Bank of Hawaii Corporation's (BOH) CEO Peter Ho on Q2 2016 Results - Earnings Call Transcript

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Bank of Hawaii Corporation (NYSE:BOH) Q2 2016 Earnings Conference Call July 25, 2016 2:00 PM ET

Executives

Cindy Wyrick - EVP, Secretary, IR

Peter Ho - Chairman, President & CEO

Kent Lucien - Vice Chairman & CFO

Mary Sellers - Vice Chairman & Chief Risk Officer

Analysts

Jeff Rulis - D.A. Davidson

Ken Zerbe - Morgan Stanley

Brett Rabatin - Piper Jaffray

Joe Morford - RBC

Ebrahim Poonawala - Bank of America Merrill Lynch

Jacque Chimera - KBW

Casey Haire - Jefferies

Aaron Deer - Sandler O'Neill

John Moran - Macquarie Group

Matthew Keating - Barclays

Operator

Good day, ladies and gentlemen, and welcome to the Bank of Hawaii Corporation Second Quarter 2016 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 today's conference is being recorded.

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

Cindy Wyrick

Thank you, Kevin. Good morning and good afternoon, everyone. Thank you for joining us today. Joining me today is Chairman, President and CEO, Peter Ho; Vice Chairman and Chief Financial Officer, Kent Lucien; and Vice Chairman and Chief Risk Officer, Mary Sellers. The comments today will refer to the financial information that was included in our earnings announcement this morning.

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.

Peter Ho

Thanks, Cindy. Aloha, good morning, everyone, and thank you for joining us today. The second quarter of 2016 was another solid quarter for Bank of Hawaii. We had good financial performance, solid asset quality, and strong balance sheet growth.

Our loans grew to $8.3 billion at the end of the quarter, up 3.3% from the previous quarter, with commercial loans up 1.5%, residential mortgages up 3.6%, and other consumer loans up 6%. Compared with the second quarter last year, total loans increased 12.2%.

Total deposits grew 1.1% from the previous quarter and were up 4.2% compared to the second quarter last year. ROE for the quarter was 15.6%. NPAs - NPAs to average loans and leases and net charge-offs to average loans and leases improved from a year ago.

Also during the quarter, we continued to make good progress on our many strategic initiatives. We completed the installation of 116 easy deposit ATM machines during the quarter and consumer deposit transactions from these new ATMs and our mobile app is now about 30% of total consumer deposit transactions.

The declining number of consumer deposit transactions in our branches are allowing us to service our customers more conveniently within our branches and within our platform.

I'll now ask Kent to provide you with some additional details on our financial performance for this quarter and then Mary will comment on asset quality. Kent?

Kent Lucien

Thank you, Peter. Net income for the second quarter was $44.2 million or $1.03 per share compared to $50.2 million, or $1.16 per share in the first quarter, and $41.2 million or $0.95 per share in the second quarter last year.

The higher first-quarter income was due mainly to the sale of Visa Class B shares in that period. Our return on assets in the quarter was 1.14%, return on equity was 15.56%, and our efficiency ratio was 57.35%.

Our net interest margin in the second quarter was 2.85%, down 1 basis point from the first quarter and up 4 basis points from the same quarter last year. Net interest income in the second quarter of 2016 included interest recoveries of $1 million, which had a positive impact of approximately 3 basis points on the margin.

Net interest income in the first quarter of 2016 included interest recoveries of $1.3 million, which had a positive impact of approximately 4 basis points on the margin. Adjusted for these recoveries the margin remained stable at 2.82%.

Premium amortization was $11.5 million in the second quarter, down from $11.7 million in the previous quarter. The investment portfolio reinvestment differential was a negative 17 basis points this quarter.

We purchased [153 million] primarily fixed rate agency mortgage-backed securities during the quarter. As Mary will discuss later, we recorded a credit provision of $1 million this quarter.

Non-interest income in the second quarter included a service fee of $1.2 million resulting from the sale of trust real estate property. Mortgage Banking income in the second quarter of 2016 increased compared with the comparable prior periods, as a result of higher loan production and our decision to increase sales of conforming loans during the quarter.

