Bank of Hawaii Corp (BOH) 2014 Q3 法說會逐字稿

Welcome to the Q3 Bank of Hawaii Corporation earnings conference call. My name is Eric, I'll be your Operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the call over to Cindy Wyrick. Cindy, you may begin.

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

Joining me this afternoon 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 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, aloha and good afternoon, everyone. Thanks for joining us and as always thank you for your continued interest in Bank of Hawaii.

We were pleased with our financial results this quarter. We grew our loans 2.8% from the previous quarter end average deposits by 1.4%. Including in that number is 3.5% growth in demand deposits. Our net interest margin was relatively stable, decreasing by 1 basis point from the last quarter as strong loan growth partially offset the impact of the flatter yield curve.

Asset quality remains strong and reduction in the specific reserve for one commercial client resulted in recording a negative provision this quarter. Liquidity and capital Ls continue to be robust and operating expenses remain well controlled.

I'll now ask Kent to provide you with some additional details on our financial performance this quarter and then ask Mary to comment on our asset quality. Kent?

Thank you, Peter.

Net income for the third quarter was $41.8 million, or $0.95 per share compared to $41.5 million, or $0.94 per share in a second quarter and $37.7 million, or $0.85 per share in the third quarter of 2013. Our return on assets in the third quarter was 1.15% and return on equity was 15.6%. Our efficiency ratio was 57.7%, a reduction from 58.4% in a second quarter.

Year-to-date net income was $121.9 million, or $2.75 per share compared to $111.4 million, or $2.50 per share in 2013. Year-to-date return on assets was 1.15%. And return on equity was 15.5%. Our year-to-date efficiency ratio is 58.9%.

Our net interest margin in the third quarter was 2.85% compared to 2.86% in a second quarter and 2.83% in the third quarter of 2013. Year-to-date net interest margin was 2.86% compared to 2.81% last year. The reinvestment yield and our investment portfolio and the differential this quarter was a minus 5 basis points.

There was a negative credit provision of $2.7 million in the third quarter of 2014 and this was primarily the result of a reduction to the reserve for a commercial credit. Our allowance for loan and lease losses at the end of third quarter was $110.4 million, or 1.7% of outstanding loan and leases.

Non-interest income for the third quarter was $45 million compared to $44.5 million in the second quarter and $45.1 million in the third quarter of 2013. The increase compared to the prior quarter was primarily due to increases in overdraft fees and insurance income offset partially by lower trust and asset management income.

Mortgage income was $1.6 million compared to $1.8 million in the second quarter and $4.1 million in the third quarter of 2013. We sold 23,000 Visa Class B shares in the third quarter for a gain of $1.9 million versus a gain of $2.1 million in the second quarter. We also contributed 5,700 Visa Class B shares to the Bank of Hawaii foundation.

Non-interest expense totaled $81 million in the third quarter compared to $81.1 million in second quarter and $83 million in the third quarter of 2013. The decrease compared to the third quarter of 2013 was primarily due to a decrease in salaries and benefits, occupancy expense and professional fees.

Year-to-date non-interest expense was $245.7 million compared to $248.5 million in 2013. The effective income tax rate was 32.6% in the third quarter compared to 30.9% in the second quarter and 28.9% in the third quarter of 2013. 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 decreased slightly to $6.8 billion this quarter. The average duration of the AFS portfolio is 2.9 years and overall portfolio duration is 3.5 years. Loan balances where $6.6 billion at the end of the third quarter, up $180 million, or 2.8% compared to the end of second quarter and up $600 million, or 10% from the end of the third quarter of 2013.

Average deposits where $12.2 billion in the third quarter, up $171 million compared to the second quarter and up $721 million from the third quarter of 2013. Our shareholders equity $1.1 billion at the end of the third quarter and we paid out $20 million in dividends and continued our share repurchase program in the third quarter repurchasing 341,000 shares of common stock for $19.8 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 15.2% and our Tier 1 leverage ratio was 7.2%.

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

Thank you, Kent. For the third quarter, loan and lease charge-offs of $3.7 million were partially offset by recoveries of $2.9 million resulting in net charge-offs of $800,000. Comparatively in the second quarter charge-offs of $4 million were more than offset by recoveries of $5.9 million resulting in net recoveries of $1.9 million.

Recoveries in a second quarter included $2.3 million related to residential mortgage loans on the neighbor islands and $1.7 million related to a commercial loan. Net charges-offs for the third quarter of 2013 were $900,000.

