Bank of Hawaii Corp (BOH) 2014 Q4 法說會逐字稿

Welcome to the Q4 Bank of Hawaii Corporation earnings conference call. My name is Leslie, and I'll be your operator for today.

(Operator Instructions)

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

Thank you, Leslie. Good afternoon, everyone, and thank you for joining us today as we review our financial results for the fourth quarter of 2014. Joining me today 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. Good afternoon, everyone, and thanks for joining us today. We're pleased with our financial results for the fourth quarter of 2014.

Overall loan demand was solid again this quarter. Loan balances grew 4.4% from last quarter, and were up 13.2% from last year. We also continued to grow our deposit base, which increased 2.2% from the previous quarter, and was up 6% from last year.

Due to our growing balance sheet, net interest income increased in the fourth quarter, and our margin was relatively stable, down 1 basis point from last quarter. Asset quality, capital levels, and expense controls continued to be strong. Now, let me turn the call over to Kent, who will give you some further detail.

Thank you, Peter. Net income for the fourth quarter was $41.2 million or $0.94 per share, compared to $41.8 million or $0.95 per share in the third quarter, and $39.1 million or $0.88 per share in the fourth quarter of 2013.

Our return on assets in the fourth quarter was 1.12%, and return on equity was 15.4%. Our efficiency ratio was 57%, compared to 57.7% in the third quarter.

Full-year 2014 net income was $163 million or $3.69 per share, compared to $150.5 million or $3.38 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 58.4%, down from 60.7% in 2013.

Our net interest margin in the fourth quarter was 2.84%, compared to 2.85%, both in the third quarter of 2014, and in the fourth quarter of 2013. Year-to-date net interest margin was 2.85%, compared to 2.81% in 2013. The investment portfolio, reinvestment differential was at minus 12 basis points this quarter, and the premium amortization was $13.7 million versus $13.5 million in Q3.

There was no credit provision in the fourth quarter of 2014. Net charge-offs in the quarter were at $1.7 million. Our allowance for loan and lease losses at the end of the fourth quarter was $108.7 million, or 1.6% of outstanding loan and leases.

Non-interest income for the fourth quarter was $45.8 million, compared to $45 million in the third quarter, and $45.3 million in the fourth quarter of 2013. The increase compared to the prior quarter was primarily due to increases in mortgage income, and trust and asset management income. Mortgage income was $2.1 million compared to $1.6 million in the third quarter, and $2.8 million in the fourth quarter of 2013.

We sold 22,000 Visa Class B shares in the fourth quarter, for a gain of $2 million, which is comparable to the gain in the third quarter. We also contributed 4,700 Visa Class B shares to the Bank of Hawaii Foundation. Year-to-date, non-interest income was $180 million, compared to $186.2 million in 2013.

Non-interest expense totaled $81.2 million in the fourth quarter, compared to $81 million in the third quarter, and $82.4 million in the fourth quarter of 2013. Year-to-date non-interest expense was $326.9 million, compared to $331 million in 2013. For the full year, we saw broad-based declines in expenses, including lower salaries and benefits, occupancy, insurance, and operating losses.

The effective income tax rate was 32.7% in the fourth quarter, compared to 32.6% in the third quarter and 29% in the fourth quarter of 2013. 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 was $6.8 billion at the end of the year, flat with Q3, and down $300 million from last year. The average duration of the AFS portfolio is 2.86 years and overall portfolio duration is 3.37 years. Loans were $6.9 billion at the end of the fourth quarter, up $291 million or 4.4% compared to the end of the third quarter, and up $802 million or 13.2% from the end of the fourth quarter of 2013.

Average deposits were $12.4 billion in the fourth quarter, up $235 million compared to the third quarter, and up $864 million from the fourth quarter of 2013. Our shareholders' equity was $1.1 billion at the end of the fourth quarter, and we paid out $20 million in dividends, and continued our share repurchase program in the fourth quarter, repurchasing 281,000 shares of common stock for $16 million.

Our Board declared a dividend of $0.45 per share for the fourth quarter. At the end of the fourth quarter, our Tier 1 capital ratio was 14.7%, and our Tier 1 leverage ratio was 7.1%. Now, I'll turn the call over to Mary.

