Bank of Hawaii Corp (BOH) 2015 Q1 法說會逐字稿

Welcome to the Bank of Hawaii Corporation first-quarter 2015 earnings conference call. My name is Christine and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Cindy Wyrick, Director, Investor Relations. You may begin.

Thank you, Christine. Good morning or good afternoon, everyone. Thank you for joining us today as we review the financial results for the first quarter of 2015. Joining me today is our Chairman, President and CEO, Peter Ho; our Vice Chairman and Chief Financial Officer, Kent Lucien; and our Vice Chairman and Chief Risk Officer, Mary Sellers. This morning's comments 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. Now I would like to turn the call over to Peter Ho.

Great. Thanks, Cindy. Good morning, everyone or good afternoon to those of you on the eastern side of the country. Thanks for joining us today. Bank of Hawaii started 2015 with a strong financial performance and we were pleased with our overall results for the quarter. Loan demand continued to be robust with total loans reaching $7.2 billion at the end of the quarter, up 4.1% from the previous quarter and an increase of 15.6% from last year.

We also continued to maintain solid deposit growth. Balances increased 2.7% from the fourth quarter and were up 7.8% from last year with balance growth coming from both our consumer and commercial and institutional segments. Asset quality, liquidity and capital levels continue to be strong. Now let me turn the phone over to Kent who will provide you some additional details on our financial performance for the quarter. Kent?

Thank you, Peter. Net income for the first quarter was $42.4 million or $0.97 per share compared to $41.2 million or $0.94 per share in the fourth quarter and $38.6 million or $0.87 per share in the first quarter of 2014. Our return on assets in the first quarter was 1.15% and return on equity was 16.2%. Our efficiency ratio was 58.3% compared to 57% in the fourth quarter and 60.5% a year ago.

Our net interest margin in the first quarter was 2.81% compared to 2.84% in the fourth quarter and 2.87% in the first quarter of 2014. The investment portfolio reinvestment differential was a minus 99 basis points this quarter and the premium amortization was $13.5 million compared to $13.7 million in the fourth quarter of 2014.

During the quarter, we reinvested about 35% of the portfolio runoff and the majority of that went to treasuries and floating rate securities. There was no credit provision this quarter. Net charge-offs in the quarter were $1.2 million. Our allowance for loan and lease losses at the end of the first quarter was $107.5 million or 1.5% of outstanding loan and leases.

Non-interest income for the first quarter was $52.3 million compared to $45.8 million in the fourth quarter and $44.8 million in the first quarter of 2014. The increase compared to the prior quarter was primarily due to an $8.3 million increase in securities gains. We sold 95,000 Visa Class B shares in the first quarter for a net gain of $10.1 million compared to $2 million in the first and fourth quarter of 2014. The higher quantity of Visa shares is because of our counterparties' minimum transaction requirements. Currently, we don't anticipate further Visa share sales in 2015. We also contributed 4700 Visa Class B shares to the Bank of Hawaii Foundation in the first quarter.

Mortgage income was $1.7 million in the first quarter compared to $2.1 million in the fourth quarter and $2 million in the first quarter of 2014. We continue to see a decrease in deposit account fees compared with prior periods due to customers holding higher average deposit balances. We are also experiencing lower levels of overdraft fees as fewer customers are choosing to opt in. Non-interest expense totaled $86.9 million in the first quarter compared to $81.2 million in the fourth quarter and $83.5 million in the first quarter of 2014. The increase compared to the fourth quarter was primarily due to a $2 million increase in separation expense, approximately $2 million in seasonally higher payroll taxes and 401(k) contributions associated with incentive compensation accrued in 2014 and paid in the first quarter of 2015 and increased technology investments.

In addition, some expenses categories such as commissions were higher this quarter reflective of higher loan production volumes. The effective income tax rate was 31.7% in the first quarter compared to 32.7% in the fourth quarter and 29.1% in the first quarter of 2014. The lower rate in the first quarter of 2014 included a $1.2 million credit for a state income tax settlement.

Our investment portfolio was $6.6 billion at the end of the first quarter. The average duration of the AFS portfolio is 2.66 years and the overall portfolio duration is 3.16 years. We are holding somewhat higher cash balances at present in light of a potential changing interest rate environment. Loans were $7.2 billion at the end of the first quarter, up $281 million or 4.1% compared to the end of the fourth quarter and up $969 million or 15.6% from the end of the first quarter of 2014.

