Good day ladies and gentlemen, and welcome to the Bank of Hawaii Corporation Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the floor over to Cindy Wyrick, Director of Investor Relations. Please go ahead.

Thank you, Karen. Good morning and good afternoon, everyone. Thank you for joining us today as we review the financial results for the second quarter of 2017. Joining me today is our Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean Shigemura; and our Chief Risk Officer, Mary Sellers. Before we get started, let me remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected. And now, I would like to turn the call over to Peter Ho.

Thanks, Cindy. Good morning or to our friends in the Midwest and the East Coast, good afternoon. Thank you all for joining us today. The second quarter of 2017 was yet another solid quarter for Bank of Hawaii. We had good financial performance with the rising net interest margin, sound asset quality, disciplined expense control, and strong balance sheet growth. Our loans grew to $9.4 billion at the end of the quarter, an increase of 3% from the previous quarter. Commercial loans were up 2.1%, while consumer loans were up 3.6%. Compared with the second quarter last year, total loans increased 12.7%. Total deposits grew 2.1% from the previous quarter and were up 8.4% compared with the second quarter last year. In addition to the strong financial results, I am pleased to announce that our Board of Directors has declared an increase in our dividend to $0.52 for the third quarter of 2017. This is the third increase in our dividend over the past 18 months. Now, let me turn the call over to Dean, who will provide you with some additional details on our financial performance, and then on to Mary, who will touch on asset quality. Dean?

Thank you, Peter. Net income for the second quarter was $44.7 million or $1.05 per share compared to $51.2 million or $1.20 per share in the first quarter and $44.2 million or $1.03 per share in the second quarter last year. The decline from the previous quarter was due to the Visa Class B shares sold during the first quarter. Our return on assets in the second quarter was 1.09%, the return on equity was 14.87%, and our efficiency ratio was 55.99%. Our net interest margin in the second quarter was 2.92%, up 3 basis points from the first quarter and up 7 basis points from the same quarter last year. Net interest income in the second quarter last year, included interest recoveries of $1 million, which had a positive impact of approximately 3 basis points on the net interest margin. Premium amortization was $10.4 million in the second quarter, down from $10.6 million in the previous quarter, and $11.5 million in the same quarter last year. The investment portfolio or reinvestment differential was a positive 22 basis points this quarter. We purchased a total of $205.3 million of securities during the quarter, primarily comprised of fixed rate mortgage-backed securities. As Mary will discuss later, we recorded a credit provision of $4.3 million this quarter. Non-interest income totaled $45.2 million in the second quarter of 2017 compared with $55.9 million in the previous quarter and $46.5 million in the same quarter last year. There were no significant items in non-interest income during the second quarter of 2017. Non-interest income in the previous quarter included a gain of $12.5 million from the sale of Visa Class B shares. Non-interest income in the second quarter last year included a service fee of $1.2 million resulting from the sale of trust real estate.…

Thank you, Dean. Net charge-offs for the second quarter totaled $3 million or 0.13% annualized of total average loans and leases outstanding. Comparatively in the first quarter of 2017, we recorded net charge-offs of $3.6 million or 0.16% annualized, well in the second quarter of 2016, net charge-offs were $1.7 million or 0.09% annualized. Non-performing assets were $16.4 million at the end of the second quarter, down $2.6 million from the first quarter, and up $100,000 from the second quarter of 2016. Reductions this quarter were due to payoffs, restructured loans returned to accrual and sales of residential foreclosed real estate. At the end of the second quarter, loans past due 90 days or more and still accruing interest were $7 million, up $1.2 million for the linked period and down $1.7 million year-over-year. Restructured loans non-included in non-accrual loans or loans past due 90 days or more were $53.2 million at the end of the second quarter, up $200,000 from the first quarter of 2017 and up $1 million from the second quarter of 2016. Residential mortgage loans modified to assist customers accounted for $18.4 million of the total at the end of the quarter. The second quarter was another very strong quarter from an underwriting standpoint. In the commercial mortgage portfolio, fundings had a weighted-average loan to value of 61%, while in residential mortgage and home equity, the weighted-average loan to value was 65%, with 53% of home equity originations in a first lien position. At the end of the quarter, the allowance for loan and lease losses totaled $106.4 million. Accordingly, given net charge-offs of $3 million, a credit provision of $4.3 million was recorded. The ratio of the allowance to total loans and leases was 1.13% at the end of the quarter, down 2 basis points for the linked period and down 12 basis points year-over-year. The allowance reflects the continued strength of the Company's asset quality and the Hawaii economy over this period as well as the mix and quality in loan growth. The total reserve for unfunded commitments was $6.8 million at the end of the quarter, up $250,000 from the first quarter of 2017 and 2016. I'll now turn the call back to Peter.

