Bank of Hawaii Corp (BOH) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2012 Financial Results Conference Call. My name is Jasmine and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Ms. Cindy Wyrick, Director of Investor Relations. You may begin.

Thank you, Jasmine, and good morning, everyone.

Thank you for joining us today as we review the financial results for the second 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 our 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. While we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected.

Now I'd like to turn the call over to Peter Ho.

Thanks, Cindy.

Good morning, everyone. Thanks for joining us today. Financial results for the second quarter of 2012 represent another good quarter for Bank of Hawaii. We continued to generate loan and deposit growth, consumer checking account counts grew 8% year-on-year, and we maintained our commitment to strong risk and expense management. In line with the industry, our net interest margin was adversely impacted by the low interest rate environment that we find ourselves in for the quarter. During the quarter, we repurchased $20 million in stock, continued to pay our dividend, and retained strong levels of liquidity, capital, and reserves.

Now let me turn the call over to Kent to review financials.

Thank you, Peter. Good morning. Net income for the second quarter was $40.7 million, or $0.90 per share, compared to $43.8 million, or $0.95 per share, in the first quarter and $35.1 million, or $0.74 per share, in the second quarter of 2011. Our return on assets in the second quarter was 1.19% and return on equity was 16.2%. Year-to-date net income was $84.6 million, or $1.85 per share, compared to $77.5 million or $1.62 per share in 2011. Year-to-date return on assets was 1.24% and return on equity was 16.7%. Our year-to-date efficiency ratio was 57.6%, a reduction from 59.8% in 2011.

Our net interest margin in the second quarter was 2.98% compared to 3.06% in the first quarter and 3.16% in the second quarter of 2011. Year-to-date net interest margin was 3.02% compared to 3.2% last year. The lower margin is due mainly to the lower interest rate environment.

The credit provision in the second quarter was $628,000 compared to $351,000 in the first quarter and $3.6 million in the second quarter of 2011. The credit provision for the second quarter included net charge-offs of $3.8 million and a $3.2 million decrease to the allowance. The credit provision for the first quarter included net charge-offs of $3.4 million and a $3 million decrease to the allowance. Our allowance for loan and lease losses at the end of the second quarter was $132.4 million or 2.3% of outstanding loan and leases.

Non-performing assets were $41.5 million at the end of the second quarter and represented 0.73% of loans. Included in non-performing loans are $26.8 million in residential mortgage loans as of June 30. Non-interest income for the second quarter was $46.8 million compared to $48.1 million in the first quarter and $49.5 million in the second quarter of 2011.

The decrease to the first quarter was primarily due to a $3.5 million gain from the sale of our equity interest and two leverage leases, partially offset by a $1 million loss on a direct financing lease in the first quarter. The decrease compared to the second quarter of 2011 was primarily due to $4 million lower debit interchange revenue as a result of the Durbin Amendment. Mortgage banking results were strong in the quarter, producing $7.6 million of income versus $5.1 million in the first quarter. Year-to-date non-interest income was $94.9 million compared to $103.4 million in 2011.

The decrease was primarily due to lower debit interchange revenue and $6.1 million in securities gains in 2011, partially offset by higher mortgage banking income. Non-interest expense totaled $80.7 million in the second quarter compared to $85.2 million in the first quarter and $93.8 million in the second quarter of 2011. The decrease compared to the first quarter was due to lower salaries and benefits expense and $1.2 million for a personal computer refresh program in the first quarter. The decrease compared to the second quarter of 2011 was primarily due to the $9 million legal settlement related to overdraft claims in 2011 and lower salaries and benefits.

Year-to-date non-interest expense was $166 million compared to $179.9 million in 2011. The effective income tax rate was 33% in the second quarter compared to 27.6% in the first quarter and 29.1% in the second quarter of 2011. The lower rate in the first quarter was primarily due to the sale of our equity interest in two leveraged leases, which resulted in a $2.7 million credit to the provision for income taxes.

The lower rate in the second quarter of 2011 was primarily due to our release of reserves due to the closing of the IRS audit for two tax years. Our investment portfolio now stands at $7.1 billion and we have under-realized gains of the portfolio of $167 million. The average duration of the AFS portfolio is 2.3 years, and overall portfolio duration is 2.7 years. Loans were $5.7 billion at the end of the second quarter, up $73 million compared to the end of the first quarter, and up $320 million from the end of the second quarter of 2011.