Thank you, Kent. Net charge-offs for the fourth quarter totaled $1.7 million, up $900,000 on a linked quarter basis, and down $6.6 million year over year. Full-year net charge-offs were $1.9 million, down from $13.4 million in 2013. The year-over-year improvement was driven off a $9.7 million decrease in gross charge-offs, and a $1.8 million increase in recoveries.

Non-performing assets were $30.1 million at the end of the fourth quarter, down $3.2 million from the third quarter, and down $9.6 million from the fourth quarter of 2013. The year-over-year improvement was due to a $4.7 million reduction in commercial non-performing assets, and a $4.9 million reduction in consumer non-performing assets. At the end of the fourth quarter, loans past due 90 days or more and still accruing interest were $8.7 million, down $442,000, and $1.2 million for the linked quarter and year over year respectively.

Restructured loans, not included in non-accrual loans, or loans past due 90-plus days were $45.5 million at the end of the fourth quarter, up $305,000 from the third quarter, and down $5.6 million from the fourth quarter of 2013. Residential mortgage loans modified to assist our customers accounted for $23 million of the total at the end of 2014.

We continued to see improvement in what we consider to be the higher-risk segments in our portfolio. In total, these segments were down $4.3 million in the fourth quarter and down $14.2 million from the fourth quarter of 2013.

Consistent with the continued strength of the Hawaii economy and our asset quality metrics, we did not record a provision to the allowance for loan and lease losses at the end of the fourth quarter. Accordingly, the allowance of $108.7 million represents 1.58% of year-end outstanding loan and leases. I'll now turn the call back to Peter.

Thank you, Mary. The Hawaii economy continues to perform well, due to a stable tourism industry, low unemployment, rising real estate prices, and accelerated construction activity.

On the visitor front, 2014 is on track to be another record year for tourism in Hawaii. For the first 11 months of 2014, total visitor arrivals increased by 0.9%, and visitor spending increased 2.3%, compared to the same period in 2013. Tourism in Hawaii will also benefit this year from the recent announcement that all Nippon Airways will be doubling service to Honolulu from Tokyo, beginning in July.

The real estate front also looks strong although low inventory levels are limiting overall sales. Inventories on Oahu are currently at 2.6 months for single family homes and 3 months for condominiums. The median sales price for a single family home on Oahu was $675,000 in 2014, an increase of 3.8%, compared to 2013.

The median sales price for condominiums was $350,000 on Oahu in 2014, up 5.4%, compared with 2013. The median days on market was 23 days for single family homes, and 22 days for condominiums in December.

This concludes our formal remarks. Thanks again for joining us today. Another good quarter, and we look forward to your questions.

(Operator Instructions)

Our first question is from Aaron Deer with Sandler O'Neill.

Peter, the loan growth in the quarter was terrific, and it came in a number of categories. I guess I'm just curious, with commercial and C&I balances coming on as strong as they did, and then with the very strong residential mortgage growth that you had, would you now reconsider selling some of the residential production going forward?

Yes, it's a good question, and obviously, you saw in the quarter, we didn't do that. But it's something that we measure, actually almost monthly, I'm going to say. It's really a function of what we're seeing in the for-sale market from a gain on sale standpoint.

So for now, we think retaining the mortgages on balance sheet remains the best path for us. We've talked in the past about having that 40/40/20 split, and even with the strong performance in the quarter there's still a bit of a surplus in that 40% category for resi mortgage. So we'll continue to do the analysis moving forward, but at least for this past quarter, it made sense for us to hang onto those balances.

Okay. And then I guess as a follow-on to that, that might be more perfect for Kent, with all these mortgages I guess coming on the balance sheet and thinking about the types of purchases that you've been doing in the securities portfolio, I'm curious to know how you guys are thinking about the rate sensitivity of the balance sheet, to the extent that you've done your updated analysis on that, where that stands at this point.

We're continuing to think about a lower duration, to maintain a risk profile that takes into account the environment that we have, and the prospect for changes in the environment. So yes, the answer is, we balance the two, a little bit longer duration on the loan side implies a little bit shorter duration on the investment side.