Average deposits were $12.8 billion in the first quarter, up $351 million compared to the fourth quarter and up $972 million from the first quarter of 2014. Our shareholders' equity was $1.1 billion at the end of the first quarter and we paid out $20 million in dividends and continued our share repurchase program in the first quarter, repurchasing 179,000 shares of common stock for $10.3 million.

Our Board declared a dividend of $0.45 per share for the first quarter. At the end of the first quarter, our Tier 1 capital ratio was 14.6% and our Tier 1 leverage ratio was 7.2%. Now I will turn the call over to Mary Sellers.

Thank you, Kent. Net charge-offs for the first quarter totaled $1.2 million or 0.07% annualized of total average loan and leases outstanding. Comparatively, net charge-offs for the fourth quarter of 2014 totaled $1.7 million and the first quarter of 2014 totaled $1.3 million, 0.10% and 0.09% annualized of total average loan and leases outstanding, respectively.

Non-performing assets were $28.8 million at the end of the first quarter, down $1.3 million from the fourth quarter of 2014 and down $8.3 million from the first quarter of 2014. At the end of the first quarter, loans past due 90 days or more and still accruing interest were $8 million, down $700,000 and $1.7 million for the linked quarter and year-over-year, respectively.

Restructured loans not included in nonaccrual loans or loans past due 90 days or more were $46.5 million at the end of the first quarter, up $1.1 million from the fourth quarter and up $2.1 million from the first quarter. Residential mortgage loans modified to assist our customers accounted for $22 million of the total at the end of the quarter. 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 quarter. And as Kent indicated, the allowance of $107.5 million represents 1.5% of total quarter-end outstanding loans and leases. I will now turn the call back to Peter.

Great. Thank you, Mary. The Hawaii economy continued to perform well, as Mary mentioned, during the first quarter. For the first two months of 2015, total visitor arrivals increased 0.8%, although visitor spending decreased 3.3% compared to the same period in 2014. Following the record levels of tourism we experienced during 2014 and prior years, the current level of visitor activity still reflects a healthy tourism industry despite the mixed year-to-date results. I would note, however, that spend out of the Japan market is off substantial year-to-date through the first two months of the year, likely as a result of the strength of the dollar versus the Japanese yen. To give you some perspective, Japan spending or the Japan market represents about 16% of overall spend and 12% of visitor days in the state of Hawaii.

The real estate front also looked strong despite the low inventory levels, which are limiting the number of sales in our market. Inventories on Oahu are currently at 2.7 months for single-family homes and 3.4 months for condominiums. The median sales price for a single-family home on Oahu rose to $676,000 during the first quarter of 2015, an increase of 3.2% compared with the first quarter of 2014. The median sales price of a condominium during the quarter was $363,750 on Oahu, up 5.4% compared with 2014. The median days on market was 21 days for both single-family homes and condominiums in March.

Overall, we expect Hawaii to continue with the moderate expansion we saw last year as construction activity increases, the visitor industry remains robust, real estate remains strong and labor markets remain steady. Jobless claims are now at a seven-year low and unemployment is at a better rate than the overall country as a whole.

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

(Operator Instructions). Ebrahim Poonawala, Bank of America Merrill Lynch.

Good morning, guys. So I guess, Peter, if you could start with loan growth in terms of it was a really strong quarter for loan growth this quarter and I think everything that you talked about in terms of the economic backdrops seems very strong as well. I guess as we look into the second and third quarter of the year, should we expect loan growth to stay kind of as is in terms of the growth rate or should we anticipate a pickup in pace as we saw sort of the plans this time last year?

Well, actually, as I recall, last year, we were pleasantly surprised with our first-quarter growth results in lending simply because there generally is a seasonal downturn, as you know, coming out of the fourth quarter where a lot of transaction activity is completed. The same thing happened to us again this year, good results both on a linked basis and on a year-over-year basis.

I am not sure that we are going to continue to chug along though at 4% linked growth. That seems awfully ambitious to me, but I do think that, on an annualized basis, being in the lower single-digit levels is certainly achievable kind of given where we have tracked the past several quarters and what we see both in the economy, as well as in the marketplace moving forward.

