U.S. Markets closed

Edited Transcript of BOH earnings conference call or presentation 24-Apr-17 6:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Bank of Hawaii Corp Earnings Call

Honolulu Apr 26, 2017 (Thomson StreetEvents) -- Edited Transcript of Bank of Hawaii Corp earnings conference call or presentation Monday, April 24, 2017 at 6:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Cynthia G. Wyrick

Bank of Hawaii Corporation - EVP and Director of IR

* Dean Y. Shigemura

Bank of Hawaii Corporation - CFO and Senior EVP

* Mary E. Sellers

Bank of Hawaii Corporation - Vice Chairman and Chief Risk Officer

* Peter S. Ho

Bank of Hawaii Corporation - Chairman, CEO, President and Director of Bank of Hawali

================================================================================

Conference Call Participants

================================================================================

* Aaron James Deer

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

* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Casey Haire

Jefferies LLC, Research Division - VP and Equity 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 - SVP and Senior Research Analyst

* Laurie Havener Hunsicker

Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst

* Matthew John Keating

Barclays PLC, Research Division - Director and Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to Bank of Hawaii Corporation First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to your host, Cindy Wyrick, Director of Investor Relations. Please begin.

--------------------------------------------------------------------------------

Cynthia G. Wyrick, Bank of Hawaii Corporation - EVP and Director of IR [2]

--------------------------------------------------------------------------------

Thank you, Nicole. Good morning and good afternoon, everyone. Thank you for joining us today as we review the financial results for the first quarter of 2017. Joining 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 the actual results may differ materially from those projected.

And now I'd like to turn the call over to Peter Ho.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Cindy. Good morning or good afternoon, everyone. Thanks for joining us today.

Bank of Hawaii began 2017 with good financial performance and a strong balance sheet. Our loans grew over -- to over $9 billion at the end of the quarter, up 1.8% from the previous quarter. Compared with the first quarter last year, our total loans increased 13%.

We also had good growth in deposits this quarter. Total deposits increased 1.1% from the previous quarter and were up 7.3% compared with the first quarter last year. Asset quality, capital and liquidity all remained strong.

Now let me ask Dean to provide you with some additional details on our financial performance this quarter. And then Mary will comment on our asset quality. Dean?

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [4]

--------------------------------------------------------------------------------

Thank you, Peter. Net income for the first quarter was $51.2 million or $1.20 per share compared to $43.5 million or $1.02 per share in the fourth quarter and $50.2 million or $1.16 per share from the first quarter last year.

Our return on assets in the first quarter was 1.26%. Return on equity was 17.63%, and our efficiency ratio was 53.42%. Our net interest margin for the first quarter was 2.89%, up 6 basis points from the fourth quarter and up 3 basis points from the same quarter last year. Net interest income for the first quarter last year included recoveries of $1.3 million, which had a positive impact of approximately 4 basis points on our net interest margin.

Premium amortization was $10.6 million in the first quarter, down from $11.1 million in the previous quarter and $11.7 million in the same quarter last year. Investment portfolio reinvestment differential was a positive 13 basis points this quarter. We purchased a total of $416 million of securities during the quarter, which were primarily comprised of fixed-rate mortgage-backed securities. As Mary will discuss later, we recorded a credit provision of $4.4 million this quarter.

Noninterest income for the first quarter of 2017 included a gain of $12.5 million from the sale of Visa Class B shares. Noninterest income for the first quarter of 2016 included a gain of $11.4 million from the sale of Visa Class B shares and a $1.9 million net gain on the sale of leased equipment. Adjusted for these gains, the decline in noninterest income compared to the fourth quarter was largely due to lower mortgage banking income, which was $3.3 million in the first quarter of 2017 compared with $6.3 million in the previous quarter and $3.2 million in the same quarter last year.

