Cindy Wyrick - IR Peter Ho - Chairman, President and CEO Dean Shigemura - Senior EVP and CFO Mary Sellers - Vice Chairman and CRO.

Brett Rabatin - Piper Jaffray & Co. Jeff Rulis - D. A. Davidson & Company Jacquelynne Bohlen - Keefe, Bruyette & Woods, Inc. Ken Zerbe - Morgan Stanley Ebrahim Poonawala - Bank of America Merrill Lynch Aaron Deer - Sandler O'Neill Partners, LP Laurie Hunsicker - Compass Point Research & Trading LLC.

Good day ladies and gentlemen and welcome to the Bank of Hawaii Corporation Third 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 introduce your host for today's conference Ms. Cindy Wyrick. Ma'am you may begin..

Thank you, Sandra. Good morning, good afternoon, everyone. Thank you for joining us today. And joining me this morning 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'll turn the call over to Peter Ho..

Thanks Cindy. Good morning or to our friends on the East Coast, good afternoon. Thanks for listening in. We really appreciate your interest in BOH. Q3 was yet another solid quarter for Bank of Hawaii. Fully diluted EPS grew to $1.08 per share for the quarter.

Loans, deposits, and total assets all grew in line with our expectations and now stand at record levels for the organization. Expenses were well controlled at $88.6 million. That's up 0.5% on a linked basis and 1.2% on a year-over-year basis. Our efficiency ratio improved to 55.8% in the third quarter as compared to 57.6% last year.

Credit remains a positive story. Net charge-offs remain well-controlled to 15 basis points on loans and non-performing assets fell from a year ago in the third quarter.

Now, let me turn the call over to Dean Shigemura, our CFO, who will give you some additional financial details and then following Dean's comments, Mary Sellers, our Chief Risk Officer will give you some highlights on our risk profile for the quarter.

Dean?.

Thank you, Peter. Net income for the third quarter was $45.9 million or $1.08 per share compared to $44.7 million or $1.05 per share in the second quarter and $43.5 million or $1.02 per share in the third quarter last year. Our return on assets during the third quarter was 1.07%, the return on equity was 14.89%, and our efficiency ratio was 55.82%.

Our net interest margin at third quarter was 2.92%, unchanged from the second quarter and up 12 basis points from the third quarter last year. Net interest income in the third quarter increased to $116.3 million, up from $112.3 million in the previous quarter and $103.9 million in the same quarter last year.

Included in the third quarter last year was an interest reversal of $800,000 which had a two basis point impact on the margin. Premium amortization was $10.1 million in the third quarter, down from $10.4 million in the previous quarter and $11.4 million in the same quarter last year.

We purchased a total of $527 million of securities during the quarter, which were primarily comprised of mortgage-backed securities, and the reinvestment differential was a positive 45 basis points. As Mary will discuss later, we recorded a credit provision of $4 million this quarter.

Non-interest income totaled $42.4 million in the third quarter of 2017 compared with $45.2 million in the previous quarter and $48.1 million in the same quarter last year.

The decline compared to the previous quarter was largely due to declines in mortgage banking income, seasonal tax service fees, and annuity insurance income and lower revenue from the customer derivative program.

Compared with the previous year, the decrease was largely due to lower gains on the sale of mortgages and lower revenue from the customer derivative program. Growth in non-interest income is continuing to be a challenge due to the downward trend in overdraft fees and our expectation for lower volumes of salable mortgages.

For the fourth quarter, we expect non-interest income to be about flat to the third quarter. Non-interest expense totaled $88.6 million in the third quarter of 2017 compared with $88.2 million in the previous quarter and $87.5 million in the same quarter last year.

For the full year of 2017, we expect non-interest expenses to be about 0.5% above our 2016 expenses adjusted for real estate sales of $3.7 million. The effective tax rate for the third quarter of 2017 was 30.62%, down from 31.37% in the previous quarter and up from 29.84% in the same quarter of last year.

