Bank of Hawaii Corp (BOH) 2014 Q2 法說會逐字稿

Hello, and welcome to the second quarter Bank of Hawaii Corporation earnings conference call. My name is Joe, and I will be your operator for today's call.

(Operator Instructions)

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

Thank you, Joe. Good afternoon, everyone. Thank you for joining us today as we review our financial results for the second quarter. Joining me this afternoon is Chairman, President and CEO Peter Ho; our Vice Chairman and Chief Financial Officer, Kent Lucian; and our Vice Chair and Chief Risk Officer, Mary Sellers. The comments today will refer to the financial information that was in our earnings announcement earlier today.

Before we get started, let me remind you that today's conference call will contain some forward-looking statements. While we believe our assumptions are reasonable, there are a variety of reasons that actual results may differ materially from those projected. Now I'd like to turn the call over to Peter.

Thank you, Cindy. Good afternoon, everyone. Thanks for joining us today. We certainly appreciate your interest in Bank of Hawaii. The Company continued to have good financial results in the second quarter of 2014. Outstanding loan balances increased 3.5% from the previous quarter, and were up 9.7% from last year. We also continued to grow deposits during the quarter, up 7% on average and up 10.7% on a spot basis. Asset quality and credit recoveries were particularly strong, and resulted in a negative provision for this quarter. Liquidity and capital levels continue to be robust, and our expenses remain well controlled. And now let me turn the call over to Kent who will add some additional details on our financials. And then we will go to Mary Sellers to talk about asset quality. Kent?

Thank you, Peter. Net income for the second quarter was $41.5 million, or $0.94 per share, compared to $38.6 million, or $0.87 per share in the first quarter, and $37.8 million, or $0.85 per share, in the second quarter of 2013. Our return on assets in the second quarter was 1.17% and return on equity was 15.9%. Our efficiency ratio was 58.4%, a reduction from 60.5% in the first quarter.

Year-to-date net income was $80.1 million, or $1.81 per share, compared to $73.7 million, or $1.65 per share in 2013. Year-to-date return on assets was 1.14% and return on equity was 15.5%. Our year-to-date efficiency ratio was 59.5%.

Our net interest margin in the second quarter was 2.86% compared to 2.87% in the first quarter and 2.77% in the second quarter of 2013. The slightly lower margin was primarily due to higher premium amortization and lower reinvestment yields in our securities portfolio. Premium amortization was $13.5 million this quarter compared to $13.3 million in the first quarter. The reinvestment yield differential was a minus 24 basis points. Strong loan growth served to partially offset these factors.

There is a negative credit provision of $2.2 million in the second quarter of 2014, and this was due in large part to positive net recoveries in the quarter of $1.1 million -- excuse me $1.9 million. Our allowance for loan and lease losses at the end of the second quarter was $113.8 million, or 1.8% of outstanding loan and leases.

Noninterest income for the second quarter was $44.5 million compared to $44.8 million in the first quarter and $48 million in the second quarter of 2013. The slight decrease compared to the prior quarter was primarily due to decreases in mortgage banking and insurance income, offset partially by higher trust and asset management income. Mortgage income was $1.8 million compared to $2 million in the first quarter and $5.8 million in the second quarter of 2013.

We sold 23,500 Visa class B shares in the second quarter for a gain of $2 million, which is comparable to the gain in the first quarter. We also contributed 5,700 Visa class B shares to the Bank of Hawaii Foundation.

Noninterest expense totaled $81.1 million in the second quarter compared to $83.5 million in the first quarter and $81.2 million in the second quarter of 2013. The decrease compared to the first 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.

Year-to-date noninterest expense was $164.6 million compared to $165.6 million in 2013. The effective income tax rate was 30.9% in the second quarter compared to 29.1% in the first quarter and 30.3% in the second quarter of 2013. The first quarter of 2014 included a $1.2 million credit for a state income tax settlement.

