Bank of Hawaii Corp (BOH) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Bank of Hawaii Corporation earnings conference call. My name is Shaquana, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Ms. Cindy Wyrick, Director of Investor Relations. Please proceed, ma'am.

Thank you, Shaquana. Good morning, everyone, and thank you for joining us as we review our financial results for the first quarter of 2012. Joining me this morning is our Chairman, President and CEO, Peter Ho, our Vice Chairman and Chief Financial Officer, Kent Lucien, and Vice Chairman and Chief Risk Officer, Mary Sellers. Comments today will refer to the financial information included in the 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 the actual results may differ from those projected. And now I'd like to turn the call over to Peter Ho.

Right, thanks, Cindy. Good morning, everyone, and thanks for joining us. Financial results for the first quarter of 2012 represent a strong start for Bank of Hawaii. During the quarter, we continued to generate good loan and deposit growth. Our net interest margin improved, non-interest income increased and we maintained strong expense management controls. We purchased $30 million in shares, paid our shareholders a dividend and retained strong levels of liquidity, capital and reserves. Now, let me ask Kent to review some of the factors affecting our financial performance this quarter and then, as is our custom, I'll ask Mary to comment on our credit quality measures. Kent?

Thank you, Peter. Good morning. Net income for the first quarter was $43.8 million, or $0.95 per share compared to $39.2 million, or $0.85 per share in the fourth quarter of 2011 and $42.4 million, or $0.88 per share in the first quarter of 2011. Our return on assets in the first quarter was 1.29%, and return on equity was 17.3%. Our net interest margin in the first quarter was 3.06% compared to 3.04% in the fourth quarter of last year and 3.24% in the first quarter of 2011. The credit provision in the first quarter was $351,000 compared to $2.2 million in the fourth quarter and $4.7 million in the first quarter of 2011. The credit provision for the first quarter included net charge-offs of $3.4 million and a $3 million decrease to the allowance. Credit provision for the fourth quarter included net charge-offs of $7 million and a $4.8 million decrease to the allowance.

Our allowance for loan and lease losses at the end of the first quarter was $135.6 million, or 2.4% of outstanding loan and leases. Non-performing assets were $41.4 million at the end of the first quarter and represented 0.74% of loans. Included in non-performing loans are $26.4 million in residential mortgage loans as of March 31. Non-interest income for the first quarter was $48.1 million compared to $43.4 million in the fourth quarter and $53.9 million in the first quarter of 2011. The increase compared to the fourth quarter was primarily due to a $3.5 million gain from the sale of our equity interest in two leveraged leases, partially offset by a $1 million loss on an aircraft lease in the first quarter. Also contributing to the increase was $1.6 million increase in mortgage banking income. The decrease compared to the first quarter of 2011 was primarily due to the $6.2 million decrease in securities gains and $3 million lower debit interchange revenue as a result of the Durbin amendment, partially offset by the net gains from the sale of leases previously mentioned.

Non-interest expense totaled $85.2 million in the first quarter compared to $84.4 million in the fourth quarter and $86.1 million in the first quarter of 2011. The increase compared to the fourth quarter was primarily due to higher payroll taxes associated with incentive compensation accrued in 2011 and paid in the first quarter of 2012, and $1.2 million for our personal computer refresh program. The decrease compared to the first quarter of 2011 was primarily due to a decrease in FDIC insurance expenses and lower operational losses. The effective income tax rate was 27.6% in the first quarter compared to 26.1% in the fourth quarter and 32.6% in the first quarter of 2011. The lower rate this quarter was primarily due to the previously mentioned lease transactions which resulted in a $2.7 million credit to provision for income taxes.

Our investment portfolio now stands at $7.2 billion, and we have unrealized gains in the portfolio of $156 million. We continue to invest on a conservative basis and increased our investments in state and municipal securities this quarter. Approximately 8% of our investment portfolio is comprised of municipal securities. The average duration of the available for sale portfolio is 2.49 years, and overall portfolio duration is 3.2 years. Loans were $5.6 billion at the end of the first quarter, up $61 million compared to the end of the fourth quarter and up $272 million from the end of first quarter of 2011. We portfolioed $43 million of 30 year conforming mortgages in the quarter. Deposits were $10.6 billion at the end of the first quarter, up $29 million compared to the end of the fourth quarter and up $709 million from the end of the first quarter of 2011. We decreased our wholesale funding with government entities by $100 million to $1.2 billion in the first quarter.