Nonperforming assets totaled $33.3 million, down $1.1 million from the second quarter and down $525,000 from the third quarter of 2013. The linked period decrease was primarily due to a $1.3 million payment on a commercial loan. At quarter end, loans past due 90 days or more and still accruing interest totaled $9.1 million, down $564,000 and $2.3 million for the linked quarter and year-over-year respectively primarily due to reductions in residential mortgage.

Restructured loans not included in nonaccrual loans or loans past due 90 days or more, totaled $45.2 million at quarter end, up $1.5 million from the prior quarter and up $5.3 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 $5.5 million for the quarter and $12 million year-over-year.

As we've discussed for the third quarter, we recorded a $2.7 million negative provision to the allowance for loan and lease losses which was net charge-offs of $800,000 reduced the allowance to $110.4 million or 1.67% of period end outstanding loans and leases.

I'll now turn the call back to Peter.

Great, thanks, Mary. The Hawaii economy remained healthy during the quarter due to a growing construction industry, positive job growth, low unemployment, stable tourism and a strong real estate market. Construction activity is gaining momentum and the overall labor market continues to improve. Our statewide seasonally adjusted unemployment rate declined to 4.3% at September compared to 5.9% nationally.

For the first eight months of 2014, the total number of visitors to Hawaii was relatively unchanged. Visitor spending however increased 2.1% compared to the same period in 2013.

Real estate market continues to look strong. Oahu's single-family home and condominium median sales prices -- or median prices rose 4.6% and 5.4% respectively for the first nine months of 2014. The volume of home sales at 2014 have increased despite of low -- despite very low inventory levels, up 1.6% for single-family homes and 0.4% for condominiums.

This concludes our formal remarks, we' d be happy to entertain your questions.

(Operator Instructions)

Ebrahim Poonawala.

First question, I guess Peter you had guided for Commercial loan growth to slow off the strong 2Q. I guess C&I balances stayed essentially flat quarter over quarter. Any color on what the slowdown, was it fully anticipated as you headed into this quarter or were you surprised by how much slower it got? And outlook, seems like you have a pretty upbeat outlook on the economy for sure. So any color would be helpful.

Yes, well we had some chunkiness particularly in the C&I portfolio, so I was looking at the average balances for the quarter. And there our view has been that we were hopeful of maintaining the trajectory in Commercial that we have now for the better part of a year and then begin infilling on consumer and residential mortgage. I think on an average basis, Ebrahim, that's exactly happen. On a linked basis we were up 4% on average in Commercial, than 3% and 3% in residential and consumer.

So I guess what I would say is we continue to believe that there's additional Commercial growth out there, that's what we're seeing in the marketplace. The markets for now are remaining to look reasonably rational. And what we are really looking for to I think really push growth a little bit further forward is a fill in, if you will, on the residential and consumer side.

Understood and I guess separate question on credit, it seems like credit recoveries and overall credit trends continue to get better each quarter. I guess as we look through I was looking at your results levels pre-crisis which were around between around 1.35. I know it is hard to say but in general should we expect reserve ratio which is about [1.67] today to trend closer to those pre-crisis levels?

I think we look at that each quarter and thus we see improvement within asset quality, our economic environment and the composition of our portfolio and growth. We'll make that determination, but that would not be an unlikely direction.

Got it, thank you very much.

Casey Haire.

A follow up on the C&I front. Is the -- just wondering because the loan yields were up nicely, up 19 bps, was there some success fees in there and was there a prepayment penalty that you guys got some serious -- some decent sized paydowns which boosted the yield and at the same time pushed down some of the -- muted the loan growth so to speak?

There were some success fees and there were some agency fees mixed in there. So really a combination of things in the quarter, Casey.

Okay and similarly on the Commercial leasing bucket as well, that was up recently as well.

Yes well leasing is a bit of an odd duck, if you will, because it's as you know that's a portfolio we've been shrinking down out from for a while. And yields are going to bump around depending on very transaction specific types of elements. So that's a tough one to give you direction on one way or the other.

Okay. And then in the securities book, Kent I was a little surprised to hear you say that the yields delta was only 5 bps on the quarter, obviously the yield curve was not -- it didn't move favorably over the quarter. So I was a little surprised to hear that especially given I think you guys were looking to pull in duration, can you give us a sense as to how that reinvestment risk narrowed and where is that as we stand today looking forward?

Yes, first of all, things where a little bit better at that point than they are today. So I think directionally I'd have to say that given all the same facts we probably be looking at a wider differential at this point in time. But back to the third quarter, it can move around and it was just one of those things where the yield rolling off was fairly low and compared to past periods of reinvestment yield was a little bit higher. But I think the bigger point here is that with a lower, flatter curve at this moment that the things we're buying at this point are just going to be lower yielding that they had been.

