Bank of Hawaii Corp (BOH) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 Bank of Hawaii Corporation earnings conference call. My name is Jasmine and I will 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. Please proceed.

Thank you, Jasmine, and good morning, everyone. Thank you for joining us today as we review the financial results for the fourth 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. The comments today will refer to the financial information included in this morning's earnings announcement.

Before we get started, let me remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected.

And now I would like to turn the call over to Peter.

Thanks, Cindy. Aloha, everyone, good morning and thank you for joining us today. We are pleased with our financial results for 2012, which remain solid despite revenue headwinds resulting from both regulatory changes and the near historic low interest rate environment that we all find ourselves in today.

Loan portfolio for the year increased nearly 6% and deposit volumes continue to grow, both on the business and consumer side, particularly in our core deposits segments.

Expense control remains good and consistent progress is being made there. And I'm happy to announce that our new credit card product is off to a very, very nice start.

So now turn the call over to Kent, who will review some of the financials affecting the quarter's performance. Ken?

Thank you, Peter. Good morning. Net income for the fourth quarter was $40.3 million or $0.90 per share compared to $41.2 million or $0.92 per share in the third quarter and $39.2 million or $0.85 per share in the fourth quarter of 2011. Our return on assets in the fourth quarter was 1.19%, and return on equity was 15.5%.

Our net interest margin in the fourth quarter was 2.87% compared to 2.98% in the third quarter and 3.04% in the fourth quarter of 2011. Securities premium amortization was $1.4 million higher in Q4 versus Q3, due to faster mortgage paydowns in the investment portfolio. Year to date, the net interest margin was 2.97% compared to 3.13% last year.

Since the end of 2012, interest rates have increased, and this may reduce the NIM compression somewhat. However, the increase is not enough yet to turn margins upward.

Mortgage banking income, on the other hand (technical difficulty) slow with higher interest rates.

Year to date net income was $166.1 million or $3.67 per share compared to $160 million or $3.39 per share in 2011. Year to date, return on assets was 1.22% and return on equity was 16.2%.

Our year-to-date efficiency ratio was 57.9%, a reduction from 59.2% in 2011. Earnings per share was up 8.3% in 2012. Loans grew 5.7%. Shareholders' equity grew 1.9%. Branches were reduced by five.

We paid $81.4 million in dividends and repurchased $81.6 million of common stock.

There were no credit provisions in the fourth and third quarters compared to $2.2 million in the fourth quarter of 2011. The allowance decreased by $2.1 million in the fourth quarter and by $1.5 million in the third quarter, which equaled net charge-offs for the respective quarters.

Credit provision for the fourth quarter of 2011 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 fourth quarter was $128.9 million or 2.2% of outstanding loan and leases.

Non-interest income for the fourth quarter was $53 million compared to $52.4 million in the third quarter and $43.4 million in the fourth quarter of 2011. Year to date, non-interest income was $200.3 million compared to $197.7 million in 2011. Mortgage banking continues to be strong in the fourth quarter and generated income of $11.3 million compared to $3.4 million in Q4 2011.

For the full year, mortgage banking produced income of $35.6 million versus $14.7 million in 2011.

Debit card income was $11 million lower in 2012, due to the Durbin Amendment. Also in 2011, we had securities gains of $6.4 million.

Non-interest expense totaled $83.5 million in the fourth quarter compared to $84.9 million in the third quarter and $84.4 million in the fourth quarter of 2011. The decrease compared to the third quarter was primarily due to lower insurance and claims expense, lower separation expense, lower profit sharing and bonus accruals, partially offset by charges related to the planned closure of branches in American Samoa.

In the quarter, we incurred expense of $1.5 million associated with the closures in American Samoa.

Year to date, non-interest expense was $334.3 million compared to $348.2 million in 2011. The decrease compared to 2011 was primarily due to the $9 million in legal settlements related to overdraft claims, decrease in mileage, program travel expense and lower insurance and claims expense.