The increased gains from the loan sales were partially offset by a $2.6 million valuation impairment to our mortgage servicing rights, which was primarily due to the recent decline in interest rates.

Non-interest income in the first quarter of 2016 included a net gain of $11.2 million from the sale of 100,000 Visa Class B shares and a $1.9 million net gain on the sale of previously leased assets.

Non-interest expense totaled $86.1 million in the second quarter of 2016 compared with $87.4 million in the first quarter and $83.6 million in the second quarter of 2015.

Results for the second quarter of 2016 included higher incentive compensation due to continued strong business growth, an increase of $1 million in group medical costs, and separation expenses of 400,000. Expenses during the second quarter were partially offset by a net gain of $1.3 million from the sale of real estate.

Results for the first quarter of 2016 included seasonal payroll-related expenses of approximately $2.5 million, an increase of 500,000 to the provision for unfunded commitments and separation expenses of 300,000.

Expenses during the first quarter were partially offset by a net gain of $1.5 million from the sale of real estate property on Guam. Non-interest expense in the second quarter of last year included 900,000 in separation expenses.

The effective income tax rate for the second quarter of 2016 was 29.77% compared with 32.01% in the previous quarter and 31.56% in the same quarter of last year. The lower effective tax rate during the second quarter was related to the release of $1.3 million in state tax reserves.

As Peter mentioned, we continued to see good growth in our loan portfolio during the second quarter. As a result of loan growth continuing to outpace deposit growth, our investment portfolio decreased to $6.1 billion.

The average duration of the AFS portfolio was 2.1 years and the duration for the total securities portfolio was 2.6 years at the end of the second quarter.

Deposit growth also remained steady with consumer deposits up about 1.1% from the previous quarter and up 6% compared to last year. Commercial deposits also increased from the previous quarter and were up 3% compared to last year.

Our shareholders equity increased to $1.16 billion at the end of the second quarter. We paid out $20.7 million or 46% of net income in dividends during the quarter and repurchased 213,000 shares of common stock, or $14.6 million.

At the end of the second quarter, our Tier 1 capital ratio was 13.66% and our Tier 1 leverage ratio was 7.29%. And finally, our Board declared a dividend of $0.48 per share for the third quarter of 2016.

Now I'll turn the call over to Mary.

Mary Sellers

Thank you, Kent. Net charge-offs for the second quarter totaled $1.7 million or 0.09% annualized of total average loans and leases outstanding. Comparatively, in the first quarter of 2016, we recorded net recoveries of previously charged off loans and leases of $3.8 million, primarily due to the full recovery of a commercial loan previously charged off in 2013. While in the second quarter of 2015, net charge-offs totaled $1.5 million or 0.08% annualized of total average loans and leases outstanding.

Non-performing assets were $16.3 million at the end of the second quarter, down $5.7 million from the first quarter and down $13.2 million from the second quarter of 2015, primarily due to successful pay offs and restructured loans returned to accrual.

At the end of the second quarter loans past-due 90 days or more and still accruing interest were $8.8 million, up 812,000 for the linked period and down 902,000 year-over-year.

Restructured loans not included in non-accrual loans, or loans past-due 90 days or more, were $52.2 million at the end of the second quarter, up $1.5 million from the first quarter of '16 and up $3.8 million from the second quarter of 2015.

Residential mortgage loans modified to assist customers accounted for $20.5 million upped the total at the end of the quarter. Consistent with the continued strength in the Hawaiian economy and our asset quality metrics, the allowance for loan and lease losses was reduced by 750,000 to $103.9 million.

Given net charge-offs of $1.7 million a $1 million provision was recorded. The allowance represents 1.25% of total outstanding loans and leases at June 30, 2016, a decrease of 5 basis points from the previous quarter. The reserve unfunded commitments remained unchanged at $6.6 million.

I'll now turn the call to Peter.

Peter Ho

Great. Thanks, Mary. The Hawaii economy continued to perform well during the second quarter. Our statewide seasonally adjusted unemployment rate was 3.3% in June as compared to 4.9% nationally.

The visitor industry remains healthy with visitor spending for the first five months of 2016 up 1% and visitor days up 1.9% compared to the same period in 2016. Increased visitors from the mainland US, Japan and other international markets offset the decline in visitors from Canada.