Our shareholders equity was $996 million at the end of the first quarter, and we paid out $20.7 million in dividends and continued our share repurchase program in the first quarter, repurchasing 639,000 shares of common stock for $30 million. Last Friday, our board declared a dividend of $0.45 per share for the first quarter. Our capital position remains strong and at the end of the first quarter, our tangible common equity to risk weighted assets was 17.6%. Now, I'll turn the call over to Mary Sellers.

Thank you, Kent. Net charge-offs for the first quarter totaled $3.4 million, down $3.7 million on a linked quarter basis and $1.3 million year over year. The linked period decrease was due to a $2.9 million reduction in consumer charge-offs, primarily in residential mortgage and home equity, and a $1.8 million increase in total recoveries driven off of $1.4 million partial recovery on a previously charged off commercial loan. Non-performing assets totaled $41.4 million at quarter end compared to $40.8 million at the end of the fourth quarter and $34.6 million at the end of the first quarter of 2011.

Residential non-accrual assets accounted for $26.4 million of the total at quarter end. The level of non-performing assets will continue to be impacted in the near term, due to the longer resolution time frame for residential assets. Loans past due more than 90 days and still accruing interest totaled $10.1 million, up $866,000 on a linked quarter basis and up $4.5 million year over year due to increases in residential mortgage and home equity. Restructured loans not included in non-accrual loans or loans past due 90 or more days totaled $29.5 million at quarter end, down $4.2 million from the prior quarter, primarily due to residential mortgage loan payoffs. Residential mortgage and home equity loans past due more than 30 days but less than 90 days and still accruing interest totaled $15.3 million and $6.1 million respectively at quarter end, down $2.9 million and $1.9 million from the end of the fourth quarter and down $1 million and $2.1 million respectively year over year.

We continued to see improvement on a linked quarter and year over year basis in what we consider to be the higher risk segments in our portfolio. In total, these higher risk segments were down $9.5 million for the quarter, due to an $8.6 million reduction in air transportation exposure and $17.8 million year over year. For the quarter, the provision for loan and lease losses was $351,000, which given net charge-offs of $3.4 million, reduced the allowance by $3 million to $135.6 million, or 2.4% of loans and leases outstanding. Absent significant deterioration in the economy, and with continued improvement or stability in credit quality, we anticipate that we may require a lower level of allowance going forward. I'll now turn the call back to Peter.

Great. Thank you, Mary. The Hawaii economy continued to gradually improve during the quarter, particularly in the visitor industry. Hotel occupancy, hotel revenue, visitor arrivals and visitor spending all reflect improvement compared with the previous year, and visitor spending remains high across all fronts. We will continue to further benefit this year with increased air seating capacity into the marketplace, most notably in recently Alaska Airlines and Elysian Airlines. The construction industry remains relatively weak, however. Although we're beginning to see increased activity, at least in the initial stages around condo, retail and resort related development. Job growth is beginning to stabilize, and the state-wide unemployment rate remains around 6.4%, which is significantly better than the US average as a whole. Forecasts for the Hawaii economy indicate modest growth in 2012 and a continuation of gradual improvement. And now, we'd be happy to respond to your questions.

(Operator Instructions). You have a question from the line of Joe Morford, representing RBC Capital Markets. Please proceed.

Thanks. Good morning, everyone.

Good morning, Joe.

Good morning.

I guess, curious, first on the margin. Did lower premium amortization contribute much to the strength this quarter? And just in general, what's your near term outlook for the margin?

Yes, it did add about $1.5 million to our interest income in the quarter. That's the delta between the fourth quarter and the first quarter.

Right.

Near term, it's always hard to call. You probably have as good a forecast on interest rates as I do. But since the end of first quarter, rates have come down. And so for example, the 10 year is at 192 or so, and we were at more like 220 or 225 into the first quarter. So directionally, rates are lower. Usually that tends to reduce the margin. But we'll see. It's still pretty early into the quarter.

Okay. And then I guess similar a little bit, can you talk about the strength in mortgage banking this quarter and how sustainable that may be based on the pipeline at period end?