Thanks Mary. As Mary mentioned, the Hawaii economy continues to perform well due in part to healthy labor market conditions and active construction pipeline in both private and public sectors, strong performance in Hawaii’s tourism industry and increased home prices. The median price was single-family home on Oahu, our primary market, increased 3.2% during the first half of 2017 and the median price of condominium increased 3.6% compared with the same period last year. The volume of single-family home sales on Oahu increased 4.4%, while condo sales increased 6%. Months of inventory declined to a low at 2.7 months for single-family home and 2.8 months for condominium. The median number of days on market during the first half of 2017 was 16 days for single-family home or condominium. During the month of June, the median number of days on the market declined even further to 12 days for single-family home and 13 days for a condominium. The visitor industry also remain strong and visitors spending increasing 9.8% during the first five months of this year and visitor arrivals up 4.2% over that same period. Spending by visitors is increasing due to the growth in arrivals as well as higher daily spending. Year-to-date, all four of the ways largest visitor markets, which includes the U.S. West, the U.S. East, Japan and Canada are showing strong growth in spending compared with the first five months of last year. In addition, all four larger Hawaiian Islands are growth in visitor arrivals and spending in May compared to a year-ago. Thanks again for joining us today and now we’d be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Brett Rabatin with Piper Jaffray.

Hey. Good morning, everyone.

Hey, Brett.

Good morning.

I wanted to first ask about loan growth and just you know is continues to be better than we expected and in the past Peter you've – or maybe last quarter, you indicated maybe pulling back from some things just given the risk inherent in the system or what have you right in the cycle, but obviously strong growth continues. Can you talk maybe about just the pipeline and then just the growth that you're experiencing; it was obviously a lot in CRE and Resi one to four this quarter?

Yes. Sure. It was a surprisingly strong quarter for us and so I would notch this as probably being half correct on high single-digit loan growth, because the spot growth was 3%, on average though average growth was 2.2% for the quarter. So I think reality Brett somewhere in between there. If you look at the average growth on commercial, it was a little underpowered in the first quarter. We think that actually should pick-up a bit for the balance of the year, but other consumer meaning home equity and indirect and installment just continue to be very strong as well as residential mortgage, which had a good performance on the balance sheet and that's on top of selling about $100 million of production for the quarter. So yes, we're happy with the three points. Although, I think we're still thinking higher single-digit as we move forward here, and that’s really was reflected in the average numbers.

Okay. Fair enough. And then on the funding base, was just curious I saw the public funds was up linked quarter, can you talk maybe about – if that has an impact on your funding costs going forward in terms of increases or how you're thinking about your deposit betas and your cost of funds?

Yes. We saw an opportunity in the second quarter to increase our market share in the public deposit side. It is a bit more expensive, but we don't expect that to have a material impact on the rest of our deposit base.

Okay.

I would add that we are seeing some recalibration on the commercial side of our deposit bases. I think as I mentioned in a couple calls ago has lot of these large construction condominium projects burn off. Fortunately, we are the recipient of a lot of those funds held in Escrow. And so we saw almost a couple hundred million dollars of volume disappear this past quarter commercial deposits, and it could be a bit more of that, but not a lot more, I don't think. But that's going to create kind of a restepping from a commercial deposit base. The consumer base continues to perform really strong. But I do think we've got a bit of a reset here on the commercial side.

