Bank of Hawaii Corp (BOH) 2015 Q2 法說會逐字稿

Welcome to the Bank of Hawaii Corporation second-quarter 2015 earnings conference call. My name is Karen 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 Ms. Cindy Wyrick. Ms. Wyrick, you may begin.

Thank you. Good morning and good afternoon, everyone. Thank you for joining us today as we review the financial results for our second quarter. Join me today is Chairman, President, and CEO Peter Ho, and Vice Chairman and Chief Financial Officer Kent Lucien, and Vice Chairman and Chief Risk Officer Mary Sellers.

The comments this morning 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'd like to turn the call over to Peter Ho.

Thanks, Cindy. Good morning, everyone, and thank you for joining us today.

We were pleased again with our overall financial results for the quarter. Loan demand remains strong and our total loan outstandings grew to $7.4 billion at the end of the quarter, up 3.5% from the previous quarter and an increase of $1 billion, or 15.6%, from the second quarter last year. Deposits continued to grow during the quarter and our balance sheet expanded to $15.2 billion. Overall asset quality of liquidity and capital levels remained strong.

Now let me turn the call over to Kent to provide you some additional details on our financial performance and Kent will pass that along to Mary to give you some color on our asset quality as well. Kent?

Thank you, Peter. Net income for the second quarter was $41.5 million, or $0.95 per share, compared to $42.4 million, or $0.97 per share, in the first quarter and $41.5 million, or $0.94 per share, in the second quarter of last year. Our return on assets in the second quarter was 1.10%, return on equity was 15.3%, and our efficiency ratio was 58.2%.

Our net interest margin in the second quarter was 2.81%, which was unchanged from the previous quarter and down 5 basis points from last year. The investment portfolio investment differential was a negative 55 basis points this quarter. The premium amortization was $13.5 million in the second quarter, unchanged from the previous quarter.

There was no credit provision this quarter. Net charge-offs were $1.1 million and our allowance for loan and lease losses at the end of the quarter was $106 million, or 1.43%, of outstanding loans and leases. Noninterest income for the second quarter was $45.9 million compared to $52.3 million in the first quarter and $44.5 million last year.

There were no sales of Visa Class B shares in the second quarter of 2015. The first quarter of 2015 included a net gain of $10.1 million and the second quarter of 2014 included $2 million in net gains. Adjusted for these games, noninterest revenue was up $3.7 million, or 8.8%, compared to the first quarter and up $3.4 million, or 8.1%, compared to the same quarter of last year.

The increase in noninterest income was largely due to our return to selling residential first mortgages during the second quarter and also seasonally strong trust and tax services. Mortgage banking revenue was $3.5 million in the second quarter compared to $1.7 million in the first quarter and $1.8 million in the second quarter of 2014.

During the quarter we sold $64.4 million in new mortgages, resulting in net gains of $1.2 million. Going forward we anticipate mortgage loan sales in the future, albeit at a slightly lower pace.

Noninterest income in the second quarter also included $500,000 referral fee related to the transition of services provided to some institutional 401(k) plans and an additional $400,000 in fees related to our customer interest rate swap derivative program. The increase in noninterest income during the second quarter was partially offset by a continuation of the downward trend in service charges on deposit accounts due to customers holding higher average deposit balances and declining levels of overdraft fees.

Noninterest expense totaled $83.6 million in the second quarter, compared to $86.9 million in the first quarter and $81.1 million in the second quarter of last year. The decrease compared to the first quarter was primarily due to seasonally higher payroll taxes and 401(k) contributions associated with incentive compensation. The increase compared to the same quarter last year is largely due to higher commission expense, resulting from strong loan production, volumes, and increased separation expense. The second quarter of 2015 included separation expense of $900,000 compared to $1.9 million in the previous quarter and was $87,000 in the same quarter of last year.

