Bank of Hawaii Corp (BOH) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Bank of Hawaii Corporation third-quarter 2015 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the call over to your host, Cindy Wyrick. Please go ahead.

Thank you. Good morning and good afternoon, everyone. Thank you for joining us today as we review our financial results for the third quarter of 2015. Joining me today is Chairman, President, and CEO Peter Ho; Vice Chairman and Chief Financial Officer Kent Lucien; and Vice Chairman, Chief Risk Officer, Mary Sellers.

Our comments will refer to the financial information included in our earnings announcement this morning. 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 materially differ from those projected.

Now I'd like to turn the call over to Peter Ho.

Great. Thank you, Cindy. Good morning and aloha, everyone. As you may have read in our September 29 8-K, the Company made the decision during the third quarter to exit out of all of our remaining legacy aircraft leases. This action obviously had a disappointing financial impact on the third quarter.

The Company was active in aircraft leasing beginning in the late 1980s, with activity peaking in the 1990s. While the cost of taking these actions has a near-term impact, we obviously believe it's in our long-term interest to be clear of these legacy assets.

Net of the aircraft impairment, Bank of Hawaii had a strong third quarter for 2015. Loan growth was balanced across asset categories and up just over 16% compared to last year. Average deposits continue to grow.

Asset quality reflects Hawaii's strong economy and prudent underwriting practices of the Bank. Annualized net charge-offs in the quarter were 10 basis points. Capital and liquidity remain strong.

And now let me turn the call over to Kent to give you more color around the quarter and the financials. Kent?

Thank you, Peter. Net income for the third quarter was $34.3 million or $0.79 per share, compared to $41.2 million or $0.95 per share in the second quarter, and $41.8 million or $0.95 per share in the third quarter last year. Our return on assets in the third quarter was 0.89%; the return on equity was 12.45%; and our efficiency ratio was 65.12%.

Third-quarter results include the previously announced impairment charges of $6.5 million or $0.15 per share related to our decision to remove all of the remaining legacy aircraft leases from the portfolio. The charges were comprised of three parts.

$1 million of the charge is included in noninterest income and based on the estimated loss of an existing aircraft lease. $9.5 million of the charge is included in noninterest expense and relates to a reduction in the net realizable value of six aircraft whose leases have matured. There is a $4 million income tax benefit associated with the previous two items.

Adjusted for the impairment charges, the return on average assets for the third quarter was 1.07%. Return on average equity was 14.72%, and the efficiency ratio was 58%.

Our net interest margin in the third quarter was 2.77%, down 4 basis points from the second quarter and down 8 basis points from the same quarter last year. Higher average loan balances during the third quarter resulted in increased interest revenue compared to the second quarter. It was largely offset by lower yields and balances in our investment portfolio.

The investment portfolio reinvestment differential was a negative 33 basis points this quarter. Premium amortization was $14.2 million in the third quarter, an increase of $700,000 from the previous quarter. This was primarily due to an increase in prepayments of Ginnie Mae project loan securities.

Interest income in the third quarter of last year included a net interest recovery of $700,000. There was no credit provision this quarter.

Noninterest income for the third quarter was $43.2 million, compared to $45.9 million in the second quarter and $45 million in the third quarter of 2014. Adjusted for the impairment charge, noninterest income for the third quarter was $44.2 million, down $1.7 million from the second quarter and down $700,000 from the third quarter last year.

The decrease from the second quarter was primarily due to a $500,000 referral fee for the transition of services for some institutional 401(k) plans received during the second quarter. Lower levels of bank-owned life insurance and seasonal tax service fees were also a factor.

Noninterest income in the third quarter last year included Visa stock sale gains of $1.9 million. There were no Visa stock sales during the second or third quarters of 2015.

Adjusted for the impairment charges, noninterest expense for the third quarter was $82.4 million, down $1.1 million from the second quarter and up $1.4 million from the third quarter last year. The decrease in noninterest expense compared to the third quarter was primarily due to a reduction in occupancy expense of $1.2 million primarily related to the sale of properties in Guam and lower separation expense. The increase compared to the prior year is largely due to higher salaries and benefits expense resulting from strong loan production, annual merit increases, and the rising cost of medical insurance.

The effective tax rate during the third quarter of 2015 was 30.4%, compared to 31.6% in the previous quarter and 32.6% in the same quarter last year. Adjusted for the benefit related to the impairment charges, the effective tax rate for the third quarter was 31.7%.