Okay, understood. And then one final one housekeeping question, the tax rate a little bit higher this quarter than what we've seen year to date. We're averaging around 31% year to date, is that a decent rate to assume going forward?

Well the rate is going to move up a little bit as income increases. And then conversely to the extent income is lower, the rate is likely to come down a little bit. And that's just a mathematical result of the fact that we have pretty much fixed levels of tax credits, either energy or low-income housing credits. So the variable is the income level which will drive that rate a little bit higher like I said at higher levels of income.

Okay, thank you.

Joe Morford.

A different take on the loan question. You did actually see a pickup in the consumer particularly home equity and the resi side and I was curious what drove that? Was it reflective of the stronger economy or were there any kind of special promotions or anything this quarter?

Right. Well a couple things, Joe. First of all, on the resi side as gain on sales has shrunk, if you will, that's obviously given us more incentive to retain those loans on balance sheet. So that's part of what we're seeing on residential mortgage.

The other thing we're seeing if you compare back to say a year ago is the refinance activity has definitely slowed. So what that's creating is reduced churn in our existing portfolio. So those elements just from a balance sheet decisioning standpoint have been accretive for resi mortgage volume, or resi mortgage volume on our balance sheet.

I would say that we're doing well in the mortgage business, so that's a business driven largely by purchase right now. So it's a good market for us, the challenge frankly is a lack of inventory. Inventory levels are pretty restrained right now. That's hurting volumes but activity for us is good.

Home equity is benefiting from I think the better economy. We're seeing better utilization rates. And again similar to the resi mortgage situation, as refis have slowed that's helped churn off the bottom of our home equity portfolio improve for us so that's helping us retain loans on the balance sheet.

Okay, that's helpful. I was also curious about the -- to quantify the impact of this one Commercial credit on the provision, trying to -- without that what kind of provisioning rate would you be looking at or another way to look at it is should we'd be expecting any kind of provision in the next few quarters?

Let me ask Mary to answer that one for you.

I think again it will really depend on what we see in activity in the portfolio in terms of loan growth and asset quality metrics and some of the composition of what that growth is and the dynamics behind that.

Okay. And then I guess maybe one other one, the investments held the maturity were down a little more this quarter, anything driving that and what expectation should we have for future runoff?

Nothing dramatic there. It's really been a continuation of the existing strategy. The only thing to take note of is to extent interest rates continue to be at low levels, we could see some increasing paydowns. And that's always a possibility. We had a little bit more higher composition of mortgages in the HTM versus the AFS. And so that's the most heavily influenced by paydowns.

Okay, makes sense. Thanks so much.

Jacque Chimera.

You mentioned higher rates in the HELOC utilization, did C&I utilization move at all in the quarter?

Not much. So C&I has been driven more by local market M&A type activity. And we've not seen a whole heck of a lot of utilization increases as the economy has expanded out here. Jacque you know that we're -- we're not a big working capital town, more services oriented, so that's not surprising to us.

So is it possible then that some of the small businesses or one-man shops are using their home equity lines instead of a traditional C&I line as they expand business?

Yes, that's an interesting insight. That could definitely -- because we're clearly seeing improved utilization in that part of the business. And as you know a number of small business owners are a hybrid between personal/small business clients for the bank.

Okay, that makes sense. Has it been a steady movement over the past couple of quarters that the HELOC utilization has increased?

Yes, it's been reasonably smooth and it's definitely a different dynamic from call it a year plus ago.

Okay. And was part of the growth in the quarter also from just new generation of home equity lines or was it primarily all utilization?

Some of it was new lines. But I would say that existing utilization is probably a bigger percentage, bigger piece.

Okay, great. Everything else I have has already been asked, so I will step back. Thank you.

Jeff Rulis.

On the mortgage banking side on the income statement I guess I'm still a little baffled by that number. I think you've given guidance on the servicing a loan is at its trough at about a $2 million a quarter number. We've had a couple quarters now below that. Is there any other adjustment that's going through that line and would you expect this to pop back up north of $2 million?

If we're retaining all the mortgages, I wouldn't expect it to pop up. There can be downward adjustments related to mortgage servicing rights. So again as mortgages are paid down that's going to affect the calculation of the servicing rights and that can be a variable in the equation. That's really the other variable that we encountered this period.

So call it -- are we still holding firm on that $2 million guidance or has that changed and would you say that the variances on MSR adjustment?

