Bank of Hawaii Corp (BOH) 2013 Q3 法說會逐字稿

Welcome to the third-quarter Bank of Hawaii Corporation earnings conference call. My name is Christine and I will be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Ms. Cindy Wyrick. You may begin.

Good morning and thank you, Christine. Thank you, everyone, for joining us today as we review the financial results for the third quarter of 2013. Joining me this morning is Chairman, President and CEO, Peter Ho; Vice Chairman and Chief Financial Officer, Kent Lucien; and Vice Chair 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. Now I would like to turn the call over to Peter Ho.

Thanks, Cindy. Good morning, everyone, and thank you for joining us today. Thanks also for your interest in Bank of Hawaii Corporation.

We are quite pleased with our financial results for the third quarter. Loan balances grow nearly 3% from the previous quarter with good consistency in almost every category. We also continued to attract quality deposits during the quarter. Our core consumer and commercial deposit balances were up 2.4% in the second quarter.

As a result of the balance sheet growth and steepening yield curve, net interest income increased and our net interest margin widened by 6 basis points from the previous quarter. Liquidity and capital levels remain robust for us at the end of the third quarter and credit quality, as Mary will get into, remains a strong point for us.

Now let me turn it over to Kent, who has greater detail in the numbers.

Thank you, Peter. Good morning. Net income for the third quarter was $37.7 million or $0.85 per share compared to $37.8 million or $0.85 per share in the second quarter and $41.2 million or $0.92 per share in the third quarter of 2012.

Our return on assets in the third quarter was 1.09%, and return on equity was 15%. Our efficiency ratio was 61%. Year to date, net income was $111.4 million or $2.50 per share compared to $125.8 million or $2.77 per share in 2012.

Year to date, return on assets was 1.09% and return on equity was 14.6%. Our year-to-date efficiency ratio was 61%.

Our net interest margin in the third quarter was 2.83% compared to 2.77% in the second quarter and 2.98% in the third quarter of 2012. The higher margin was primarily due to lower premium amortization in our securities portfolio, loan growth and higher levels of asset reprising.

Premium amortization was $14.4 million this quarter compared to $16.8 million in the second quarter. Loans grew 2.5% sequentially and the investment portfolio reinvestment differential was a positive 16 basis points.

During the quarter, we also amended and extended $125 million of private long-term repurchase agreements and thereby lowered the rate on those repos from 4.68% to 4.20%. So far this year, we have amended and extended $325 million of private long-term repos and on average have lowered the rate by 79 basis points.

There was no credit provision in the third quarter of 2013. Net charge-offs in the quarter were $900,000. Our allowance for loan and lease losses at the end of the third quarter was $123.7 million, or 2.1% of outstanding loan and leases.

Noninterest income for the third quarter was $45.1 million compared to $48 million in the second quarter and $52.4 million in the third quarter of 2012. The decrease compared to the second quarter was primarily due to a decrease in mortgage banking income and a decrease in prepayment and syndication fees.

Mortgage income was $4.1 million compared to $5.8 million in the second quarter, $11.7 million in the second quarter of 2012. Year-to-date, noninterest income was $140.9 million compared to $147.3 million in 2012.

Noninterest expense totaled $83 million in the third quarter compared to $81.2 million in the second quarter and $84.9 million in the third quarter of 2012. The increase compared to the second quarter was primarily due to an increase in separation expense and data processing services. The decrease compared to the third quarter of 2012 was primarily due to a decrease in salaries and benefits and lower net occupancy expense. Year to date, non-interest expense was $248.5 million compared to $250.8 million in 2012.

The effective income tax rate was 28.9% in the third quarter compared to 30.3% in the second quarter and 32.5% in the third quarter of 2012. The lower rate in the third quarter of 2013 was primarily due to a release of reserves related to the closing of a tax audit for prior years.