Noninterest expense totaled $88.6 million in the first quarter compared with $89.6 million in the previous quarter and $87.4 million in the same quarter last year. Results for the first quarter of 2017 included payroll-related expenses of approximately $2.5 million. Noninterest expenses during the first quarter last year included seasonal payroll-related expenses of approximately $2.5 million, an increase of $500,000 to provision for unfunded commitments and a net gain of $1.5 million from the sale of a real estate property in Guam. Noninterest expenses for the fourth quarter of 2016 included $1.3 million in compensation due to the increase in the stock price during the quarter and a net gain of $1 million on the sale of a branch building. For the full year of 2017, we expect expenses to be about 2% to 3% above our 2016 expenses, adjusted for real estate sales of $3.7 million.

The effective tax rate for the first quarter of 2017 was 29.72% compared with 28.38% in the previous quarter and 32.01% in the same quarter last year. The effective tax rate for the first quarter of 2017 was lower than originally estimated due to the adoption of an accounting change related to the exercise of stock options and vesting of restricted stock. The effective tax rate for the full year of 2017 is expected to be between 31% and 33%.

As Peter mentioned, we continued to see good growth in loans and deposits during the quarter. Our investment portfolio was $6.2 billion at the end of the quarter, and the duration for the available-for-sale portfolio was 2.48 years. The held-to-maturity portfolio duration was 3.48 years, and the duration for the total securities portfolio was 3.11 years at the end of the quarter.

Our shareholders' equity increased to $1.19 billion at the end of the first quarter. We paid out $21.4 million or 42% of net income in dividends during the first quarter and repurchased 114,000 shares of common stock for $9.6 million. At the end of the first quarter, our Tier 1 capital ratio was 13.41% and our Tier 1 leverage ratio was 7.29%. And finally, our board declared a dividend of $0.50 per share for the second quarter of 2017.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Dean. Net charge-offs for the first quarter totaled $3.6 million or 0.16% annualized of total average loans and leases outstanding as compared with net charge-offs of $3 million or 0.14% annualized in the fourth quarter of 2016. In the first quarter of 2016, we recorded net recoveries of $3.8 million, driven off the full recovery of a single commercial loan previously charged off in 2013.

At the end of the first quarter, nonperforming assets decreased to $19 million or 21 basis points, down from 22 basis points at the end of the fourth quarter and down from 27 basis points at the end of the first quarter of last year. Loans past due 90 days or more and still accruing interest totaled $5.9 million, down $1.2 million for the linked quarter and down $2.1 million year-over-year. Restructured loans not included in nonaccrual loans or loans past due 90 days or more totaled $53 million, up $800,000 from the prior quarter and up $2.3 million year-over-year. Residential mortgage loans modified to assist our customers accounted for $18.5 million of the total.

At the end of the quarter, the allowance for loan and lease losses totaled $105.1 million. Accordingly, given net charge-offs of $3.6 million, a credit provision of $4.4 million was recorded. The ratio of the allowance to total loans and leases was 1.15% at the end of the quarter, down 2 basis points for the linked period and down 15 basis points year-over-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 in loan growth. The total reserve for unfunded commitments was $6.6 million at year-end, unchanged from the fourth quarter of 2016 and the first quarter of 2016.

I'll now turn the call back to Peter.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Mary. As Mary mentioned, the Hawaii economy remained healthy throughout the first quarter of 2017. Our visitor industry continues to grow from the record levels of last year. For the first 2 months of 2017, total visitor arrivals increased 3.3% and visitor spending increased 9% compared with the same period in 2016.

The pace of construction remains strong in both the private and public sectors, and home prices continued to increase throughout the quarter. The median price for single-family home on Oahu, our primary market, increased 3.5% in the first quarter of 2017, and the median price of a condominium increased 2.6% compared with the same quarter last year. The volume of single-family home sales on Oahu increased 1% and condominium sales increased 7.1%.

Months of inventory declined to 2.7 months for a single-family home or a condominium, and the median number of days on market was 19 days for a single-family home and 20 days for a condominium. Conditions remain tight. Statewide seasonally adjusted unemployment dropped to 2.7% in March, the lowest level in the past 10 years.

Thanks again for joining us today. And now we'd be happy to respond to your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Brett Rabatin, Piper Jaffray.

