Bank of Hawaii Corp (BOH) 2013 Q4 法說會逐字稿

Welcome to Fourth Quarter Bank of Hawaii Corporation Earnings Conference Call.

(Operator Instructions)

Please note that his conference is being recorded. I will now turn the call over to Cindy Wyrick. You may begin.

Thank you, Alexandra. Good afternoon, everyone, and thank you for joining us today.

Joining me this afternoon, is our Chairman, President, and CEO, Peter Ho, our 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 the earnings announcement released 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 that the actual results may differ materially from those projected.

And now, I'd like to turn the call over to Peter Ho.

Thanks, Cindy. Good afternoon, everyone, and thanks for joining us today. We're please with our financial results for the fourth quarter of 2013.

Overall, loan demand was solid this quarter. Outstanding loan balances grew 1.5% from the previous quarter. We were especially pleased to see positive results in both our commercial and consumer portfolios this quarter, as we've been anticipating and hoping to see such.

We also continued to grow overall deposits during the quarter. Most importantly, core consumer and commercial deposit balances grew 2% for the third quarter.

Due to our growing balance sheet and the steeper yield curve, net interest income increased in the fourth quarter and our net interest margin widened by 2 basis points. Liquidity and capital levels remained robust at year end. Credit quality, aside from a single and isolated commercial credit situation which has been fully provided for, remained stable.

And now, let me turn the call over to Kent, who will provide you further detail

Thank you, Peter.

Net income for the fourth quarter was $39.1 million or $0.88 per share, compared to $37.7 million or $0.85 per share in the third quarter, and $40.3 million or $0.90 per share in the fourth quarter of 2012. Our return on assets in the fourth quarter was 1.12%, and return on equity was 15.4%. Our efficiency ratio was 60%.

Full year 2013 net income was $150.5 million or $3.38 per share, compared to $166.1 million or $3.67 per share in 2012. Year-to-date return on assets was 1.10%, and return on equity was 14.8%. Our year-to-date efficiency ratio was 60.7%.

Our net interest margin in the fourth quarter was 2.85%, compared to 2.83% in the third quarter, and 2.87% in the fourth quarter of 2012. The higher net interest margin was primarily due to lower premium amortization in our securities portfolio, continuing loan growth, and higher levels of securities repricing.

Premium amortization was $13.8 million this quarter, compared to $14.4 million in the third quarter. Average loans grew 2.7% sequentially, and the investment portfolio reinvestment differential was a positive 21 basis points. There was no credit provision in the fourth quarter of 2013.

Net charge-offs in the quarter were $8.2 million. Our allowance for loan and lease losses at the end of the fourth quarter was $115.5 million, or 1.9% of outstanding loan and leases.

Non-interest income for the fourth quarter was $45.3 million, compared to $45.1 million in the third quarter, and $53 million in the fourth quarter of 2012. The decrease compared to the prior year was primarily due to a decrease in mortgage banking income.

Mortgage income was $2.8 million, compared to $4.1 million in the third quarter, and $11.3 million in the fourth quarter of 2012. Year-to-date non-interest income was $186.2 million, compared to $200.3 million in 2012.

Non-interest expense totaled $82.4 million in the fourth quarter, compared to $83 million in the third quarter, and $83.5 million in the fourth quarter of 2012. The decrease compared to the third quarter of 2013 as well as Q4 2012, was primarily due to lower salaries and benefits expense and occupancy costs. Year-to-date non-interest expense was $331 million, compared to $334.3 million in 2012. Also, separation expense was $2.1 million higher in 2013 versus 2012.

The effective income tax rate was 29% in the fourth quarter, compared to 28.9% in the third quarter, and 32.7% in the fourth quarter of 2012. The lower rate in the fourth quarter of 2013 was primarily due to the utilization of capital losses on the sale of a low income housing investment.

Our investment portfolio now stands at $7 billion. The average duration of the AFS portfolio is three years, and overall portfolio duration is 3.9 years. Loans were $6.1 billion at the end of the fourth quarter, up $89 million or 1.5% compared to the end of the third quarter, and up $241 million or 4.1% from the end of the fourth quarter of 2012.

Deposits where $11.9 billion at the end of the fourth quarter, up $307 million compared to the end of the third quarter, and up $385 million from the end of the fourth quarter of 2012.