Increased spending from the mainland US and all other international markets continue to offset the decline in spending from the visitors - from our visitors from Japan and Canada.

Construction continues to be robust in both private and public sectors and our real estate market also remains strong. Home prices continue to reach new record highs on Oahu, our primary market.

The median price for a single-family home on Oahu increased 6.1% during the first half of 2016 and the median price of a condominium increased 7.4% compared to the same period in 2015.

The volume of single-family home sales on Oahu in the first six months of 2016 increased 7.8% and condominium sales increased 10.7%. Months inventory were 3 months for single-family homes and 3.1 months for condominiums. Median days on market was 14 days for single-family homes and 20 days for condominiums.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jeff Rulis of D.A. Davidson.

Jeff Rulis

Good morning.

Peter Ho

Morning, Jeff.

Jeff Rulis

Peter, just to follow up on, you said that construction activity is pretty robust and sounds like months of supply pretty low. But any signs out there of weakness or slow down in the drivers there?

Peter Ho

Well, I think we're seeing a transition in construction. So really the cycle started with the ultra luxury vertical segment, residential towers. That is basically phasing out at this point. There is still a number of towers coming up, but we're clearly kind of beyond mid-cycle in that phase.

We still have a good amount of more affordable or more market priced residential high-rise coming online. But for the most part, I think vertical is kind of in the stable phase. The rail continues to push forward; retail development continues to move forward, although that segment is also maturing.

So, I think what we're going to see in the transition from vertical to a lot of deferred type projects that have frankly been pushed aside as a result of all the activity in the marketplace. And now I guess the next couple of years we should start to see a fair amount of single-family project development out towards the western side of Oahu.

Jeff Rulis

Got it. And then on the ATM rollout detail, could you remind me if - is there any cost drag for that. Is it largely prepaid just sort of additional costs potentially there or maybe lowering going forward?

Peter Ho

Well, there is a cost. When we talk about - when Kent has talked about our expense rate being at 3% and about a third of that being investment type of expenses, the additional depreciated cost of our new fleet is part of what goes into that number.

So, yes, there is a cost; it is not necessarily insignificant. But we are getting great uptake in these machines. And what its doing is allowing our branch staff to spend a lot more time consulting and servicing customers rather than just transacting with customers.

So we think there is a great customer benefit there. Hopefully, there is going to be a financial benefit. But you are right, there is an expense drag on the front end.

Jeff Rulis

That 30% of transactions is mobile and ATMs. Is there a target that you are shooting for or do you prefer to have some foot traffic?

Peter Ho

Well, really what we are trying to shoot for is effectively a ubiquitous delivery platform. So, our goal is to enable our customers to bank with us in whichever fashion they deem desirable.

And clearly with the way that the world is moving from a digital and mobile standpoint, more and more people are looking for automation. So that’s really what we're looking to provide to them. The people that want to continue to come into our branches are great customers and people that we want to see daily or weekly or monthly as well.

Jeff Rulis

Got it. All right. One quick last one, I guess how is the weather, the storm that’s moving through?

Peter Ho

It passed through, scared the dog last night, but that’s about it.

Jeff Rulis

Got you. All right, thank you.

Operator

The next question comes from Ken Zerbe with Morgan Stanley.

Ken Zerbe

Thanks. Question on margin, could you just talk about how we should think about net interest margin compression from here or even if can keep it stable but excluding the interest recoveries?

Kent Lucien

Well, Ken, we were at 282 net of recoveries in the quarter, which was spot on what we had earned in the first quarter and just a little bit higher than last year's second quarter. So I think…

Ken Zerbe

And I guess…

Kent Lucien

Yes, Ken?

Ken Zerbe

No, sorry, I guess I was just thinking like going on a go forward basis given what we're seeing with yields having come down so much?

Kent Lucien

Yes. So rates were low even in the second quarter. So what I am trying to say is I think we have a fairly good shot at maintaining our margins, which is really the effect of the loan growth substituting for investment securities.

So I mean it depends on what the rates are at the time. But in the market that we see right now, I think a fairly stable margin is still in order.

