Good day, ladies and gentlemen and welcome to the Bank of Hawaii Corporation First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. [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.

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 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 that actual results may differ materially from those projected. And now I would like to turn the call over to Peter Ho.

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 to over $9 billion at the end of the quarter, up 1.8% from the previous quarter. Compared with the first quarter last year, 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?

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 in 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 six basis points for the fourth quarter and up three 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 four 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. The 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. Non-interest income for the first quarter of 2017 included a gain of $12.5 million from the sale of Visa Class B shares. Non-interest 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 non-interest 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.…

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 first quarter of 2016, we recorded net recoveries of $3.8 million driven of 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 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 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 of 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 two 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.

Thanks Mary. As Mary mentioned, the Hawaii economy remained healthy through the first quarter of 2017. Our visitor industry continues to grow from the record levels of last year. For the first two months of 2017, total visitor arrivals increased 3.3% and visitor spending increased 9% compared with the same period in 2016. The face of construction remained strong in both the private and public sectors and home prices continue to increase throughout the quarter. The median price was single-family home on Oahu, our primary market, increased 3.5% in the first quarter of 2017 and the median price of our 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 single-family home or condominium and the median number of days on market was 19 days for single-family home and 20 days for 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.

[Operator instructions] Our first question comes from the line of Brett Rabatin of Piper Jaffray. Your line is now open.

Hey, good morning, everyone.

Hey Brett.

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

Yeah, you're right. There was a little bit of a shift in mix from what we've experienced in the best 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 of 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 in the past several quarters. Consumer I think is going to remain strong, but I do think that I think for later cycle on the commercial side, we have begun to tighten in a bit on the underwriting and 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 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 would feel pretty good about that. That will put us in line for a higher single-digit overall loan growth rate.

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 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?

Yeah, the differential in reinvestment versus what was running off was about 13 basis points. So, this is the first quarter and 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 to mortgage-backed securities. We do also purchased some floaters just as a mid 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.

Okay. Great. Thanks for the color.

Thanks Brett.

Thank you. Our next question comes from the line of Jacque Bohlen of KBW. Your line is now open.

Hi. Good morning, everyone.

Good morning, Jackie.

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

Sure. Yeah so it was a number of things. Actually, we had some seasonal expenses that occurred at the end of the year, the yearend push. Some of that 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 will have to say that over the entire expense base, we did see a little bit better performance on our expenses.

May I can add to that, it's always tough to compare Q1 to Q4 because of the seasonality. So, Jackie I like to look at year-on-year from this particular quarter and there you'll see we're up 1.4% or yeah 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, we end up 2% closer to 3% overall expense growth for annualized number, that's probably about where we would anticipate ourselves ending up for the year for the foreseeable future.

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

It's tough to hire people. We've actually been out this for a while now. So, going back a couple years now, we've been increasing our hiring rates of 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 point out is a difficult situation for those trying to hire people. But there is no question, it definitely is adding to wage inflation for most employers including ourselves here in the island.

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

Yes.

Okay. And then just one last quick one and then I'll jump 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 of MSR on mortgage banking this quarter?

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

Okay. So, the balance of that with sales.

Yes.

Okay. Great. Thanks guys.

Thank you. Our next question comes from the line of Aaron Deer at Sandler O’Neill. Your line is now open.

Hey. Good morning, guys.

Hey Aaron.

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

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

Okay. Great. I'll work with that. And then Peter a 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've seen in the market currently and to the extent that you're running promotions and how does that affect where the portfolio -- the loan portfolio yield might be a trend in from here?

Well, I would say that the salable sector is pretty much in line with whatever saleable pricing is. So, there is 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 first quarter we were thinking about higher rates and lower volumes. As we stepped into this quarter, a slightly different environment. So, it is tough to tell where price is going to fall out Aaron, but I think all things considered, I think we're thinking pretty stable from here now, pending some kind of rate movement up or down.

Okay. And then relatedly Dean, I was surprised that you mentioned the securities book you guys at a little bit this quarter, obviously, what happens with your deposit if you're going to drive some of that, but just where do you think about the securities book is shaken out as a percentage say of the earning asset mix going forward?

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

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

Yeah.

Okay. Very good. Thanks for taking my questions. I'll step back.

Thanks Aaron.

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

Good morning, guys.

Hey Ebrahim.