Okay, great. Appreciate the color.

Yes.

Thank you. And our next question comes from the line of Jackie Bohlen with KBW.

Hi. Good morning, everyone.

Hey, Jackie.

Peter, touching on the deposits again, and the movements that you had in between commercial and just looking at for some of the public deposits you were able to gather. Is that what's driving the shift within the individual accounts, meaning that we saw CDs pick-up and savings and money markets moved down during the quarter?

Well, I think that what we're seeing – overall, we're seeing pretty good performance across most deposit categories. I would say that when you look at the market share position that we have on the time side, we think that we have some opportunity just to kind of get to a natural fair share position there. So yes, I think you're correct from that standpoint. In terms of where the funds are coming from, the second quarter is a little tough to use analyzing on a linked basis, because of the run down that we experienced in both commercial and consumer deposits in Q2 because of tax payments. But so I tend to – for Q2 in particular, I tend to look at a year-on-year delta basis. And there when you look at the year-on-year, still 76% of our deposit growth came from commercial and consumer deposits, where 24% coming from the government side or the institutional side. So I think we're still looking for balanced growth along all categories and all customer segments. It just happens I think in Q2, as Dean mentioned, we had some good opportunity late in the quarter to pick-up on the institutional side and we are seeing good success with our time initiatives.

Okay. Thank you. That's very helpful.

Yes.

And Dean, what was the timing of the securities purchase in the quarter?

It was spread out through the quarter. There wasn't any real peaks or valleys, so pretty even across the quarter.

Okay. And are you still looking at deploying some excess liquidity that way?

It will be dependent on loan growth versus the deposit growth. The funding from the deposits will mainly come from – I mean the loans will come mainly from the deposits, but to the extent that it exceeds the deposit growth. We will pull it down from the investments. But at this point, I would expect it to be flat to maybe even flattish I guess is the way I would characterize it.

Okay, great. Thank you. I’ll step back now.

Thank you. And our next question comes from the line of Casey Haire with Jeffries.

Thanks. Good morning, guys. Question on the expense front. Dean, I think you said you expect expenses up 2% on the year. They're pretty much flat year-to-date, so and by my math that implies a pretty steep ramp in the third quarter up to little above $92 million. Is that correct and is some of these branch square foot optimization or these – or is the cost of them back loaded towards the back half of the year?

Yes. Casey, it’s Peter. We're probably in the early stages of picking up the savings on the branch rationalization or the branch modernizations. We like to think about it. So we have three new branches up and running, starting I guess back in last November. And by the end of the year or early into next year, we'll have an additional three branches. And these are basically cutting our square footage in half from a total square footage standpoint, but keeping customer facing square footage at about 80% of the prior locations. So yes, we're definitely seeing some pick-up, some upside from an expense standpoint there. Last year, we were chatting about kind of a 3% view on expense growth. I think 2% is probably the new 3%. And the reason why it's trending up in part is because if you look at the components of our expenses, one thing that stands out is software costs and data charges are moving up, and part of that are the investment initiatives that we're putting in place to make ourselves a little more supportive of the self-service digital environment for our customer base. So yes, you're right, expenses have been well controlled, but we do have some investments coming through the pipeline. I think in the next couple quarters that may have the opportunity to kick the expense line a bit.

Okay, great. And just any updated thoughts on the NIM outlook? Dean, you mentioned that the reinvestment was positive 22 basis points, how was that shaping up in the third quarter in the early going here?

I think the NIM will have some marginal increases mainly due to the mix change as we increase our loan balances. And in addition, the shorter duration type assets, our floating rate securities and loans will benefit from the increases at Fed funds. So based on those two things, we do expect some modest increases in the NIM. We'll see more material increases if the longer-term rates start increasing and the curve starts to steep in.

Okay, great. And just last one for me. The construction book, I think you guys have talked previously about that one and some of the projects finish up and pay down. Are you expecting that to be about $150 million by year-end? Is that still the expectation?

Yes. I think will definitely bridge 200 and 150 is probably a reasonable goal. But the good news is projects were invested in are paying off on time and they have all been successful projects for us.