Deposits were $11.5 billion at the end of the second quarter; up $927 million compared to the end of the first quarter and up $1.6 billion from the end of the second quarter of 2011. Customers shifted approximately $700 million in wholesale funding with government entities to public time deposits during the latter part of June.

Our shareholders' equity was $1 billion at the end of the second quarter and we paid out $20.5 million in dividends and continued our share repurchase program in the second quarter; repurchasing 425,000 shares of common stock for $20 million. The Board also increased its repurchase authority by $75 million. Last Friday, our Board declared a dividend of $0.45 per share for the second quarter. Our capital position remains strong and at the end of the second 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 second quarter totaled $3.8 million, [up] $440,000 on a linked quarter basis and down $2.2 million year-over-year. The year-over-year decrease was largely due to a $1.7 million decrease in consumer net charge-offs, mainly in home equity.

Non-performing assets totaled $41.5 million at quarter-end compared to $41.4 million at the end of the first quarter and $34.2 million at the end of the second quarter of 2011. Residential non-accrual assets accounted for $26.8 million of the total linked quarter end. As we've discussed in the past, the level of non-performing assets will continue to be impacted in the near term, due to the longer resolution time for residential assets.

Loans past due more than 90 days and still accruing interest totaled $7.2 million, down$ 2.9 million on a linked quarter basis, and down $604,000 year-over-year, due to a decrease in residential mortgage. Restructured loans not included in non-accrual loans or loans past due 90 days or more totaled $31.1 million at quarter end; up $1.6 million from the prior quarter, primarily due to an increase in residential mortgage loan modifications.

Residential mortgage and home equity loans past due more than 30 days, but less than 90 days and still accruing interest totaled $10.4 million and $6.7 million, respectively, at quarter-end. Residential mortgage was down $4.8 million quarter-over-quarter and $6.9 million year-over-year, while home equity was up $581,000 quarter-over-quarter and $290,000 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 $4.6 million for the quarter and $19.8 million year-over-year.

For the quarter, the provision for loan and lease losses was $628,000, which, given net charge-offs of $3.8 million, reduce the allowance by $3.2 million to $132.4 million, or 2.3% of outstanding loans and leases. Absent significant deterioration in the economy and with continued improvement or stability in credit quality, we anticipate that we may require lower level of allowance going forward.

I'll now turn the call back to Peter.

Great, thanks, Mary.

The Hawaiian economy remains stable. Unemployment rates remain well below that of the national average, as they have for some time now. Single family home prices here in Oahu are beginning to trend up. Our visitor industry, our number one industry here in the state, is having a great year, up 17%, driven mostly by international visitors. The defense sector for us remains stable, and construction, which peaked in 2007, appears to be bottoming at this point and we'll see as the number of condo projects and single family projects on the books have a positive effect on the cycle moving forward.

Now, we'd be happy to respond to your questions.

(Operator Instructions) Aaron Deer, Sandler O'Neill & Partners.

I'll start with a question on the margin. Obviously, the asset yields are under pressure and I'm wondering what more you might be able to do on the funding side to help preserve your margin going forward?

Yes, there's really not too much more to be done on the funding side. Deposit pricing is already quite low, so we do see a tick here and a tick there between the quarters. The long-term repos are just that. They're long-term. They have make hold provisions, so I think it's unlikely that we'll be able to really reduce that cost in the near-term.

Okay, and then, Kent, I imagine that you probably spent some time looking at the Basel III proposals and how they might affect your capital ratios. Can you talk about maybe, to the extent you've done the analysis and can share the results, where your pro forma capital ratios shake out under some of the new proposals and what that might mean for your buybacks going forward?

Yes, we've done some very preliminary work so I don't want to cite any specific numbers. But generally, we think the risk-weighted assets may go up a little bit, but not substantially and the unrealized gains in the portfolio, through ALCI if it's included in Tier 1 capital, might even increase some of our ratios. Now the ALCI portion is rolled out over its five years in small bits and pieces, so it depends on what the market is at the time. But just based upon that, it would look like it would have a positive impact to us.