Ken Zerbe

Okay. And then just another question. In terms of C&I growth, I know you guys have talked probably several quarters that C&I growth could or should start to slow, that the C&I cycle is sort of in the later phases. But still you do fantastic every quarter in terms of growing loans.

Is there any reason to assume that loan growth should slow from here or - I mean, I heard what you said on the construction side, but within C&I in particular? Thanks.

Peter Ho

Yes. Well, commercial in general has slowed to I guess the year-on-year change spot was 8.6% for all commercial segments and 8.7% on average. C&I actually was - on an end of period basis was about flat.

And we would you know, I think there may be a little growth left in that segment. But I think that stable is probably the watchword for that particular asset class moving forward. We still think there is room in commercial mortgage. We still think there is likely room in construction. And leasing you know is a portfolio that we're slowly diminishing.

Ken Zerbe

Okay. That helps. And then just last question, in terms of Mortgage Banking, if we - I guess if we back out the MSR valuation charge, it would probably be somewhere in that $6 million $7 million range.

Was this a particularly strong origination quarter such that going forward you won't expect it to be as strong or is there something more fundamental that might keep Mortgage Banking a little higher than where it has been?

Peter Ho

Well, it was a stronger quarter both on a linked and year-on-year basis. But we see a lot of activity in the housing market as we described in our earlier comments. And there is - with rates being what they are, there is some refinance opportunity.

So I am not sure we are going to be able to match Q2, which was a great quarter for the team. But we think that the market is going to give us opportunity to continue to develop mortgage volumes.

Ken Zerbe

Perfect. Thank you very much.

Operator

Our next question comes from Brett Rabatin with Piper Jaffray.

Brett Rabatin

Hi, good morning.

Peter Ho

Hey, Brett.

Kent Lucien

Hey, Brett.

Brett Rabatin

Just wanted to go back to sort of the gives and takes and the margin thought process. As you are looking at the loan growth prospects over the back half of the year are you expecting construction to be a little bit more of the growth that to help the loan yield or maybe you can just talk about the back half loan portfolio in terms of if you can maintain that.

And I assume a part of the margin stability outlook is some mix shift change over the next two quarters?

Peter Ho

Yes, I think that’s right. So I think that there is some room left in construction just because of the lag nature of these projects. So I think we're likely to see growth in that portfolio, although remember that’s a pretty small portfolio for us.

Resi mortgage I think is going to be stable and in some ways really a bit dependent on what we decide to do from a balance sheet standpoint, as well as what we decide to do from a for-sale standpoint.

But where we're seeing the most growth right now is in other consumer and those portfolios carry with them pretty solid margins.

Brett Rabatin

Okay. Great, that’s good color. And the other thing I guess I was just curious about was thinking about expenses and the initiatives and you kind of had a little bit more expense run rate thought process higher, but obviously 2Q was not too bad.

Going back to the expense growth question, can what you are doing technology wise offset the growth that you are having in other fees or how do we think about some of those various components?

Kent Lucien

Yes, Brett, I think that we've guided at around 3% annual increase in expenses. And I think that’s still appropriate. Just to make it easy we've articulated that it’s really three elements, general inflation, initiatives and then business growth.

Second goes - ways of thinking about it are still appropriate. We did have a little up-tick in Q2 mainly in our medical expenses. But that tends to even out over the course of a year. So bottom line I think 3% is the way to think about it.

Brett Rabatin

Okay, still 3%. All right. Thanks for all the color.

Kent Lucien

Yes.

Operator

The next question comes from Joe Morford with RBC.

Joe Morford

Thanks. Good morning or afternoon. Maybe I missed it, but did you comment on what the reinvestment rates were like in the investment portfolio currently?

Kent Lucien

Yes, Joe, I mentioned that the differential was a minus 17 basis points and then what ran off in the second quarter was at a yield of 2.03. And what we bought was at 1.86%. So that’s the difference.

Joe Morford

Okay. And then I guess following up on the other question, what about yields on the new loan production relative to the existing book, how is that differential?

Kent Lucien

So, in Q2 when you averaged everything the differential was 6 basis points lower in Q2 versus Q1. But because of the higher volume of loans versus securities that netted down to only 1 basis point of difference on the earning assets Q2 versus Q1.