--------------------------------------------------------------------------------

Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [2]

--------------------------------------------------------------------------------

Wanted to, I guess, first just talk about the loan growth in the quarter. The mix changed in 1Q, commercial and CRE, a little more flattish. Can you give us maybe your outlooks for those segments? And then are we thinking about high single-digit growth this year as you see it?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, you're right, there was a little bit of a shift in mix from what we've experienced the past several, several quarters. And part of that, Brett, I think is, you mentioned, commercial growth was relatively muted at 0.3% for the first quarter. But recall that's coming off a 3.7% fourth quarter, so a bit of level setting, I think, there. Resi was pretty much in line at just over 2%, and other consumer was 2.9%, near 3%. So I think those levels are about what we would anticipate. As we think moving forward, I still come back to this higher single-digit level, and I'll tell you why. I think that resi is likely to remain consistent with what we've seen the past several quarters. Consumer, I think, is going to remain strong. But I do think that -- I think we're later cycle on the commercial side. We have begun to tighten in a bit on the underwriting. That probably is going to impact volume levels for us. And I think we're going to begin to see the other side of our construction portfolio. So we're up to $270 million-plus, which historically is a pretty high number for us. If we come back down to, call it, $100 million construction portfolio, that has the potential to take about 4.5% out of our commercial balances. So that's going to be a bit of a headwind. I think if we got low single-digit growth out of the commercial portfolio this year, I'd feel pretty good about that. That would put us in line for a higher single-digit overall loan growth rate.

--------------------------------------------------------------------------------

Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [4]

--------------------------------------------------------------------------------

Okay. That's good color. And then the other thing was the margin was obviously benefited by both loan and securities portfolio yields. Can you talk about the securities portfolio, if you did anything in it this quarter? And then does that -- do you think, especially the -- I guess the held-to-maturity portfolio, should that continue to improve? Or are you investing at this point?

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [5]

--------------------------------------------------------------------------------

Yes. The differential in reinvestment versus what was running off was about 13 basis points. So this is the first quarter in quite a number of quarters where it was a positive differential for us. We're really not doing anything that different in terms of our reinvestment, still the mortgage-backed securities. We do also purchase some floaters just as a mitigant against interest rate risk. We did also increase the size of the portfolio, so that helped with the margin versus what we had in cash the previous quarter.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from the line of Jackie Bohlen of KBW.

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [7]

--------------------------------------------------------------------------------

I wondered if you could provide a little bit of color on what the driver was of the linked-quarter decline in other expenses.

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [8]

--------------------------------------------------------------------------------

type="A" />

Sure, yes. So it was a number of things. Actually, we had some seasonal expenses that occurred in the end of the year, the year-end push. Some of it related to production and sales. We did see a decrease in our RSU, restricted stock unit, expenses related to, number one, the lower -- slightly lower stock price as well as the $1.3 million increase last quarter. So those are pretty big drivers for us. But in general, I would have to say that, over the entire expense base, we did see a little bit better performance on our expenses.

--------------------------------------------------------------------------------

Peter S. Ho, Bank of Hawaii Corporation - Chairman, CEO, President and Director of Bank of Hawali [9]

--------------------------------------------------------------------------------

Yes. Maybe, Dean, I could add to that. It's always tough to compare Q1 to Q4 because of the seasonality. So Jackie, I'd like to look at year-on-year for this particular quarter. And there, you'll see we're up 1.4% or -- yes, up 1.4% for Q1 '17 versus last year, which I think is pretty strong performance for us and I think indicative of where we're trying to end up, although I would say that, as Dean mentioned earlier, if we end up 2%, closer to the 3% overall expense growth for an annualized number, that's probably about where we would anticipate ourselves ending up for the year for the foreseeable future.

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [10]

--------------------------------------------------------------------------------

Okay. And what kind of an impact are you seeing from just the extremely low unemployment rate that's in your market?