Okay, so you would not anticipate the, as you prepare for that going forward, it impacting the pace of your share repurchase program as it's been over recent quarters?

At this point, no, but it's with a caveat.

Sure.

The caveat is it really depends on is ALCI included, what are the market conditions, and that sort of thing.

Okay, thank you.

Casey Haire, Jefferies.

Just a question on the loan pipeline and just an update there. It looks like commercial was pretty weak this quarter, resi was very strong. Is that what we should expect going forward?

What we tried to do is effectively keep our loan categories in reasonable balance here. Residential is up for obvious reasons, had a very strong couple of quarters, which is reflecting on our balance sheet. I would look to see that level, at least on the balance sheet, moderate somewhat. What we're hoping is that we see continued movement in our commercial segment. If you look year over year, commercial balances are up 3%. That's a bit impaired by our leasing business because as you know, that's a business that we are deemphasizing and so we've seen a fair amount of shrinkage in the outstandings there.

If you net that number out and just look at pure C&I, commercial real estate and construction lending, we're actually up 5.6% year-on-year, which is about the level that we think we can be looking at in the environment that we're in today. I think commercial has some upside; certainly that's what we're seeing in the pipeline. Looking at the consumer home equity dealer and direct, assuming the economy continues to operate at a level that it is, I think we'll begin to see growth in that segment. Certainly won't have the reductions that we've experienced in that segment for the past couple of years.

Okay, great. On the expense side of things, obviously pretty good result this quarter. Looks like your efficiency initiatives are starting to filter through. Can you just give us an update as to where that stands right now? Are we now at the right run rate or is there more benefits trickling through?

We're going to keep working at it. We're not done in terms of trying to become as efficient as possible. There can be ups and downs and for example, to the extent we're involved in a credit card business, there could be some higher expense levels associated with that business. But as a trend, we're going to keep working at this and we're hopeful that we can, in fact, reduce expenses even more.

Okay, great. It looks like it mostly came from the comp line, but headcount was only down very slightly. I know there was some FICO roll-off but what exactly was, how did you guys do it without reducing headcount all that much?

I think you have to look at the longer term. If you look at year over year, we're down right around 1.5% on employee count. Sometimes it takes a while to catch up in terms of the expenses and we're starting to catch up.

Okay, thank you.

Craig Siegenthaler, Credit Suisse.

This is actually Nick Karzon standing in for Craig. If I can follow-up on the previous question, just to go through the salaries and benefits and talk a little bit more about the individual moves. It looks like the salary line was down about $850,000 quarter over quarter and there was a pretty significant reduction in the retirement and other benefits line. I was just wondering how we should think about these going forward and what the realistic run rate is?

The retirement situation is a function of how we fund that plan. The plan is frozen and so the funding of the plan itself has a lot to do with the expense level. But I think the salary category is a definite trend that we're hoping to continue to see improvements in. Certainly, the overall salary and benefits is a trend that we're continuing to work on.

Okay, thanks. Switching gears a little bit, it looks like the securities portfolio on an end-of-period basis was down about $200 million, but the average balance was relatively flat quarter over quarter. Is this something that could decline a little bit with the rates where they are?

It's possible. We chose, right at the end of the period, not to make some investments. It's going to depend on the overall funding of the bank. If funding increases, then we'll have to add to the portfolio. If funding decreases, we can reduce the portfolio.

Where's the new money yield bond for the second quarter on the securities?

Yes, we repurchased at an average yield of 1.85% and the run-off was at 2.81%; about 100 basis points differential.

Okay, thanks so much for taking my questions.

Joe Morford, RBC Capital Markets.

First was just a follow-up again on the margin type questions. I was curious how much of the drop in the margin, if any, can be attributed to increased premium amortization in the quarter?

Yes, the increase in that category was $1.2 million compared to the first quarter.

Okay, thanks. Second, was just curious if you could talk about the mortgage banking pipeline going into the third quarter and just how you feel about that line item through the balance of the year?