Our investment portfolio now stands at $6.9 billion. The average duration of the AFS portfolio is 2.76 years, and overall portfolio duration is 3.78 years. During the quarter, we repositioned approximately $325 million from AFS to HTM, and so our investment portfolio is now 33% AFS and 67% HTM.

Loans were $6 billion at the end of the third quarter, up $147 million or 2.5% compared to the end of the second quarter and up $224 million from the end of the third quarter of 2012. Commercial loans increased by $78 million this quarter.

Deposits were $11.6 billion at the end of the third quarter, up $159 million compared to the end of the second quarter and up $388 million from the end of the third quarter of 2012.

Our shareholders' equity was $1 billion at the end of the third quarter. We paid out $20 million in dividends and continued our share repurchase program in the third quarter, repurchasing 165,000 shares of common stock for $8.9 million.

Our Board declared a dividend of $0.45 per share for the third quarter. At the end of the third quarter, our tangible common equity to risk-weighted assets was 15.4% and our tier 1 leverage ratio was 6.95%. We plan to increase our tier 1 leverage ratio to 7% by year end.

Now I will turn the call over to Mary Sellers.

Net charge-offs for the third quarter totaled $900,000, down $1.4 million on a linked quarter basis and down $577,000 year over year. Both the linked-period and year-over-year improvement were due primarily to recoveries realized from residential mortgage and home equity loans moving through the foreclosure process.

Nonperforming assets totaled $33.8 million, down $2.6 million from last quarter and down $6.5 million year-over-year. Both the linked-period and year-over-year decrease were due to reductions in residential mortgage nonaccrual loans. However, we continue to expect the level of nonperforming 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 $11.4 million, up $804,000 on a linked-quarter basis and up $3.9 million year-over-year. The linked-period increase was due to a $584,000 increase in residential mortgage loans and a $128,000 increase in home equity.

Restructured loans not included in nonaccrual loans or loans past due 90 days or more totaled $39.8 million at quarter and, up $691,000 from the prior quarter and up $8.4 million year over year. Residential mortgage loans modified to assist our customers in retaining their homes accounted for $21.4 million of the total at the end of the quarter. Residential mortgage and home equity loans past due more than 30 days but less than 90 and still accruing interest decreased by $2.6 million on a linked-quarter basis and $4.1 million year-over-year.

We continue to see improvement in what we consider to be the higher risk segments in our portfolio. In total, these segments were down $1 million for the quarter and $11.3 million year over year.

As Kent shared with you, we recorded no provision for loan and lease losses in the third quarter, which, given net charge-offs of $900,000, reduced the allowance to $123.7 million or 2.1% of outstanding loan and leases. With continued strengthening and stability in the economy and continued stability and credit quality, we anticipate requiring a lower level of allowance going forward.

I will now turn the call back to Peter.

Let me close by sharing with you some color on the local economy here in the Hawaiian Islands. In a nutshell, it remains a very positive story. The visitor industry continued to be a good source of strength for the economy during the quarter, augmented by some other activity. For the first eight months of 2013, visitor spending increased 5.1% from the record levels achieved in 2012. Arrivals were also up 5.1% and year-to-date the visitor industry has contributed over $1 billion in state tax revenue. That's up $50 million from the same period last year.

The housing market remains a good story for our marketplace. Oahu single-family home and condominium median prices rose 6% and 8.9%, respectively, in September and year-to-date are up 3.3% and 5.4%. Home sales volumes are also up in a healthy way, up 7% for single-family and 16.5% for condominium. Inventory levels are down to very low levels, 2.8 months for single-family homes and three months for condominiums. Sellers of homes in Hawaii are achieving 98.5% of asking list price for single-family and 99.7% of list price for condominium, so obviously a very good seller's market.

Unemployment is down to 4.3% in August. That's down from 5.1% at year end, and I think, as most of you know, down significantly from that of the national average.

Finally, I guess what I would share is we believe we are in the earlier stages of what could be a pretty constructive construction expansion here in the islands, just a number of both private and public projects beginning to come online, and we think that that gives us an opportunity here in this marketplace to expand further into the economy.

