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Edited Transcript of BOH earnings conference call or presentation 22-Oct-18 6:00pm GMT

Q3 2018 Bank of Hawaii Corp Earnings Call

Honolulu Oct 23, 2018 (Thomson StreetEvents) -- Edited Transcript of Bank of Hawaii Corp earnings conference call or presentation Monday, October 22, 2018 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

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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 Third Quarter 2018 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to hand the call over to Ms. Cindy Wyrick, Director of Investor Relations. Ma'am, you may begin.

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

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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.

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

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

Third quarter of 2018 was another good one for Bank of Hawaii. In addition to our strong financial results, asset quality 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 as a result of our decision to reduce public deposits, as we have discussed during 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?

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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 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 from the same quarter last year. Net interest income on a reported basis for the third quarter of 2018 was $122.9 million, up $2.4 million from the second quarter and up $6.6 million from the third quarter of last year. Our deposit beta improved during the third quarter of 2018, decreasing to 20% compared to 28% in the previous quarter. As Mary will discuss later, we recorded a credit provision of $3.8 million this quarter.

Noninterest 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 noninterest income during the third quarters of 2018 or 2017. Noninterest 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 noninterest income is largely due to trust and mortgage banking income. We currently expect noninterest income to be approximately $42 million in the fourth quarter of 2018.

Noninterest 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 noninterest expense during the third or second quarters of 2018. Noninterest 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% in the same quarter last year as a result of tax reform. Currently, we expect the effective tax rate for the fourth quarter of 2018 to be between 19% and 21%.

Our investment portfolio was $5.7 billion at the end of the third quarter. Premium amortization during the quarter was $8.7 million, down from $9.2 million in the previous quarter and $10.1 million in the same quarter last year. We purchased a total of $348 million of securities during the quarter, which were primarily comprised of treasuries and mortgage-backed securities.

The reinvestment differential during the third quarter was a positive 94 basis points. The duration of the available-for-sale portfolio was 2.47 years at the end of the third quarter of 2018. The held-to-maturity portfolio duration was 4.22 years, and the duration for the total portfolio was 3.58 years.

As Peter mentioned, we had loan growth of 1.8% during the third quarter. For the full year of 2018, we 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 in dividends and repurchased 296,500 shares of common stock for a total cost of $24.6 million. We repurchased an additional 72,000 shares between October 1 and October 19 at a total cost of $5.7 million. And finally, our board declared a dividend of $0.62 per share for the fourth quarter of 2018.

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

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

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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, in the third quarter of 2017, net charge-offs were $3.5 million or 0.15% annualized.

Nonperforming 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 linked period and down $3.2 million or 5 basis points year-over-year.

Loans past due 90 more -- days or more and still accruing interest were $8.1 million at the end of the third quarter compared with $13.3 million at the end of the second quarter of 2018 and $6.7 million at the end of the third quarter in 2017.

Restructured loans not included in nonaccrual loans or loans past due 90 days or more were $49.5 million at the end of the third quarter, down $749,000 for the linked period and down $5.6 million year-over-year. Residential mortgage loans modified to assist customers accounted for $20 million of the total at quarter end.

At the end of the quarter, the allowance for loan and lease losses totaled $108.7 million, given net charge-offs of $3.3 million and credit provision of $3.8 million was recorded. The ratio of the allowance to total loans was 1.06%, down 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 and 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 our 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 like 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.

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

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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 8 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 4 larger Hawaiian Islands saw growth in both visitor spending and visitor arrivals.

Real estate also continues to remain strong during the first 9 months of 2018. The median sales price of a single-family home on Oahu, our primary market, increased 4.2%, and the median price for a condominium increased 5.5% compared with the same period last year. During the month of September, the median price for a single-family home set a new record high of $812,500.

Inventories continue to remain tight, and the volume of single-family home sales on Oahu decreased 3.7%, and condominium sales decreased 0.1% during the 9-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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jeff Rulis of 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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You guys continue to have pretty good success in the auto lending segment. I'm just interested in the success of that category. Is it competition-based? Are you seeing limited competition there? Kind of what are you hearing from your customers in that market?

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

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Well, it's a business that we've been in for quite a while through the cycles. I'd say, we probably have the best leadership and management team that we've had in quite a while. That's allowing them to pick up market share, frankly. We've been successful in thinking through various ways to attack the market from a pricing standpoint, skewing, frankly, towards the higher end of the quality spectrum. And we're also beginning to get a little more active in some markets within our core 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.