The effective tax rate during the second quarter was 31.6%, compared to 31.7% in the previous quarter and 30.9% in the same quarter last year. As Peter mentioned, our balances grew -- our balance sheet grew to $15.2 billion during the quarter, due to strong growth in our outstanding loan portfolio. As a result of this loan growth, which outpaced deposit growth, our investment portfolio declined to $6.5 billion.

The average duration of the AFS portfolio was 2.71 years and the overall portfolio duration was 3.46 years at the end of the quarter. Deposits also continued to grow during the second quarter and increased to $13.1 billion, up $117 million from the end of the first quarter and up $411 million from the end of the second quarter last year.

Our shareholders' equity was $1.1 billion at the end of the second quarter. We paid out $19 million in dividends during the quarter and continued our share repurchase program, repurchasing 184,000 shares of common stock for $11.5 million. At the end of the second quarter our Tier 1 capital ratio was 14.5% and our Tier 1 leverage ratio was 7.2%. Finally, our Board declared a dividend of $0.45 per share for the third quarter.

Now I will turn the call over to Mary.

Thank you, Kent. Net charge-offs for the second quarter totaled $1.5 million, or 0.08% annualized, of total average loans and leases outstanding. Comparatively, net charge-offs for the first quarter of 2015 total $1.2 million, or 0.07% annualized, while in the second quarter of 2014 net recoveries were $1.9 million, driven off recoveries of $2.3 million related to residential mortgage loans and $1.7 million related to a commercial loan.

Non-performing assets were $29.5 million at the end of the second quarter, up $673,000 in the first quarter and down $4.9 million from the second quarter of 2014. At the end of the second quarter, loans past due 90 days or more and still accruing interest were $9.7 million, up $1.7 million for the linked period and down $15,000 year-over-year. Restructured loans not included in non-accrual loans, or loans past 90 days or more, were $48.3 million at the end of the second quarter, up $1.7 million from the first quarter of 2015 and up $4.7 million from the second quarter of 2014.

Residential mortgage loans modified to assist our customers accounted for $22 million of the totals at quarter end. Consistent with the continued strength of the Hawaii economy and our asset quality metrics, we did not report a provision to the allowance for loan and lease losses at the end of the first quarter. Accordingly, the allowance of $106 million represents 1.43% of total quarter-end outstanding loans and leases.

I will now turn the call back to Peter.

Great. Thank you, Mary. The Hawaii economy continues to perform well. For the first five months of 2015 visitor spending increased 2% on visitor arrival growth of 4.1% compared to the same period in 2014. The labor market continues to improve and the statewide seasonally-adjusted unemployment rate was 4% in June as compared to 5.3% nationally.

The real estate market in Hawaii also remains strong. For the first six months of 2015 volume of single-family home sales on Oahu increased 3.4% and condominium sales increased 3.3% compared to the same period in 2014. The median price of single-family home sales on Oahu was 2.3% higher during the first half of 2015 and the median price of a condominium was 2.4% higher compared with 2014.

Median days on the market declined to 18 days for single-family homes and 22 days for condominiums in June. As you can imagine, inventory remain quite low with levels now at 3.2 months for single-family homes and 3.5 months for condominiums. Overall, we expect Hawaii to continue its trend of expansion as construction and activity increases, the visitor industry continues to grow, and real estate remains strong. And the job market remains strong as well.

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

At this time we would be happy to respond to your questions. Karen, can you open the queue please?

(Operator Instructions) Ebrahim Poonawala, Merrill Lynch.

Good morning, guys. I was wondering if you could just touch upon -- you mentioned the deposit growth -- sorry, loan growth outstripped deposit growth this quarter and it seemed like that helped support the margin a little bit. Just in terms of your expectations around deposit growth for the back half of the year and relative to that, how you think about the margin, if we don't account for any changes in interest rates.