The effective income tax rate was 32.7% in the fourth quarter compared to 32.6% in the third quarter and 26.1% in the fourth quarter of 2011. Lower rate than 2011 was primarily due to closure of three tax years and the release of reserves for uncertain tax items. The year-to-date effective tax rate was 31.5% compared to 29.5% in 2011.

Our investment portfolio now stands at $7 billion and we have unrealized gains in the portfolio of $168 million. The average duration of the available-for-sale portfolio is 2.77 years and the overall portfolio duration is 2.89 years.

Loans were $5.9 billion at the end of the fourth quarter, up $72 million compared to the end of the third quarter and up $316 million from the end of the fourth quarter of 2011.

Deposits were $11.5 billion at the end of the fourth quarter, up $309 million compared to the end of the third quarter and up $937 million from the end of the fourth quarter of 2011. Correspondingly, securities sold under repurchase agreements were down $1.2 billion for the year.

At the end of the quarter, we also took on $100 million of long-term debt, which is three-year term money and priced at 50 basis points.

Our shareholders' equity was $1 billion at the end of the fourth quarter. We paid out $20.2 million in dividends and continued our share repurchase program in the fourth quarter, repurchasing 339,000 shares of common stock for $14.9 million.

Last Friday, our Board declared a dividend of $0.45 per share in the fourth quarter. At the end of the fourth quarter, our tangible common equity to risk weighted assets was 17.2%.

Now I'll turn the call over to Mary Sellers.

Thank you, Kent. Net charge-offs for the fourth quarter totaled $2.1 million, up $642,000 on a linked-quarter basis and down $4.9 million year-over-year. For the full year, net charge-offs were $10.7 million or 19 basis points of total average loan and lease outstandings, down from $21.4 million or 40 basis points of total average loan and lease outstandings in 2011. The improvement was driven off a $1.9 million decrease in commercial net charge-offs and an $8.9 million decrease in consumer net charge-offs, primarily in our residential and home equity portfolios.

Non-performing assets totaled $37.1 million, down $3.2 million from the third quarter and $3.7 million year-over-year. The linked-period decrease was primarily due to a $3.7 million decrease in residential mortgage non-accrual loans.

However, we continue to expect the level of non-performing assets to be impacted in the near-term due to the longer resolution time frame for residential assets. At quarter end, loans past due 90 days or more and still accruing interest totaled $10.4 million, up $2.9 million on a linked-quarter basis and $1.2 million year-over-year. The linked-period increase was due to a $2.9 million increase in residential mortgage related to three loans that are expected to return to current status.

Restructured loans not included in non-accrual loans or loans past due 90 days or more totaled $31.8 million at quarter end, up $418,000 from the prior quarter and down $1.9 million year-over-year. Residential mortgage loans modified to assist our customers in retaining their homes accounted for $22.2 million of the total at the end of 2012.

Residential mortgage and home equity loans past due more than 30 days but less than 90 days and still accruing interest increased by $711,000 on a linked-quarter basis but were down $3.8 million year over year.

We continue to see improvement in what we consider the higher-risk segments in our portfolio. In total, these segments were down $1.4 million for the quarter and $13 million for the year.

We recorded no provision for loan and lease losses in the fourth quarter, which, given net charge-offs of $2.1 million, reduced the allowance to $129 million or 2.2% of outstanding loans and leases. The allowance does consider the closure of our American Samoan operations, which had total loan outstandings of $15.8 million at the end of 2012.

Absent significant deterioration in the economy and with continued improvement or stability in credit quality, we anticipate requiring a lower level of allowance going forward.

I will now turn the call to Peter.

Thanks, Mary. Let me finish our formal comments by giving you some color on what we are seeing in the economy out here in Hawaii.