Our shareholders equity was $1 billion at the end of the fourth quarter, and we paid out $20.1 million in dividends. And continued our share repurchase program in the fourth quarter, repurchasing 86,000 shares of common stock for $5 million.

Our Board declared a dividend of $0.45 per share for the fourth quarter. At the end of the fourth quarter, our tangible common equity to risk-weighted assets was 15.5%, and our Tier 1 leverage ratio was 7.1%.

And now, I'll turn the call over to Mary Sellers.

Thank you, Kent.

Net charge-offs for the fourth quarter totaled $8.2 million up $7.3 million on a linked quarter basis, and up $6.1 million year-over-year. Both the linked period and year-over-year increase were due to a $6.6 million charge-off related to a commercial loan in Guam. For the full-year, net charge-offs were $13.4 million, or 0.23% of total average loans and leases.

Non-performing assets totaled $39.7 million at the end of the year, up $5.8 million from the third quarter, and up $2.6 million year-over-year, again, due to the commercial loan in Guam.

Occurring loans and leases past due 90 days or more totaled $9.9 million at year-end, down $1.5 million on a linked quarter basis, and down $551,000 year-over-year. Both decreases were due to reductions in residential mortgage loans.

Restructured loans, not included in non-accrual loans or loans past due 90 days or more, totaled $51.1 million at year-end, up $11.3 million from the third quarter, and $19.3 million from the prior year. The increase was primarily due to the restructure of a Hawaii commercial loan, which is expected to be fully repaid during the first quarter of this year. Also included in the $51.1 million were $22.8 million in residential mortgage loans, modified to assist our customers in retaining their homes.

We continue to see improvement in what we consider to be the higher risk segments in our portfolio. In total, these segments were down $2 million for the quarter, and $12 million for the year.

As Kent shared, we recorded no provision for loan and lease losses in the fourth quarter, which given net charge-offs of $8.2 million, reduced the allowance to $115.5 million. We continued to estimate the required level of allowance based upon the economic environment, asset quality, dynamics, and portfolio growth and composition.

I'll now turn the call back to Peter.

Thanks, Mary. Let me finish with a little commentary on the Hawaiian economy, which continues to perform well.

On the visitor front, 2013 is on track to be another record year for tourism in Hawaii. For the first 11 months of 2013, total visitor arrivals increased by 3%, and visitor spending increased by 2.9% over the record levels of the same period in 2012. While spending and arrivals softened a bit late in the year, it's important to remember that 2013 is comping off of three very strong years in both the arrival and spending growth.

Further, we'll begin to see our China market benefit from direct air service growing from one carrier last year to three in 2014, with Air China and Hawaiian Airlines joining China Eastern.

The real estate market looks strong as well. Oahu single-family home and condominium median prices rows 4.8%, and 4.6% in the year. And the volume of home sales was also strong, up 4.6% for single-family homes, and 11.8% for condominiums.

Inventories remain in at very low levels at currently 2.7 months for single-family, and 2.9 months for condominiums. And average days-on-market were 20 and 21 days for single-family and condominiums respectively in 2013.

Construction activity should pick up in 2014, as progress on the city's rail project won an over a dozen announced condominium projects, and three major retail projects advance. The statewide seasonally adjusted unemployment rate declined to 4.4% in November, down from 5.1% in December of 2012, and significantly better than the national rate of 7%.

Thanks gain for joining us. We'd be happy to respond to your questions.

(Operator Instructions)

Our first question comes from Ibrahim Poonawala from Bank of America Merrill Lynch. Please go ahead.

Good afternoon, guys. I was wondering if first we could start off in terms of you being upbeat regarding the local economy for the last few couple of quarters now. And I'm just wondering, we had pretty strong loan growth this quarter, as we look out into next year, should we expect loan growth to pick up for what we've seen in the fourth quarter?

What's happened is, I think the commercial environment has led the loan categories, because of what's happening in our real estate market and what has been happening in our visitor segment. So, I would imagine that we will continue to see similar trending on the commercial side, which as you noted, has been strong for the past year or so.

We're beginning to see traction on the consumer front. Non-residential mortgage consumer front. Nice growth in installment lending, nice growth in dealer and direct lending, good car sales here in the islands this year. So hopefully, what had been a bit of a lagging trend, pulls up a little bit closer to how commercial lending has fared over the past year or so.

