Bank of Hawaii Corp (BOH) 2014 Q1 法說會逐字稿

Hello, and welcome to the Q1 Bank of Hawaii Corporation earnings conference call. My name is Eric. I'll be your operator for today's all.

(Operator Instructions)

Please note this conference is being recorded. I will now turn the call over to Cindy Wyrick, Ms. Wyrick, you may begin.

Thank you, Eric. Good afternoon everyone, and thank you for joining us today as we review the financial results for our first quarter of 2014.

Joining me this afternoon is our Chairman, President, and CEO, Peter Ho; Vice Chairman and Chief Financial Officer, Kent Lucian; and Vice Chairman and Chief Risk Officer, Mary Sellers. The comments today will refer to the financial information that was included in our 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'd like to turn the call over to Peter Ho.

Thanks, Cindy. Good afternoon everyone, and thank you for joining us today. We are pleased with our financial results for the first quarter of 2014. While we've registered nearly 2% growth versus last quarter and 7% growth versus last year. Importantly, we are getting positive growth contribution from across the spectrum of commercial and consumer categories.

Deposits continue to grow, and we finished the quarter with over $12 billion in total deposits. Liquidity and capital levels remain robust, and our credit quality improved from an already strong position.

Now I'd like to turn the call over to Kent who will give you some deeper financial insights. Kent?

Thank you, Peter. Net income for the first quarter was $38.6 million, or $0.87 per share, compared to $39.1 million, or $0.88 per share in the fourth quarter of last year and $36 million, or $0.81 per share in the first quarter of 2013. Our return on assets in the first quarter was 1.12%, and return on equity was 15.1%.

Our efficiency ratio was 60.5%. Our net interest margin in the first quarter was 2.87% compared to 2.85% in the fourth quarter and 2.82% in the first quarter of 2013. The higher margin was primarily due to lower premium amortization in our securities portfolio, as well as continued loan growth.

Premium amortization was $13.3 million this quarter compared to $13.8 million in the fourth quarter. This was partially offset by a slightly negative reinvestment differential of 15 basis points in the securities portfolio. There was no credit provision in the first quarter of 2014. Net charge-offs in the quarter were at $1.3 million.

Our allowance for loan and lease losses at the end of the first quarter was $114.1 million, or at 1.8% of outstanding loan and leases. Non-interest income for the first quarter was $44.8 million compared to $45.3 million in the fourth quarter and $47.8 million in the first quarter of 2013.

The decrease compared to the first -- excuse me, to the prior quarter was primarily due to lower mortgage banking income offset by a $2 million security gain which was the result of selling 22,000 Visa Class B shares. We also contributed 5,500 Visa Class B shares to the Bank of Hawaii Foundation. As of the end of the quarter, we have 482,000 Visa Class B shares remaining, and we may continue to sell the shares periodically over the next several quarters at approximately the same pace as this past quarter.

Mortgage income was $2 million compared to $2.8 million in the fourth quarter and $6.4 million in the first quarter of 2013. Non-interest expense totaled $83.5 million in the first quarter compared to $82.4 million in the fourth quarter and $84.4 million in the first quarter of 2013.

The increase compared to the fourth quarter was primarily due to seasonally higher payroll taxes and 401(k) contributions associated with incentive compensation accrued in 2013 and paid in the first quarter of 2014. The decrease compared to the first quarter of 2013 was primarily due to lower salaries and benefits expense. We also had a $700,000 operating loss this quarter.

The effective income tax rate was 29.1% in the first quarter compared to 29% in the fourth quarter of last year and 30.7% in the first quarter of 2013. The first quarter of 2014 included a $1.2 million credit for a state income tax settlement. We are currently anticipating a somewhat higher effective income tax rate for the balance of year.

Our investment portfolio remains at $7 billion. The average duration of the AFS portfolio is 2.99 years, and overall portfolio duration is 3.73 years. Loans were $6.2 billion at the end of the first quarter, up $114 million, or 1.9% compared to the end of the fourth quarter of last year and up $427 million from the end of the first quarter of 2013. Consumer loans increased by $70 million in the first quarter and commercial loans increased $44 million compared to the prior quarter.