It’s a pretty typical performance for us and could be what happens going forward. Hard to say, but could be.

Joe Morford

Fair enough. And then I guess the other question was just non-performing assets have improved significantly the last couple quarters. What's driving that, is it just the final resolution of some issues that have been around for a while? And just are you actually seeing any new inflows at all right now?

Mary Sellers

Very modest inflows. It’s really just been resolutions on the book we had. And it’s been very successful because we have achieved a number of payoffs and we've been able to restructure and return some of our customers to accrual.

Joe Morford

Yes. Now it’s been great. Okay, thanks so much.

Peter Ho

Good.

Operator

The next question comes from Ebrahim Poonawala with Bank of America Merrill Lynch.

Ebrahim Poonawala

Good morning, guys.

Peter Ho

Ebrahim, how are you?

Ebrahim Poonawala

Good. Just a question around obviously credit quality currently is very strong. I guess two questions on credit. One, are there more recoveries as you - I know it is hard to sort of call them out. But as you sort of look back are there more write-offs that can come back over the next few quarters, and if so how big is that volume right now?

And secondly, given your comments around commercial sort of outlook, is there a point in time where results flatten out and we actually starts building reserves?

Mary Sellers

So first, on the recovery side, I think you'll see just a continued pace of modest recoveries on the commercial side. The kind of large blocks [ph] have really come through. We didn't have that many large commercial charge-offs through the cycle to recover.

In terms of - I'm sorry, your second question?

Ebrahim Poonawala

Just in terms of the overall level of results. When - do we actually need credit metrics to deteriorate before results flatten out and you actually start building results?

Mary Sellers

Well, actually no, we do look at the portfolio every quarter. We look at the composition, we look at the metrics and we look at the dynamics within the economy. So, at some point we would obviously begin to build reserves.

Ebrahim Poonawala

Understood. And then just separately to clarify your comments on expenses. I just wanted to make sure we had our comp right from 2015. Are we saying 3% expense growth off of $342 million in 2015?

Kent Lucien

We're talking about adjusted expenses, so taking out any one-time gains from the equation, so a normalized change is what I am referring to.

Ebrahim Poonawala

Helpful. And if I can ask one last question to Peter on commercial loan growth outlook, I guess in spite of your comments seem to be driven by given where we are in the cycle.

Is there a point where commercial growth picks up six or nine months down the road or for this cycle do you think you are done and you might actually have a downturn is what it takes before things pick back up?

Peter Ho

I am not sure I see a downturn. We were running double-digits in commercial loan growth call it going back a year ago or so and we're now down to 8%. I think there is still growth in the market. We just think that that growth is going to be moderating at this point just given where we are timing wise in the cycle.

Ebrahim Poonawala

Thanks for taking my questions.

Peter Ho

Yes.

Operator

Our next question comes from Jacque Chimera with KBW.

Jacque Chimera

Hi. Good morning, everyone.

Peter Ho

Hi, Jacque.

Jacque Chimera

Kind of weighing the comments on Mortgage Banking, that 2Q may have been a peak quarter and then looking at the large increase in gain on - or in loans held for sale in this current quarter. Are you expecting that portfolio to perhaps remain elevated or is it something where those sales might be additive to third quarter?

Peter Ho

I think that the market is still constructive towards good, solid mortgage production. So as you know, Jacque, there are a whole lot of factors that go into our determining exactly what we end up doing with that production.

I would not be surprised to see both residential mortgage growth on our balance sheet, as well as pretty good fee income generated off of that production.

Jacque Chimera

Okay, fair. And then looking to the gain on sale that you had in the trust line item in the quarter, is that something that happens maybe on a smaller scale in any given quarter or are sales like that more one time in nature?

Peter Ho

Well, that’s pretty episodic, yes. We've got a good sized trust portfolio, and from time to time there are transactions that happen within that portfolio. And when that happens there are stated fees involved and that’s what happened there. But there is really no way to determine if and when those opportunities come up.

Jacque Chimera

Okay. So outside of that would you expect trust income to be fairly steady?