Great. Thank you.

Take care, Casey.

Thank you. And our next question comes from the line of Jeff Rulis with D. A. Davidson.

Thanks. Good morning.

Hi, Jeff.

Peter, you mentioned, I guess outline the economy; I guess one of the challenges that is the tight labor pool. If you could just comment on sort of the talent acquisition retention and the challenges out there that that kind of expense related, I guess could you see a material impact on your expense outlook on that front?

I think so. So we're down to 2.7% unemployment here in the Islands. And that number has been stable for a bit now. So that clearly creates challenges for us. I think we've been – the branch has been able to attract talent pretty nicely, but there are definitely some trouble spots that are not unique to Bank of Hawaii. So technology acquisition is difficult and expensive, compliance and risk talent is expensive and difficult to get our hands on. Unfortunately, we are in reasonable shape in both of those areas. But you're right that those have the ability to require a higher expense line and salaries and potentially to some one-time pops and retention bonuses and the like.

Gotcha. And then maybe one for Mary, just maybe the net charge-off rate has been very similar to the last couple quarters. I guess any commentary on your expectations of that level on a net basis going forward?

I think given the quality of our portfolio and the strength of origination that it should be fairly consistent.

Okay, great. Thank you.

Thank you. And our next question comes from the line of Aaron Deer with Sandler O'Neill.

Hey. Good morning, everyone.

Hi, Aaron.

I wanted to follow-up Dean on your commentary regarding the margin. I noted that the average Fed fund balances were down a couple hundred million from quarter-to-quarter yet and a period it continued to trend higher. Just given it seems like generally positive, margin trends generally, does that kind of – will you have a rebuild of some of your cash on the balance sheet that's going to be a little bit of a headwind at least for [indiscernible] end of the third quarter on the margin?

What happens at the end of the quarter, we do get a little bit – I don't want to call it a surge, but we do get increase in deposits, which then translates at a period end basis in higher cash level. Having said that, we are continuing to reinvest at the moment and again, it will just depends on the loan and deposit growth throughout the quarter whether we adjust the cash balances or not.

Okay, very good. And then Mary on the – just curious on the auto book, there's kind of increasing concern here in the – with some of the main loan lenders anyway that if some of the auto paper's going to little over extended into sub-prime. What kind of trends are you seeing in your auto book and if there are any concerns that you have on that portfolio going forward?

Well, we've always historically originated very modest levels of sub-prime paper. We look to ensure that our customers can actually repay their loans. And so it's averaged about 2% on that origination front. As we talked about last quarter, we did get a little overextended in Guam where we see a loss rate that's about 70 basis points higher than Hawaii. And we also had some challenges and our mix with used. We've made adjustments over the past year, so we think we've curtailed that, but we will see some of that flow through over the next few quarters.

Okay. That's helpful. Thank you. And then just one last question, on the – C&I looked kind of flattish in the quarter, just curious where line you suggested and first getting traction in and bringing on some new commitments there?

Yes, Aaron, it’s Peter. Pretty stable, it was a flat quarter for C&I. I know some of the C&I were up 5%, 6% on year-over-year basis, but I think and I think I've said this before. I think we're pretty deep in the cycle to see a lot of C&I growth. We don't carry share national credit portfolio, so most of our C&I is really acquisition debt, modestly leveraged acquisition debt for end market transactions. And I think just given where we are in the cycle that that trends probably gone on for the here and now. So what I would anticipate is the C&I buckets probably going to be flattish to up modestly from here and now.

All right, good stuff. Thanks for taking my question.

Yes. Take care.

Thank you. [Operator Instructions] Our next question comes from the line of Laurie Hunsicker with Compass Point. Please go ahead.

Yes. Hi, good morning.

Hi, Laurie.

Just wondered if I could follow-up specifically as it pertains to loans on the commercial real estate side, linked quarter you were up 21%. How should that trend going forward given your overall guide? And I just wanted to follow, so you could refresh on your overall guide I think last quarter as it pertained to the commercial portfolio loan you said we’re looking for low single-digit growth there as you're thinking that's going to be a bit higher?