The effective tax rate in the third quarter last year benefited from the release of federal and state tax reserves and increased energy tax credits. As Peter mentioned, we had good loan and deposit growth during the quarter. Our investment portfolio increased to $6.3 billion as strong deposit growth during the quarter exceeded loan growth.

The duration of the available sales portfolio was 2.21 years at the end of the quarter. The held-to-maturity duration was 3.53 years and the duration of the total portfolio was 3.05 years. Our shareholders' equity was $1.2 billion at the end of the third quarter, up slightly from the previous quarter and up from the same quarter last year.

At the end of the third quarter, our Tier 1 capital ratio was 13.27% and our Tier 1 leverage ratio was 7.24%. During the third quarter, we paid out $22.2 million or 48% of net income in dividends and repurchased 183,500 shares of common stock for a total of $14.8 million.

We repurchased an additional of 44,500 shares between October 2nd and October 20th at a total cost of $3.7 million. Our Board authorized an increase of $100 million in our share repurchase program resulting in a remaining authorization of $126.9 million at October 20, 2017.

And finally, our Board declared a dividend of $0.52 per share for the fourth quarter of 2017. Now, I'll turn the call over to Mary Sellers..

Thank you, Dean. Net charge-offs for the third quarter totaled $3.5 million or 0.15% annualized of total average loans and leases outstanding. Comparatively, in the second quarter of 2017, we reported net charge-offs of $3 million or 0.13% annualized, while in the third quarter of 2016, net charge-offs were $2.4 million or 0.11% annualized.

Non-performing assets were $17 million at the end of the third quarter, up $600,000 from the second quarter and down $1.6 million from the third quarter of 2016. At the end of the third quarter, loans past due 90 days or more and still accruing interest were $6.7 million, down $300,000 for the linked period and up $1 million year-over-year.

Restructured loans not included in non-accrual loans or loans past due 90 days or more were $55 million at the end of the third quarter compared with $53.2 million at the end of the second quarter and $52.1 million at the end of the third quarter of 2016.

Residential real estate loans modified to assist our customers accounted for $19.7 million, up the total at the end of the quarter. The third quarter was another very strong quarter from an underwriting standpoint.

In our commercial mortgage portfolio, fundings had a weighted average loan to value of 66%, while in residential mortgage and home equity, the weighted average loan to value was 67% and 66% respectively, with 56% of home equity originations in a first lien position.

At the end of the quarter, the allowance for the loan and lease losses totaled $106.9 million. Accordingly, given net charge-offs of $3.5 million, a credit provision of $4 million was recorded.

The ratio of the allowance to total loans and leases was 1.12 at the end of the quarter, down one basis point for the linked period, down eight 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 and quality in loan growth.

The total reserve unfunded commitments was $6.8 million at the end of the quarter, unchanged from the second quarter of 2017 and up $250,000 from the third quarter of 2016. I'll now turn the call back to Peter..

Great. Thanks Mary. The Hawaii economy continues to perform well due to healthy labor market conditions, an active construction pipeline, the continuation of the strong performance of our tourism industry, and increasing home prices.

The medium price of a single-family home on Oahu, our primary market, increased 3.4% during the first nine months of 2017 and the medium price for condominium increased 5.4% compared with the same period last year. The volume of single-family home sales on Oahu increased 5% and condominium sales increased 5.8%.

Months of inventory at September declined to a low of 2.4 months for single-family homes and 2.6 months for condominiums. The median number of days on market for the first nine months of 2017 was 16 days for single-family homes or condominiums.

During the month of September, the median number of days on market -- I'm sorry for condominiums is up to 19 days and the numbers on market for single-family home declined to 14 days. Tourism in Hawaii also remained strong with visitor spending increasing 8.5% during the first eight months of 2017 compared with the same period in 2016.

The growth in spending is a result of a 4.7% increase in visitor arrivals and an increase of 3.9% in average daily spending. The stronger -- strongest growth in visitor arrivals in spending so far this year has been from the U.S. East region and Japan. 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 with Piper Jaffray. Your line is now open..

Hey everyone, good morning..

Brett?.