Our investment portfolio decreased slightly to $6.9 billion. The average duration of the AFS portfolio is 2.95 years, and overall portfolio duration is 3.52 years. Loans were $6.4 billion at the end of the second quarter, up $216 million, or 3.5%, compared to the end of the first quarter and up $567 million, or 9.7%, from the end of the second quarter of 2013. Average deposits were $12 billion in the second quarter, up $215 million compared to the first quarter and up $785 million from the second quarter of 2013.

Our shareholders' equity was $1.1 billion at the end of the second quarter. We paid out $20 million in dividends. And continued our share repurchase program in the second quarter, repurchasing 220,000 shares of common stock for $12.5 million. Our Board declared a dividend of $0.45 per share for the second quarter. The Board also increased the share repurchase authority by an additional $100 million. At the end of the second quarter, our tangible common equity to risk weighted assets was 15.5% and our Tier 1 leverage ratio was 7.2%. Now I'll turn the call to Mary Sellers.

Thank you, Kent. For the second quarter, loan and lease charge-offs of $4 million were offset by recoveries of $5.9 million, resulting in positive net recoveries of $1.9 million. Comparatively, charge-offs for the first quarter of this year totaled $4 million, which would [bring] recoveries of $2.7 million, resulted in net charge-offs of $1.3 million. Net charge-offs for the second quarter of 2013 were $2.3 million, with charge-offs of $4.7 million offset by recoveries of $2.4 million. Recoveries this quarter included $2.3 million related to residential mortgage loans, primarily on the neighbor Islands where property values have been recovering, and a $1.7 million related to a commercial loan.

Nonperforming assets totaled $34.4 million, down $2.7 million from the first quarter and down $2 million from the second quarter of 2013. Both period 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 slightly on a linked quarter basis and down $1 million year over year. Restructured loans not included in nonaccrual loans or loans past due 90 days or more totaled $43.6 million at quarter end, down $848,000 from the prior quarter and $4.5 million year over year. Residential mortgage loans modified to assist our customers accounted for $22 million of the total at the end of the quarter.

We continue to see improvement in what we consider to be the higher risk segments in our portfolio. In total, these segments were down $1.7 million for the quarter and $7.5 million for the year. We recorded a $2.2 million negative provision in the second quarter, which reduced the allowance for loan and lease losses to $113.8 million, or 1.77% of period end loans and leases outstanding, down from 1.84% the previous quarter. Each quarter we estimate the required level of allowance based upon the economic environment, asset quality dynamics, portfolio growth, and composition. I'll now turn the call back to Peter.

Thanks, Mary. The Hawaii family remains healthy, due to an expanded construction industry, positive job growth, low unemployment, stable tourism, and a strong real estate market. For the first five months of 2014, total visitor spending increased 3% compared to the same period in 2013, despite very modest increases in total visitor days for the year to date. Construction activity in Hawaii is picking up momentum with a significant number of condominium projects, major retail projects, hotel and resort redevelopment, public construction activities, and a long-awaited $5.5 billion rail project all underway.

The labor market continues to improve, and the statewide seasonally adjusted unemployment rate was 4.4% in June compared to 6.1% nationally. The real estate market also looks strong. Oahu single-family home and condominium median prices each rose 7.1% in the first half of 2014 and the volume of home sales was also strong, up 1.6% for single-family and 1.3% for condominiums. Both single-family homes and condominiums on Oahu set all-time median sales price records in June. Inventories remain at very low levels and are currently at 2.8 months for the single-family home segment and 3.3 months for condominiums.

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

(Operator Instructions)

Our first question here comes from Aaron Deer from Sandler O'Neill.

Hi. Good afternoon, everyone.

Hi Aaron.

Looks like a really strong quarter, and in particular I guess the loan growth was impressive. I look back, and looked to me like this maybe the best quarter of loan growth you guys have seen since 2003.