Understood. And I guess just a second question in terms of provisioning, I guess credit continues to be strong. If you can sort of help us think about this, if the outlook of credit is getting better, there seems more room to (inaudible) results. Could we have another full year or at least the next couple of quarters of zero provisioning unless something changes in the credit backdrop?

It will depend in part really on the growth that we achieve and again, we look at it quarter by quarter and really make a determination based on the facts at that point.

Got it. Thanks for taking my questions.

Joe Morford, RBC Capital Markets.

Thanks. Good morning, everyone. Just following up on the loan growth question, the residential mortgage portfolio has been an important contributor to that. Can you just talk about your decision to continue to retain those balances on your balance sheet going forward the next few quarters? Is that being a major contributor to growth?

I will start on that and Kent can clean up. Basically, we look at that every quarter and for now, it looks to us, just from a pure economic and financial standpoint, that retaining those loans on balance sheet gives us better value to the shareholder than selling them through and picking up the gain on sale. We still have capacity on our balance sheet for residential mortgages, largely in part because the other pieces of the loan book are growing for us, as is the overall earning asset base. So those are really the two determining factors and both of those factors are pointing in that direction for us right now, Joe.

Okay. Super. That makes sense. I guess the other question was just on expenses. And I recognize this quarter had the one-time separation costs and some seasonal items in there and you continue to invest in areas like technology. What is a good run rate for the second quarter to kind of build off of going forward?

Well, I think, obviously, you can take away the seasonal figure and the separation expenses. We do sometimes have some other items creep into any particular quarter, so we had a little bit higher medical expenses in the first quarter. I don't think that is necessarily indicative of what we would expect going forward. So that is an example of something that might also come off the run rate.

Okay. Is that something you can quantify at all or was that a material item this quarter or --?

I think we saw a number, about $500,000 or so higher than the fourth quarter.

On the medical?

Yes, on the medical.

Okay. Great. Thanks so much.

Jacque Chimera, KBW.

Good morning, everyone. I wanted to touch back on the differential that you had mentioned. Did you say it was a negative reinvestment differential of 99 basis points?

I did, yes.

And I could completely be missing something here, but I am just wondering how that 99 plays in with the securities yields in the quarter because as I look at the average balance sheet, they were only down by 2 basis points. So if you could just provide a little bit of color on that.

Sure, Jacque. A couple things. First of all, the amount of dollars that we reinvested were pretty light so only about one-third or so of portfolio runoff was reinvested. And when we did reinvest, we were at a pretty low end of the yield curve, so floating rate securities, relatively modest term treasuries. Those were the types of things that we bought and it is really in respect to a couple things -- the interest rate environment which has the potential to change here over the next, whatever, several quarters and the fact that we are putting more mortgages onto the balance sheet. So we have a little bit longer duration on the loan side. We are bringing down the investment duration in consideration of that fact.

And were those purchases leaning more towards the end of the quarter?

No, not necessarily. I really don't recall the exact timing.

Okay. And the premium amortization, I know it was down by about $200,000 in the quarter. What are your expectations as we move forward just in light of what interest rates have been doing and refinancings and everything?

Yes, no, I think what we saw in the first quarter wasn't unusual and it is pretty typical of what we might expect going forward. Of course, that number will vary as a function of interest rates. That is about all I can say on that.

So you didn't notice in the quarter any uptick in prepayments and it is not the expectation that it will increase going forward? It should stay fairly even keel?

Jacque, there has been a little bit of a mini refinance boom. I wouldn't say it is as large as some of the other refinance activities that we have seen. That happened kind of late fourth quarter of 2014. There's some timing associated with that. It could have a modest impact in the second quarter, but, again, I am not expecting any huge change.

Okay, great. Thank you for the added color. I really appreciate it. I will step back now.

Jeff Rulis, DA Davidson.

Thanks, good morning. I noticed, on the income side, ex the securities gains, just the trust mortgage banking service charge fees down sequentially. Would you point to seasonality there or was there anything that particularly led to the decline linked quarter?

Well, it is not a very big change, so maybe $100,000 or so. So there is really nothing in particular there to talk about. If you compare it to a year ago, actually we were up about $400,000.

Okay, yes, they are modestly lighter sequentially, but nothing to --?

No, nothing dramatic there.