It's funny, Joe. Every year we say what are we going to do next year with no refi boom and we've been wrong three years in a row. We're midstream through that 2012 edition, so we should continue to see activity through the pipe pretty strong moving forward. That's different from what ends up on the balance sheet, as you know. Those loans either show up on the balance sheet and represent longer term yield for us or we sell them off into the secondary and pick up the gain on that. But overall activity, just volume-wise, is pretty strong.

What about the gain on sale margin, how's that been trended?

About 2%; its been up.

Okay, thanks so much.

Jeff Rulis, D.A. Davidson.

A question on the other non-interest income line of $4.1 million, nearly 50% of Q1 level; was it Q1 that contained some one-time stuff?

Yes, the gain on the lease transactions, there were three of them, was in the other category in the first quarter and that just didn't repeat in the second quarter.

Okay. Then one follow-up for Mary, perhaps. You alluded to the provisional, all things being equal, could potentially be lower. What element does loan growth have in that? You booked some decent growth and how does that translate into the overall provision in your comments about it potentially being lower?

I think loan growth definitely attracts some reserves, but given the quality of what we're seeing come into the portfolio, I think that will be relatively modest in terms of determining what the overall level of the reserve is.

Okay, thank you.

Brett Rabatin, Sterne, Agee.

I wanted to ask, around the credit card business, can you give us any thoughts around what you're thinking about that looking like or what we should expect for the balances perspective or just maybe bottom line contribution?

Sure. We think that the best way to approach this is with a renewed program as opposed to potentially picking up existing programs. Likelihood is that it will be from a ground-up type approach, so it's going to take us a while to pick up balances. The rate at which we pick up balances, I think, is an interesting thing to think around because we've had very good success in effectively helping other institutions sell-through to our customer base. What we're going to be looking to is the degree to which we can re-attract back existing customers. We're going to be looking through to exactly how much horsepower do we get out of our branch system, which we think is pretty considerable. The bottom line though, Brett, is I think it's going to be a pretty slow ramp up. As Kent alluded to earlier, there may be some start up costs that, for at least a while, trump the revenue that we're generating off of the program. But long-term, we think it's a good really good strategic product to have in our suite of products.

Okay. The other question I wanted to ask was just around the branch profile. I know you've fine-tuned the franchise here the past year. Should we expect you to further do that in the next year or so? Is that basically what you meant, I think Kent was talking about improving efficiency some more. Is that basically where a lot of that comes from or are there other initiatives that might also drive operating leverage as well?

Sure. On the branch profile, we basically have three formats of branches -- what we call banking centers, which are full service, just about every service we offer at the Company is delivered through these larger branches, and then we have at the other end of the spectrum, our in-store branch fleet, of which we have 13 right now and that's been a very good format for us from a convenience standpoint. Somewhere in the middle there is what we call our mid-sized branches. What we're doing is trying to figure out where we have overlap in the branch system and take advantage of being able to potentially reposition people to branches that have popped up over the relative near-term with our in-store fleet as that's grown. The other opportunity that we have out there is, as the leases come up on a number of these branches, we took the opportunity to reposition either into a more optimal space from a real estate standpoint or into potentially smaller spaces than what we've had historically. That actually has been a pretty good source of value for us over the past year or so.

Okay. One last quick one -- will you guys benefit any from the rail system in terms of being able to make loans to the various providers that will be putting that in? Or how should we think about the benefits of that getting put in on Oahu?

Rail kind of speaks to construction. I mentioned earlier that we've seen for the past 1.5 years construction, I guess probably best described, stabilize from the peak in 2007. I think that to the extent that the rail moves forward, and there's still some rumblings as to whether or not that's going to happen, that will definitely attract development and construction work, both in terms of the actual build-out of the system, as well as in terms of development opportunities around the station stops. Longer-term, that should be a positive for us as lenders and for the construction segment in particular.

Okay, great. Thanks for all of the color.

Jacque Chimera, KBW.

I just have two really quick ones -- was there any change in the funding cost when the public deposits moved over from the repos into the deposit book?

No, Jacque. It's just a straight move over.

Okay. I read an article, I can't remember what publication but I read an article that talked about the military presence that would be moving to Oahu that originally it wasn't thought to have gone there. Do you have an update or background on that and any effects we might see from that?