So wondered if you could give some color on where the strength came from, particularly since it looks like you had some good growth in your commercial balances? And then what your thoughts are in terms of the outlook for the back half of the year, if this is some momentum that we can expect to see continue? Or if maybe some expected growth in the back half maybe got pulled into this quarter.

Sure. Well, so we would agree with your sentiment, Aaron, on loan growth. It was a great quarter for loan growth, not just in absolute terms but in terms of participation from the entire portfolio of businesses that we have.

And so again, we were led by commercial loan growth pretty much throughout the categories. The C&I was strong, commercial mortgage was strong, has been strong for quite a while now. Construction lending, given all that's happening here in the Islands, was up 33% in the quarter, up to $121 million. The only category that was down is our lease portfolio, and as you know that's a portfolio that we're strategically de-emphasizing at this point. So commercial is strong.

I'm a little hesitant to say that we're going to be able to pull through at these levels throughout the rest of the year. Not that I see a downturn in the marketplace or us being less competitive, but I would recognize that we had a strong commercial quarter in Q1, which is a little uncharacteristic for us. Usually that's a lighter quarter. And frankly, I was thinking maybe we would see the results of that here in Q2.

We got the result we did. Activity remains good in the marketplace, but at some point I think we might just have an average quarter versus a good quarter commercial-wise.

The thing that we're really enthused about, we've been talking about this for at least a few years, is as we've seen commercial loan growth pick up, really going back several years now. We've senses that the broader economy would start to kick in. We are beginning to see that on the consumer side.

So consumer loan growth this quarter in particular was very strong, up 2.6% linked and 7.9% for the year-on-year, with a lot of participation from just about every consumer loan category that we have. So feel good about growth in general. Like the participation across the portfolio. Looking forward, though commercial's just had a really good go, and it may be tough to sustain that.

Okay. That's helpful.

And then also it looked like the yields in each of those respective portfolios for the most part seems fairly stable. Have we seen a bottom in terms of the loan pricing here? Do you feel like things are moving in the right direction on that front?

I'm not sure we're ready to call a bottom. Deals remain very competitive, and we are seeing -- we've just the reference rate move around quite a bit in the past quarter. I'm not quite ready to say that.

Okay. And then maybe one last question for Kent.

On the other side of the balance sheet, the deposit post were also very, very strong in the quarter, and it looked like they might have come in particularly strong toward the end. How do you anticipate that -- those funds being deployed?

Was there any temporary deposits in there? Are you going to can get that deployed? And if so, what kind of rates are you getting on new securities?

Aaron, we did see a pretty high amount of deposits come in right at the end of the quarter. And you'd really have to characterize those as transitory because they were mainly used for either bond payments or other customer needs. So it did leave the bank shortly after the end of the quarter. So that is why I quoted average deposits in my remarks, other than the point-to-point deposits.

Having said that, just using the average number we're still seeing deposits come into the bank. So our balance sheet is expanding. Fortunately, the expansion is going into loans, and we're kind of just keeping even on the investment side.

We are continuing to be conservative with respect to the securities we are buying. And in fact, we are taking a little bit of duration off the table, really in deference to the fact that back on the loan side we are taking a little bit more duration risk.

You probably noticed that mortgages were higher, for example, on the loan side. So the investment side is pretty tight in terms of duration. So you saw, for example, we went down about 24 basis points in terms of reinvestment yield. That reflects that approach to duration, as well as the market just being a little but lower than it had been in the first quarter.

Okay, great. That's all very helpful. I appreciate it.

Thanks, Aaron.

Our next question comes from Ebrahim Poonawala from Merrill Lynch.

Good afternoon, guys.

Hi, Ebrahim.

Hi. I was wondering if you can comment in terms of the outlook in terms of share buyback? I think given the growth we had in balance sheet this quarter you increased the buyback authorization.

If you could just talk about in terms of, is the most likely path for future buybacks similar to the pace we've been doing over the last few quarters? Or is there a sense where you could hold buybacks for a certain time where balance sheet growth is picking up? Any color you can give there would be helpful.