Wanted to first just go over the expense guidance, making sure we're on the same numbers. You're talking about 0.5% of growth this year on a -- I think kind of a core basis.

Will that imply $91 million, if I'm looking at the numbers right, in 4Q? And would that include anything like charitable contribution or any thoughts on that growth from 3Q?.

No. I think your math is about right for the fourth quarter, but we do think that there's some opportunities to come in maybe under that. But also keep in mind that we do have some seasonal year end expenses that come through in the fourth quarter..

Okay. And then just wanted to talk about the -- kind of the balance sheet and you had a little more growth in CDs than I guess I would've expected and a little extra liquidity during the quarter. Just any thoughts on the forward margins as it relates to reducing liquidity.

Can that move higher from here? And then just the growth in the CDs, kind of any color around that?.

Yes. Sure. I'll handle the volume side, and then Dean; maybe you can touch on what that means to margins. CDs is an area where we see some opportunity for a couple of reasons. We're pretty underrepresented relative to our competitor set here in the islands.

So, time deposits are about 13% of our overall deposit base, which is -- call it almost half of our competitors. So, we think we have some market share opportunity there. We're getting reasonable pricing in that segment, particularly in the consumer side. And we're also using it somewhat as a defensive tool.

So, we think it's important to be able to provide our customers with some yield as we're in a now rising rate environment. And rather than giving that up on interest-bearing demand side or on the savings side, we try to segment that into the time side, but that's our strategy regarding time at this point.

Any comments on margin, Dean?.

Yes. So, the margin we expect some perhaps modest growth and that's going to be based on balance sheet growth, loans and deposits. We did deploy some of the cash towards the end of the quarter as rates began to rise. So, I would expect something similar in the fourth quarter if we continue to grow the deposit base in excess of the loan base.

So, the portfolio is just really a -- kind of an outlet for excess liquidity and if we see opportunities, we'll continue to grow that..

I'm sorry. So, you say grow the margin benefit from reduced liquidity, i.e. you're getting higher yields, obviously, 45 basis points higher in the quarter.

The margin, can it trend a little higher, in your view?.

Yes. It will be based mainly on the balance sheet growth..

Okay. Great. I appreciate all the color..

Yes, thanks Brett..

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

Thanks. Good morning..

Hi Jeff..

Just a question on the -- just a follow-up on the expense guidance. So, you had some severance in the quarter. Maybe you could talk about kind of related there, if more is expected.

But is that in your -- I guess in the expense guide on growth from the balance of this quarter?.

Well, I can talk about the severance piece. It's certainly a little bit higher than what we've seen in prior quarters at about $2 million. It relates to the earlier retirement of some executives. So, that's a part of it that will result in some cost savings down the path.

We also had some restructuring in the mid-management levels of our branch division, which also provide some upside to us from an expense standpoint. So, I think we can expect that we'll continue to see some level of activity in this space, but I think the $2 million mark was pretty much on the high end of what I would anticipate moving forward..

Okay. I guess jumping around line item wise. In the other non-interest income, that was down $1 million linked quarter. Is there any reason for that? And I guess that's included in your flattish guidance sequentially on fee income..

Yes. It is included in the flat guidance and some of the items there; our swap income was down in that category..

Okay. And maybe one last one, just the Visa sale update. I think last quarter, you kind of still said to be determined.

Is that still for Q1 of next year, still deliberating on that one?.

Yes, I think we may have made some progress on a deliberation on that one. I think we're going to hold off in Q1 on that sale simply because there is some liability on the conversion rate if -- as the Class B shares convert. And so we don't want to be in a position to sell off everything and then have somewhat of a hanging liability out there.

So, not likely to sell in the first quarter the remaining balance of our Visa at this point..

Got it. Thanks..

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

Hi, good morning everyone..

Hey Jackie..

Sorry to be the third person to touch on expenses, Peter. But I just wanted to see what had changed from last quarter's guidance when it was looking like expenses might be up 2% and now they're up just 0.5%..

I think we're seeing a very good performance on staffing levels across the organization.