Well, the mortgage banking, as I think a lot of you know, is a business that's a big part of our overall loan portfolio. We're generating revenue in two ways. One, by booking the assets and holding them on the balance sheet, and then secondly through just taking on the transaction and booking through the fee and selling off to the secondary market. Where we would like to be, what we target is a 40/40/20 split between commercial, residential and consumer lending. And so our activity this year is really -- or this quarter was really in response to growth that we saw throughout the rest of the portfolio. We look to maintain that ratio throughout the year. So, that's really what's going to be the driver of the future residential loan growth, at least as it pertains to being held on the balance sheet, Joe.

Okay. That's helpful. Thanks.

Yes.

Your next question comes from the line of Ken Zerbe representing Morgan Stanley. Please proceed.

Hi, thanks. Just a question on the tax rate. If we back out the $2.7 million tax benefit that you got, obviously the other one-time items from numbers, it's probably look at a core tax rate, looks like it was a little bit higher than normal this quarter. First, are we doing the math right on that, and does that imply anything going forward?

I'm going to assume you did the math right, but it sounds approximately correct. As income moves up, the effective rate is going to move up because the offsets to our statutory rate are generally fixed credits. So, for example, low income housing credit, that sort of thing. And so with higher levels of income and just a fixed credit, you're going to get a higher effective rate, all those things constant.

Okay. That makes sense. The other question I just had was on the securities and loan growth, obviously very strong this quarter. What's your view of how sustainable either of those balances might be going forward or further growth from here?

Well, I'll speak to the loan growth. The thing that we like the most in the quarter was the consistency across the different categories. So, on an average basis, we had growth at every category except our lease book which, as I think a lot of you know, is a book that we frankly have been looking to moderate as we move forward. We talked about residential mortgage already. I think commercial's got a pretty reasonable chance at having a good year this year. And the consumer book, by which I mean our home equity and auto and other installment lending, I think is poised for a rebound. As you guys well know, that's been a book that's been somewhat declining on us over the past couple of years. We've seen that flatten, now we're actually starting to see growth and hopefully, economy willing, we're going to see that continue out through the year.

All right, great. Thank you.

Your next question comes from the line of Brett Rabatin representing Sterne Agee. Please proceed.

Hi. Good morning.

Hi, Brett.

Good morning.

Wanted to ask -- I know I focused on this last quarter, but just the reserve and the amount of potential provisioning going forward, credit leverage, was curious if the economy continues to be a little stronger, do you expect that the provision would probably be pretty minimal at most going forward?

Well, we definitely expect that we would not need to provision at the levels we have in the past and would be lowering our provision levels. Tough for me to comment on the exact dimensions of that.

Fair enough. But it would make sense that your reserve level would continue to be lower than it has been in the past few quarters?

Yes.

Okay. And then secondly, just wanted to ask on the consumer portfolios, I know you've had a renewed focus in growth in those segments. Can you talk about the competitive landscape in Hawaii? Are you seeing currently any irrational competition on either mortgages or HELOCs?

The mortgage side I would say is pretty clean competitively, pricing-wise and in terms of credit underwriting. The home equity side is a space where I think like a lot of markets across the country, people are looking to pick up outstandings because of the variable rate nature there. So, we are seeing a good amount of teaser rate pricing, which obviously is affecting spreads there. The auto -- the indirect market is pretty darn competitive right now, and I'd say that most of our local competition is priced at a pretty tight band. But that's one area where we're seeing national competitors really pricing down to pick up volume.

Okay. Great. Thank you.

Your next question comes from the line of Casey Haire representing Jefferies. Please proceed.

Hey, good morning, guys. Thanks. Just a question on -- another one on the margin, I guess. The muni investments as a percentage of the book, you said I think was 8%. Is there an appetite to increase that exposure? And what kind of yield are you guys getting on these munis?

Yes, there might be a small appetite for some additional munis, but not very much. We're -- I think 8%, 9%, maybe up to 10%, but not much more beyond that. The yield that we're getting ranges from 1% to 1.4%, in that neighborhood, on a tax equivalent yield. We've gotten some a little bit higher, based on taking a little bit more duration risk. But it's still pretty modest.