Peter Ho

Yes.

Jacque Chimera

Okay. Thank you.

Operator

Our next question comes from Casey Haire with Jefferies.

Casey Haire

Thanks. Good morning, guys. Just a couple of clarification questions, first, Kent, on the NIM, the reinvestment rate. When you say down 17 Bps are you saying that new money is coming on at 199, which would be 17 Bps below the existing securities yield or is that the roll-off yield? Just wanted to clarify that?

Kent Lucien

Yes, it’s the roll off. And so what rolled off in Q2 was at a 2.03% yield. And what we put on was at 1.86% and that’s the differential that I am referring to, that 17 basis points.

Casey Haire

Okay. And is that - and there has been no change in the investment strategy, you guys are still steady as she goes?

Kent Lucien

Yes, it’s steady as she goes. There can be differences between quarters. But over a little bit longer timeframe it’s the same strategy.

Casey Haire

Okay. And premium amortization I believe, if I heard you correctly, it was down sequentially and typically works on a lag for you guys. I was just wondering if the stable NIM outlook, does that assume some headwind from premium amortization going forward?

Kent Lucien

Its down a little bit, about 200,000, part of that is the size of the portfolio is just getting smaller. But there can be a variation between periods depending on refinance activity and in that sense you are correct, there can be a lag as to when market conditions change and when we see pay offs that trigger potentially higher levels of amortization.

Casey Haire

Okay. Just last one for me on switching to Mortgage Banking. The breakdown between servicing and then the gain on sale, I think historically it’s been - the servicing has been $2 million.

What's the expectation post the adjustment for that line to - for the servicing to be – what's the run rate there I guess going forward?

Kent Lucien

It should be about the same at about $2 million.

Casey Haire

Okay. Thank you.

Kent Lucien

Yes.

Operator

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

Aaron Deer

Hey, good morning, everyone.

Peter Ho

Hey, Aaron.

Aaron Deer

I think most of my questions have been answered. I just - a few little accounting items. One is of the loan sales in the quarter what was the total volume sold?

Kent Lucien

It was approximately $80 million.

Aaron Deer

Okay. So I guess looking at the volume that made it to held for sale at period end maybe we see a similar volume of sales in the third quarter?

Kent Lucien

Not necessarily. I mean, it’s held for sale because we've committed to sell it. It hasn't yet closed necessarily, and it’s kind of a two-step process.

Aaron Deer

Okay. And then just to get a good sense of - is the tax rate for the full year, do you have kind of an idea what that is shooting at?

Kent Lucien

Not really. I mean I've given between 30% and 35% is a general guidance. We could be down a little bit just because we have had some of these reserves roll off, as we did in the second quarter. But on a go forward basis that guidance is still appropriate.

Aaron Deer

Okay. And the gain on the real estate sale, it looks like that was in the occupancy line, is that correct?

Kent Lucien

Yes.

Aaron Deer

Okay, very good. Thanks for taking my questions.

Kent Lucien

You're welcome.

Operator

Our next question comes from John Moran with Macquarie Group.

John Moran

Hey, guys. How is it going?

Peter Ho

Good.

John Moran

I am sorry if I missed it in the prepared remarks or from last quarter, but was there an MSR that you guys called out one way or another in 1Q?

Kent Lucien

No, there wasn't anything called out in 1Q. So, the charge that we took was strictly Q2.

John Moran

Okay, all right. And presumably the reason that you are calling it out is that it’s much larger than what it would run in any kind of given quarter then, right?

Kent Lucien

Well, interest rates dipped down right at the end of the period, and that affects prepaid speeds which in turn affects the valuation of the servicing rights. And so, that’s what happened here.

John Moran

Sure, got it. But normally it wouldn't be running anywhere near like $2.6 million?

Kent Lucien

No, no.

John Moran

Okay.

Kent Lucien

With the events in Europe and the vote, rates really came down right at the end of the period.

John Moran

Got you, got you. Okay, thanks. And then just maybe a follow-up on some of the initiatives. I know that you guys some spend around mobile and the ATM stuff, which is now it sounds like it is pretty much implemented.

