew to 10.9 billion at the end of the quarter up 1.1 person for the previous quarter end up 6.4% from the third quarter last year.
Deposits were 15.3 billion down from previous quarter due to a decline in public deposits, which offset solid growth in our consumer book.
Compared with the ended the third quarter last year total deposits were up 3.4%.
Now let me ask Dean provide you with some additional details on our financial performance. This quarter and then Mary will commence comment on our asset quality Dave.
Thank you Peter net income for the third quarter, Cdnineteen was $52.1 million or $1.29 cents per share.
Our return on assets during the quarter was 1.17% the return on equity was 16.02% in our efficiency ratio was 58.55%.
Net income for the third quarter of 2019 included the previously disclosed increase in our legal reserves $6 million or 11 cents per share related to the tentative settlement of a class action lawsuit regarding overdraft fees.
Adjusted for this legal reserve our return on assets during the quarter was 1.27% the return on equity was 17.37% and our efficiency ratio was 55.05%.
Our net interest margin into third quarter was 3.01% down three basis points from the previous quarter and six basis points from the same quarter last year.
Net interest net interest income on a reported basis for the third quarter 2019 was $124.9 million up 800000 from the second quarter and up 2 million from the third quarter last year.
Decline in the margin for the third quarter 2019 reflects the ongoing impact of the lower interest rate environment.
Given the current challenging rate environment, we anticipate that the net interest margin for the fourth quarter will be lower by four to five basis points.
As Mary will discuss later, we recorded a credit provision of $4.3 million this quarter.
Noninterest income totaled $46.5 million in the third quarter up 29 team compared with 45.5 million in the previous quarter and 41.5 million in a same quarter last year.
Third quarter of 2019 included a negative charge of $500000 related to a change in the visa class B conversion ratio.
There were no significant items and noninterest income during the second quarter of 2019.
For the third quarter of 2018.
The increase in noninterest income during 2019 reflects growth in mortgage banking revenue and higher levels of customer derivative activity.
We currently expect noninterest revenue to be approximately $45 million during the fourth quarter of 2019, excluding the previously announced gain of $3.8 million related to the early buyout of the leveraged lease.
Noninterest expense totaled $100.3 million in the third quarter 2019, including the legal reserve.
Up from 92.7 million in the previous quarter and 90.5 million in the same quarter last year.
There were no significant items in noninterest expense during the second quarter of 29 team with a third quarter of 2018.
Adjusted for the legal reserves the higher levels of expenses.
Primarily relates to higher compensation and other variable expenses due to increase business growth.
And continued investments in technology facilities and our people.
Excluding the legal settlement for the full year of 2019, we continue to expect expenses to be about 2% to 3% above our adjusted 2018 expenses.
$365 million.
The effective tax rate for the third quarter of 29 team was 22.08% compared with 21.84% in the previous quarter and 18.75% in the same quarter last year.
The increase from the previous quarters is mainly due to a reduction in tax exempt municipal securities.
For the fourth quarter, we expect the effective tax rate to be between 22 and 23%.
Which includes a one time increase of $2.1 million related to tax adjustment items that will offset the previously disclosed 1.8 million dollar credit related to the early buyout I'll be leveraged lease.
Our investment portfolio was $5.5 billion at the end of the third quarter.
Premium amortization during the quarter was $6.4 million.
Up from 5.8 million in the previous quarter and down from 8.8 million to the same quarter last year.
We purchased a total of $312 million of investment securities during the quarter, which were primarily comprised of fixed rate mortgage backed securities.
The reinvestment differential during the third quarter was a negative 36 basis points the duration of the available for sale portfolio was 2.9 years at the end of the third quarter of 29 team. They held to maturity portfolio duration was 3.6 years and the duration for the total investments securities.
<unk> was 3.3 years.
Our total shareholders equity was $1.3 billion at the end of the third quarter, our tier one capital ratio was 12.33%.
And our tier one leverage ratio was 7.32%.
During the quarter, we paid out $26.3 million or 51% of net income and dividends.
And repurchased 360000 shares of common stock for total costs of $29.9 million.
We repurchased an additional 92000 shares between October Onest in October 25th at a total costs a $7.8 million.