Okay. But wouldn't it have to -- so the FTE yield is 1% to 1.4%?

Yes.

Wouldn't it have to be a little bit stronger than -- because your existing portfolio is yielding 2% and change. I would have thought that it would have to be a little bit higher than that, just to -- presuming that this is driving the NIM higher.

It's not the only factor driving the NIM higher. So, the composition of the balance sheet, more loans is helping, little bit lower amount of funds sold is helping. The premium amortization that we talked about a few minutes ago, those are all pushing in the positive direction. The munis are playing a part here, but it's not the major part so far.

Okay. Got you. And then just one more on capital, if I may. I know you guys had talked about last quarter actually saying the tier 1 leverage is not as -- you're not going to be holding to as tight to the 7% level as you had in the past. I was just curious, at what point does that become, at 6.6% and kind of falling, at what point does that become a hindrance to capital turn being internally or externally with regulators?

Well, I think I've mentioned in the past that we're looking at all aspects of the economy, our performance, these ratios in making decisions on how much capital to return to the shareholders. But -- and so certainly, yes, the answer is yes. Leverage is relevant. I can't give you a particular target on that. But it's definitely a factor.

Okay. Thank you.

Your next question comes from the line of Jeff Rulis representing D.A. Davidson. Please proceed.

Thanks. Good morning.

Good morning.

Just a question on the investment securities line item. Any -- maybe you could comment, not necessarily guidance, but just the conditions that sort of govern that for you at this part of the cycle, expectations that that's a number that stays fairly modest going forward or any thoughts there.

Yes. The portfolio size is really a function of the funding. So, the funding through the cycle has been very strong, very good deposit growth, and so the increase in the portfolio is really going to be a function of that, less any loan growth. That's really the reason that we would make any decisions on the investment portfolio.

Right. And so through the P&L in terms of gains, while you're growing that, I suppose we should assume that the gains are going to stay modest, as they have?

You mean in terms of realized gains?

Correct.

Yes. We -- from time to time, we make a decision on a particular security that, just from an alcove perspective doesn't fit in, and we make a decision to sell it, which can result in a gain or a loss. But in terms of trying to realize gains, just to realize gains, that's not likely to be what we do.

Okay. And then maybe just the last one on comp expense. You mentioned a little higher due to payroll taxes. Q1 typically higher than Q4. You expect that to be the case this year as the year unfolds? Does it expect to taper off through the course of the year?

Yes, it's just an unusual phenomenon in the first quarter. So, the first quarter of next year will have the same kind of result. But for the next three quarters, we won't have that. So, it's purely a first quarter type of thing.

Okay. Thank you.

Your next question comes from the line of Craig Siegenthaler representing Credit Suisse. Please proceed.

Thanks, guys. Just looking at the available for sale securities yield which popped up, I'm wondering, what were the composition the securities added in terms of duration and yield and maybe the type of securities. Is it -- typically, it's probably all MBS; right?

Well, let me quote just the taxable yield that we added during the quarter. So, the average that we added was 1.99%, so that would take into account everything. So, munis and MBS and treasuries, the whole bit. The duration of the portfolio went up a little bit in the quarter, but that was more a function of the fact that rates increased. So, the duration's going to stretch out when rates go up.

Got it. And then in terms of kind of loan yield pressure, this quarter it was down about 9 basis points sequentially. How do you think that steps forward into the second or third quarter. Is there anything unusual in the 9 basis points we should think about, and what's your kind of view of the run rate given kind of continued low rates?

I think it was a pretty normal quarter. We have seen a little degradation on the mortgage side, which as you would guess, is a big portion of the overall bookings for the quarter. A lot of that is going to depend on what the composition of the loan categories that we on-board in future quarters. But it felt -- there's nothing -- nothing felt unusual about the quarter for us.

And then I'm l not sure if you hit on this already, but in your table 9 where you break out payroll taxes, $3.8 million to $2 million, that $1.8 million, is that roughly what we should back out when we think about the 1Q to 2Q run rate?

Yes, hold on one second. Let me just get that figure. Yes, it's about $1.8 million, is the delta between Q4 and Q1 on that line item. And so that's the kind of nonrecurring expense item.

