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Edited Transcript of BOH earnings conference call or presentation 28-Jan-19 6:00pm GMT

Q4 2018 Bank of Hawaii Corp Earnings Call

Honolulu Jan 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank of Hawaii Corp earnings conference call or presentation Monday, January 28, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cynthia G. Wyrick

Bank of Hawaii Corporation - Executive VP & Director of IR

* Dean Y. Shigemura

Bank of Hawaii Corporation - Vice Chair & CFO

* Mary E. Sellers

Bank of Hawaii Corporation - Vice Chair & Chief Risk Officer

* Peter S. Ho

Bank of Hawaii Corporation - Chairman, President & CEO

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Conference Call Participants

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* Aaron James Deer

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst

* Ebrahim Huseini Poonawala

BofA Merrill Lynch, Research Division - Director

* Jacquelynne Chimera Bohlen

Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research

* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Laurie Katherine Havener Hunsicker

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

* Matthew John Keating

Barclays Bank PLC, Research Division - Director & Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Bank of Hawaii Corporation Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions)

I would now like to introduce your host for this conference call, Ms. Cindy Wyrick. You may begin, ma'am.

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Cynthia G. Wyrick, Bank of Hawaii Corporation - Executive VP & Director of IR [2]

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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.

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [3]

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Great. Thank you, Cindy. Good morning, everyone. Happy new year, and thank you 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 remained 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 cost local public deposits. Excluding public deposits, our combined commercial and consumer deposits increased 2.8% from last year. We're especially heartened by this performance given our cost to 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?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [4]

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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 $1.1 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 3 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 sale negatively affected our fourth quarter margin by approximately 2 basis points.

Our deposit beta during the fourth quarter was -- 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. Noninterest 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. Noninterest income is beginning to stabilize, and for 2019, we expect it will remain at approximately $42 million per quarter.

Noninterest expenses in the fourth quarter of 2018 were particularly noisy and unusual for us. Noninterest expenses totaled $95.1 (sic) [$95.9] 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. Noninterest 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. Noninterest expenses in the fourth quarter of 2017 included one-time employee bonuses totaling $2.2 million. Adjusted for these items, noninterest expenses were up 2% compared with the fourth quarter of 2017, and up 1% from the previous quarter. Adjusting for unusual and nonrecurring items, noninterest expenses for 2018 were $365 million or 2% above 2017 noninterest expenses. For 2019, we expect noninterest 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 pay out approximately 50% of net income and dividends to maintain adequate capital to support our business growth, with a minimum Tier 1 leverage ratio of 7%, with the remainder available for share repurchases.

Now I'll turn the call over to Mary Sellers.

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Mary E. Sellers, Bank of Hawaii Corporation - Vice Chair & Chief Risk Officer [5]

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Thank you, Dean. Asset quality remains strong in 2018, given Hawaii's healthy economic conditions and our continued focus on our customers and 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, nonperforming 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 nonaccrual 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 from the -- 4 basis points from the third quarter and down 8 basis points from the fourth quarter of [27] (sic) 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.

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [6]

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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%, and visitor spending increased 8% compared to the same period in 2017. All 4 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 of 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 sales price for 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jeff Rulis with D.A. Davidson.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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Peter, just looking at the consumer segment and the net production, pretty strong, even with the credit card sale there, right? I guess, any color on what's occurring within that segment? And I'll leave it at that.

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [3]

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You're talking on the loan side, Jeff?

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Correct. Sorry.

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [5]

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Yes. Okay. Yes. I mean, 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. So it's -- 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.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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How about thoughts on the commercial side in '19?

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [7]

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Yes. Commercial is a little bit to the other direction. Commercial, 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 payout 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 than we did in '18, we'd consider that a pretty reasonable year's work.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [8]

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Got it. Okay. And one last one on -- Dean, you mentioned expectations for fee income in '19, sorry 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? Is that -- would you say that is correct?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [9]

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Yes. I think that they've kind of been hovering around that $2.1 million per quarter kind of income range. And I think that's kind of where we expect them to be in this year.

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Operator [10]

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Our next question comes from Aaron Deer with Sandler O'Neill.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [11]

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Just following up on the loan activity. The construction I saw was down a bit in the quarter. I'm guessing that, that reflected just completions on various projects. But you mentioned in your commentary that construction -- that the pipeline is looking strong. I'm just wondering if what product types you're seeing that in? And is that product types that you expect to be participating in?

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [12]

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Yes. Aaron, it's -- well, 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 often, too, 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 you 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 and ultra high-end down along the Kakaako area, we're seeing a lot of activity around more mid-market 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, 1 year ago.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [13]

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Okay. That's encouraging. And then, Dean, with -- looking at the securities portfolio over the past year, you've been letting that kind of bleed a bit lower? As you look at it, the current rate environment and what the deposit flow is real quick, what's your expectations for your plans for the securities book in the year ahead?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [14]

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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-3 years is what we're looking at, maybe could be a tad higher, but generally in that same area.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [15]

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Okay. And then, just quick one on the tax outlook. You gave the guidance 19 to 21. Just curious, if I recall, in past years, I'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?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [16]

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Well, generally, the -- what drives the variance, 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 is -- could be the low point, but beyond that, I think, right now, it's kind of stable throughout the year, pending any kind of discrete items that come through.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [17]

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Okay. And just one last one, just on the deposit environment. In past quarters, you've commented that there's been some aggressive pricing by some of your competitors on deposits, particularly on the public funds where you guys have backed off from. A commentary from other banks in other parts of the country so far this earning season have suggested that some of those pressures have abated. Are you also seeing that in the Hawaii market where maybe there's a little bit less pricing competition?