As Peter mentioned, we continued to see strong growth in our loan portfolio during the quarter. As a result of loan growth continuing to outpace deposit growth, our investment portfolio decreased slightly to $6.4 billion. The average duration of the portfolio was 3.37 years at the end of the quarter.

Although average deposits increased during the third quarter, total deposits were down slightly at the end of the quarter. Growth in our consumer deposits was offset by declines in commercial and other deposits.

We saw some commercial deposit declines in the quarter, but the commercial deposit category is up 7% versus a year ago. Also we saw some seasonal declines in the public deposit area.

Our shareholders equity was $1.1 billion at the end of the third quarter. We paid out $19.6 million in dividends during the quarter and continued our share repurchase program by repurchasing 226,000 shares of common stock for $14.5 million.

At the end of the third quarter, our Tier 1 capital ratio was 14.11%, and our Tier 1 leverage ratio was 7.18%. Finally, our Board declared a dividend of $0.45 per share for the fourth quarter of 2015.

And now I'll turn the call over to Mary.

Thank you, Kent. Net charge-offs for the third quarter total $2 million or 0.1% annualized of total average loan lease outstandings. Comparatively, net charge-offs for the second quarter totaled $1.5 million or 0.08% annualized, while in the third quarter of 2014 net charge-offs were $800,000 or 0.05% annualized.

Nonperforming assets were $29.5 million at the end of the third quarter, flat with the second quarter and down $3.8 million from the third quarter of 2014. At the end of the third quarter, loans past due 90 days or more and still accruing interest were $8.1 million, down $1.5 million for the linked-period and down $1 million year-over-year.

Restructured loans not included in nonaccrual loans or loans past due 90 days or more were $50.7 million, up $2.4 million from the second quarter and up $4.8 million from the third quarter of 2014. Residential mortgage and home equity loans modified to assist our customers accounted for $24 million of the total at the end of the quarter.

Consistent with the continued growth of the 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 third quarter. Accordingly, the allowance of $104 million represents 1.35% of total quarter-end outstanding loans and leases. The reserve for unfunded commitments was $6.1 million, up $200,000 for the linked-period, driven off growth in our commercial portfolio.

I'll now turn the call back to Peter.

Great. Thanks, Mary. As I mentioned earlier, the Hawaiian economy continues to perform well. The visitor industry is showing steady growth, with August year-to-date visitor days and visitor expenditures up 3.9% and 3.1%, respectively.

Real estate values continue to advance steadily. Year-to-date through September, Oahu median single-family home prices are up 4% while median condo prices are up 1.4%. Months of inventory at 3.2 months for single-family homes and 3.5 months for condominiums, combined with median days on market of 20 and 19 days for single-family homes and condominiums, indicate Oahu, our primary market, remain supply constrained.

Construction activity continues to improve in both the private and public markets. And as a result of all these factors, unemployment on Oahu is now at 3.4%.

And now we'd be happy to address your questions.

(Operator Instructions) Aaron Deer, Sandler O'Neill & Partners.

Good morning, everyone. Kent, maybe I'll start with you. I want to make sure I heard you correctly about the premium amortization differential this quarter versus the prior quarter. It was $700,000, is that correct?

Yes, that's correct. The total is $14.2 million, and it had been $13.5 million in the previous quarter.

Okay, so on a relative basis, that's a couple of basis points, probably in terms of the margin impact?

Right.

Okay. In general then, I guess the margin absent that seems pretty modest as the new assets coming on are less variability relative to what's there currently. Has there been any change in terms of where you're bringing on new assets given what the rate environment's been recently and what the competitive pressures are on the island for loans? Or is it comfortable?

Yes, as I mentioned, we're reinvesting at right now minus 33 basis points. So it's a little bit tighter in terms of duration, and the interest rate environment hasn't been that robust; so that's what's creating that.

Okay. On the securities side; then how about on the loan side in terms of pricing?

Well, we were down about 4 basis points on average compared to the second quarter. But as I mentioned in the formal remarks, the fact that we are growing loans at such a strong pace is producing higher total interest revenue.

Okay. Then, Peter, maybe if you can just comment a little on the strength that you had in commercial real estate this quarter, and then also the outlook for the -- I know the lease financed portfolio that remains is fairly modest. But just curious to know what we might expect to see in that book going forward.