And finally, a board declared a dividend of 67 cents per share for the fourth quarter of 2019.
Now I'll turn the call over to marry sellers. Thank you Steve.
Net charge offs for the third quarter totaled 3 million or 0.11% annualized of total average loans and leases outstanding as compared with net charge offs of 2.4 million or point or 9% annualized in the second quarter, 2019, and 3.3 million or <unk>, 0.13% annualized in the third.
Quarter of 2018.
Non performing assets were 21.6 million or 20 basis points at the end of the third quarter down from 21.8 million 20 basis points at the end of the second quarter and up from 13.8 million or 13 basis point at the end of the third quarter of last year loans past due in 90 days or more and still accruing interest.
Were 6.1 million down 300000 for the link period, and down 2 million year over year.
At the end of the quarter restructured loans not included in non accrual loans or loans past due 90 days or Mark were 46.2 million down 2.4 million from the second quarter of 2018 and down 3.3 million from the third quarter of 2018.
Allowance for loan on leases totaled 108.9 million at the end of the quarter up 1.3 million from the second quarter. Accordingly, given net charge offs of 3 million a credit provision up 4.3 million was recorded.
The ratio of the allowance to total loans and leases was 1% at the ended the quarter unchanged for the link period and down six basis points year over here.
The total reserve for unfunded commitments was 6.8 million at the end of the quarter unchanged from the second quarter from 19, and the third quarter 2018.
The allowance reflects the continued solid asset quality and composition of the banks portfolio at the end of the third quarter, 82% of consumer Outstandings were supported by residential real estate with a weighted average loan to value of 58%.
And 60% of our commercial Outstandings were supported by commercial real estate with a weighted average loan to value a 55%.
Given the strength and resilience in our core Hawaii, and Guam markets were 97% of or assets are held coupled with our ongoing credit discipline, we do not anticipate needing to reposition our portfolio for any turn in the economic cycle I'll now turn the call back to Peter.
Thanks, Barry So what are you economy remained stable through the third quarter of 29 team.
Our statewide unemployment rate in September was 2.7% remains very low compared to the unemployment rate of 3.5% nationally.
Visitor arrivals continue to increase in for the first eight months of 29 team were up 5.2 per cent compared to the same period the 28 to.
In spite of the strong growth and arrivals were continuing to see a modest decline in daily spend with total visitor spending down 0.5 per cent compared with the same period in 2018, mostly due to lower international spec.
Our real estate market also continued to remain active we had particularly strong growth in single family home sales during the third quarter, which increased by 8.7% over the same period and 28 teams.
Year to date sales a single family homes are now at comparable levels with 2018 and median sales prices remained stable.
Condominium sales fabric continues to soften through the third quarter year to date sales condominiums declined 6.7 per cent compared with the same period in 2018 immediate sales prices are down 1%.
Once of inventory the ended the quarter were three and a half months for single family homes, and 3.9 months for condominiums. The year to date media number of days on market was 23 days for single family home and 26 days for a condominium.
Thanks, again for joining us today and now we will be happy to respond to your questions.
As a reminder to ask a question you would need to press star one on your telephone.
To withdraw your question price to pankey, please standby well be compound secure when they roster.
And our first question comes from Jeff Rulis with D.A. Davidson you May proceed.
Thanks, Good morning.
Jeff.
A couple of questions on the expense side.
Any way to talk about the kind of what the variable piece of the salaries being up.
What portion of that is.
The increase in mortgage banking or the variable.
If that's possible to kind of break that out.
Well, if you look at the breakdown for salaries.
We have and one of the tables, the increase quarter over quarter, mainly due to the additional work day.
So that adds about.
Half a million dollars.
To the expenses, then and a lot of the rest of the increase in salaries and benefits is the elevated level of separation for the quarter.
Okay.
Right.
Thanks, Steve well then the other question on the expense out is that just the rise in the equipment line.
Was there to make significant quarter to quarter, it seemed like that popped up a bit.
No it is it.
Excuse me it reflects our continued investment and generally the ITC pieces, what what hits that line and so we do have a number of projects that are competing completed.