Hi. 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 Peter if you could just talk about in terms of pricing competition on the lending side and if you're seeing any sort of pick up in deposit betas and what the market is doing in terms of deposit costs?

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

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 of deposits for the quarter is up a basis point versus last quarter. Feels like that's a pretty good space for us to be in and we're trying to obviously where deposit on the consumer front. The commercial front is a little bit challenged in that we have a number of project types of transactions where we are 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 harder to remain flat on the commercial side as we overcome that transaction run off. The consumer side should be strong and pricing for the most part I think is pretty disciplined in the marketplace.

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

Yeah 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 move recently, I would not expect a similar increase quarter-over-quarter from fourth to first and going into the second.

Got it and just switching gears to what Peter you said about construction loans, may be going down to $100 million if I heard you correctly? Is there a timeline like do you see these commitment 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?

Well a number of our loans are in the higher end residential condominium market and fortunately those are maturing off of the successful transactions for us. There is a chance and a plank here Ebrahim and that would be just more market rate or affordable types of vertical products 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.

Understood. And I'll sneak in a last one just around the tax benefit from the accounting change, how much was that in dollar terms for the quarter?

$1.9 million.

$1.9 million. Got it. Thanks for taking my questions.

Yes.

Thank you. Our next question comes from the line of Casey Haire of Jefferies. Your line is now open.

Thanks. Good morning, everyone.

Hi Casey.

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

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.

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

Well I think we'll continue to see very strong performance within residential and from 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 might pick up a little bit through this year and then adjust back.

Okay. Great. Thank you.

Thanks Casey.

Thank you. Our next question comes from the line of Jeff Rulis of DA Davidson. Your line is now open.

Thanks. Good morning.

Hi Jeff.

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?

Yeah well, so actually the project rotation is more of an upcoming phenomenon 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's 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 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.

Got you. Okay. And then one last one, the Visa sales, the balance there is the idea that early next year you would clean up that balance.

Well we haven’t made our decision yet, but we're going to keep all our options available to us. Actually, that's an interesting one and as you all know, our practice has been to sell for few years now and 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 is a reasonable likelihood that we may hang on to that capital because there is potential for readjustment and 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 something we're thinking pretty strongly about right now.

Okay. Thanks.

Thank you. Our next question comes from the line of Laurie Hunsicker of Compass Point. Your line is now open.

Great. Thanks. Hi. Good morning. I was wondering if you could help us think about going forward on the loss provision as we look at your reserves to loans is now sitting at 1.15% and how we should be thinking about that and what your goal is in terms of a target level to that number?

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 in that growth.

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

Yes, it's an interesting question and it 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.

Okay. That's helpful. And then just two numbers, your assets under management, what is that number?

AUM it's historically been about $10 billion.

Yeah.

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

Yeah, it's about there right now.

Okay. And so -- okay. That's helpful, thanks.

Thank you.

Thank you. [Operator instructions] Our next question comes from the line of Matthew Keating of Barclays. Your line is now open.

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

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 etcetera are a little bit different there, but I think the income levels etcetera are a little bit different there, but it is part of our core markets. So, at this point it accounts for about 20% of our total portfolio and it's a little bit of an outsized loss rate although the yields are better in that market.

Got you. That's helpful and then maybe Peter you could talk to the new branch format. I know recently you launched the new branch in Pearl City and there is I guess seven more, so those updates are new branch format is scheduled for this year and many 30 over the next five years, but is that going to be front end loaded like what's kind of the pace of that investment will be around seven per year, is that sort of the goal right now?

Yeah, it's going to be a pretty steady process Matt and that's really, we would love to accelerate, but fortunately for us a good amount of our real estate is held in lease and so really a lot of the reinvestment for us reflects is just the rate of leases that are coming out for renegotiations or maturity and that's really in part was driving that timing. 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-looking branches. They are sized appropriately to the types of activity and transactions that are happening in the marketplace and near and dear to our hearts are also very efficient operations for us. So, so far so good. Our sales staffs, our revenue staff is coming out of them. Although it's early, look promising. So, we're pleased.

Great. Thanks.

Yeah.

Thank you. And I am showing no further questions at this time. I'll turn the call back over to Cindy Wyrick for closing remarks.

I would 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 clarifications on any of the topics discussed today. Thanks, everyone and have a great day.

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