The visitor industry had a very good year, a major source of strength for the Hawaiian economy. We had a record number of visitors to Hawaii this year and visitor spending reached a record high of $14.3 billion. That's up over 18% for the year, most of that increase coming from our International segment.

We are beginning to see construction activity in our markets. We're seeing housing prices and volumes improving year on year. Inventory now in the single family market is down to under three months of inventory.

Statewide unemployment is 5.2% in December, and on our main market of Oahu that number is down into the low 4% range.

It looks like the forecast for 2013 would indicate continued growth in tourism. Seeing very good forward levels there and a gradual, albeit consistent, improvement across other sectors of our economy.

And now, we would be happy to respond to your questions.

(Operator instructions) Craig Siegenthaler, Credit Suisse.

This is actually Nick Karzon for Craig Siegenthaler this morning. Just kind of a first question -- can you give us a little bit more color in terms of what we should expect from the closure of the branches in American Samoa, both on the non-interest expense side, as well as fee income, and then potentially any impact on loan balances with those closures in the first quarter?

Okay, so the annual expenses in American Samoa are about $2.5 million. The corresponding fee income is about $2 million. There is a loan balance; it's about $15 million or so. So on a [NIAC] basis, actually, it's negative for us. So those are the major items.

Got it, thanks. And then just a second question -- can you give us some additional color on the mortgage banking results in the fourth quarter in terms of maybe the production level and gain on sale margin? And then maybe any thoughts from what you are seeing in the first month of the first quarter of 2013 in terms of what we can expect going forward.

Well, the mortgage application volume actually dipped down in the fourth quarter. That's pretty typical, though; that's seasonal. It's actually starting to look a little bit higher into the first quarter; but, again, that is seasonal. Compared to last year's first quarter, it's probably a little bit lower than last year's first quarter.

The gain on sale was high in the fourth quarter. It was 319 basis points in the fourth quarter.

Alright, thanks for taking my question.

Casey Haire, Jefferies.

Kent, just a follow-up question for you on some of your comments on the margin. It sounds like, obviously, rates are helping out on the security front. I was wondering if you could provide some color as to where new money is getting placed versus the 2.30% existing yield on the securities portfolio.

Yes, so the portfolio continues to be dominated by the mortgage-backed securities, over 75%, and we are continuing to reinvest into that segment. But we are also adding municipal securities and some corporates; but, obviously, that is a much smaller portion of the portfolio.

Okay, is that -- any color as to how that yield compares to the existing yields on a blended basis?

Well, in the fourth quarter, the reinvestment differential was about 114 basis points, so the runoff rate compared to the reinvestment rate was that 114 basis points. But now, that was fourth quarter. Into the first quarter, generally, rates have moved up about 25 basis points. So that differential, all other things equal, would be diminished by the improvement in rates.

Got you. So still a drag, just less of one?

Yes, it's still a drag. I think we have made some further increase in general interest rates for it to turn to a positive for us. But it's a lesser drag than it would have been otherwise.

Got you, okay. And then on earning asset front, could you give us a little help? It seems like there was a big disconnect in terms of the period end balances and what happened with averages, specifically on the security side. The period end up 360, the average down 180 -- did you guys invest a lot at the end of the quarter and at the end of the year?

Yes, that's pretty typical. At the end of the year, you get a flush of deposits, so that was put to work, but it just didn't impact the averages for the whole quarter.

Okay, is this stuff you expect to stick around, or is this just transient deposits?

Like I said, it's very typical at the end of the year to get a flush of deposits. They tend to run off early in the subsequent year, and that has pretty much been the pattern for many years.

Okay, and just lastly on the expense outlook, you guys continue to do a pretty good job in calibrating the expense line lower than what is the top revenue environment. I'm just curious; is there more room there? Is there more opportunities or are we at the end of the line there?

I think there is opportunity. I think the organization has really turned to very productive, very efficient. We are finding things we can do better. Some of the facilities items that we have been talking about really begin to kick in, in 2013. So I think we are still on the right track and I think there is still some opportunity there.