And with that, we would be happy to take any questions you might have.

(Operator Instructions) Casey Haire, Jefferies.

So a question on the margin outlook -- I'm just wondering, that premium amortization of 14.8 -- can we expect some further downside from here going forward?

And then on the reinvestment yield, Kent, I believe you said plus 16 bips. Does that mean that new money is coming on around 2.40 or so?

So the answer to your first question is yes, we would expect amortization to probably come down somewhat into the near-term. It's all a function of prepay speeds, which have been slowing. So those conditions continue. So yes, the answer is yes to that.

As to the reinvestment situation, 16 basis points was the differential in the third quarter. And let me see if I can find the figures here. It's about 2.25 or so in terms of the current level of purchases, in that neighborhood.

Okay, thank you. And then just one more, on the loan growth outlook -- Peter, you obviously -- you're sounding pretty good about some of the opportunities you see on the construction side of things. Coming off a very strong result by your standards, in double digits, what kind of expectation of growth can we expect going forward?

Yes, well, I think that the year-on-year number in commercial, as you know, is pretty extraordinary by our standards. So I'm not sure that I would anticipate us to maintain double-digit year-on-year numbers off into the near future, but I do believe that there is a pretty good probability of continued solid loan growth for us down the commercial front.

Okay, thank you.

Nicholas Karzon, Credit Suisse.

First, on the mortgage banking side, can you give us some color on the volumes you saw this quarter and the gain on sales spread, and then also the mix between refi and purchase in the quarter?

Yes. So in terms of new applications for the quarter, those were down 48% compared to the second quarter. The gain on sale was 210 basis points; that's down about 20 basis points from Q2. In terms of the composition, 54% are purchase and 46% refi.

Thanks. And then going into the NIM a little bit, we saw the NIM turn this quarter and saw the inflection there. How close do you think we are to seeing the loan yield compression slow and potentially stabilize?

On the loan side?

Yes.

The mortgage loan side?

No, the loan portfolio as a whole.

That's about 3 basis points.

That's a tough question to answer because the velocity of loans that we are putting onto the balance sheet has changed, the loan volume that has changed pretty significantly down the mortgage side, which would be the bulk of our longer-term assets. So I guess my thought to that would be we are certainly decelerating in terms of losing spread, but it's not clear exactly when we are going to turn.

Okay, thanks for taking my questions.

Erin Deer, Sandler O'Neill & Partners.

Following up on Nicholas's question, maybe another way of asking it is on the new loans that you are booking today, how does the pricing on those compare to what you were booking six months or year ago?

Well, it depends on the category. So on the commercial -- obviously, you can understand our hesitation in talking pricing here, Erin. So on the resi side, when we are --

You don't have to give specific numbers. Just in terms of, to the extent that you are still seeing pricing pressure from competition, I'm just trying to gauge where we are in that.

Right, so here's what I would say. On the salable residential mortgage side, we are clearly up in terms of yield versus last year. On the jumbo residential mortgage side, we are up as well, but that's probably the most competitive spot in the residential mortgage space.

On the commercial front, I would say that certainly for commercial real estate loans of good quality and reasonable size, there's a good amount of pressure competitively, although we are looking to hurdle at a minimum 200 basis points on like riskless assets.

And then on the C&I side, that's really all over the place. But in general, C&I lending is squarely in the LIBOR space versus base, and spreads really are dependent on the type of transaction, but competitive.

That's helpful; I appreciate that. And then just quickly on the capital side, these share buybacks have been slowing this year relative to last, and I expect that has something to do with both the stock price being much higher as well as the deferred positive growth trends you are seeing. So I'm just wondering, when I look at the tier 1 ratios, it seems like it has been hanging in the 675, 70% level. Is it fair to assume that that's kind of a floor for where you guys want to have your capital levels going forward?

Well, maybe correct you on one thing. The capital actions really haven't reflected the price of the stock. Some of the reduced capital and buybacks has solely been a function of trying to get to a 7% tier 1 leverage ratio.