I think the thing that I shouldn't say surprised me, but it's pleasant to see is we're seeing great correlation in our variable comp relative to somewhat softer levels of performance in both our broker/dealer as well as our mortgage operation, which were businesses that had seen some lightening of their volumes vis-à-vis last year.

And just overall, as you know, we've put a lot of investment and time and effort into just trying to become a more efficient operation and we're starting to see that pull through.

Facilities management expense, for instance, has been -- is down actually for the quarter and has been flat for a few quarters and so we would anticipate that performance just to remain on. So, we feel good about where expenses are. I think that this quarter is probably a reasonable quarter to benchmark off of Jeff's question around the severance.

That's going to come in and out, but I think on a run rate basis, Q3 is probably a pretty good one..

Okay.

And as you look into 2018, are we at a point where some of the -- what you put into place, the table, to reduce expenses is offsetting a lot of investment in the future for the bank?.

That's -- yes. I mean, I think as it stands today, the answer is yes, but the [Indiscernible] that I would insert here is we're always looking for great things to invest in. So, as we see opportunities to create positive value for our shareholders through investment in the near-term to benefit the long-term, we're going to continue to do that..

Okay, fair enough.

And then outside of what you had mentioned with the overdraft and with mortgage banking, are there any other fee line items where you could see pressure going forward? Or alternatively, are there any items that are primed for growth?.

Well, I think the other area that hurt us in the quarter was annuity sales and so that is really a byproduct of the fiduciary law, which is in a pretty murky space right now.

We've made the decision, Jackie, to be pretty conservative down that path and that's curtailed a number of sales and frankly, fees that we otherwise would would've enjoyed in other quarters. So, that's one that I would -- I'd be looking out for.

And then I guess the other comment I'd make is as our commercial business moderates out, as we discussed in past quarters, the overall level of customer derivative business probably is going to moderate along with that..

Okay. Thanks Peter. That's great color. I'll step back..

Okay..

Thank you. And our next question comes from the line of Ken Zerbe with Morgan Stanley. Your line is now open..

Great. I guess first question. Just in terms of the fee income, the guidance is going to be called roughly flat in fourth quarter. When we think out to 2018, just conceptually, is there anything that would lead to a meaningfully different number than if I just took $42 million times four, maybe a little bit of growth.

So, it's like $168 million for 2018? Is that roughly the kind of way you're thinking about it? Or is there anything that would drive it faster or slower than that? Thanks..

Yes, I think that's a good way to look at the expectations for next year..

Okay, perfect. And then in terms of NIM, obviously we had the June rate hike and I get the excess liquidity this quarter.

But when you think to the December rate hike, are you guys planning to change or do you think you may benefit actually a little more meaningfully from a possible December rate hike than you did in this current quarter?.

Well, in terms of the benefit from a December rate hike, that would fall pretty much into the first quarter of next year..

Of course..

Yes. So, we do expect some benefit out of that rate hike, though, if we get it..

Of course. Fingers crossed.

And then just last question, just in terms of the deposits, was there anything, especially on the commercial side, that was a little more transitory in nature that you might expect to see some of that or some of the public funds flow out next quarter? Or do you think they're pretty sticky at this point?.

Commercial was up smartly in the quarter. There were some chunky escrow deposits that stuck through quarter end. So yes, that's in play. And to be honest with you, Ken, I'm not exactly sure what projects those are, but those are somewhat transitory..

Got it, okay. So, those escrow may or may not stick around for the -- into this quarter. Okay..

Well, I'm pretty sure they will not because those are transactional, but what ends up happening oftentimes is transactions replace transactions..

Got it. Okay, all right. Thank you very much..

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

Good morning guys..

Hey Ebrahim..

Just -- I guess if you could talk about in terms of deposit pricing. Last quarter, Peter, you talked about seeing some movement on the commercial deposits side in terms of some pricing sensitivity, why consumer was holding up. Just want to see what the change has been in both those categories in terms of client conversations.

And are you thinking about making a wholesale change to your deposit products versus just working with promotions? Now, I would love any thoughts around that..