And I think the last component is going to be residential mortgage. And there, we're hopeful that we may begin to see growth in resi mortgages on our balance sheet for the reason that we just aren't going to be pushing that through the for sale mechanism as much as we had in the past.

As gains on sale reduce, and frankly, as overall volumes reduce, it just may make more sense for us to put those loans onto our balance sheet. So there's a potential to see growth there. So I think the answer to your question, we're looking for continued growth, certainly in the line of what we've seen on the commercial side, and potentially some uptick on both the residential and consumer side.

Understood. And I guess, and just tied to that in terms of when you think about mortgage banking earnings looking out, should the fourth quarter be a sustainable run rate even if you balance sheet or volume going ahead or should that drop off even more?

Well, probably the most stable element of our mortgage income is our servicing income. And that's, call it $2 million a quarter. So we're pretty comfortable with an $8 million per year mark, and anything above and beyond that is going to be a function of what happens in the for sale market for us. Which, as you point out, has been pretty sluggish of late.

Got it. And if I could, one last question. On [reserve relief], it seems like the pace of [reserve relief is actuated] in the fourth quarter. I'm just wondering in terms of as we look out, what year-end catch up as you updated your models, et cetera, and should we again return to a more slower pace of reserve reliefs, or do we -- I'm just trying to get a handle on when do we start seeing a provisioning bill tied to loan growth as we move forward?

Well I think it's difficult to predict the future to determine exactly when that would occur. But as you indicated, it's a function of the growth we're seeing in our portfolio, as well as economic dynamics and asset quality metrics. So we weigh those each quarter, and it will play out this year how it does.

All right. Thank you very much.

We're getting closer to provisioning, but we're not quite there yet.

We have a question from Aaron Deer from Sandler O'Neill. Please go ahead.

Hello, good afternoon guys.

Hello, Aaron.

Mary, question for you on the Guam loan. I'm guessing this is just a one-off situation, but I was wondering if you can let us know what business or industry the borrower is in, and if there's any collateral on that credit? And then what your expectations are in terms of the potential for any additional write-downs or recoveries on that?

Well, I can share that it's a 15-year client of ours that had a shift in their business model. It is an evolving situation, and so I'm not at liberty really to disclose too much around it. But as Peter indicated, we are fully reserved for the balance, and that's really for the potential downside, just given uncertainty around the whole situation.

Sure. Okay. And then, Kent, you mentioned just that the tax rate being a little lower this year had to do with the low income housing investments. Is that totally a one-time thing, or would you expect that given the investments that you've made that you're going to continue at something akin to this to the rates that you had this year? Is it going to bounce back up to the 31%, 32% level?

Yes, good question, Aaron. I think I've been providing guidance in the 30% to 35% range. And I think probably the way to think about it going forward is more in the 28% to 32% range. Just taking account of some of the investments we've made and some of the things we're planning. So that's the range that I would give you.

Okay. That's helpful. Thank you.

Thanks, Aaron.

Jeff Rulis from D.A. Davidson is online with a question. Please go ahead.

Thanks. Good afternoon.

Hello, Jeff.

A question on the -- back on the mortgage banking. Is there a lag in the expense side of that, that should mortgage banking approach that $8 million or year run rate? Is there a greater benefit still to play out on the cost side of that, or has that been in check -- been adjusted?

It's a bit of an evolving situation. Longer-term, there's clearly an expense opportunity just by virtue of the fact that commissions are going to be lower. One of the challenges that we have though, is as we came out of the volume scenario that we came out of with the refinance, obviously there's a fair amount of deferred stuff just to take care of from an administrative standpoint. So there's a bit of a lag there from a labor standpoint.

The other element that we're working through, is in determining exactly how QM is going to affect our marketplace. And so, I know that you probably noted that there are a number of banks trying to figure out what's the additional resource requirement going to be around QM, and how do we continue to make all the good loans we want to make in that new environment.

So, we're stepping our way through that. I think longer term, there is opportunity, but that may not play out for a while.

Okay. And then, we've seen over to pick up in the share repurchase in January, relative to the Q4 rate. Any change in strategy, or is it just a timing thing?

It's really a timing thing. And we worked pretty hard in the fourth quarter to make sure that we hit the tier 1 leverage target that we've talked about previously. We've done that. So, we would expect to see the repurchase activity step up quite a bit going forward, compared to what we did in the fourth quarter.