And that's a similar sequential seasonal change you generally deal with from first quarter to second quarter, a step back down to kind of a $2 million run rate?

Yes, about -- that's about right.

Got it. All right. Great, guys, thanks for taking my questions.

You're welcome.

Your next question comes from the line of Aaron Deer representing Sandler O'Neill. Please proceed.

Good morning, everyone.

Hey, Aaron.

Hi.

I think most of my questions have been answered. Just a quick one for Mary. I know they had changed the regulatory guidance on how home equity lines are accounted for when behind delinquent firsts, and it looked like there was a very modest uptick in your home equity portfolio. But I just want to make sure that that's fully accounted for in the numbers that you have, and we wouldn't expect any sort of change in that going forward?

Yes, it is.

Okay. And then just one other quick one on the expense. You highlighted, Ken, the computer refresh in the quarter is like $1.2 million. I just want to confirm, that was a fully expensed item, not something that was capitalized so that we should see that drop back out in the --

Yes, that's a fully expensed item.

All right, that's it from me. Thanks, guys.

Okay, Aaron.

Your next question comes from the line of Jacque Chimera representing KBW. Please proceed.

Hi, good morning, everyone. Most of my questions have also been answered. Just a quick one, probably for Peter. You've spoken in the past about looking for efficiency gains in the current economy. Has any of that been incorporated into your expense structure, or is that something we could look for future?

I think it's beginning to seep into the expense side, Jacque. I think that most of our initiatives are somewhat midstream right now. So, I would look for continued expense efficiency off in the next several quarters. Some of it's in there, but a lot of it's not, I guess is the answer.

Okay, great. Thank you very much.

Your next question comes from the line of Bryce Rowe representing Robert W. Baird. Please proceed.

Thank you. Just wondering what the mortgage servicing right fair value change was for the quarter?

I don't recall offhand. It was a pretty small number, though, and I can't recall exactly, but I think it was less than $1 million.

Okay. Ken, do you have the amount of originations for the quarter that were -- and in the subsequent sales, mortgage loan sales?

Yes, I think I quoted what we portfolioed, but let's see. I'm not going to quote a number because I can't find it offhand. So, we'll try to follow up with you on that.

Okay. Thank you. That's all I have.

Okay.

Your next question comes from the line of Russell Gunther representing Bank of America. Please proceed.

Hi, guys. Thanks for taking my questions. Bit of a follow-up on Jacque's, in terms of the expense efficiencies. Was the decline in the quarter in the net occupancy line largely due to the consolidation of branches in the fourth quarter or in the first? And then is there an expectation that that would be part of the driver for increased efficiencies going forward?

That's certainly a piece of it. And Kent, you probably have the numbers tighter than I do. But my recollection is we didn't have a whole lot of that embedded in the first quarter, so that's kind of a forward opportunity for us.

Yes, that really won't begin to take effect until the second quarter forward.

Okay. Great. So, there's room for further improvement off of that already nice pick-up in the first quarter than the occupancy line?

Yes.

Okay. Last question is a bit of housekeeping. Could you just remind me, in terms of with regard to overdraft and processing transaction, are you guys on an as-received basis, low to high, high to low, where are you on that?

We are low to high.

Okay. Thanks so much.

We have a follow-up question from the line of Brett Rabatin representing Sterne Agee. Please proceed.

Hi. I just want to follow up on the securities portfolio and what the duration was in the held to maturity and the AFS portfolio. And then I think you mentioned kind of a backup in duration during the quarter, given rates. Can you talk about the sensitivity to higher rates on the duration?

Yes. I provided the AFS duration at 2.49 years, the overall is 3.2 years. I apologize, but I have to do some arithmetic to get just the HDM duration. But because there's mortgages in the portfolio, the duration is going to move up as rates go up, and that's the main reason that the duration increased in the quarter.

Okay. But you guys weren't shortening or extending any duration during the quarter, if I understood correctly.

No, no. There's a little bit of that merely through the acquisition of the municipal securities, so they do have some duration to them.

Right.

But in terms of the strategy, the objective of maintaining a conservative portfolio on all dimensions, including duration, that's still in play.

Okay. Thanks, Kent.

You're welcome.

At this time, there are no further audio questions. I would now like to turn the call back over to management for closing remarks.

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.