Well since we just had a figure lower than $2 million, I wouldn't hold to $2 million. So yes admittedly it'd be -- could be as low as what we experienced this quarter.

Okay, maybe I'm not expressing the question right. So the MSR adjustment, that's the difference below the $2 million figure or we're just -- we've broken through and that --

Yes, that's the difference.

Okay, fair enough. And I guess related to that, the refi activity so far in Q4 the last -- in recent weeks have you have seen that pick up?

A bit, it's picked up a bit. But overall volumes -- so I think in the quarter the MSR issues what created that delta versus the numbers we've been discussing previously. But as we look forward, our overall volumes, production volumes, are off from prior high refi periods and that will over time impact our overall servicing portfolio as if less is coming through the door and obviously some stuff rolls off, that can impact our fee income as well over time.

Sure. Okay, thank you.

Brett Rabatin.

Wanted to think thematically a little bit, you guys have had faster growth in the loan portfolio the past two quarters and traditionally the strategy has been to reduce expenses 1% or 2% and try and grow revenue if you can. And it seems like this year you have a more concerted effort to actually grow top line revenues or at least the loan portfolio and maybe expenses are flattish. Could you guys maybe talk about if there's been any thought on a change in the operating strategy, do you want to become more of a growth oriented Company? And as we go into 2015, should the traditional metrics that you guys try and hit change with a more growth bent?

Yes, so I think in a vacuum we still believe that all things being equal we can improve efficiency. But I think you point to a positive development in the market situation here and that is I think the market -- we think the markets giving us a pretty good set of growth opportunities whether it's down the loan side or the deposit side. And so we're not going to hesitate to invest where we need to to further that opportunity.

So in the past we've talked about being if we can pick up call it 2% in savings in a year on an absolute basis, that would be our base goal. As we look forward, that's still our goal, but what's going to get overlaid on top of that are the ability to retain talent, the ability to or the need to bring on additional systems as volume levels widen out. And we're clearly seen volume levels widening out in both our residential, Retail and Commercial businesses.

So I think we're still a Company that would look to keep expenses flat. But as for creating a net reduction, that might be in the path of peril to just greater opportunity out there for us right now.

Okay. And then I guess the other thing is related is just thinking about expenses, run rate and then going forward. How much is increased regulatory oversight having an impact on what you spend these days? Or can you talk about maybe the contribution of that for keeping you from reducing the expenses on an absolute basis maybe?

Sure. Mary, you want to handle that?

Sure. Well I think we are seeing the need to continue to invest given the proliferation of regulation and then the changes that are coming out. So I would say on a direct basis really as we look at what we're investing strictly from pure compliance related professionals, we're up to about $5.3 million this year and that's up slightly. And we'll continue to see the need to add resources in that area just to stay abreast of what is changing.

Okay, that's very helpful. Thanks for all the color.

(Operator Instructions)

Casey Haire.

Quick follow up. Kent, you mentioned you've seen some paydowns in the securities book, curious premium amortization this quarter, what was that number?

It was the same figure as the second quarter, so $13.5 million.

Okay, got you, thanks. And in the outlook, given some of these -- this refi wave that you're starting to see crop up again, is there an expectation that we'd start to see that as a headwind going forward?

It's definitely possible.

Okay, thank you.

Aaron Deer.

I think most of my questions have been answered, I just had one follow up for you, Peter. Your comments about I think you said you refer to the market as being reasonably rational, is that referring to rates or structure or both, if in fact you're referring to competitive pressures? And then along those lines, where are new loan yields coming on this past quarter relative to earlier in the year? Are we seeing similar pricing or is there still downward pressure on that front?

Yes, well since Mary sees all the pricing coming over the trans, I'll push that to her. On the competitive side, I think really my comment was more towards terms and conditions then to pricing. And certainly at the mid market level which frankly is a little bit more of a local phenomenon here competitively we're seeing what we would consider to be reasonable structures through the pipeline. And then obviously as you push up to more trophy like sizes then things get a little bit looser. But still I think within the realm of reasonableness. And on the yield side Mary, you want to touch that?

I think given the liquidity within the Hawaii market that there's a great deal of competition especially on those quality credits and so we have seen pressure on pricing within that. And consistent with where the yield curve is moving also.

Okay, are we talking -- relative to earlier in the year a few basis point down or double-digit basis points down?

I'd say a few basis points down with a few outliers here and there.

Okay. Thanks, guys.

And at this time we have 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 additional questions or any further clarification on any of the topics discussed today, please feel free to contact me. Have a great evening, everyone.

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