Sure. I think what you're referring to is troop levels for the Marines that were originally scheduled to go directly into Guam. Ultimately, what they decided to do was break those troop segments up and a portion of that came to Hawaii. Net-net for Bank of Hawaii, because we operate in both of those markets, it really doesn't have much of an impact for us economically speaking. Generally speaking, what we're seeing is, despite the fact that the Pentagon obviously is pulling back on its budget, what we're benefiting from is the repositioning into the Asia-Pacific region for our American defense forces. The net impact has been what I'll call a push. At least, to date its been a push for us.

Just better overall spending within the state as far as higher military level?

Within the State of Hawaii, right.

Okay, great. Thank you very much.

Erin Davis, Morningstar Equity Research.

I had a question about the recoveries. I noticed that the recoveries on loans and leases previously charged off fell sharply in the second quarter. Most of that was in commercial and industrial, but it was largely across the board. I wonder if you could give us some color on that and what we might expect going forward?

In the first quarter, Erin, we had a $1.4 million recovery on a previously charged-off C&I loan, so I think the run rate this quarter will probably be about the same throughout the year. There's a little bit of lumpiness in the residential and home equity space as we go through that resolution process.

Okay, thank you.

Russell Gunther, Banc of America Merrill Lynch.

A couple questions just on deposit behavior in the quarter. With regard to the public money that moved over, could you comment on your expectations for the stickiness of that funding?

It's fairly stable and just to be clear, the movement from repo to deposit really shouldn't have any influence on the long-term condition of that deposit. But certainly, its been fairly stable over the last several periods. I'm not aware of anything that would change that.

Okay, thank you. Then on the non-interest bearing deposit side, the rate of growth has been slowing, but still, in-flows are good. Could you comment on your expectations going forward there?

You're talking about on the demand side?

Yes, non-interest bearing deposits.

Okay. We look at averages and so as I look at our demand business, average demand consumer was up 3% linked and is up 10% year over year, up 16% year over year on the business side. We've been very pleased with the activity that we see there. It's a big push in our branch system, in our business banking system, to really try to build relationships. I mentioned earlier that our consumer checking account growth was 8% for the quarter year-on-year and so we're beginning to see the fruits of that and that mostly manifests itself in the demand segment. The activity there has been good.

Okay. Just to follow-up on loan growth, we talked a bit about how commercial has been a bright spot for you guys. You'd commented earlier in the beginning of the year that you'd expect a good outlook for commercial. Could you comment on your outlook for the second half relative to what you've seen so far this year?

Yes. We're always a bit of a lumpy business, so it's a little challenging speaking to a quarter or two, but longer term, what I'd say is we see activity in the commercial real estate space. We see, certainly, activity down the construction side, although, as you know, in following our Company, that tends to be one of our smaller businesses. Into C&I, really something to think about there is, there we really have two businesses. One is a large corporate dealing with investment grade funded loans.

There we've soon a fair amount of choppiness as those companies are, for the most part, trying to extend out their longer term liabilities given the rate environment. In the other segment that we have is more middle market, smaller commercial segment. There we've seen consistent growth now for, I want to say 1.5 years quarter on quarter. What we'd like to do is to continue to build-out that segment, that's a great relationship segment for us, and maintain that larger segment.

Okay, I appreciate all the color there, particularly with commercial. Just last one for me would be hopping to fees, if you could talk about what driver of the fee income growth might be from here and what would lead that going forward?

Fee income growth, for the most part, gets back to the notion of whether or not we intend to begin charging for our core deposit products and to date, we've avoided that. I'm not sure that, that's a great long-term franchise enhancer, so we'll have to see. Never say never, but as of now, that's not something in the cards for us.

Thanks for taking my questions.

(Operator Instructions) Brian Zabora, Stifel Nicolaus.

Question on the mortgage banking production -- can you give a sense of how much expenses might have be increased from the higher levels of revenue?

You're getting at commissions, Brian?

Yes.

I don't know what the number and variable comp relates directly back to the mortgage side, so it's something that we'd have to get back to you on. I'm not sure it's a terribly significant number.

Okay, that's all I had.

At this time, we have no further questions. I would like to turn the call back to Ms. Cindy Wyrick for closing remarks.

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

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