Okay, thank you very much.

Joe Morford, RBC Capital Markets.

Just given the relatively positive economic outlook, I would be curious about your current expectations for loan growth in the year ahead. And maybe is it reasonable to think we might see a similar pace to the 6% or so growth we saw last year?

Okay, well, we think that the economy is going to continue to be disruptive for our operations, loans in particular. I guess on the commercial front, I would say that we would anticipate continued growth in just about all categories, the caveat being, you understand, that we are slowly bringing down our lease portfolio. Whether we are going to see a consistent pattern of growth intra-quarter or in all quarters is yet to be seen. But I think on an annualized basis, I expect to see growth there.

The consumer book, which you know has been somewhat sticky for us until recently -- we're beginning to see pretty reasonable movement there. And then finally, the resi mortgage book has been a source of volume for us. But as Kent alluded earlier, we are going to see what kind of volumes we get this year relative to the success we have had in prior years. So little bit of a question mark there, a little bit of an opportunity, though, there because we are both sellers as well as portfolio holders of those assets.

And then just to follow up on that -- what was your impression of the new QM rules, and do you see that having much of an impact? And also on mortgage, what is the split you are seeing between refi and purchase activity?

Yes, so you are talking about the CFPB initiative?

Yes, I am, thanks.

Yes; we have run that analysis. The good news is, for a number of those categories that are now prohibited, the fact of the matter is, Bank of Hawaii was just not in those categories to begin with.

Probably the most hurtful element to us is in the debt to income. And so we had an underwriting level of 45%. That's now 43%, and so the impact of that is going to be in the $20 million, $30 million range. Most of that differential from 43% to 45% we would be able to push through into the Fannie or Freddie market because they are, I guess, exempt, for lack of a better term. But we probably will get clipped on the private client side where we are just dealing with a different scale of debt to income. And so underwriting at 45% would be more than appropriate, given income levels there. And so it will have a nominal effect on us.

Okay, and the purchase/refi split?

We are pleased to see that moving up, frankly. I think historically and certainly in the last couple of years refi had been the majority of volume that we were taking in. I think in this most recent quarter, purchase is well into the double-digit range in terms of percentage -- in fact, I think well above 20%.

So good movement there, and I think a positive sign for overall housing and economic activity out here.

Sounds good. Thanks a lot, Peter.

Jeff Rulis, DA Davidson.

A couple of questions were answered, but I guess a little housekeeping on the expense line. Just wanted to confirm that that American Samoa -- the charge was through the occupancy line?

Most of it is, yes. There is an element that's in salaries and benefits associated with severance expense. But the majority is in occupancy.

And, Kent, the impact of that leaving the system, as you outlined -- none of that really occurred in Q4? That is a full quarter with American Samoa in and then (multiple speakers)?

Yes, and that will be true in the first quarter as well.

Got you. And then the tax rate, could we expect, or, Kent, do you expect around these levels or slightly higher going forward?

Yes. The rate itself sometimes is affected by the level of income because you have a fixed amount of credits and offsets. But I would not disagree with your assertion. These rates are pretty typical.

Okay, that's it, thanks.

Jacque Chimera, KBW.

It was nice to see the fee diversification that happened in the quarter just with most line items being up. Could you maybe provide a little more color on what the main driver was across those?

Are you talking about the trust and asset management?

Yes, the trust, the insurance, exchange fees. It looked like almost everything had a linked-quarter gain.

Yes. Well, apparently, the trust business, higher values in assets under management is the reason. We also had a trust that is in liquidation and we had additional fees there.

In the insurance category, we did have a little boost in annuity and life insurance products in the fourth quarter, but for the whole year insurance was actually down for us. So a little bit of movement upward in the fourth quarter, but nothing very dramatic. So this is the only real highlights outside of the mortgage banking results, of course.