Sure. I think directionally we are probably looking at a higher level of buybacks relative to what we've done over the first and second quarter. I think you can tell that by the fact that the authority granted by the Board of $100 million, that's 2 times of what it had been in the previous authority. Without quoting a specific number, directionally it's likely to be a bigger number going forward.

If you can remind us, is there a minimum level of PCE that you want to maintain, or I'm just wondering if there is a potential for doing an ASR and doing buybacks, buying back stock sooner rather than later?

What we've said is that between dividends and buybacks, we want to return all the earnings that we can to the shareholders, really subject to a minimum Tier 1 leverage ratio of at least 7%. So that is really the box that we're working with. And so that is how we are drawing that dimension.

Understood. Just a quick question on mortgage banking.

I believe you had mentioned last quarter that there's about $2 million in mortgage servicing income, which is where we should expect sort of that line to trough. Is that still the case, and should we expect that number to be around $2 million plus or minus over the next several quarters?

Yes, I think plus or minus. There could be some small minuses. For example, we were little bit under that this quarter. And that's partly due to how we account for mortgage servicing rights.

So as we portfolio mortgages, that tends to amortize that balance. So that's really what accounted for the small decrease off of that $2 million figure. But right around that neighborhood is the way to think about it going forward.

Understood. Thank you for taking my questions.

Thank you Ebrahim.

Our next question here comes from Jeff Rulis from D.A. Davidson.

Thank you. Good afternoon.

Hi Jeff.

I don't recall if you guys discussed any kind of intentions on that the Visa selling and contributions. I guess at this pace you've got close to four years. Is there any thoughts you could share on your intent for that going forward?

Yes. So we had really started to sell some of the Visa stock in the first quarter. And actually we did mention in the call for the first quarter that we would probably be continuing at that same pace into the future.

Okay.

So that's where we are. We will likely continue into the foreseeable future.

In addition, we are contributing about $500,000 worth of Visa stock to the Foundation. So that's a pretty tax efficient way for us to fund the Foundation. It will help reduce our expenses going forward. So that's going to continue as well.

Okay, thanks. And Peter, a follow-up on the loan growth. And you outlined some of the -- obviously a lot of construction activity on the Island. I guess that construction segment for you, particularly in the bank, swung pretty considerably.

Maybe you could talk about the type of construction loans that you're underwriting and putting in portfolio. I guess I don't strike you as a normal traditional construction lender, but what exactly is the production there?

Yes. I think you pretty accurately characterized how we look to hold ourselves in that segment.

So if you look back historically, I think in the last cycle we may have peaked at just over $200 million in construction outstandings, and kind of flexed up and down depending on where we were certain projects. That is about where we are looking to be into the cycle. We're really not -- I want to consider us to be a headline construction lender. We do it. We do it to support deep and important relationships that we have with the real estate community here in the Islands.

And really what we look to do is, obviously we provide world-class support in that form of lending. But really the upside for us that we see within the broader commercial portfolio is just the other types of loan categories that go into play when you're in the middle of a pretty good-sized construction cycle like we are right now, Jeff.

Okay. That helpful. That's it for me. Thanks.

Okay, thanks.

The following question comes from Casey Haire from Jefferies.

Hey, good afternoon guys.

Casey.

Peter, just wanted to follow-up on your comment earlier on loan pricing. And was wondering, if -- I know mainland competitors have been a problem in the past. And I'm just wondering if that is what is contributing to your cautious -- your caution here, and are you seeing mainland competitors start to come into the -- what's a heating-up Hawaiian economy?

Yes. So I think that by now the secret of the growing Hawaiian economy is just about non-secret with everyone. So we are beginning to see some participants that we hadn't seen in a while that we saw in the last cycle, I'll say. That's predominately at the $25-plus million dollar end of the spectrum.

So most of the marketplace remains pretty contained. The larger end is getting more competitive, getting more competitive with players that we're used to dealing with cycle in and cycle out.