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

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Got it. And then, Peter, I'd be interested in your thoughts on just deposit growth for '19, maybe absent the public deposit runoff piece. Just commercial and consumer kind of expectations, maybe the balance of the year.

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

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I think we have another quarter or so of dealing with the overall aggregate deposit levels in our government book. So we always talked about this for a couple or 3 quarters now, and the 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 lists a pretty substantial headwind that we face now for the better part of a year. The commercial book is performing pretty well. We're putting a lot of emphasis, obviously, as is everyone, in growing good-quality, sustainable deposits. Consumer book, performing well there as well. Similar story in terms -- again, and the team and the troops charged up just to try and drive quality deposit growth there. Probably -- these things work in cycles. So the government book was the first book to really start to move on us from a beta standpoint understandably. That's going to be what it's going to be. We're, frankly, not going to stand in the way of market repricing there. The commercial book is -- on the front end, we had a little frothiness that I think we're beginning to overcome. That book is looking pretty stable. Consumer, similar story but lagging commercial a little bit. So I think to your question, as we look to '19, I would hope that we could hang on to somewhat steady but unspectacular deposit growth throughout the year on a year-on-year basis within that segment of the balance sheet.

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

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

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [7]

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Yes. We did have a couple of discrete items in the third quarter that brought the tax rate down. But looking into the fourth quarter, right now, we don't have any of that forecasted. So we do have true-ups occurring so they could move a bit, but right now, it's 19% to 21%.

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Operator [8]

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Our next question is from the line of Ebrahim Poonawala of Bank of America Merrill Lynch.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [9]

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Just sort of following up on your comments around deposit growth. It does sound like we should expect the loan-to-deposit ratio to drift higher if loan growth next year resembles what we've seen in 2018. Can you -- one, is that a fair assumption? And if so, Dean, can you talk about sort of your expectations around the margin assuming we continue to get rate hikes from the Fed?

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [10]

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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. I suspect we're going to be able to hang on to loan growth as we've guided 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, in my mind, good solid deposit growth is, call it, 2%. So yes, that's a pretty widespread, and that's going to begin to erode into our loan-to-deposit ratio, which makes me feel good we are where we are at this point.

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [11]

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And to answer your question about the margin, 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 steepen, 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.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [12]

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Got it. So you do expect margin to continue to trend higher? And just to add to that, can you talk about deposit competition just on the consumer and commercial side in -- on the island? Like, is it picking up? Are you seeing any pressure to raise sort of your offered deposit rates on the retail front?

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [13]

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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's just an awful lot of money at stake, people are bidding on a one-off custom basis for time deposits. We're seeing that in the market.

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Operator [14]

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And the next question is from the line of Aaron Deer of 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 [15]

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Peter, given your outlook for loan-to-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?

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

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It will be really on the -- based on the deposit growth. So if we experience kind of low single digits in deposit growth, that's what would be the expectation for earning asset growth.

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [17]

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Right.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [18]

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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 the -- to those Visa shares this quarter? Or was that -- the modest loss in securities, was that just a sale of some kind?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [19]

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

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Operator [20]

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(Operator Instructions) Our next question is from the line of Jacquie Bohlen of KBW.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [21]

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Just touching base on the good differential that you had in the securities purchases in the quarter. I know that when we spoke last quarter on the call, you had 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?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [22]

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

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [23]

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

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [24]

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Pretty much, yes. Yes.

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Peter S. Ho, Bank of Hawaii Corporation - Chairman, President & CEO [25]

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Yes, duration is flat, right?

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Dean Y. Shigemura, Bank of Hawaii Corporation - Vice Chair & CFO [26]

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Yes, duration is flat. Yes.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [27]

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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 you're thinking on that.

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

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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. That really is a result of what's happening in the rate environment. And what that's done, obviously, is impacted the 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 at a higher percentage as rates have moved up. So we're looking to hang on to fee levels where they are right now, Jacquie. 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 next quarter or so, if we can stick within the $41 million, $42 million range, that's what we're trying to do.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [29]

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Okay. And I would assume as you start to lay out some of the plans for future areas of growth, you'll provide updates on calls?

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

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Sure.

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Operator [31]

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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.

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Cynthia G. Wyrick, Bank of Hawaii Corporation - Executive VP & Director of IR [32]

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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.

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Operator [33]

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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.