Sure. Okay. And one quick last one, it looks like the insurance line item has taken off a little bit since the first half of year, or of 2013. Anything driving that, or would you expect further growth in that category?

In insurance income?

Correct, on the fee income side.

If you're referring to the BOLI, we did have a pickup in the fourth quarter compared to a year ago, and compared to the third quarter. BOLI, things happen and people unfortunately they pass away, and that's how BOLI works. So, and we had some of that happen in the fourth quarter. But that's very difficult to predict.

Okay. I want to make sure we're -- not on the BOLI, but just your insurance line item, non-interest income.

So it was $2.3 million in the fourth quarter, $2.2 in the third quarter. So very comparable.

Okay. All right, that's it for me, thanks.

Thanks.

Nick Karzon from Credit Suisse is online with a question. Please go ahead.

Good afternoon.

Good afternoon.

I guess first to start off, on the other non-interest expense, it looked like it stepped up a little bit quarter-over-quarter, and the professional fees are also little bit higher. And I was wondering if those are related to the stress test or some items that were little bit unique to the fourth quarter?

Not really the stress test, per se. We're basically funding that with internal resources. We did spend some more money in advertising in the fourth quarter compared to the third quarter. We had a little bit higher operating losses in the fourth quarter compared to the third quarter. But other than that, it's pretty standard stuff.

Got it. Thanks. And then as a follow-up, I was looking at the trajectory on the loan yields. And loan yields had come down about 2 to 3 basis points a quarter in the second and the third quarters, and fell a little bit further in the fourth quarter at 12 basis points. So wondering if there's anything -- any guidance you can give in terms of what the new yields are in the fourth quarter, or what you're seeing in the first quarter? That might help us think about the trajectory there.

Yes, good point. You're right. The yields came down about 12 basis points sequentially. But half of that was associated with the timing of fees. So, there are fees associated with loans that are released into interest income.

And so there can be some timing, there was some more income in the third quarter compared to the fourth quarter. We also had a interest recovery in the third quarter that did not repeat in the fourth quarter. When you strip that out, the change was about 6 basis points negative.

So we're still trending down. And what we saw into the fourth quarter was, in terms of the average of new loan yields versus what was either paid off or matured, was a minus 47 basis points. Now that number actually is less compared to the third quarter, which had been 75 basis points. So still negative, but a smaller negative. And again, that's all related to the 6 basis point compression in the fourth quarter.

Got it, that's helpful. And then if I could ask one final question. Just on the premium amortization comments that you made earlier, I was wondering if you could give us the premium amortization as it just relates to the MBS security portion of the portfolio?

I don't think we've been releasing that.

I think it was $8.7 million in the third quarter?

Okay, I'm looking at my notes here, and so I'm not disputing what you said. But the third quarter MBS amortization was $8.3 million, and it was $7 million in the fourth quarter.

Got it, that's really helpful. Thanks.

Okay.

Jacque Chimera from KBW is online with question. Please go ahead.

Just a quick follow-up on the premium am again, are we nearing the bottom on that or do you think there's little bit more room to go in future quarters, assuming rates continue to move up a bit?

Yes. We might see some small negatives here. But I think we are approaching the flat line. So pretty big change here between third and fourth quarter. I wouldn't necessarily predict the same amount going forward, but there's some small opportunity.

Okay. And then looking to -- that was really good color you gave on the loan portfolio with the difference between what the loans were going on and where the portfolio is currently priced. Do you have that information for the securities book?

As a matter fact I do. So, I mentioned that it was a positive 21 basis points. What we put on in the fourth quarter averaged 2.26%, what came off was 2.05%.

That's a nice trend.

We'll take it.

And then just one last quick one, I noticed there was an increase in leases this quarter and it's been a little bit of time since we've seen that. Any new lending that's going on, or was it just fluctuations in the portfolio?

Well, actually it's a positive trend. And so in our lease portfolio, we really have two portfolios going. One is a legacy leverage lease portfolio, which we're watching amortize to nothing. And then we have a equipment leasing operation and portfolio that we're trying to grow, because it is good, solid operating business for us.

So, what you saw in the fourth quarter, Jacque, was really about $12 million in new business coming on. A lot of it related to what's happening on the construction site here in the islands as compared to, call it, $2 million last year.

So that's something we could see pick up this year as construction continues to grow?

Yes hopefully, and it generally the way that these transactions work, they're pretty heavily back-loaded to the third and fourth quarter.