I guess the only other thing that I would add is that some of those banks really are, frankly, more partner than competitor. And we've been pretty effective in working with some of the larger banks in basically sharing syndications with Bank of Hawaii as the lead lender here locally.

Okay. So is it correct to think that the mainland competition, you primarily see them on the commercial side of the house, specifically CRE?

Mostly CRE. A little C&I for much larger transactions. Frankly, that's not a very deep market out here.

But yes, mostly CRE on the commercial side. And then on the consumer side there have always been national providers in our marketplace.

Okay, great. And then Kent, just a couple questions for you on the loan yields side. Just digging in a little deeper.

On the C&I, the yield only down 1 bp. Was their any noise there quarter to quarter, be at loan fees? And then similar color on commercial mortgage, down about 20 bps, as well as resi mortgage up 10 bps? I know that's a lot, but just looking for any incremental noise quarter-to-quarter that drove those yield swings.

Yes, Casey. Nothing really unusual to report on those. So I can't give you any additional color on that.

Okay. So commercial mortgage, there was no prepayment penalty in the first quarter?

No.

Yes, I did the same analysis, Casey. This is Peter. Kind of what yields fell and what yields went up were kind of all over the place quarter-to-quarter. So I'm not sure I saw any real pattern there.

Okay. Just two last housekeeping questions. One, the tax rate. And then, Kent, was a big MSR adjustment this quarter in the mortgage banking line?

No, not a big one. As I mentioned earlier, it was about $200,000 or so.

Okay, great.

And the tax rate, I think I mentioned 30.9% for the quarter. Little bit higher than the first quarter, only because we had a state tax settlement in the first quarter. But otherwise very comparable to our experience last year.

Okay. So 31% is a good never to use going forward?

I've given guidance in a range. So I think the range is -- I can't tell you 31% precisely is the right way to think about it.

Okay. Thank you.

You're welcome.

Thanks, Casey.

Our next question comes from Jacque Chimera from KBW.

Hi. Good afternoon, everyone.

Hi, Jacque.

As I'm looking at the mortgage production in the quarter, the mortgage banking. Was the linked quarter decline in that, was that driven more by the decision to put more loans into the portfolio than to book them into income?

Well, let me take a step back on the question. Production is down. It's down because basically we are comping against a higher level of refinance activity.

And so really what we are down to now is more of a purchase market and a lot less refi, although we are still -- we still get some refi. And that is what's really driving the volumes.

And really on the purchase side what's holding back the market is, as I mentioned in our earlier comments, inventory levels in Hawaii, and on Oahu in particular, which is about 70% of the market, are just very low levels. People want to buy homes, there isn't a lot to buy right now.

Okay. So it's much more a function of the market then the shift to try to put more loans on the balance sheet?

Well, yes. The marketplace is definitely shifted from refi to purchase.

In terms of our balance sheet decisioning, gain on sale is not what it was in years past. And we love the quality and the look of the mortgages we are originating. So yes, we are increasingly putting those loans onto our balance sheet.

Okay. So then as I look at it, all the different construction projects that are going on in Oahu, at what point do we start to see those turn into future mortgage generation?

Hopefully they're all opportunities for future mortgage generation. And frankly, one of the things that we like about the project nature of these condominiums coming up is that they each have their own unique customer segments.

So we've been fortunate to have been on the construction lending side, the commercial side of a number of these projects, which obviously gives us a leg up in helping to establish relationships with purchasers, with buyers, whether they be domestic or international. And it's just been a very nice way for us to try to build out relationships through the commercial side of the business.

Okay. So kind of working on Phase 1, and then once projects are completing -- completed, it makes it easier to move in for Phase 2, then?

Right, exactly.

Okay. And one last quick one.

On the service charges, was there anything unusual in the second quarter, maybe in the first quarter? I noticed that on a year-on-year basis, the last two quarters have had a run rate. Is anything particular going on in there, or it just general fluctuations?