So what we saw in the third quarter was deposits grew, the balance sheet was bigger because of that, and so a little bit less in terms of buybacks. So that's really the determinant here. We are going to continue to try to get to the 7% leverage ratio by the end of the year.

Okay, perfect, thanks for taking my questions.

Jacque Chimera, KBW.

I wondered if you could touch on the timing of the impact into expenses from a compensation standpoint, just on the slowdown in mortgage banking and when you will see that reflected there as well.

Yes, well, I think intuitively as volumes fall, you should expect some offset in expenses, Jacque. The challenge, though, I think, is that the whole industry is changing pretty rapidly in the residential mortgage space. The thoughts where unqualified mortgages and what are the impact there, some of the prices changes that we are seeing in salable versus jumbo and the transition from refinance to purchase and, frankly, purchasing a pretty tight purchase market here in the islands has us really thinking about where we want to take this business.

So what I would say is we are really exploring how best to create value out of our mortgage business. The market is changing pretty meaningfully, and of course having the right expense structure is going to be in place. But that's not altogether clear exactly what that is at this point for us.

Okay, and then another expense question quickly -- the separation expense, you've had some of that for the last couple of quarters. Is there anything unusual in there? I know you had some branch closures that are pending (multiple speakers) --

Yes, I think you characterized it pretty accurately. It has been somewhat of a consistent theme for us in certain quarters. And I think, as you know, the way that we look at expense management is really a little bit more of a serial approach than an episodic or program type approach. And so we are constantly reviewing various operations in the organization, trying to see where there are efficiency opportunities. And when we come upon some of those opportunities, that's when you see a bulge in severance expense. So this quarter was a little on the higher end, but probably directionally not too unusual for us moving forward.

Okay, great, thank you for the color, I appreciate it.

Joe Morford, RBC Capital Markets.

I was first curious -- the deposit growth in the quarter was quite strong again. Anything in particular driving that or anything different going on this quarter?

Clearly, we are not doing anything on the pricing side because our cost of deposits is pretty darn low at this point.

To be honest with you, we've been rather surprised at the strength of our deposit performance over the past -- I'll call it over the past year. So when we look at the source of those deposits, some of it is coming in, certainly, through just market increases. The economy is doing well here in the islands. But to be honest with you, a lot of it is coming through from market share gains, and that makes us feel good about the brand, but it's certainly not coming through as a result of us pricing up for deposits.

I wouldn't have thought so. And then just on the credit side, the charge-offs are extremely low this quarter. I was just curious about the pipeline for additional recoveries and. Maybe along with that, just really talked about, the release talked about some -- alluded to some softness in residential mortgage and the neighboring islands. I was just curious for an update on where that stands.

I think you will see a pretty consistent trend as we move forward over the next few quarters in our residential book. If you look, gross charge-offs are running pretty consistent, and that tends to come from our neighbor island portfolio, but we also are working through our pipeline of foreclosed assets. And we will see a steady stream from that, on par with what you are seeing.

Okay, thanks very much.

Jeff Rulis, D.A. Davidson & Company.

Peter, just to follow up, a question or two on your economic comments. It sounded pretty positive. I guess the first question -- could we assume that the government shutdown didn't have much of a negative effect on what you are seeing so far?

Just anecdotally, I think it did have an impact. So we still had reasonably positive results but probably offset somewhat by the effects out of Washington. So we have got a pretty heavy reliance on national parks here in the state, and they are a major visitor attraction. So Pearl Harbor was closed for two weeks; National Volcano Park was closed for a couple of weeks.

So I think that clearly it was not good for business, and it's really tough to figure out what impact -- what's happening in Washington is having on consumer settlement with respect to taking a vacation in Hawaii. So I think it's having an impact; it's just not having enough of impact to change pretty strong statistics in the visitor industry for us right now.