Deposits were $12 billion of the end of the first quarter, up $130 million compared to the end of the fourth quarter of last year and up $793 million from the end of the first quarter of 2013. Our shareholders' equity was $1 billion at the end of the first quarter, and we paid out $20.1 million in dividends, and continued our share repurchase program in the first quarter, repurchasing 215,000 shares of common stock for $12.5 million.

Our Board declared a dividend of $0.45 per share for the first quarter, and at the end of the first quarter our tangible common equity to risk-weighted assets was 15.5%, and our Tier 1 leverage ratio was 7.1%. Now I will turn the call over to Mary Sellers.

Thank you, Kent. Net charge-offs for the first quarter totaled $1.3 million, down $6.9 million on a linked quarter basis and $651,000 year over year. As you'll recall, the fourth quarter included a $6.6 million charge-off related to a commercial loan in Guam.

Nonperforming assets totaled $37 million, down $2.6 million from the fourth quarter and down $1.3 million from the first quarter of 2013. Both the linked-period and year-over-year decreases were due to resolutions, primarily in our residential mortgage portfolio.

At quarter end, loans past due 90 days or more and still accruing interest totaled $9.7 million, down $144,000 on a linked quarter basis and down $1.9 million year over year. Restructured loans not included in nonaccrual loans or loans past due 90 days or more totaled $45.6 million (sic -- see Press Release "$45.5 million") at quarter end, down $5.5 million from the prior quarter and up $15.5 million year over year.

Residential mortgage loans modified to assist our customers in retaining their homes accounted for $22 million at the end of the quarter. Residential mortgage and home equity loans past due more than 30 days but less than 90 days and still accruing interest increased by $1.2 million on a linked quarter basis and decreased $4 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 $2.8 million for the quarter and $14 million year over year.

As Kent shared, we recorded no provision for loan and lease losses in the first quarter, which given net charge-offs of $1.3 million, reduced the allowance to $120 million, or 1.84% of outstanding loan and leases. We continue 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.

Great. Thank you, Mary. Let me give you a few comments on the Hawaiian economy. In a nutshell, things remain robust and positive. Unemployment is now down to 4.5% as compared to 6.7% nationally.

The visitor segment appears to be moderating from four consecutive of years of growth and spending in visitor days. For the first two months of 2014, expenditures are down 2.8% and visitor days are down 1.2% (sic -- see Press Release "2.1%"). Factors affecting the industry include a stronger dollar, the Japanese consumption tax which kicked in in April of this year, and the cumulative effects of higher and higher average daily room rates in our marketplace.

Construction activity is ramping up in 2014 with numerous condominium projects, major retail projects, hotel and resort development, home and construction activities, and a long-awaited $5.5 billion rail project clearing [the lift], the last of its outstanding hurdles.

The real estate market also look strong. Oahu's single-family home and condominium median prices rose 9.2% and 1.5% respectively in the first quarter of 2014, and the volume of home sales was also strong, up 1.9% for single-family homes and 1.7% for condominiums. Inventories remain at very low levels and are currently at 2.6 months for single-family and 3.2 months for condominiums.

Thanks again for joining us today, and now we'd be happy to respond to your questions.

Eric?

Thank you.

Can you open the questions?

Certainly.

(Operator Instructions)

Aaron Deer.

Hi. Good afternoon, everyone.

Hello, Aaron.

Peter, your comments at the beginning of the call were pretty positive in terms of the outlook. And I guess noting the paydown that you had in the commercial book during the quarter and what would have been the growth rate absent that, it a seems like the growth outlook remains pretty good.

Any sense of what we should expect for the year? And is it going to continue to be more heavily weighted on the commercial side versus the consumer side, given that you've been retaining more of your mortgage production?

Yes, I think mortgage production should build, just as a reflection of how we are beginning the balance sheet versus sell through those loans in the secondary market. The commercial book has been strong for a few years now. We think we've got some positive momentum left there, so we are pretty optimistic there.