Okay. And then, Kent, on the Visa sales, I guess your guidance of not expecting further sales for the year would expect, given that you have got a balance there, to resume in 2016. Is that reasonable at the full-year level?

Yes, Jeff, that would be the current plan pending any other developments, but as we sit here today, yes, that is reasonable.

Okay. And then, Peter, just interested in your comments about the -- I guess as it pertains to Japan visitor count and spending, but the strong dollar, it affects other international. I guess kind of the near and maybe medium term, your expectations for that impact?

Well, yes, that is an interesting thing to be looking at right now given where currency rates are heading with the dollar. Really, the big upturn in the yen occurred in the fourth quarter of 2014, so it went from 100 into the one teens, 118, 119 call it and that was coming off of a rise from call it the 80s to the 100s in 2013. So there really have been two stairsteps and it really wasn't until we saw the upturn late 2014 into the 118, 119 range on the yen that we saw a meaningful decline in purchasing. So again, that is 16% of the spend in the marketplace.

Another thing to note though is that the Japanese in particular have a pretty strong penchant for luxury purchases. So a lot of that delta, I think there is a 13.5% delta in spend year-to-date this year versus last year, is coming off of luxury goods, if you will and that obviously has some impact on state taxes, has some impact on sales commissions, but for the most part most of that money gets repatriated back to Europe or Italy or wherever those goods are coming from. It is something we are following, but I think the nature of Japanese spending patterns, the fact that it is a much smaller market than it was certainly 10, 20 years ago as a percentage of the overall pie, as well as the fact the Canadian dollar, the Australian dollar, certainly the renminbi have been a lot more stable than what has happened to the yen over the past couple of years. Things should be okay, but we just want to keep our eye on what is happening with the Japan market.

Okay, thank you.

Aaron Deer, Sandler O'Neill.

Good morning, everyone. Peter, I was wondering if you could just elaborate a little bit more on your thoughts in terms of the growth outlook. I think I heard you say that you have got an expectation for annualized double-digit growth, that that kind of pace could continue. Are you suggesting double-digit growth for the full year or that that double-digit pace could continue to happen on a sequential quarterly basis?

Well, you can always hit a flat spot, so I think I would be more comfortable, Aaron, talking about on an annualized basis we see the market and the economy capable of allowing us to generate in the lower double-digit rate level.

Okay. And in terms of your expectation for the type of growth, as you and Joe were talking about, a lot of it this quarter was in the single-family residential. As you kind of look at the pipelines, do you anticipate any sort of shift in the mix of production whereby maybe you see a little bit better, stronger growth in the commercial real estate or C&I portfolios?

Yes, C&I had a really good quarter. I will tell you that there were a few large loans that went in that quarter, great credits. We are happy to have them, but we may not have that level of activity in C&I moving forward. Although it has been a strong contributor for us for a while now. I would anticipate CRE to continue moving along. It has been a steady, consistent performer for us, double-digit annualized growth rate for a few years now. We see some runway there. The construction book is up 22% year-on-year, albeit at pretty low levels. I think we were at $111 million at the end of the first quarter, but those loans will begin to mobilize up as the skyline begins to build out around here.

And then on the resi side, we are seeing good marketshare participation for Bank of Hawaii and really part of what is helping the volumes for us is the loan up of these projects coming to market. So last year, I think we went through three of them. They were a nice addition to volume for us, so we have got great relationships with the sponsors, the developers of those projects and we have got a few more, several more slated for this year and potentially into next year.

And the ones that are coming on this year, what's kind of the price range are those? Are those higher end or are those more midrange and are they more investment properties or live-ins?

It is really mixed and I am just going to guess, I would say it is about even. By units, it is probably about even.

And then, Kent, just a couple quick follow-ups. The Visa sales next year, can we presume then too that, given the agreement if it -- if it's with the same counterparty, that it will be done in a single bulk purchase, not in individual quarters?

I would think so. Of course, things can always change where counterparties have a different way of operating, but assuming the market is the same and the list of counterparties is the same, that is probably how we would execute next year.

Okay. Then if you continue to contribute shares to the Bank of Hawaii Foundation, what kind of tax rate should we expect for the remainder of the year?

Well, there was nothing very dramatic in the first quarter. We didn't have any settlements or anything of that type, so it is a pretty good indicator of what the full year might be.