Yes, so I would characterize Q3 from a pricing standpoint, on liabilities and deposits in particular, about -- it felt a lot like the first couple of quarters of the year. So, no real changes there. I think we ended up at 26 basis points cost on deposit for the quarter.

That's up obviously from a year ago, but I think pretty much in line with what's happening to fed funds. So, we're actually quite pleased with the betas that we're seeing, at least in the early phases of the fed's tightening here. As far as changing out deposit products as compared to just tactically managing pricing, that's an interesting question.

And to me, we have most competitors in this market offering a free checking product. Having said that, Hawaii is bit of an outlier from a national perspective in that space.

But I certainly wouldn't want to introduce pricing into the marketplace unless there was a real compelling reason or a compelling benefit that we'd be giving to consumer on top of what we're already doing today..

Understood. So, I take it that you're not seeing any movement by competitors either in terms of freezing deposit pricing at least so far..

No, it's feeling reasonably steady..

Okay. Got it. And just moving to loan growth, Peter, if you can just break down in terms of commercial loan growth as running at about 3% year-to-date growth, if you can break it down into C&I income and CRE.

As we think through -- going into 2018, do you expect that to be kind of a low single-digit growth portfolio? Or is that anything that changes until some sort of a cycle turn happens?.

Yes. So, I think what's happening there, Ebrahim, is C&I has been flat for us for a couple of quarters, I wouldn't anticipate much change there. The CRE book, the commercial mortgage book, continues to be strong. We had 2% growth in the quarter and I think that's going to continue to be a source of strength for us.

But it's really the construction side that has turned from being constructive to somewhat dilutive to us. So, we were down 6.5% in the quarter. So, compare that against prior quarters when that number was very much a growth factor than the commercial portfolio.

So, I think your thought around, I'd call it, maybe a mid-single-digit portfolio on the commercial side is probably reasonable..

And C&I is weak because of competitive pressures or just overall business activity? You've seen some slowdown there and you don't expect that picking up?.

Yes, I think it's the latter. Our C&I portfolio is a little unique in that we're purely in-market. We do have some shared national credits, but those are all basically to cash management relationships of the company. But we're really -- we've not been in the cycle -- in the business of picking paper off the desk.

And the local market, I think, from a cycle standpoint is pretty stable at this point for that category..

Got it. Thanks for taking my questions..

Yes..

Thank you. And our next question comes from Aaron Deer with Sandler O'Neill. Your line is now open..

Hey good morning everyone..

Hey Aaron..

Peter, switching to the other side of the loan book on the consumer side. You guys have had some good traction there pretty much across the Board.

Can you give us just a sense of your outlook in terms of what kind of growth we should expect there heading into year-end and 2018?.

Yes, that's become the strength of our portfolio and I think we were somewhat anticipating that. I think we're starting to see the flattening or the maturation of the commercial side. Resi mortgage, I think, is going to continue to be strong, but that's really -- that growth rate is going to be dictated by what we sell into the secondary.

So, what that leaves us is consumer. We were up a little over 4% for the quarter. Great performance across all of the consumer segments on equity and direct and installment. And I think as long as the economy -- at least the consumer economy continues to hold out here, I think we've got the opportunity to continue to grow in that space..

Okay. And then just trying to understand a little bit more in terms of the deposit strategy and liquidity on the balance sheet. It sounds like you're willing to encourage more CDs onto the balance sheet just as a market share strategy.

But how does that play out vis-à-vis your -- the excess liquidity to start in the balance sheet? And if that continues to -- if you're growing securities at a similar pace as the loans versus shifting more on to the loan side, can you continue to -- can we see any margin expansion from here? It sounds like -- obviously, the margin was flattish second to third quarter.

It sounds like maybe there's some expansion going forward.

But how are you thinking about just liquidity and deposits going forward and the impact that, that's going to have on that margin?.

Yes, let me ask Dean to help me with that question..