The consumer book, consumer other than residential mortgage, is probably the area that has been somewhat of a pleasant surprise for us. We've been waiting for the Hawaiian consumer to catch up somewhat, if you will, with our commercial segment. That begins to be happening at this point.

Hopefully we will see that piece tail along with the rest of the segments here. But yes, I think likely from a volume standpoint, loan growth we're anticipating to be reasonably positive.

That's great.

Then with respect to the new loans that are coming on, it looks like the lower loan yields outweighed the new loan balances this quarter. Are we getting closer to an inflection point there where we are closing that gap?

Let me ask Kent to respond to that.

Aaron, yes, we are.

You saw the averages were pretty much spot-on compared to the fourth quarter. So what I saw in the quarter was a slightly negative yield, but a much smaller negative then we have seen in prior periods.

Okay, that's great.

Just a clean-up question. You noted the release of the tax reserve. It sounded like that was for the state tax settlement. Was the gift to the Bank of Hawaii Foundation, that was independent of the $1.249 million that's in the release?

Yes. It was in addition to the $1.2 million.

Okay. Can you give us that number?

There was approximately $200,000 of benefit.

Okay. That's great. Thank you for taking my questions.

Thanks, Aaron.

Jeff Rulis.

Thanks. Good afternoon.

Hello, Jeff.

Last quarter I think you indicated that the servicing income was about $8 million a year at a minimum, I guess suggesting that the mortgage banking line item, if you look at this quarter at a trough. Is that correct or would you agree with that?

Yes, pretty much, Jeff.

So about $2 million this quarter. So obviously annualized, that's $8 million. So pretty much right at the bottom.

And the outlook, I mean, any positive view that you can grow that line item or (multiple speakers)?

I wouldn't think so. Obviously, to the extent we are retaining mortgages, that line item would not grow.

Got you.

Then on the comp line, that increase, what portion of that is seasonal or, I guess what you would say, not expected to recur?

It is about $2 million in the first quarter of each year, is our seasonal expense.

Okay, great. Thanks. That's it for me.

Thanks.

Brett Rabatin.

Hello, good afternoon.

Hello, Brett.

Wanted to follow up a little on expenses. And thinking about fourth quarter versus first, you were able to get a little bit in terms of you always are focused on getting efficiencies.

Aside from the seasonality of the personnel, is there anything we can expect going forward that might continue to result in expenses declining slightly year over year? I know you kind of have a goal to keep expenses going slightly negative. Any up date on that thought process?

No, other than to say I think we are still on track. We've talked about dimensions of between 1% and 2% of annual expense reductions. I think that's still within the range of what we would expect.

Okay. Great. Thanks for the color.

[Certainly.]

Casey Haire.

Hello, guys. Good afternoon.

Hello, Casey.

Question for Kent.

You mentioned that new money yields on securities this quarter was 15 bits to the negative. Is that where we are today? Just some updated thoughts on reinvestment risk as we stand today.

What's been happening, obviously, is that interest rates have really bounced around. And if anything, rates are a little but lower at this moment than what we saw on average through the first quarter. Like-to-like securities and duration to duration the same, it is probably a little bit lower.

Than that 15 bps?

Yes.

Okay.

The premium amortization outlook, that ticked down again this quarter. Is 13.3%, is that a good -- obviously, we will continue to monitor rates, but can we get much movement from that level going forward?

Hard to say. Again, it is going to be a function of what the environment does. It is possible to go down a little bit, but I wouldn't say too much.

Okay, great.

And then on the mortgage banking side, if memory serves, the expenses do lag there. So should we expect some leverage on the expense side from what was a very light mortgage banking quarter in the first quarter, looking ahead to the second quarter run rate?

Well, I think the difference is that the volume of activity in the first quarter was down sequentially about 6%. So the difference was that we retained the majority of the mortgages.