Well, I think that the loan -- it's really the loan growth piece that was on the heavy side this quarter and that is what created the discrepancy. So loans were up on an average year-on-year basis 16%, which was pretty -- it's obviously a pretty high level for us, and deposits were up 6.9%. So we had healthy deposit growth; it was just overshadowed by extremely strong loan growth, much of that coming from our residential mortgage book.

As we move forward, I think we would continue to expect loan growth to exceed deposit growth, but probably at a lower level. So I think we're going to continue to be constructive in terms of margin on the swap between loans and investments, but we will also still have support from some level of growth on the deposit front.

Understood. And just separately in terms of I guess expense outlook as we look out into the back half of 2015, is 1% year-over-year growth expectation for the full year still consistent with how you are thinking about it?

You know, I will jump in and Kent can clean up. We ran about a 3% increase year-on-year in the second quarter and if you strip out separation expenses, that's about a 2% increase. And I think, given where we are in terms of volumes, sales volumes, we're going to continue to see the commission and incentive side put pressure on the expense line, which is not a bad thing. It's actually just reflecting positive things happening along the income statement.

We have also got a 4% unemployment rate out here in the island. So we have got to attract and retain quality people and that's just not as efficient to do in this environment as in prior years.

Got it, thanks for taking my questions.

Aaron Deer, Sandler O'Neill.

Can I get the variance on the new securities purchases relative to the portfolio in the quarter? I'm not sure -- I might have missed it, but if you did not give that, can you also give that for the loan book?

I didn't cite that number and I don't have a figure for you. We're going to have to get back to you on that.

Okay. Was there much in the way of securities purchases this quarter?

It was about two-thirds of the runoff.

Okay. Then, as you kind of look out toward the back half of the year, what are you guys seeing in terms of the pipeline? I know there's another big project that is starting up here in August. I know I'm going to mess up the pronunciation on this, but I think it is Keauhou Lane. Are you guys participants in that deal or are there any other large projects that could be contributing to the construction book going into the back half?

So the market remains pretty strong out here in terms of condominium development. We are involved in a number of projects at this point. I wouldn't anticipate our construction book growing that much more. I think probably there's a little room for expansion but what happens, Aaron, as you know, is as soon as we fund up a project another one pays off. And that's a good thing.

So I think that near-term outlook, that book of business should be reasonably flat to growing moderately for us. We have had some good success in converting construction outstandings into longer-term residential mortgage outstandings as these projects selloff and sellout. And so that is also an opportunity for us and, in fact, was a good part of our story this past quarter.

I would say the next couple of quarters is a bit of a flat spot for us in terms of that activity. We have a couple of projects coming to market, but that's going to be into next year.

Okay, good stuff. I appreciate the color. Thank you.

Casey Haire, Jefferies.

Good morning, guys. Thanks. So I just wanted to follow-up I guess on the loan yield question. I understand, Kent, you don't have the number handy, but if I look at the tables quarter to quarter, you guys had very good stability. Only home-equity really showing any sort of significant degradation.

I'm just curious; do you feel like loan yields have stabilized at this point and we will get some stabilization going forward?

You know, it's a function of the environment and overall the interest rate environment was a bit more productive than it had been in the first quarter, so that's always helpful. And you're right, across the categories. Most of our categories were either pretty flat compared with the first quarter, or even up compared to the first quarter. So that resulted in a very modest overall loan yield decline of only 2 basis points compared to the first quarter.

Okay. And then the reinvestment differential, the 55 bps was last quarter. Just one month into the third quarter here, what has been sort of the blended average yield on placements in the securities book this quarter versus that 2.20%?

I don't normally quote interim figures; I'd hesitate to give you a number. But the environment has been fairly productive into the early part of the third quarter, but we take a pretty conservative view in our reinvestment activity in the investment portfolio, so we're going to keep the duration fairly low. I wouldn't look for anything spectacular on this differential.

Okay, great. And switching gears to credit quality, with a 1.43% loan-loss reserve you guys are now pretty close to your pre-crisis level. I know you've been saying that provisions are coming at some point, but the metrics continue to be very benign.