So was the fourth quarter more just a timing issue where fees just happened to rise a little bit on the quarter, or could we look for more fee growth outside of mortgage banking in 2013?

Well, again, back to trust and asset management, to a certain degree it depends on the value of assets. So we do have a higher level of assets under management. That has a lot to do with fees in that segment.

Other than that, I wouldn't expect anything extraordinary.

Okay, and then just one last quick one for Peter. You had mentioned the credit card program and that that was doing well. What line items in particular is that already starting to hit, as far as loans and maybe something for fee generation?

Yes, right. Well, we are only a few months into it. Largely branch generated, so we are not really going mass-market in terms of mail drops right now, Jacque, so somewhat of a slow, soft opening. But the results are good. Our approval rate's looking about where we wanted it to be, maybe a little bit higher. Commitments are, to date, into the low-eight-figure range. But, obviously, it will take a while for people to spend into these cards.

So a bit early to tell what the bottom line impact is going to be, but certainly the early activity looks promising.

Okay, great, a key for the color and thank you for taking all my questions.

Brett Rabatin, Sterne Agee.

I wanted to just talk about expenses for a second. You were able to lower on a core basis expenses about 2.5% in 2012. I am curious if that is the goal for 2013, and does that basically result from the branch closures you are doing and the other programs? I'm just trying to figure out if expense rationalizations might be higher or lower than what they were in 2012.

Brett, I will talk on the branch side, and then maybe Kent can clean up with all the other items that we have afoot.

The branch rationalization program has been successful for us. And obviously, the idea is to get efficiency but not to drive efficiency at the expense of either deposit performance or just basic franchise performance.

So I would say we are about halfway through that right now, at least what we have identified for now. There are initial savings out there, but there are moving pieces here and they have to do with closing in certain areas and opening in other areas, to make sure that we are sailing from a real estate demographic standpoint. So that still is an opportunity out there for us.

I guess the only other thing I would say about the optimization program is one of the keys to our success, we think, in this program has been the fact that we effectively have a no-layoff policy. So as we transition staff out of closed branches, we move them into outer-lying existing branches, which obviously has had, I think, a calming influence on the branch desk. It has also helped with retention, many of these customers whom deal with these branch personnel on a daily or weekly basis.

So a lot of the savings that we will or have garnered out of it come on the back end, if you will, as we just manage towards general attrition levels.

Okay, and then the other question I had was just around year-end activity, how much that impacted, if any, either your loan or your deposit balances in terms of folks going on with tax stuff.

Kent spoke to the usual crush of deposit run-up at year end. It felt a little higher this year than in past years, but a lot of that stuff just washes through early in the first quarter of the next year. And then, in terms of on the loan side, it seemed to be a pretty reasonable year end closing.

Okay, great, thanks for the color.

Aaron Deer, Sandler O'Neill & Partners.

I just wanted to circle back on a couple points with respect to the margin. One was -- and forgive me if you have already addressed this -- what impact did paydowns in the securities book have in the portfolio? And with rates having come up here a little bit, has that begun to stabilize? I just wonder if you can give us like a basis point impact from, say, the fourth quarter to the third quarter.

So differential in yield between what ran off and what was reinvested was 114 basis points in the fourth quarter. And as I mentioned, that was based upon an environment where, for example, the 10-year Treasury was more like 1.70%; and now, today, we are over 2%. So we are making up some of the differential today, but it's going to take a bit more of a higher rated environment for us to turn positive on the margin.

So I think the compression we have experienced in the fourth quarter and really throughout the year may be mitigated a little bit here, but not completely overwhelmed.

Right, I think I might have misspoke. I was looking for the prepayment impacts. But that's fine.

The other question I had was more on the funding side. I know, obviously, you had a lot of deposit inflows, and it doesn't seem like there's a whole lot more you can do in terms of rationing rates on your CD. It's already -- it looks like it's pretty low. But what about with respect to the repo funding? What is the maturity schedule on that, or is that something that you can prepay?