So if we do start to get some higher short-term rates late this year, how do you anticipate that affects your -- where the margin goes, and what are your thoughts on where the 10-year might go at this point?

I'll answer the second part first. We've been pretty consistent about not trying to out-guess the marketplace, in terms of a forecast. So for planning purposes, for [Alco] purposes, we really use the market consensus on interest rates, and so we really don't have any greater insight than that.

In terms of, if the yield curve were to flatten, that by itself and no other change, it would be negative to us. It's all a matter of magnitude and timing. But it would be hard to say it would be positive for us, let's put it that way.

Fortunately, we have a fairly sizable component of both variable and floating rate loans in the loan portfolio. That is somewhat helpful, and that, combined with a relatively low beta, we believe, in terms of deposit pricing, hopefully it's a modest impact. That's kind of how we see it.

Okay. Thanks for taking my questions.

Next question's from Jackie Chimera with Keefe, Bruyette & Woods.

Can you give a little bit of color on the professional and casualty reserve adjustment, and what bucket that fit in?

It's in the insurance bucket, and basically, we've had a pretty clean period here in terms of claims, new claims, both workers' compensation claims and professional liability claims. And so based upon a -- we do this actuarial study every year, based upon how the claims are coming in, and how they're developing, and accordingly, we reduce the reserve.

Okay. So did that flow through fees then or expenses?

It would be in expenses.

Okay.

It would be in other expenses.

Okay. That's what I thought. I just wanted to double check on that. And was there anything unusual or maybe non-recurring in professional fees this quarter?

It was a little bit higher. So we have been spending a little bit more resources with outside services in particular, with various compliance obligations, and so we saw some of that in the fourth quarter.

So is that less likely to repeat then, going forward, since it was outside work?

I think we're going to have some higher compliance costs. I think that's just kind of the nature of the industry, and the nature of the business. So it's -- I can't say it's unique to the quarter. We could see some higher expenses in that category.

Okay. And looking at expenses overall, I know in the past you tried to do a reduction on a year-over-year basis of 1%, and then past comments, maybe it seemed like that wasn't quite as high of a priority, just given the significant growth you've been having. Peter, maybe you could give us an update on your thoughts on expenses as we look into the new year?

Right. Well, we've been -- if you go back over the past five years, we've been able to sequentially drop expenses in each of the past five years. And obviously, that was done against a different growth set than what we face today. Certainly for 2014, and probably into a latter part of 2013, we've begun to see a pretty consistent growth pattern, Jackie.

So I'm not sure that lower expenses are in the cards for us. 1 When we look at expenses moving forward, a lot of that's coming from incentives and commissions and just wanting to maintain the appropriate staffing level to support our customer needs and support our business development needs. So we could see a tick up, just in overall volume-based types of activities.

The other thing that I'd say is, we've got a good amount of building happening in the Company right now. So a lot of the projects, Kent alluded to the compliance piece, which is with us.

But we also have a good number of projects in place that require some outside assistance, some consulting work, but that have some real opportunity to help us from a revenue standpoint moving forward. So I guess I'd say that's the backdrop.

Is it possible to see slightly elevated expenses this year? Yes. I don't know that's an indication of the Company taking a different expense posture than we've had previously, versus just a lot of different, frankly good things happening in our marketplace, and in our situation right now.

Okay. So is it fair to characterize it as more a function of the growth that you're driving, and just the economy being completely in full swing now?

Yes, right.

Great. I'll step back. Thank you.

Our next question's from Jeff Rulis with D.A. Davidson. Please go ahead.

Maybe a question for Peter -- on pretty good loan growth, very strong in 2014, and I guess as it shapes your view of 2015, anything in that -- in the economy that you sense is overheating or you'd be a little more guarded this coming year, versus what you've seen in the past year?

Not really. Commercial, despite the fact that it's been strong for a few years now, I think, has some opportunity again this year.

You heard the commentary around residential mortgage, so that's going to be in some ways an Alco decision, so either we'll take that in volume, or we'll take that in fee income. But the outlook, at least for now, on the residential mortgage front, looks strong as well.

And then the one category that frankly I've been most heartened by is in the other consumer bucket. And as you know, that's been a flattish portfolio for us for a while now, and we're beginning to see good pick-up in that segment as well, which I hope speaks to a slightly more enabled consumer base out here in Hawaii. So I'm going to say that there's additional opportunity in this year.