I think the lease portfolio, Aaron, we'll continue to see bleed down, probably at the same rate we've seen for a few years now. So what we're bringing on in that portfolio are good basic operating leases to commercial operations here in town. And what's coming off, obviously, as you all know, are legacy national leveraged transactions. The net effect of that is going to be that the portfolio is going to shrink.

Overall, all of our asset -- all of our lending categories are performing very well right now. CRE has been the headliner for a good amount of time; it continues to be through the third quarter, and we think we still have some space left in this cycle for continued growth.

Having said that, we're pretty mature in both the commercial and in particular the commercial real estate cycle. Really what you're likely to see is, as our core relationships begin to pull back in light of pricing in the marketplace, you'll likely see us doing the same.

Residential mortgage has been very strong as a result of just the environment. The refinance market had been reasonable, and we've also had a good amount of condominium projects where we've been the beneficiary of good amount of market share as those projects have come to market.

We're going to see a bit of a dip in that segment. We're between projects, if you will, in the cycle; so we may see some pressure on residential mortgage loan growth the next couple quarters, but we've got some projects down a year or so from now.

Then finally on the other consumer side, home equity and indirect and installment and credit card, those portfolios are growing very nicely for us and really I think are a reflection of what's happening with the economy here in town.

That's great. Thank you very much for the color on that.

Jacque Chimera, KBW.

Hi. Good morning, guys. I want to ask a question on the resi mortgage. Did you sell any of that in the quarter?

We did.

About how much, the production, just a round estimate?

Production? Mary has the number here.

We sold $71 million in total.

Okay. How were gain on sale margins in the quarter, Mary?

It was about 180.

180. And can you remind me --

And that includes the servicing rights.

Okay. Is that about what you had expected it to be at?

Yes.

Okay. Then switching over to expenses, I know that Guam had an impact in the quarter; but we've seen a decline now for the last couple of quarters. Could you just give some color on what maybe some other one-time items might've been in the last few quarters, or if that's a good run rate for us going forward outside of the Guam impact?

Well, as we mentioned, the real estate had an impact. We may have some future real estate transactions that would be one-time in nature.

Other than that, the one-time items were really in the second quarter. I mentioned the 401(k) transaction. We had BOLI insurance benefits that were paid in the second quarter.

So it's those types of things that are possible. The BOLI is always possible into the future. The 401(k) transaction is not going to repeat into the future.

Okay. Do you have a dollar value for what the Guam impact was? I'm guessing it was a gain on the sale of the property.

Yes, it was $1.4 million. It was actually two separate transactions and there had been a small transaction in the second quarter. So the swing or the delta was $1.4 million this quarter.

Okay. Thank you; that's very helpful. I'll step back now.

Joe Morford, RBC Capital Markets.

Thanks. Good morning, everyone. Just clarifying first on Jacque's thing there on the Guam, that's a gain that reduced the net occupancy number this quarter; and then going forward we would go back to what had been the more normal run rate. Is that correct?

That's correct. The only caveat to that is that we do have various pieces of real estate that we may sell from time to time. And so that could impact it, but you're right on the general principle.

Okay. Fair enough. Then I guess I was curious; the release mentioned there were several large commercial recoveries in the quarter. I guess curious to get a little more detail about that and just in general the pipeline for recoveries as we think about the growth having been stronger, and just when we might start seeing an actual loan-loss provision for the Bank.

Actually, I think the recovery stream is pretty modest; it's running about $0.5 million a quarter at this point. We really don't have any large, commercial recoveries on the horizon.

In terms of the reserve, we take a look each quarter. It really will depend on the asset quality metrics moving forward, the growth, how that growth is diversified across various portfolios, and really the economic environment here in Hawaii.

Okay. Thanks so much.

(Operator Instructions) Ken Zerbe, Morgan Stanley.

Great; thank you. Sorry, just going back to one of the earlier questions on loan yields. Like CRE I think was down, if you just look at the yield, about 6 basis points. Resi mortgage was down 7 basis points sequentially.

Where are you putting on new CRE and resi mortgage yields currently versus the portfolio rate?

Resi mortgage is 4%, in that neighborhood. That would be typical for a 30-year mortgage. Sometimes there is blending in there of 15-year mortgages which can impact that.

Right. And the commercial -- let's see. The commercial mortgage space is coming on at about what's on the balance sheet right now.