So, just to kind of give you a step back, the investment portfolio is kind of our outlet for the excess liquidity. So, to the extent that the loan portfolio growth is exceeding our deposits or vice versa, we'll either add or subtract from the investment portfolio.

So, as the investment portfolio were to expand, what happens is it's -- because it's just a lower-yielding asset, the margin may be somewhat hindered a bit, but what happens is our net interest income increases. So, while we -- there's kind of a trade-off between the margin and income.

And from our standpoint, we think that the income is a better measurement for us than the margin. So, that's how we address all the excess liquidity. We may deploy it into our investment portfolio, which will give us more income..

Yes, as far as -- go ahead, Aaron..

Well, I guess, I'm just -- it sounds then I guess that rather than kind of paying up -- I mean, you guys really don't need to pay up for any liquidity at this point. You guys have so much on the balance sheet.

So, I guess -- but it sounds like you're willing to go out and get those deposits, capture market share for the sake of growing NII and -- without necessarily being too concerned about what that means for the margin..

Yes. I think that the NII vis-à-vis the margin, I think that's the right way to understand how we think about it. The time space is really I think more a reflection of a couple of things.

One, when you look at our share of time deposits versus the size of our deposit base, it does look strange compared to the rest of our competitor set here and it's strangely low, number one. So, we think that there's a market share opportunity there.

Obviously, this is a product that customers enjoy having in their suite of products and I think we may have been a little delinquent in delivering that, number one. Number two, it's also helpful to us in helping to further segment the pricing around our other deposit categories.

So, we've got non-interest-bearing demand, interest-bearing demand, savings and time. To the extent that we can offer solutions through our time product from a yield perspective, we believe that helps us preserve pricing in other categories..

Got it. That's helpful. Thank you, Peter. Thanks Dean..

Okay..

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

Hi, thanks. Good morning..

Hi, Laurie..

Wanted to understand deposits for a minute again. I know a lot of people have touched on this, but specifically your CDs so I'm just looking -- just stripping out everything else, just your CDs. So, this quarter, your weighted cost was 97 basis points; last quarter, 78; the quarter before that, 60.

Are you all running specials and how should we be thinking about where that cost is going to go?.

Well, it's really -- there are two different types of CDs. There are public CDs and then there are consumer CDs. The pricing is highest in the public space, is lower in the consumer space.

So, to the extent that we can do more on the consumer front, even at a higher rate than what we've traditionally provided on the consumer side, that gives us an opportunity not to have to fund as much from a governmental standpoint or the government segment. So, that would--.

And how much -- I'm sorry.

How much was the public money?.

Our total public deposits were $1.1 billion, I want to say.

Is that right?.

Yes..

Yes, but not all of that is time, right?.

Yes..

Okay How--.

$1.6 billion..

$1.6 billion..

Yes..

Okay.

And how did the $1.6 billion compare to where it was last quarter on the public money side?.

It's actually about flat. It's up about $50 million..

Okay. Okay. And then as we look at your new branches that are coming online, are there some promotional CDs that you're doing on the consumer side -- or I guess I would say, where are we with the three new branches? I think you had mentioned that they're potentially coming online..

Yes, right. So, we started with Pearl City. That was our first new branch last year, November. Then we opened in Hawaii Kai with a new branch. Kihei, which is on Maui, opened as well. And I guess a month or so ago; we opened our new main branch. So, that was a remodeled branch.

Basically, we took the branch space in half and gave it a -- frankly, a much needed facelift. It's really -- it really came out nicely. And so really what we're trying to do with these branches is cut operating overhead by sizing them appropriately to the 21st century.

We're obviously trying to upgrade the fit and finish and look and feel of the branches to conform to our brand standards.

And then, thirdly, we're trying to deliver a more technology-based experience to customers who increasingly desire that, right? So, the area that has to do with electronic banking is much more pronounced in our new branches than previously. We have a lot more consultation space than we used to.

So, the ability to sit down and talk to customers about other financial products other than just making a deposit is really a focus there. And the teller space is actually a bit smaller than traditionally. The back office space is almost non-existent at this point because you just don't need that kind of back office square footage anymore.