So the depreciation is starting as well as some of the software costs.
Got it okay.
For Mary just on the net charge offs.
The type of loans that make up the net charge offs and if you could comment if that's been a similar mixes as past quarters.
Yes. It has as expected we continue to see our net charge offs, primarily in our dealer and direct portfolios while our.
Home equity and residential merger mortgage portfolios remain at a modest recovery position.
Okay. Thanks.
And our next question comes from Air from from Walla with Bank of America. You May proceed.
Good morning, guys.
Morning.
So first question wanted to follow up on the margin guidance Oh.
Oh around.
I believe you said for about four to five basis point of compression is what you expect in the fourth quarter.
Can we talk to just in terms of how we should expect the margin to behave if we did.
Multiple rate hikes do you see some leveling off all.
Or and.
One if the fed what to stop let's say in December do you expect the margin to essentially bottom out immediately off into four linked quarter. If you could provide any color on that that would be helpful.
Oh, yes, I'm, just two rate hikes or rate drops hey dropped sorry, sorry, if I misspoke break drop about pets I was confused that's what I thought of [laughter], yeah, Okay, well the the guidance I provided included.
And expect that 25 basis point rate cut this week by the fed.
There's a potential for another cut in December , but it's too late in the year to impact us a materially in the fourth quarter.
But going forward, it's really.
You know the.
The cuts at the short end of the curve for them have a minimal impact on us about one basis point, it's really the shape of the curve that's going to impact us more.
The flatness of the curve is whats pressuring our margin currently.
So if we continue to see the long end stayed low.
The the margin, we'll probably see.
At the lower end of this range here.
Got it and I'm sorry, if I missed this did you see what are the new security yields coming on add like what are the duration. What is the yield of Newport uses that you expect to do.
So the new duration, the new securities that were purchasing our coming on as you know generally their mortgage backed securities. So about 270 to 80, maybe little bit higher now that the rates have been kind of creeping up.
Duration is about call it four to five years.
Got it sort of ideas and that's one of her but moving away from the margin. Peter If you could talk too in terms of expense leverage as we look for into 2020 .
If you've got it environment doesn't quite any relief like you've done obviously, a good job managing expenses I would show the last decade. They are there opportunities within the bank, where you see oh potential for cutting cost for the total superfan expense inflation is something that you're going to have to live it even if the revenue environment.
<unk>.
Yeah, So I think that.
We have been focused on that 2% to 3% absolute Ben's create for as as you pointed out a long time now.
We continue to think that that's the appropriate level for us obviously, if we see.
Meaningful drop off in revenues will have to respond to that and unfortunately, you know what's been a component of expense.
Expenses, all along has been a fair amount of investment or reinvestment a few will into a number of this efficiency moves down the digital path.
And so we're hopeful that irrespective of what happens on the revenue side moving forward will begin or will increasingly begin to see the benefits of those investments take place.
Understood. Thanks for taking my question.
Yep.
And our next question comes from Aaron Deer, with Sandler O'neill you May proceed.
Hi, good morning, everyone.
Player.
Peter It seems like the to Hawaii economy continues to hold up pretty well I'm just curious to get your thoughts on kind of where pipeline stands today and I guess it year to date, you guys kind of been growing at about 6% annualized too is you kind of look out into 2020 do you think that's oh.
Reasonable pace to maintain through through at least early part of next year.
Yeah. So I think that the crux of the question Aaron is around where we are in the cycle.
More than the health of the Hawaiian economy, Hawaiian economy, I think well my my view is it remains pretty pretty darn stable.
We do view ourselves to be later cycle, if you will.
And so what would begins to creep up.
Has to do with credit selection and credit retention for you know for that matter.
So we are seeing.
Some elevated levels of exits if you will or commercial portfolio.
Obviously, that's putting some strain on our pay downs interesting statistic. The third quarter was our second best production quarter in the past eight quarters. What was also our second highest pay off quarter and about eight or so we got we got the numbers. We got on the commercial front, so I see that as a bit of it.
Headwind.
Touch of a headwind.
Market conditions remain pretty solid I'd also say as Mary mentioned that we don't foresee any strategic repositioning that any of our portfolios. So we have that you know as a bit of a tail wind at our back.