Yes. Actually, I think our guidance on loan growth has been high single-digit overall and probably consumer leading that increase. So yes, I mean commercial we're thinking mid-to-high single-digit. I think the way to think about commercial mortgage is really is probably the leader of the pack for our commercial loan book. It's true. There's probably a bit of a curtailment in deal flow at this point in the cycle, but we're still getting good growth in commercial mortgages and that's coming predominantly through refinance opportunities. So I think the last report I saw about 26% of our production was from new deals if you will and the balance of that was really coming from Refi. So to the extent that we can continue to be successful in the local marketplace and real estate, I think the commercial mortgage had a chance to continue to perform pretty well, but maybe not at the same level but it did this quarter. This quarter is pretty exceptional number for us.

Okay. And so just to be clear though, that it's a raise from where you were last quarter in terms of last quarter, I'm just talking about the commercial portfolio only, your low to single-digit growth is now mid-to-high single-digit that’s…?

Yes. I think that we are always kind of mid-to-high-ish on the commercial side.

Okay. And then within your commercial real estate book, is any of that purchased this quarter?

Purchased activity – yes 20% of the activity.

Well, I don’t understand what…

Well, purchased – our customer is purchasing, we didn't buy any loans.

That’s right. Yes, so it’s all originated. Okay, good. And then also on auto, just wanted to follow-up to Aaron's question, your overall FICO and your $484 million, what is that?

Our overall – I'm sorry.

Your FICO score on you auto book, what is currently?

I think the weighted FICO rate now is 692.

692. Okay and how much of that is below 660?

I don't have that number handy. I could get appear later Laurie.

Okay. That's great. And then just one other number [too] that I wanted, your assets – your AUM?

$9 billion.

$9 billion, okay.

Yes.

Okay. And then, where generally do you see that going? Is there going to be an emphasis?

Yes, I mean that's an area that we've historically had a fair amount of ambition to build-out whether through our broker dealer or through our trust company. But I have to say that $9 billion has been pretty consistent number for an awful long time. So I think we had aspirations to build that, but that's been one of the elusive spots for us from a business opportunity standpoint Laurie.

Okay. Great. And then just last question, going back to expenses. Your other line that was $15.7 million this quarter about $1 million above the March quarter run rate, is there anything non-recurring in that?

Well, I wouldn’t characterize this non-recurring, but we did recognize the increase in our reserve for unfunded commitments in that line, so that 250,000 is included in there.

Okay. Okay, great. Thanks. I’ll leave it there.

Thank you. And our next question comes from the line of Matthew Keating with Barclays.

Yes. Thank you, good morning. Dean, maybe if you could follow-up on the question from earlier on deposit betas, I know you are talking about volume to get more aggressive on the public deposit side this quarter. But just thinking about longer-term, I think Bank of Hawaii exhibited around 20% to 30% deposit beta during the last interest rate sort of tightening cycle when the industry is closer to 50%. Do you think that's still a reasonable expectation or as anything changed in the market where you think deposit betas might be higher this time around? Thanks.

Our current expectation is that it will still be about the 20%, 25% beta over the longer-term. The CD book is more opportunistic for us, so the core deposits we still continue to expect that same type of beta over the term.

Okay. And at this point no real pressure from retail depositors for higher rates at this point?

Not really.

All right. Okay. And then I guess maybe if you could comment to on whether your recent conclusions about selling Visa shares in the first quarter of next year. In the last quarter, you mentioned you're still contemplating that whether you want to move forward on that front? Thanks.

Yes. At this point we’re considering holding the remaining shares that we have. There is some risk associated with the conversion ratio, still to be determined when that date actually is, so we're holding back on the remaining amounts.

Okay. Great. All my other questions have been asked already. So thank you.

Okay, Matt. End of Q&A

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Bank of Hawaii management for any closing comments.

Thank you everyone for joining us today and for your continued interest in Bank of Hawaii. As always, feel free to contact me if you have any additional questions or need further clarification on any other topics discussed today. Thanks everyone and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.