--------------------------------------------------------------------------------

Peter S. Ho, Bank of Hawaii Corporation - Chairman, CEO, President and Director of Bank of Hawali [11]

--------------------------------------------------------------------------------

It's tough to hire people. It's -- we've actually been at this for a while now. So going back a couple years now, we've been increasing our hiring rates, pay for just about all levels of the company. I think that's helped us get a little bit out ahead of the unemployment situation, which, as you pointed out, is a difficult situation for those trying to hire people. But there's no question it definitely is adding to wage inflation for most employers, including ourselves, here in the islands.

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [12]

--------------------------------------------------------------------------------

Okay. And that's all baked into the 2% to 3% expense growth expectations?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [14]

--------------------------------------------------------------------------------

Okay. And then just one last quick one and then I'll step back. Looking to the mortgage banking income in the quarter. I know that last quarter had a write-up in MSR. What was the impact on -- of MSR on mortgage banking this quarter?

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [15]

--------------------------------------------------------------------------------

The fee income still remains relatively close to about, I would call it, $2 million per quarter. And we didn't really take any -- we didn't take any impairment this quarter or write-up. So going forward, it's about $2 million.

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [16]

--------------------------------------------------------------------------------

Okay. So that balance of that is what you've got with sales?

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [17]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from the line of Aaron Deer of Sandler O'Neill.

--------------------------------------------------------------------------------

Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [19]

--------------------------------------------------------------------------------

Just following up on Jackie's question on the -- on that other expense line. The -- I just wanted to make sure. Because that particular line seemed like it was kind of materially low with -- even on a year-over-year basis, just wondered if there was anything particular that drove that lower this quarter, if this is a good run rate to work off of or if it's likely to bounce back up to the kind of $16 million, $17 million range where it's been.

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [20]

--------------------------------------------------------------------------------

I would say, looking at it from just an overall standpoint, I think the guidance that we have provided and Peter elaborated on, if you take a look at the overall expense growth of 2% to 3% over last year, that would give you good guidance. There's really nothing in the other expense line that would jump out that would be a variance over last year.

--------------------------------------------------------------------------------

Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [21]

--------------------------------------------------------------------------------

Okay, very good. I'll work with that. The -- and then, Peter, question on the strength that you saw on the residential mortgage and the home equity. Can you talk a little bit about the pricing that you're seeing in the market currently and to the extent that you're running promotions? And how does that affect where the portfolio -- the loan portfolio yields might be trending from here?

--------------------------------------------------------------------------------

Peter S. Ho, Bank of Hawaii Corporation - Chairman, CEO, President and Director of Bank of Hawali [22]

--------------------------------------------------------------------------------

Well, I would say that the salable sector is pretty much in line with whatever salable pricing is. So there's not a huge amount of variability in that space. I think where we are seeing competition from both local as well as national providers is like the rest of the country, which is in the jumbo space. Tough to see where -- the first quarter, we were thinking about higher rates and lower volumes. As we stepped into this quarter, a slightly different environment. So it's tough to tell where pricing is going to fall out, Aaron. But I think, all things considered, I think we're thinking pretty stable from here on out.

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [23]

--------------------------------------------------------------------------------

Yes, pending some kind of rate movement up or down.

--------------------------------------------------------------------------------

Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [24]

--------------------------------------------------------------------------------

Okay. And then relatedly, Dean, I was surprised that you mentioned the securities book, you guys added a little bit this quarter. Obviously, what happens with your deposit flows is probably going to drive some of that. But just where you do you think about the securities book shaking out as a percentage, say, of the earning asset mix going forward?

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [25]

--------------------------------------------------------------------------------

Well, what we did was we took advantage of the higher rates that we saw recently. Going forward, it'll still be subject to the deposit growth and loan growth. But I would say, at these levels, it would probably be close to where we are now.

--------------------------------------------------------------------------------

Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [26]

--------------------------------------------------------------------------------

Okay. So just kind of flattish on that for the time being?

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [27]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question comes from the line of Ebrahim Poonawala of Bank of America.