Okay. Great, thank you very much.

You're welcome.

Brett Rabatin from Sterne Agee is online with a question. Please go ahead.

Good afternoon. I wanted to ask if I could just a little more color on expense thoughts for 2014, and maybe anything around branch structure, If you guys have any plans to change the network this year, and then any kind of initiatives that you're looking at in terms of expenses going into the next year or so?

Sure. Well, I think Kent has been pretty explicit in his guidance on expenses. What we would aspire to would be call it a 1% annual reduction in absolute expenses. We still think that that's a pretty reasonable target, both from an operating standpoint, as well as from a financial opportunity standpoint.

The branch side is -- we still think there's opportunity there. The opportunities get a little bit more complex in that there's probably less opportunity to pull down a branch in a particular area that is to isn't as strategic for us, or isn't as meaningful for us. So, really what the opportunities are now are more system wide opportunities.

So where we have communities that are important communities for us and the population trend has moved in a certain direction, what we're really looking to do is how do we add facilities in one part of a community, and then take down the legacy facilities after the fact. So, those, I think, have the opportunity to both create service value for our clients, as well as a financial payoff through lower expenses for us. But they're just more complex and tougher to get done in short order.

Okay. That's great color. And then the other thing I was curious about was back on mortgage banking. If you gave it, I missed it. But just the originations in the quarter, the gain on sale margin, and how much you expect QM to potentially impact that going forward?

This is by recollection, so I may be off a point or two. I believe the gain on sale averaged about $178 million in the quarter. So that would be quite a bit lower than it had been in Q3 or a year ago. Closer to $300 million a year ago.

In terms of new applications into the quarter, they were down 5.6% sequentially. And applications were down 42% compared to a year ago. So that's the biggest leading indicator of mortgage volume.

QM, right now as Peter said, we're looking to approach QM with the idea that we will continue to make all the good loans we can within our market. A significant asset class for us. About 17% of our production in 2013 would have been -- or kind of met QM or non-QM I should say, based really primarily on the TI component. So we're really waiting to see how it plays out, but we-re prepared to do non-QM mortgages into our portfolio.

Okay. Great, thanks for all the color.

Yes, thanks, Brett.

Joe Morford from RBC Capital Markets is online with a question. Please go ahead.

Thanks, good afternoon, everyone.

Hello, Joe.

Really everything has been asked, so it's just a couple quick follow-ups. One just on the buyback, when you talk about stepping that up again here this year, is that just with the existing capital that you're generating each quarter, or would you be considering doing some sort of preferred offering, or something that could help support that activity?

Well my comments were really in reference to the capital that we're currently generating. Never say never on some other source, but that's really not in our current thinking.

Okay. That's fine. And then I wasn't sure if I heard one of the responses on expenses right, but did you talk about what came out of expenses, or if mortgage production related costs this quarter? And is that run rate fully reflective, or might we see some further reductions here in the first quarter?

Yes, Joe, I think that we have an opportunity to see longer-term further reductions in expenses more in line with production levels and mortgage. But, as Mary was alluding to, we're still pretty early in the QM process, and we want to see what sort of additional operating burden that puts on us as we try to do as much production as we can in this new world.

Right. Okay, that makes sense. Thanks very much.

Yes.

Casey Haire from Jefferies is online with question. Please go ahead.

Hello, guys, this is actually Jonathan Dane for Casey. I was wondering, in regard to your comments on margin, can you give us any additional color as to how we should be thinking about the margin going forward into 2014?

Well, now we've seen a couple quarters now of modest positive increase in the margin. And it's really a function of the things I mentioned: Loan growth, lower amortization, repricing of securities.

So to the extent those conditions continue, it's possible for the margin to expand, albeit at a modest level. Now if conditions change, if interest rates should reverse course more than they have in the last few days, for example, that could change what I just said. But overall, I think it's possible to see some positive, albeit modest increase.

Okay. Great. And then just to go back to a question earlier on the other expense line. You guys had said that there was some higher advertising costs this quarter. Were those included in the other line?

Yes.

Okay. Great. Thanks.

We have no further questions at this time.

Thank you, Alexander, and thank you, everyone, for joining us this afternoon, and for your continued interest in Bank of Hawaii. As always, if you have additional questions or need further clarification on any of the topics we've discussed today, please give me a call. Thanks so much again, and have a great evening.

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