So the mortgage revenue was down simply because we didn't sell those mortgages. So there's some modest decrease in expenses that we would expect in the next few quarters, but I wouldn't say it is going to be dramatic.

Okay, so it is not a big amount? Okay, great.

And last one, the tax rate, if I add back the tax reserve release in the recon table, I get to about a 31.4% tax rate. Is that a safe number to use going forward?

Well, I quoted between 28% and 32%. And the first quarter, for that very reason you cited, was lower. So, yes, I'd say we are probably more on the high side than the low side going forward.

Okay. Thanks for taking the questions.

Thanks, Casey.

Jacque Chimera.

Hi, everyone.

Hi, Jacque.

I apologize if you addressed this in your prepared remarks. I missed the first minutes of the call.

But I was wondering if you could talk about the lease portfolio absent the paydown, what that portfolio would have been if it hadn't occurred -- the early payout or buyout?

Do you have that, Mary?

I do. The paydown was about was about $22 million.

So then it sounds like --

(Multiple speakers) quarter it's $240 million in lease outstanding -- so $22 million.

So absent the portfolio that's running down in the early -- the potential for early buyouts and everything, the growth in leasing is still going pretty well?

It's fairly modest. It is really focused solely on our Hawaii-based customers. So today it totals about $50 million of the total $240 million.

Okay. Then my next one, probably a question for you, Peter.

I wondered if you could touch on tourism a little bit. I know in newspapers and different articles that you read the perception seems to be that the decline in tourism spending and everything is a negative. Is that actually what it is? What's your perception on that?

Well, hi, Jacqui.

I think the first thing to think about is we've had several years of really strong visitor spending growth. So frankly the fact that we are off a bit here in the beginning of 2014 is not terribly surprising.

I guess the two trends that I would be focused on, and they are a bit different, is what's happening with Japan. So Japan is 17% of visitor spend.

There are a couple things going on there. One I think I talked about it at the end of the call a little bit. The national sales tax in Japan this month went from 5% to 8%. And in October of next year, it will go an additional 2% -- so to 10%.

There's some thought that some of the softness that we've experienced in the Japanese spending of late is as a result of Japanese nationals front-loading their consumption at home in preparation for that increase in the sales tax rate.

Longer term that may moderate. I say that because what happens when, say, next year when the sales tax goes to 10%, then we will have about a six-point positive differential with our sales tax versus Japan. We will see what happens there.

The other thing to think about is the Japanese yen has depreciated versus the dollar, really in an increasing trend last year. So spending off from Japan this year, first two months, that's comping against a much stronger yen in the corresponding period a year ago. That's what's happening with Japan.

The other thing that's happening is we've seen our average daily room rate increase now for several years. So we are up another 6% year to date. We were up in the high-single-digit level last year, and we are beginning to see a little weakness in our US West traffic.

Our US West traffic is our thriftiest of segments. So there's some thought that maybe as average daily rates have climbed, that's beginning to impact the supply of US West visitors. If that's the case, then likely what will happen is as supply and demand moderate that hopefully takes care of itself from a pricing mechanism standpoint. So that's a little color into what we are seeing in the visitor industry.

Okay. Have you have seen any changing trends over the last couple of months with visitors from China or South Korea?

No, that's pretty new. I think we tripled our lift into the Hawaiian market out of China.

Anecdotally, I hear that's going pretty well. A bit interesting to note is last year we lost $200 million in spend out of Japan, and it was correspondingly made up completely by the other international segment, much of which is South Korea and China.

There's a bit of a transition happening. Too early to give you a sense on exactly what the increase capacity lift into Hawaii from China is going to do this year, though.

Okay, fair enough. Great. Thank you for the additional color. I appreciate it.

Thanks, Jacque.

At this time, I'm showing no further questions.

I'd like to thank everyone for joining us this afternoon and for your continued interest in Bank of Hawaii. As always, if you have any questions or need additional information, please feel free to contact me.

Thanks, everyone, and have a nice evening.

Thank you, ladies and gentlemen. This concludes today's conference.

Thank you for participating. You may now disconnect.