--------------------------------------------------------------------------------

Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [29]

--------------------------------------------------------------------------------

I just wanted to first start off in terms of your outlook on the margin as we think about the benefit from the March rate hike hitting 2Q numbers. And then Peter, if you could just talk about in terms of pricing competition on the lending side and if we are seeing any sort of pickup in deposit beta, as in what the market is doing in terms of deposit costs.

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [30]

--------------------------------------------------------------------------------

Okay. First, the margin. Yes, the rate increase in March will help us obviously on our floating-rate loans and securities. So going into the second quarter, you'll see on those loans better yields. The rate decrease, however, just recently will have some impact on our longer-term -- long-maturity loans. So I think not sure, but we might be in offset right now between the shorter rates and longer rates.

--------------------------------------------------------------------------------

Peter S. Ho, Bank of Hawaii Corporation - Chairman, CEO, President and Director of Bank of Hawali [31]

--------------------------------------------------------------------------------

And then pricing-wise, Ebrahim, not really much to report on the loan pricing side in terms of just odd pricing competitively in the marketplace. Things seem to be reasonably in line with where they have been. On the deposit side, I think a similar story. Look at our cost to deposits for the quarter is up 1 basis point versus last quarter. Feels like that's a pretty good space for us to be in. We're trying to, obviously, grow deposits on the consumer front. The commercial front is a little bit challenged in that we have a number of project types of transaction where we're the primary bank for large sums of money, and as those projects mature out, we lose those balances on the commercial side. So we may be in a position of trying hard to remain flat on the commercial side as we overcome that transaction runoff. The consumer side should be strong, and pricing, for the most part, I think, is pretty disciplined in the marketplace.

--------------------------------------------------------------------------------

Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [32]

--------------------------------------------------------------------------------

Understood. And just to make sure I understand this, what Dean said, you expect the margin -- should we expect a similar sort of margin expansion, all else equal, in terms of what we saw 1Q over 4Q into second quarter? Or will it be less pronounced because of the factors Dean mentioned?

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [33]

--------------------------------------------------------------------------------

Yes. Going forward, I think just the rate side might be a little bit more neutral. Obviously, with the mix change, that will help our margin. But given where the long-term rates moved recently, I would not expect a similar increase quarter-over-quarter from fourth to first and going into the second.

--------------------------------------------------------------------------------

Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [34]

--------------------------------------------------------------------------------

Got it. And just switching gears to what, Peter, you said about construction loans maybe going down to $100 million, if I heard you correctly. Is there a time line -- like do you see these commitments rolling off and are you not making new commitments, which is why you think this is going to fall? And like by when do you think it should get there?

--------------------------------------------------------------------------------

Peter S. Ho, Bank of Hawaii Corporation - Chairman, CEO, President and Director of Bank of Hawali [35]

--------------------------------------------------------------------------------

Well, a number of our loans are in the higher-end residential condominium market, and fortunately, those are maturing off. Those have been successful transactions for us. There is a chance at a plank here, Ebrahim, and that would be just more market rate or affordable types of vertical projects coming online. We are seeing a bit of that. That is, I think, an upside opportunity. But for the most part, I think that, absent that, we'll see construction balances tail off to, call it, the $150 million range by year-end.

--------------------------------------------------------------------------------

Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [36]

--------------------------------------------------------------------------------

Understood. And if I can sneak in a last one just around the tax benefit from the accounting change. How much was that in dollar terms for the quarter?

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [37]

--------------------------------------------------------------------------------

$1.9 million.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Our next question comes from the line of Casey Haire of Jefferies.

--------------------------------------------------------------------------------

Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [39]

--------------------------------------------------------------------------------

One more question on the margin. Dean, you mentioned the yield differential on securities in the last quarter was -- or in the first quarter was plus 13, and you're not doing anything differently. Obviously, the yield curve has flattened a bit. I was just wondering what that yield differential is in the early part of the second quarter here.

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [40]

--------------------------------------------------------------------------------

Well, it's still hard to say given that we are not really reinvesting right now. The volume has slowed down a little bit. But I would say that it's still positive to -- slightly positive maybe to the previous -- the current yield, but I would not expect much of a differential if rates stay where they are.