I'm just -- if you guys continue to get good news on the credit front, would that allow you to --? Would that prevent you from going below your pre-crisis floor, so to speak, on the LLR? Would you be willing to go through that if the credit metric supported it?

I think it's a decision we make every quarter as we look at the makeup of the portfolio. It will be in part driven off where some of the growth is and the mix of that, and I think that if it warranted we would consider going modestly below.

Okay, great. And just last one for me; just to clarify on the other income line it was pretty strong for you guys this quarter. I think, Kent, you mentioned there was $400,000 of swap income activity that benefited that line. Did I hear that right?

Yes, that's the number.

Okay. So ex that it's -- a $4 million run rate is good for that line item?

Well, we also -- I mentioned we had basically a sale of some of our 401(k) services during the period and that was $500,000, so that's included in that line as well.

Okay, got you. Thanks for clarifying.

Jeff Rulis, D.A. Davidson.

Thanks, good morning. Just a follow-up on the comp expense. Peter, you talked about I guess the tie to higher production in the market you serve. Going to be tough to kind of keep that down; but could we still assume that -- I guess typically you guys have had your highest expense in Q1. Do you think that to kind of hold true this year? I guess the expectation to close the year.

Well, yes, Q1 was clearly and hopefully the high watermark expense wise. We've got a history of lower operating expenses year-on-year and I would just caution that that is likely not to be the case as we move forward. I mentioned that we had 2% year-on-year growth when you take out separation expenses in the second quarter and that to me, given the environment, is kind of -- that's probably going to be a typical quarter for us would be my guess.

Frankly, for a lot of good reasons. We are investing in the marketplace; it's just doing really well out here.

And then maybe just a follow-up on the loan portfolio as well. I guess I'm looking at any segment that surprised you to date. I think, Peter, you've been pretty vocal about the consumer really coming on the island, but any segment you think -- outside of the construction you said leveling off, but anything else that is sort of [heavy] that you are frankly surprised at the production to date?

Well, if you take commercial as a category that's up 16% year-on-year. And so we are happy with that growth. We like the loans that have comprised that growth, but there's a midpoint to every cycle as I've experienced it and I would say we're getting pretty mature in the commercial cycle.

Residential had a terrific quarter and it really was, in a lot of ways, a combination of some really positive things. So we have been very -- our team has been very, very successful at the project side of the purchase market and with the condominium development happening in the islands that has been very constructive for us. As I mentioned earlier to Aaron, that is a bit of spiky business so that kind of comes and goes. We're probably not going to have that level of activity for a few or several quarters at this point.

I think that resi was just a really, really strong quarter that I'm not sure I would anticipate seeing 18% year-on-year growth in that portfolio every quarter.

Great, thank you.

Ken Zerbe, Morgan Stanley.

I guess just actually on the same resi mortgage question side. I think you said that you expect to slow down the pace of resi mortgage sales. Is that only because you expect resi mortgage balances to slow in terms of their growth, or --? I'm just trying to reconcile the two pieces, because you've had fantastic growth in residential. Just wondering why you're not selling more.

Well, I was really referring to the level of income and so what I am talking about is really pretty modest, but I just didn't want to give the impression that we were going to be up next quarter in that category. So the actual amount sales could be about the same. The gain, however, could be a little bit less.

As we go forward, the methodology of sales will probably be in a flow process, and as we started here in the second quarter it was really bulk sales. In other words, things out of inventory. So they had a little bit bigger gain than we would expect necessarily going forward.

Okay. Then just another question for you. In terms of loan growth outpacing deposit growth, presumably you are funding that with some sort of borrowed money, but can you describe that a little bit more? What exactly are you using to fund those loans?

Are you able to duration match? Do you even want to duration match, given that you are increasingly asset sensitive? And is it meaningfully reducing your asset sensitivity? I know that was a lot of questions, but it's all kind of one topic.