Yes. The prepayment comes with a price, so they all have make-whole requirements. So we don't see any particular good purpose in prepaying any of the term in private repos.

The public repose -- a little bit of difference there. That really represents short-term funding, many of the same characteristics as deposits. And we have been reducing the level of public repo funding in favor of deposit funding. Those are somewhat interchangeable.

Okay, thanks. I think all my other questions were asked and answered, so thank you.

Erin Davis, Morningstar.

Hi, thank you for taking my questions. I had a question about the allowance for non-performing loans and then losses. Every quarter -- and recently you haven't been posting any provisions, and that is causing your allowance to run down naturally. But even so, it's quite [hurry] as a portion of non-performing loans; it's like 400% now. And I wonder how you see that developing going forward and what you see as a medium-term target for the provision, and if you think that we might start to see some more benefit from that, or if you see this as a steady-state level.

I think, as I mentioned, that with continued stability in credit quality and our economic environment stabilizing and improving, we would expect that concurrently with the reduction in our risk profile that we would continue to require a lower level of allowance. I think if you look historically, we are pretty measured about that and take a look each quarter and evaluate where we need to be.

Okay, so you wouldn't probably feel comfortable naming a medium-term target, say, like 3% of non-performing loans or 2% of total loans or something like that?

No, I don't think so.

Okay, thank you for taking the questions.

Russell Gunther, Bank of America.

The bulk of my questions have been asked and answered at this point, but maybe just to follow up with regard to loan growth. If you guys could give a little color on what was driving some of the commercial growth in the quarter?

Well, I think you know that commercial mortgage had been a leader for us for a while now. That continued to be the case in the fourth quarter on a linked basis. Results on a year-on-year basis were exceptional.

Construction is a small number for us and is not likely to be a leader for us. But as I mentioned, we are beginning to see increased activity here in the marketplace, so I would look to that sector as contributing to growth, but not necessarily becoming a headliner loan category for us.

And then, finally, C&I, which had been probably the laggard as we built in through the cycle, we are beginning to see some life in that segment as well right now.

Great. And then I appreciate that and the color you provided earlier. Based on the level of activity you are seeing, would it be your expectation at this point to be able to outpace loan growth that you guys put up in 2012?

I thought the 2012 was pretty good performance.

Got it, okay. Thanks for taking my questions.

(Operator instructions) Brian Zabora, Stifel Nicolaus.

A question on the charges for American Samoa -- will there be any future charges in coming quarters?

No. We're going to continue to operate here in the first quarter. But in terms of closure type expenses, I would not anticipate additional charges.

Okay. And then, did you see any impact from the tag program expiration in deposit balances in January?

I think neither here nor there. So I think that's what we were braced for, so clearly, we didn't see a runoff, I think, directly associated with tag, nor did we see a crush of deposits coming in from other institutions.

Thanks for taking my questions.

Casey Haire, Jefferies.

Just real quick, capital return finished the year just under 100%, which I think is what you guys were targeting for 2012. Just wondering -- is that your same outlook for the year ahead, or should we expect that to moderate lower?

It's about what we are expecting. We have been increasing our tier 1 leverage ratio here over the last two quarters. We want to get that up a little bit more. But think about a little bit longer period of time, we are turning all the capital we are generating, less than the capital we need for growth; that's still the strategic objective.

Got you, and then just one on mortgage banking. Kent, you mentioned that volumes are better than fourth quarter but weaker than last year's first quarter. Just wondering, the gain on sale in the first quarter of 2012 -- was that meaningfully lower?

It was lower, yes. it was about 50 basis points lower.

In first quarter 2012?

Yes.

Okay, thank you.

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, Jasmine, and I would like to thank everyone for joining us here today, and for your continued interest in Bank of Hawaii. As always, if you have any additional questions or any further clarification on any of the topics we discussed today, please feel free to give me a call. Take care and 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.