Which charges?

She was talking about service charges.

Deposit fees.

Oh yes. What's happening is, well, there are two things happening. The economy is getting better, so people have more cash. And so overdraft activity is down, which all things considered I think is a great statement.

The other thing that's happening is on the commercial side. Account analysis fees are down because as earnings credits are lower because of the rate environment. A lot of commercial customers that used to pay for additional cash management services are choosing to forgo without those services. So that is suppressing analysis income.

Okay, that makes sense. Okay, great. Thank you for the color. I appreciate it.

Yes.

Thanks, Jacque.

And next we have a question here from Brett Rabatin in from Sterne Agee.

Hi, good afternoon.

Hi, Brett.

Wanted to talk about expenses for second. I guess if we look at expenses link quarter and take out some of the seasonal staff in 1Q, expenses were kind of flatish to maybe slightly down in the second quarter.

And just wanted to get an update on -- every year you are trying to reduce the expense pace a little bit. Was hoping you could spend a second or two talking about any increased regulatory burden you might see with having to comply with anything new versus your efforts to continue to improve operating leverage and efficiency.

Right. So it's absolutely true that we're having to expend resources in the compliance area. Fortunately, I think we are being thoughtful and efficient in that regard.

We still think that the opportunities outweigh the risks and burdens in this area. So I think I've given guidance in the past that at present we can hope to reduce our expenses by about 1% per year. Now, that can be quarters where we don't exactly get that annualized result. But over kind of the medium or longer -- little bit longer term, I think that opportunity is still available to us.

So the guidance for 1% is still good?

It's still good, subject to, as I said, about quarterly variation.

You're right. Fair enough. Okay.

And then I guess the other thing I was curious about, If you gave it, I missed it, but the utilization rate on the commercial book, if you had that handy.

It's up a bit but not meaningful. We're not -- just the construct of our economy here just doesn't have working capital as a big component of people's businesses because we are a service economy. So it is up a bit, but it's not a meaningful driver of loan growth.

Okay. And just last question. I heard the duration of the portfolio is, I think, 3.52 years. Didn't know if there was any thought on reducing the duration as we go into next year, or can you give us any color on the --

Yes, I did mention earlier that we are taking the duration down a little bit. And it's mainly a function of what we're doing otherwise from the balance sheet. So, for example, as we are growing loans and as we are growing mortgages within the loan portfolio, as an offset to that we are taking some of the duration down within the securities portfolio.

Okay, great. Thanks for all the color.

You're welcome, Brett.

Our next question here comes from Joe Morford from RBC Capital Markets.

Thanks. Good afternoon, everyone.

Hi, Joe.

First, just a follow-up on Brett's question on expenses. The other-other category was kind of noticeably lower than it's been for the last several quarters, and I know category can be notorious for quarter-to-quarter volatility. But I was just wondering if there is anything meaningful in there, and perhaps pointing towards a new run rate?

Well, in the first quarter we did have an operating loss. So that was about $700,000 in the period. So that's probably the biggest bulge there in the other line.

Okay. And then separately, I recognize that the strong recoveries this quarter drove the negative provision. In the past you've suggested that given the stronger loan growth you might reinstate the provision this year. Is that still the mindset, or might we see some additional reserve releases, given the portfolio trends?

Well I'll start and that Mary can clean it up.

I think we obviously have to call them the way we see them. And so it's based upon the facts and the circumstances as they develop. And so the second quarter was somewhat unusual because of the a large recoveries that we experienced.

So that's the type of thing that, difficult to predict. It's always possible. But that's really what drove it in the second quarter here.

I think you did a great job, Kent. (Laughter)

Fair enough. Thanks so much.

Yes, take care.

At this time, speakers, I'm showing no further questions from the audience.

Well, I'd to thank 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 that topics we discussed today, please feel free to contact me. In the meantime, have a great evening, folks.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation, and you may now disconnect.