So we're in a world that all a aggregates to in our view looking forward into next year, it's kind of a mid single digit loan growth.
Factor.
I think historically on the me either kind of the recent past we've been talking about mid to higher single digit level, I think I'd, probably place our sentiment around the mid space or the higher mid.
But you know I mean, we'll see we'll see what we go from here.
Sure I know it seems reasonable the.
And then on the deposit side, obviously this quarter this past quarter you had.
Now close out of that part of the public deposits, but.
Presumably if you see some some uptick cure heading into year end and then as we get into 2020, you know the deposit costs. It looks like those have started to come down some.
Is it.
Is it your expectations kind of based on where the competitive market stands now that there's going to be more room to bring down deposit costs and maybe help give 'em give some relief to the margin next next year.
Yeah, I I hope so so you covered a lot of real estate there and so.
[laughter] and really kind of a lot of what we're thinking about these days is as you might imagine.
Deposit wise, we were yeah, we were down on a linked basis, 1%, but but note that that decline really came out of our public book So.
The into our core commercial and consumer deposit base consumer particular performed well on a linked basis I think the important thing is that all three of those.
Businesses.
Public consumer and commercial you know were up over 3% on a year on year basis, we consider that to be.
About where we want to be you're right now because as you alluded to the rate environment, just so darn on certain.
And so were were positioned right now is to take advantage of our liquidity position and our long loan to deposit position, which is the strongest in our market and try and take a pretty darn conservative approach to pricing because you know to be honest, we can't figure out whether it's you're going to go up or go.
Down so our best course, it's remained relatively conservative on the pricing front and relatively conservative on the term front.
As to deposits that work that we're putting out there.
Okay, and then just a quick one for Dean.
Just had a fair bit noise. This year, and then I guess in the first quarter than a couple of items in the.
Coming in the fourth quarter and the in the tax line.
Yeah Prospectively for 2020 is should we be thinking about it.
Kind of 20, 122% ish range for the effective tax rate.
Right now it's a hard to say we haven't completed our budget yet we're still went through the process.
So I would not want to give a.
Guidance yet.
Okay, Alright, thanks for taking my question.
Sure.
And our next question comes from Jackie Bohlen with KBW you May proceed.
Hello, and good morning.
Hi, Jackie.
Well I just want to Peter just connect more broadly in terms of the economy.
I understand where we're at at the cycle. If you could talk about you mentioned your prepared remarks bulk visitor spending that has been coming down a little bit and then also softening in the condo market and just some other drivers of that and getting lower construction and congo's as part of it but just any thoughts you have on that and then how how that equates into what you're seeing.
King about in terms of.
Where we are the cycle understanding where probably pretty later.
Yeah, I think you just yeah, I think you hit it on the head.
The both the the.
Visitor.
Industry as well as the real estate market here.
I've been chugging, along quite nicely for for a pretty extended period of time now.
And I think what we're seeing in the numbers is basically comping off of what's been years of growth.
And a little Frank little flattening of activity.
So no real estate I would still call.
Our market to be stable, although not growing terribly.
Terribly much at this point.
Given where we are from an underwriting standpoint, the where we're positioned.
Balance sheet wise, that's that's a pretty reasonable outcome.
From what we see at this point of the cycle.
On the visitor front.
Couple of things are working against US you know I mentioned that we're just working against a larger and larger denominator number one.
But you know.
Remember that.
That a dollar strength has been around for several several years now and that's beginning I think thats beginning to show up in the international numbers. So is spending as well as days has been soft internationally and I think what we're seeing is a little bit of relative trade to potentially other.
Our.
More valuable marketplaces like Europe .
Versus Hawaii for four for so our Canadian Australian.
Non Japanese customers.
The Japanese yen actually is traded pretty strongly over the past several years, so thats been a benefit to us, but we're watching that pretty closely as well. So that's yeah, that's kind of how how I would view.
The visitor industry in the market as a whole.
Okay. Thank you that's great color and then just one last one.
For me I'm, probably for Mary on do you have any color you can provide on how you're thinking about seasonal and where the reserve might trend or.