Okay, and then your comments on the construction business -- that's more of an indirect benefit in just overall activity. You guys don't look to book real construction activity, at least on the residential side. Or are you looking to capture some activities directly in that business?

Yes, that's a really good nuance. I think at our peak in the last cycle took our construction book up to a little over $200 million. That's a business that we are in to support some of the finest real estate clients in this marketplace. It's not really a business that we look to for generating loan growth, per se.

So the construction activity, I think, from Bank of Hawaii's standpoint is going to play into our opportunities through just general economic expansion as well as supporting just a lot of businesses that support the construction trades.

Great, thanks.

Brett Rabatin, Sterne Agee.

I wanted to ask about the tax rate and just thinking about that going forward. I know there were a couple of things that impacted it this quarter. Would it be fair to assume that the tax rate on an ongoing basis is lower than it was the first half of this year?

Well, I don't know about that last comment, Brett, but it can be episodic, as we demonstrated here in the third quarter. We had a situation where we closed out some audits on uncertain tax matters were accordingly released. That brought us down to under 30%. I still have to guide you at between 30% and 35% as an effective rate going forward. Hopefully, at the low end of that would be a way to think about things. So nothing that has happened this quarter really changes anything longer-term.

Okay, and then the other follow-up was just around premium amortization. And I know it was down, I think, from 16.1 to 14.8 this quarter. Can you talk about what might be an ongoing level for premium amortization, excluding what might be accelerated due to just cash flow from the portfolio coming in faster than expected?

Well, maybe if I give you a few more facts, it will help a little bit. The amortization in this quarter was 14.3 --

I'm sorry, 14.3.

Yes, 14.3. And of that, 8.7 was due to amortization for mortgage-backed securities. And that number had been 10.7 in Q2.

So really, the major change is in the mortgage space. There are limits. You are not going to get that number down by half; that's unrealistic. And you are really not going to be able -- and the amortization for other types of securities, any premium associated with a treasury note -- it's just not going to change as a function of interest rates.

So I can't really give you a number for Q4 or beyond, other than to say directionally it's likely to be a little bit lower into the fourth quarter.

Okay, great, thanks for the color.

Don Destino, Harvest Capital.

I was going to basically ask Brett's question about run rate amortization. Let me just ask the one more nuance I was going to add to my question, which is could you tell us what the premium is, the premium that needs to be amortized in the current securities portfolio?

No, we haven't released that.

All right, thanks very much.

Matthew Keating, Barclays.

It was nice to see some modest growth in the residential mortgage book this quarter. It has been kind of (multiple speakers) period where refinancings will be challenged. Can you talk about what impact that typically has on your on-balance sheet residential mortgage portfolio?

Sure. That ironically has a positive impact on residential mortgage outstandings. So as refis -- as the attractiveness of selling through refis comes down with gain on sale coming down, there's probably a natural move towards portfolioing a higher proportion of residential mortgages for us. So that's accretive to outstandings.

The other thing that happens is that, as refi activity slows, just the natural churn at the bottom of our portfolio slows as well, so kind of a dual stage impact there. And I think the bottom line to that is, whereas we have seen resi mortgage outstandings fall reasonably precipitously in the past several quarters, we will probably see a flattening of that going forward.

Great, and just one last question on expenses, you've had a pretty good track record over the past 2 to 3 years of reducing the absolute dollar number of expenses. Is that a goal that you guys continue to shoot for at the moment?

It is. We had been -- I think of the past couple of years, we have been running with a soft goal of call it 2% per year. I think, as we look forward, we still believe we can reduce expenses on an absolute basis. That 2% may shrink a bit, though, really as an offset not to expense management, but really as an accommodation to investing a little bit more on opportunities that we see and what we view as an expanding marketplace here.

So yes, still bringing it down, absolutely, but maybe not at the same rate of the past couple-three years.

Great, thank you.

(Operator Instructions) We have no further questions at this time.

Thank you, Christine. I would like to thank everyone 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 further clarification on any of the topics we have discussed today. Have a great day, everyone.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.