--------------------------------------------------------------------------------

Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [41]

--------------------------------------------------------------------------------

Okay, great. And then just switching topics to credit, Mary. Not to split hairs, I mean, the -- only 21 bps of nonaccruals, but the auto book and the other book, the loss content has ticked up modestly here. Can you just give us an outlook on what you're seeing in the -- maybe the consumer charge-off outlook for '17?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, I think we'll continue to see very strong performance within residential and home equity. And as you said, the other consumers, where we might see a little bit of softness, we have adjusted some of the underwriting in that at this point in the cycle. But it might tick up a little bit through this year and then adjust back.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

Our next question comes from the line of Jeff Rulis of D.A. Davidson.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [44]

--------------------------------------------------------------------------------

Peter, I just wanted to follow up on your comment on the deposits, and focus on the consumer side has been lending to some good growth. But on the commercial front, so that -- was that really sort of some project rotation that goes out of that? Or was there any seasonality linked quarter, I guess, quarter-to-quarter?

--------------------------------------------------------------------------------

Peter S. Ho, Bank of Hawaii Corporation - Chairman, CEO, President and Director of Bank of Hawali [45]

--------------------------------------------------------------------------------

Yes. Well -- so actually, the project rotation is more of an upcoming phenomena. And really, I think what happened on the deposit side, on the commercial front, we were down 0.9%. But recall that's coming off of a fourth quarter we were up 6.2%. So I think a lot of that is just, frankly, coming off a very strong fourth quarter on the commercial front. Having said that though, I do think that, as we battle the drop-off in project types of large escrow-type deposits, we're going to be challenged to keep commercial deposits flat to slightly up. That's going to be our intent. But I think you're absolutely right, the consumer book has been a great story for us, pushing double digits really on an annualized basis. And we're hopeful that, that just continues to be the case. That, by the way, is 50% of our overall deposit base.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [46]

--------------------------------------------------------------------------------

Got you, okay. And then one last one. The Visa sales, the balance there, is the idea that early next year, you'd clean up that balance?

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [47]

--------------------------------------------------------------------------------

Well, we haven't made a decision yet, but we're going to keep all our options available to us.

--------------------------------------------------------------------------------

Peter S. Ho, Bank of Hawaii Corporation - Chairman, CEO, President and Director of Bank of Hawali [48]

--------------------------------------------------------------------------------

Actually, that's an interesting one. And as you all know, our practice has been to sell, for a few years now, into the first quarter for the year. I think we're down to roughly another year left of sales. And so as Dean mentioned, that gives us a bit of a decision point. And there's a reasonable likelihood that we may hang on to that capital because there is the potential for readjustment, the final terms and conditions of our sale of the Visa shares, if and when or as that transaction is resolved. And I think having that capital, if you will, to help offset whatever potential liability there is there is something we're thinking pretty strongly about right now.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

Our next question comes from the line of Laurie Hunsicker of Compass Point.

--------------------------------------------------------------------------------

Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [50]

--------------------------------------------------------------------------------

I was wondering if you could help us think about going-forward loan loss provision, as we look at your reserves to loans that's now sitting at 1.15%, how we should be thinking about that and what your goal is in terms of a target level for that number.

--------------------------------------------------------------------------------

Mary E. Sellers, Bank of Hawaii Corporation - Vice Chairman and Chief Risk Officer [51]

--------------------------------------------------------------------------------

Well, Laurie, I don't think we have a target level. We run the estimate every quarter, and it's really based upon our analysis of our asset quality, what we see in the economy and other environmental factors and really what growth we're having and the mix of that growth.

--------------------------------------------------------------------------------

Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [52]

--------------------------------------------------------------------------------

And so at what point are you going to put a floor on that number? If that number gets down to 1% or, again, there just is not one?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. It's an interesting question. And really, I think, the way that you're describing the question, it's deciding on the number and working backwards. And I think where Mary is coming from is she runs through the analysis and the number drops out from the bottom of that, and that's really how we run the process. So it's tough to say what the number is going to be per se. But certainly, as we continue to grow, certainly as we get later into this credit cycle, and there are cyclical elements to all credit cycles, you can imagine that we're probably going to become a little more conservative in our reserving moving forward, Laurie.