If you're not disclosing at this point when you expect Q.
Sure Jackie well, we completed several parallel runs and today, we're not seeing any material impact in the conversion to see so and it really reflects our portfolio composition and the fact is heavily weighted to assets with historically very low charge off rates.
And some reallocation within the reserve composition based on the life of loan comp a concept.
Clearly, we won't know until we actually implemented what the conditions are at that point, but so far it doesn't look to be a big issue for us.
Okay, great. Thank you.
Thanks Jackie.
And our next question comes on Laurie Hunsicker with Compass point you May proceed.
Thanks, Hi, good morning.
Just wondering if we could go back over to deposits do you have the piece that's the public time.
How much time in six to 65 right six just yet.
Okay, and then how how are you thinking about that bucket going forward that the 665 billion three f. tell at all.
Well the into 94 right.
Well so the way that we look at that portfolio is about half of that our operational.
You know effectively relationships that we have with the various because it's a pallet is in our marketplace. The other half our time.
Less relationship very.
Price sensitive right rate sensitive.
And.
So I would say that for half of the billion three.
We would like to retain and or grow that business because it's good sticky business for us.
For the other half a when rates are low they tend to be.
Good value sources of funding for us as rates elevate as they did last year.
Not so much because you know obviously municipalities have a fiduciary obligation to get the highest rate they can and whatever markets. They can get those rates.
So that's that's basically how we think about it or okay. Okay, and then I thought I mean, you you you take your cost of deposits down and in every single category is there is there any planned reduction that its maybe happened early in the fourth quarter that well continue to see that try.
I wonder how should we be thinking about that.
Yeah, I mean, we manage the read pretty closely and will where we have opportunities continue to reduce the rates.
Okay, or maybe just asked sorry, just one more question I've asked another way if we look at your core deposits. So axeing out all Cds, so 80% of your deposits here core and those were costing.
[laughter] 29 basis points, and obviously, you've got a huge chunk of noninterest bearing but in other words, we think about where that cost could trend down to how should we think about that.
Well I don't know what the ultimate low point would be but I would say that the trend would be lower subject to our local market competition.
Okay, Okay, and one more question emerging here do you have the premium amortization number.
Right that's corridor.
Oh, Yeah with 5.8.
Yeah corridor.
Was 6.4 this [laughter] 6.2.
Yeah, Okay. Okay.
6.4, sorry 6.4.
6.4, okay, great. Thanks, I'll leave it there.
Okay. Thanks.
[noise] and we have a follow up question from ever put Walla with Bank of America. You May proceed.
Hey, guys just more.
Follow up on capital neutral on a Peter like when you think about.
Buyback activity going forward you overseeing the of the dividend.
But just talk to us in terms of capital would be out and cap ratio do we expect to sort of manage the bank to where the ratios are well should we expect.
Oh, yeah excess capital had gone in excess of owning spoken to occur over the next few quarters.
No we would have and habit for quite some time return capital in excess of our earnings just generally our policy is has been for a long time, 50%.
Overtime, 50% of our dividends of our of our.
Dividends at 50% of our earnings and the remaining balance to growth and stock buyback.
To up to up to 100% of earnings, but that's the way we think about it.
And Peter do you think about Oh devaluation the stock price anything you know if it were given how you talked about sort of maybe you had in the cycle is there any desire to maintain access capital right now or the fact that doesn't really impact Oh, how you think about capital strategy.
Well. It's a good question is a question we seem to have gotten a fair amount over the years of less than the last four or recently.
So yeah, I mean, you know.
The economic.
Economic conditions or the condition of our own balance sheet capital needs our growth prospects as well as what we know how we view the intrinsic value of our stock you know clearly play into our quarterly buyback Decisioning words quarterly buyback decisioning.
To date, and we continue to believe the stock remains an attractive.
Vehicle for us to repurchase and.
I think we see that absolutely awful other their future as well.
Well thank you.
Yeah.
Ladies and gentlemen.
This now concludes Jack you any portion of today's call I wouldn't like to turn the call just anyway for any closing remarks.
I'd like to thank everyone again 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. Thanks, everyone again and have a great day.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone happy with it.