Okay, terrific. Thanks for taking my questions.

(Operator Instructions). Casey Haire, Jefferies.

Good morning, guys. Just wanted to follow up on the expenses. If I have it correctly, I think you guys have been talking about expenses being up zero to 1% on the year from about a $327 million starting point in 2014, which would imply at the high-end, $330 million. Obviously a seasonally challenged quarter here, but if I strip out that $87 million, that implies a quarterly run rate for the remainder of the year of about $81 million, which seems a little aggressive given how well you guys are growing. Is there any updated thoughts on what the expense guide is for the year?

We still think the 1% is a good way to think about the full year. Now having said that, we talked a little bit more about loan production and volume and there can be associated expenses with that. So with higher production volumes, (technical difficulty) some higher expenses, all to the good though, positive operating leverage associated with that trade.

Okay, got you. So no fundamental change in that view?

No.

Okay, great. And then, Kent, I want to follow up on your comments on -- you guys are going to be running the balance sheet a little bit more liquid in preparation for higher rates. Can you just talk a little bit about that motivation given you guys have a very liquid balance sheet, positioned very well in the Hawaiian market from a core funding perspective and also run a pretty tight securities book. So just trying to get some understanding of why the need to increase liquidity and keep it tight on the securities book and is that cash balance, are we going to see that going even higher from here?

So it's not really a question of liquidity; that is not the issue. The issue is interest rate sensitivity and either playing defense or maybe taking advantage of a little bit of an opportunity here to the extent rates change. I think that the mention -- we could be talking about a modest increase off of what we already have in terms of cash funding, maybe 5% of our balance sheet in that category, but nothing much more than that.

Okay, great. And then just lastly on the loan yield, what is the new production yield versus that 406 within loan book?

It depends on category. So 30-year mortgages are coming in at about 375. I will say there is intense pressure on anything short and anything variable. So C&I, as you can see, has been hit pretty good and I think that is indicative of where people are trying to find Safe Harbor in this rate environment.

Okay, great. Thank you.

Justin Maurer, Lord Abbett.

Good morning, guys. Sorry if I missed it earlier on the mortgage stuff that you guys were putting on. Are you trying to sell -- Peter just mentioned the 30-year stuff. Is that -- are you guys trying to be a little bit more selective in terms of what you are putting on or are you just kind of taking what the market is giving you and just obviously relating it to duration, how you think about that?

Well, we are just putting on what we are originating out in the market.

Okay, so you are not trying to focus on safe sell, your 30 year and try to keep any of the short stuff or whatever?

No, no. I mean we love the short stuff, but people, for obvious reasons, are trending towards longer-term assets or longer-term loans.

And the percent of total loans has been relatively -- mortgage as a percent of total, even though you guys have been taking that up, I think it is a little over 37% of the total loan book at the quarter. How high could that conceivably be? Could it go over 40% if you kept putting it on or are you trying to keep it mixed properly?

Historically, it has been above 40% and as a percentage of earning assets, it has been substantially higher in our modern history. But what we have talked about is maintaining -- on the simplest terms, maintaining our mortgage book at about 40% of the overall loan book and I think that remains a good rule of thumb for us right now.

Okay. Thanks much.

Joe Morford, RBC Capital Markets.

Thanks. I guess you have touched on it, but really it's a follow-up question just on some updated thoughts on the margin outlook given that where you are seeing most of the loan growth this quarter or just in general is where you are seeing some of the greatest pressure on loan yields. And so just how we should be thinking about the margin outlook from here.

I think it is a tough environment. I think that we are looking for floating or shorter assets, loan assets and so is everyone else. So the market -- I guess borrowers are benefiting from that. To be honest, I am not seeing or we are not seeing as much pressure on the residential mortgage product as perhaps we would have anticipated, so that's been a bit of good news for us.

On the commercial mortgage segment, for the most part, it has been reasonably stable the past year. So I think much of the commercial segment is stable, but for that short/floating area, the C&I area, which people seem to be willing to dive to get quality assets there pricing wise, dive pricing wise.

Interesting. Okay. Thanks so much.

Thank you. We have no further questions, so I will now turn the call back over to Cindy Wyrick.

I would 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 discussed today, please feel free to contact me. Have a great day, everyone.

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