Having said that, I will tell you that I think 13% year on year is an awfully heady number. I'm not sure that I would plug that into any forecast moving forward. But I think there's still opportunity for growth.

Okay. Maybe another economic question. Either anecdotal or specific on just the local take on the lower energy prices and the anticipated impact on the islands?

That's an interesting situation. We continue to have the kind of pricing in oil and petroleum that we've seen over the past several months, and the thing to remember about Hawaii is we're -- in fact, I think we are the most petroleum-dependent state in the country, because that is the basis of almost all of our utility generation. Despite the fact that we're a small place, people's automobile and gasoline budgets are pretty sizable, relative to their overall income.

Obviously with air travel being such a big component of our economy, that plays into it as well. So I've seen -- assuming oil prices maintain their current levels, and assuming at some point that begins to trickle into gas prices and energy prices and the like, some of the analysis I've seen have impacts as high as 1.5% to our overall economy. The consumption of energy in our state is roughly equivalent to about 10% of our overall GDP.

So it's a headwind?

No, as a potential tailwind.

Got you. Just wanted to confirm.

Lower prices being a stimulus into the economy.

Okay. I'll step back. Thank you.

(Operator Instructions)

And our next question's from Brett Rabatin with Sterne Agee.

Wanted to go back to fee income, and just ask if, again, thinking about 2015, if there are any new initiatives that we might see this year and if any changes in your local competition might give you opportunities in a few specific areas?

Down the fee income line, I think, thankfully we've burned through the mortgage side. So I wouldn't anticipate any meaningful delta to the downside there for 2015. I will say that we haven't changed up too much in the way of specific products, but I will say that we -- we're pretty focused in on our wealth management space right now.

We are a year-and-a-half into restarting our credit card operation, and we feel very strongly that's going to give us some additional revenue in 2015. So I'd say for the past year or so, that's been basically a re-de novo type product that should start to generate some meaningful revenue for us. So those are probably the two areas that I would look to, for this year.

Okay. And then just want to go to -- obviously continued strong loan growth, and that really helped the margin in 2014. I'm just curious as you look at what you're doing in the commercial real estate category, can you maybe just give us a little bit of flavor for what you're seeing in terms of your originations in that segment? Is it a lot of mini-perm type stuff or is it opportunities to refinance stuff away from other lenders, or maybe give us a little more flavor around your growth in the commercial real estate portfolio?

In CRE, it's really a combination of all those. So I'm not sure that any one category is out-competing any other.

There is some re-fi business. There's still a pretty good amount of sales activity happening. There's a good amount of repositioning and retrofitting and reconditioning of properties going on right now, given where values are.

And then a fair amount of land tenure opportunities as well. So people buying out lease fee interest, and things like that. So I guess what I'd characterize the activity at, Brett, is really a pretty balanced portfolio of stuff going on, not really dominated by any one particular category.

Okay. Great. All my questions have been asked. Thank you.

Next question's from Joe Morford with RBC Capital Markets.

Most of my stuff has been asked too, but I guess just one on the deposit growth, that was again pretty encouraging. I was just curious, anything unusual driving that and also just looking at the mix, this quarter was mostly in the interest-bearing demand. While maybe the non-interest bearing has lagged a little bit the last couple quarters, and was just curious, perhaps any reasons behind that?

No, I don't think so, Joe, other than just some clients are category into one bucket or the other. The reality is, the amount that we pay on the interest-bearing demand is pretty nominal. So I'm not sure that there's any yield stuff going on there.

But yes, the growth was good again. If you look at the -- we're quoting end-of-period numbers but if you look at the average numbers, we're up 7.5% in total deposits year on year. And I guess what strikes me as most attractive to that number is, it's coming from a pretty broad set of businesses, both consumer, as well as commercial for us.

Okay. That's encouraging. Thanks a lot.

At this time I show no further questions. We'll turn it back to the speakers for final remarks.

Thank you, Leslie. And I'd like to thank everyone for joining us today, 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 feel free to contact me. Have a nice evening. Thanks everyone.

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