So, it's kind of have your cake and eat it, too strategy. We're getting great operating efficiency out of them and they're just nicer facilities for our customers..

And am I right to say you have three more branches that will be opening here shortly, either end of this year or into next year? Or has that been curtailed?.

No, it has not. We're opening Manoa later this year and Pearlridge is up -- I want to say early next year. And then we've got a bunch on the plate, but nothing announced after that..

And so -- and how should we be thinking about expenses for these new branches? These aren't remodeled ones; these are absolute de novo, brand-new, correct?.

No. No. They're all remodeled..

They're all remodeled, okay..

Yes. So, the strategy there is we think that the footprint we have is appropriate from account standpoint and location standpoint. They're just bigger than we need. And so -- and they're bigger than we need and they're older than we need, so we need to make them smaller and younger..

And smaller and more efficient, okay. And so -- okay. So, asked a different way then, how should we be thinking about each branch on a go-forward savings run rate and I'm sure everyone is slightly different.

But if you would overlay a general metric of, hey, each branch we remodeled longer term saves us X, what would that number be?.

I don't have a number to share; we've not shared that previously. But I will tell you that we do expect to get savings out of the facilities cost of every new branch and we do expect to get savings out of operating costs because they're smaller, they're more efficient. Generally, you can run these with a little more efficient FTE footprint..

Okay. Great. Just a few more questions. Just going back over the non-interest income. The annuity and insurance line, the curtailed sales and fees that you talk about, so previously this had been running $7 million, $7.5 million annually.

It looks like -- are we thinking about the third quarter run rate here $1.4 million is a good number? Then maybe this should be about a $5.5 million annual line?.

Yes, I think that's about right.

I think, yes, I think annuity sales were down about $700,000 -- $600,000 in the quarter?.

$700,000..

$700,000, and that's probably a good way to think about it..

Okay, okay. And then on the trust side linked quarter, you had a drop there, too.

Was there anything specific? Or I should say in the June quarter, was there something non-core that I missed?.

Yes, it was about $700,000 differential and that was driven by -- in the second quarter, we still get some seasonal tax revenue from tax preparation, number one. And number two, we had a couple of special service fees as a result of some trust work that we did for some clients that just is non-recurring..

Okay. Great. And then last question.

Your AUM, where did that finish up September?.

It was almost unchanged from the previous quarter, pretty much the same..

$9 billion?.

Yes..

Great. Thanks. I'll leave it there..

Thank you. [Operator Instructions] And we do have a follow-up question from the line of Brett Rabatin with Piper Jaffray. Your line is now open..

Hey Peter. I just wanted to follow-up and ask, you've been talking about the construction market may be slowing a little bit, but it seems like there's some new stuff going on maybe outside of Waikiki.

I'm just curious about maybe some updated thoughts on the construction market and if that may or may not benefit you? And then just as you see it, are there things that you're thinking are overheated or you're avoiding intentionally in commercial real estate? Thanks..

Yes. Well, things -- the commercial real estate market has been strong for several years now and there certainly have been assets that we've refinanced a couple of times. And at some point, as those assets are growing, you just kind of decide that's probably maybe not the right thing to do to refinance a third time.

But that's majorly the limit of overheating. I don't really see that in any broad real estate category here in the islands. The construction opportunity is shifting from high-rise, luxury high-rise, in a very defined market, [Indiscernible], in particular.

And that -- what's happening is the newer opportunities are more in the mid-market or affordable side and/or in market spaces that are just a little less tested and proven. So, I think to answer -- to get to the crux of your question, if the affordable market, in fact, heats up, yes, I think we'd love to participate in that. That's great business.

That's great business for the state, frankly. In some of these newer higher end projects sprouting up in other parts of the city, we're probably going to be a little more cautious into that space. They're generally with sponsors that we don't have as much experience with and they're in market places where we don't have much experience with..

Okay. Great. Thanks for the color..

Thank you. And I'm showing no further questions at this time, so I'd like to return the call to Ms. Cindy Wyrick for any closing remarks..

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

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