I think there is still some footprint refresh things that are kind of going on. Maybe you could just remind us what the remaining initiatives are and kind of what the timeline looks like end of this year and then into '17 what kind of carries over?

Peter Ho

I think the best way to think about it is 40 potential projects. Really the idea is to refresh our entire branch footprint. And frankly a number of our branches are just tired looking. So what we want to do is, number one, improve the look and feel, and number, two just make them more modern and efficient branches and places where our customers would enjoy transacting and doing financial services.

So, it’s a pretty long list of stuff to do that frankly is going to roll out much longer than 2017. This is a long-term initiative. We pretty much have our docket full for the next couple of years.

And so kind of the activity that we talk about this year and last year is about the pace of activity that we're going to see for a while to come.

John Moran

I got you. Okay. Thank you very much for taking the question.

Peter Ho

Yes.

Operator

[Operator Instructions] Our next question comes from Matthew Keating with Barclays.

Matthew Keating

Thank you. Good morning, everyone. Peter, I had a bigger picture question rather on loan growth. Certainly it’s been very strong for the past couple of years now. But if you think back over the last 10 years, it's sort of grown at a compounded annual growth rate of about 2.5%. Since you joined the bank back in 1993 it’s even lower than that.

So what's changed in your view from a strategic perspective to be able to grow loans at such a faster clip? Because I think in the past the target has been loan growth, GDP growth plus 300 basis points or so.

And if you look at GDP growth forecast for Hawaii, real GDP growth is estimated to run in the 2.3%, 2.4% range. So what's allowed the strategy to grow loans at the pace that they have grown at? Thanks.

Peter Ho

Yes, a couple of things. So, if we go back to 1993, which, you are right, is when I joined the bank, we were a very different footprint at that time. In fact, we were about the same size then as we are today. I want to say we topped out at about $14 billion.

And our business was all over the place. So we were as far east as New York and as far west as Asia, Tokyo. We were in all of the major international money centers and then south into the South Pacific and the Western Pacific.

And so, what we've done strategically between then and now is really bring our focus back to predominantly Hawaii, as well as our Western Pacific markets, so that's Guam, Saipan and Palau, its about 10% of our book.

So that has had the effect of - if you kind of go to the midpoint of '93 at today kind of halved our size. We were at about $8 billion for a good amount of time. And then really what has happened is post recession and crisis we've accelerated both our deposits as well as our loans.

So I guess the way to think about it is there is a strategic shift in there today, we're a very different company than we were in 1993. And then kind of embedded in the early mid 2000 range is a cyclical shift. So recession downward and then recovery upward.

We lost about $1 billion in loan outstandings through the recession. So we pulled back pretty hard on the reins. Frankly I think a little harder than would have been optimal, but we did.

So the loan growth that we are seeing today is a combination of what the market is allowing us. And so the market, as you know, is very strong here in the islands. And actually the Western Pacific is very strong as well. And we're also, I think, in some way picking up market share that we had frankly lost during the downturn of the Great Recession.

Matthew Keating

That’s helpful. And I know you mentioned the residential mortgage book, you are going to kind of decide to see how much you want to portfolio versus sell going forward. If you look this quarter it is up to about 36% of the overall loan book. In the recent past it’s gone as high as 42%.

But could you remind me is there any ceiling you have in your term and how big you want that to grow as a percentage of the overall loan book? Thanks.

Peter Ho

Yes, we have a guideline, it is not a policy but it is a guideline. And that is what we want is a balanced loan portfolio. And the way that we would view balanced is something approximating 40% commercial, 40% residential and 20% other - other consumer lending, so indirect and home equity and the like.

And that’s about what we have. We've got a little - as you point out, we have got a little room on the residential mortgage portfolio. But in some ways that portfolio is dependent on growth in the other two segments of our lending categories.

Matthew Keating

Understood. That’s helpful. And of the $3 billion, call it, residential mortgage portfolio, how much of that is fixed versus adjustable rate loans? Thanks.

Mary Sellers

80% fixed.

Peter Ho

About 80% fixed.

Matthew Keating

Thanks very much.

Operator

I am not showing any further questions at this time. I would like to turn the call back over to Cindy.

Cindy Wyrick

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

Operator

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

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