--------------------------------------------------------------------------------

Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [54]

--------------------------------------------------------------------------------

Okay, that's helpful. And then just 2 numbers. Your assets under management, what is that number?

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [55]

--------------------------------------------------------------------------------

AUM was -- it’s historically been about $10 billion.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [57]

--------------------------------------------------------------------------------

Okay. Yes, I had it at $8.8 billion at the end of last year. I didn't know if you had a current number. Also looking for loan service for others. I had it at $2.7 billion at the end of the year. I don't know if you had a current number on that.

--------------------------------------------------------------------------------

Dean Y. Shigemura, Bank of Hawaii Corporation - CFO and Senior EVP [58]

--------------------------------------------------------------------------------

Yes. I mean, it's about there right now.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Matthew Keating of Barclays.

--------------------------------------------------------------------------------

Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [60]

--------------------------------------------------------------------------------

I guess my question will be for Mary, regarding the auto portfolio. I know it's a pretty small portfolio at the bank. But could you explain maybe what -- a little bit more about that book in terms of FICO score, what have you? It's interesting given how low the unemployment rate is in Hawaii and we are seeing trends in that portfolio that seem to be mirroring that of the broader U.S. despite a better job picture potentially. So maybe you could just provide some more color on the credit quality of the auto book.

--------------------------------------------------------------------------------

Mary E. Sellers, Bank of Hawaii Corporation - Vice Chairman and Chief Risk Officer [61]

--------------------------------------------------------------------------------

Sure. Well, I think the credit quality of our auto book really reflects our growth in the Guam market, which is a little bit of a different market relative to Hawaii. I think the income levels, et cetera, are little bit different there, but it is part of our core market. So at this point, it accounts for about 20% of our total portfolio. And then that's a little bit of an outsized loss rate, although the yields are better in that market.

--------------------------------------------------------------------------------

Matthew John Keating, Barclays PLC, Research Division - Director and Senior Analyst [62]

--------------------------------------------------------------------------------

Got you. That's helpful. And then maybe, Peter, you could talk to the new branch format. I know recently you launched a new branch in Pearl City. And there's, I guess, 7 more or so of those updates -- or new branch formats scheduled for this year and maybe 30 over the next 5 years. But is that going to be front-end loaded? Like what's kind of the pace of that investment? Will it be around 7 per year? Is that sort of the goal right now?

--------------------------------------------------------------------------------

Peter S. Ho, Bank of Hawaii Corporation - Chairman, CEO, President and Director of Bank of Hawali [63]

--------------------------------------------------------------------------------

Yes. It's going to be a pretty steady process, Matt. And that's really -- we would love to accelerate it, but fortunately for us, a good amount of our real estate is held in lease. And so really what a lot of the reinvestment for us reflects is just the rate of leases that are coming up for renegotiation or maturity, and that really, in part, what’s driving that timing. We are -- so we do have Pearl City up and running. We have Hawaii Kai up and running. We're very pleased with the outcomes. These are great local branches. They're sized appropriately to the types of activity and transactions that are happening in our marketplace and near and dear to our heart. They're also very efficient operations for us. So, so far so good. Our sales stats, our revenue stats coming out of them, although it's early, look promising, so we're pleased.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

And I'm showing no further questions at this time. I'd turn the call back over to Cindy Wyrick for any closing remarks.

--------------------------------------------------------------------------------

Cynthia G. Wyrick, Bank of Hawaii Corporation - EVP and Director of IR [65]

--------------------------------------------------------------------------------

I'd like to thank everyone for joining us today and for your continued interest in Bank of Hawaii. As always, feel free to contact me if you have additional questions or need further clarification on any of the topics discussed today.

Thanks, everyone, and have a great day.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may now all disconnect. Everyone, have a great day.