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [18]

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Yes. I would say that there is some similarity to those statements, Aaron, here in this market.

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Operator [19]

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Our next question comes from Jackie Bohlen with KBW.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [20]

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Speaking with the public funds, Peter, are those at a level where you're comfortable now? Or do you expect additional declines in 2019?

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [21]

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It really is a function of what kind of pricing pops up. I mean, 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 public deposit levels, which we should be grateful. I think that 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 hundred million dollars sort of runoff. But for now, we're reasonably optimistic in that particular book of business.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [22]

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Okay. That's helpful. 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?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [23]

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That assumes a bit higher on the long end. It's 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 will be on the upper end of that guidance.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [24]

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Okay. And are there any additional Fed fund increases embedded in that? Or is it more a function of the steepness of the curve that drives the guidance?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [25]

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We had one kind of mid-year.

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Operator [26]

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Our next question comes from Laurie Hunsicker with Compass Point.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [27]

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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?

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [28]

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Our public time?

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [29]

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Yes.

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [30]

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As of quarter end, was 6 29.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [31]

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Okay. Great.

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [32]

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Down from 8 38 1 year ago.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [33]

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And then, just on margin. Can you help us think about where you have premium amortization modeled in that guide?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [34]

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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 from also 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.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [35]

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The 8.1. Okay. And so, again, just thinking about that, if we look linked quarter, we strip out that premium am, your core margin, widened to only 1 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, I mean, we could be at the higher end of your guidance, potentially.

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [36]

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Potentially.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [37]

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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 were some slight uptick there in nonperformers. The nonperformers' sitting at $2 million, up from $650,000 last quarter. What that was, and any details there?

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Mary E. Sellers, Bank of Hawaii Corporation - Vice Chair & Chief Risk Officer [38]

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It was just a number of smaller real estate loans for owner occupants within our mortgage portfolio. Nothing material.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [39]

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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?

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Mary E. Sellers, Bank of Hawaii Corporation - Vice Chair & Chief Risk Officer [40]

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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 and the segments that we see that growth in as well as the economic outlook.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [41]

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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...

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Mary E. Sellers, Bank of Hawaii Corporation - Vice Chair & Chief Risk Officer [42]

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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.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [43]

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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?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [44]

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I think it's -- 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 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 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.

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Operator [45]

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Our next question comes from Matthew Keating with Barclays.

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Matthew John Keating, Barclays Bank PLC, Research Division - Director & Senior Analyst [46]

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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 that you have that growth moderating a bit in 2019. I'm just curious for your perspective on how much a moderation in growth? It's still positive, right, in terms of visitor expenditures, I think, up about 4% versus up about 9% last year.

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [47]

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Yes.

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Matthew John Keating, Barclays Bank PLC, Research Division - Director & Senior Analyst [48]

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What sort of impact does that have on your business? Is it just a good thing that it's still going up? If you could just provide some color, it will be great.

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [49]

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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 what DBEDT 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 when 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, oftentimes, 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. So put another way, I think that as long as we have consistency and reasonable growth within the visitors 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.

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Matthew John Keating, Barclays Bank PLC, Research Division - Director & Senior Analyst [50]

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That's great color. And then, maybe, Dean, on the expense growth, the 2% to 3% core expense growth for 2019. Any -- like, is most of that going to be coming in terms of people costs, of any particular projects, as 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 the line item on expenses that you'd contemplate for 2019?

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [51]

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Why don't you go ahead, Dean?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [52]

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I wouldn't say unusual. I think it's 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 initiatives that we -- strategic initiatives that we've been working on.

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [53]

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Yes. So really, for a couple of years now, Matthew, we've had a fair amount of investment into the bloodstream or expense base around digital initiatives, obviously, around security and network hardening initiatives as well as 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've had that last year, maybe a year before, and we'll likely to have that again certainly this year and perhaps in the next. But in -- net-net, we think that's going to be a positive for our financial performance moving forward.

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Operator [54]

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Our next question comes from Ebrahim Poonawala with BOA Merrill Lynch.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [55]

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I'm sorry if I missed this. I joined a little later. But -- well, I wonder if, Peter, if you 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 growth -- balance sheet, I guess, average earning assets stayed relatively flat over the last couple of years. And I'm wondering if that's 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?

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [56]

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Yes, Ebrahim, it's a good question. I think that -- I think about it really in 2 ways. From an aggregate growth standpoint, really, for the past, call it, 6 quarters, our deposit growth has been retarded somewhat by our stated strategy in our public book. So in other words, the run up in 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 the minority of all of our portfolio size-wise. Having said that, we're running at the very lower end of cost of 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.

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Operator [57]

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And I'm not showing any further questions at this time.

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Cynthia G. Wyrick, Bank of Hawaii Corporation - Executive VP & Director of IR [58]

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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 any further clarification on any of the topics we've discussed today. Thanks, everyone, again, and have a great day.

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Operator [59]

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Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. And have a wonderful day.