(multiple speakers) So essentially, in this case, we are remixing the balance sheet. And by that I mean we are reducing the investment balances and that reduction is therefore flowing into the loan balances.

We didn't take any term funding on in this period. I have to say we wouldn't do that going forward; that is always a possibility. But this was funded strictly from the reduction of the investment portfolio.

Okay. All right, thank you.

(Operator Instructions) Jacque Chimera, KBW.

Good morning, everyone. What drove the main choice to sell mortgages again? Was it gain on sale driven? Was it more portfolio positioning?

Well, so you followed us for a while, Jacque and you know that for periods we retain mortgage production. In some environments we've chosen to sell that. Kind of where we were this quarter was, given where production levels were, given where margins were on the sales side, our decision was to do, frankly, a little bit of both to get the best outcome for the income statement and the balance sheet.

Okay. So even with the decline you are anticipating gain-on-sale margins that are still attractive enough to continue to sell some of the production next quarter?

I think that's what Kent alluded to, right?

Okay. And then the HELOC expansion, you had really good growth in that portfolio in the quarter. Was it new bookings or was it increased utilization?

Both.

That's good to hear. Did it lean more one way or the other?

Utilization was up about 1%, while production was $78 million in the first quarter this year and it was up to $111 million this quarter.

Okay. Any campaigns that you are running that are different?

Not really. I think it's just we continue to run those and target also some of our clients on utilization activity due.

So not much in the way of promotion kind of in the traditional typical sense there, Jacque, but a lot of good work around creating, I think, more attractive product features to the home equity space. And I think better targeting of people that are actually going to use the product versus just have the unused commitment.

Okay. Then just one last quick one. Peter, you continue to have just excellent, excellent deposit growth and I know that the funds come in and they've continue to come in year after year. Are you currently running any campaigns or any compensation that's driving that growth, or is that just the natural growth that is happening in your market for you?

No, you know if you look at the rate volume analysis in the packet that you all work off of, we really haven't done much in the way of deposit pricing in the marketplace. So that volume or that growth has come largely on the back of what I think is the quality of the franchise.

We are seeing a fair amount of promotion in this space, locally as well as nationally, and so we have to rethink what we do pricing wise given that environment. But to answer your question, no, we have really not done a lot of pricing promotion around our deposit base.

And the promotion that you are seeing locally, understanding that it's not coming from you, is it more of your bank peers or credit unions?

Both.

Okay, so just liquidity. Okay, thank you. That's very helpful.

Joe Morford, RBC Capital Markets.

Hello, everyone. Lot has been asked already; I guess one more stab at the question on yields, loans, and securities. Just big picture the margin has held up fairly well.

Do you feel that we are kind of stabilized at this level and almost hit an inflection point and perhaps --? In the past you've talked about kind of expectation for steady downward with the loan repricing and stuff, but do you think we've maybe stabilized here?

Well, that's possible, but no guarantees. We have seen these head fakes in the past where it sure looks like rates are moving up and margins stabilize only to find out that, well, it's not really a trend. It's just an aberration. It's definitely possible that we have hit the bottom here, but as I said, I just can't guarantee that.

I guess along those lines for the other question would be, I guess following up on Ken's question on asset sensitivity. As we perhaps get closer to the Fed raising rates here, can you just talk about the updated thoughts on the benefit you would expect from that? And also the timing, i.e., are you getting a lot of it up front immediately, or does more of the benefits flow through after we have had quite a few hikes?

It's all proportionate and it does take time to play out. Our models all show we are still asset-sensitive. The Q will report that with a 200 basis point shift in the curve, that is worth 5% to us in the first year. So that is the dimension of it. So that is about as best I can explain it.

Okay, fair enough. Thanks, Kent.

Thank you. We have no further questions at this time. I would like to now turn the call back over to Ms. Wyrick.

Thank you very much and thanks, everyone, for joining us here today and for your continued interest in the 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.