Got you. Okay, so there were presumably other factors that drove the yield decline in those two areas this quarter?

Well, the resi mortgage had been 4.14% in the second quarter. So you're blending in at a lower yield. Then when you take account of the fact that it's not all 30-year mortgages, -- there's some 15-year mortgages in that number -- that would be the reason.

So somewhere below 4% on the resi.

Right. On average, right.

But I think directionally, your sense that pricing is getting tighter is probably correct. I think versus a year ago, I would say the resi mortgage market is tighter, particularly at the jumbo end of the spectrum. Commercial real estate is pricing-wise probably tighter. C&I for obvious reasons is probably the tightest, but has been for some time now.

Understood. I guess that's why I was asking the question, that if you're doing CRE at 3.79% and that's where the yields are on the portfolio then presumably we shouldn't see any more compression; but it kind of sounds like we still should. That's why I was asking the question, just trying to understand how much more compression would see in those lines going forward.

Yes, well, I think it's tough to tell because it's a dynamic situation. But directionally I would say the market is getting more competitive, which would allude to the fact that pricing may get tighter.

Understood. Okay. Then just another quick question on deposit side. I think I saw that your total deposits in the period were actually down just over a percent this quarter.

Is that a concern for you guys? I mean, you have such a large securities portfolio that I'm sure you could remix from securities into loans for the next X number of quarters or years with no problem. But just wondering how important it is for you to actually increase sure deposits, or if you are fine just remixing for the next few quarters.

Well, I think what we're always looking for are reasonably granular, sticky relationship deposits. So to the extent that we can expand that book of business, we're always looking to do that.

Ironically, we're probably the lowest paying deposit institution in this market which, as you know, is a pretty low cost of deposit market. And yet we've over the years had just a bounty of deposit flow in. So those will come in and those will go out; we intentionally maintain a good amount of liquidity because what we're really focused on is our relationship deposits.

So if spot balances bounce from quarter to quarter, frankly that doesn't bother us as much as just understanding where we are with our relationship deposits -- which, as I look at it, core consumer and core commercial have been growing nicely for us on an average basis.

Got you. Okay; thank you.

Aaron Deer, Sandler O'Neill & Partners.

Hey, guys. Just wanted to follow up on the Visa shares that you still have available for sale, and see if the expectation was still that you might be looking to sell another slug of those in the first quarter of next year. Is that still the plan?

The plan is to sell stock next year, and probably of the same magnitude as we've done this year and really going back one previous year. Whether it occurs exactly in the first quarter, I can't predict that at this moment. But, yes, the trend is -- the desire is to sell another slug of stock.

Okay. That's all I had. Thank you.

Jeff Rulis, D.A. Davidson.

Thanks; good morning. Peter, a question on the -- I don't know if I missed this, but specifically on the C&I segment. Looks like net production slowed from last quarter. Interested in if there was payoff activity or some seasonality occurring within that segment.

Not much on the way of seasonality, Jeff, because given our economy out here we don't have a lot of seasonal lending type of activity. But yes, we have had some payoffs.

The C&I book is probably our least granular or most chunky portfolio for us, so we do see swings as we close on something or if something pays off. I guess what I would say is, of all of our commercial portfolios that's probably the portfolio that we're looking for just a steady -- I won't call it flatlining, but we're looking for that portfolio to be steady versus growth out into the future.

Okay. Then maybe on your mortgage banking outlook, I guess the MBA posted a 9% to 10% drop in originations in 2016. How does that align with BOH and your expectations?

Well, really for us in this marketplace there are three factors that come into play. We've got a lot of project financings in the market right now. So that in any given quarter can produce a pretty good slug of volume for us if we're the dominant mortgage provider for a particular project as it comes online.

For-sale business, purchase business, has been pretty steady here in the islands. As long as sales volumes continue on the path that they have, which has been mid-single-digit growth, that should be pretty steady for us. Obviously, we'd like to do more of that business if we can.

I think the swing factor is going to be refi, and refi is going to be a function of what happens rate-wise. So if we see rates drop or at least remain stable, that should be reasonable business for us. If rates move up sharply, then obviously that's going to have a negative impact on volumes.

Okay. Thank you.

Thank you. I'm showing no further questions. I will now turn the call back over to Cindy Wyrick for closing remarks.

I'd like to thank everyone again 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, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone have a great day.