Bank of Hawaii Corp (BOH) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bank of Hawaii Corporation first-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

Now I would like to hand the call over to Cindy Wyrick of Investor Relations. Ma'am, you have the floor.

Thank you, Brian. Good morning and good afternoon, everyone. Thank you for joining us today as we discussed the financial results for our first quarter of 2016.

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. The comments today will refer to the financial information that was 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 differ materially from those projected.

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

Thanks, Cindy. Good morning and aloha, everyone. Thanks for joining us.

Bank of Hawaii began 2016 with a strong first quarter. Fully diluted earnings per share were $1.16.

Loan balances grew to $8.1 billion at quarter end. Average loan growth in the quarter was 2% sequentially and 12.6% on a year-over-year basis.

Deposit balances grew to $13.5 billion at quarter end. Average deposit growth in the quarter was 2.3% sequentially and 4.3% year-over-year. Average core deposit growth was 2.2% sequentially and 6.3% year-over-year.

During the quarter, we sold 100,000 Class B Visa shares. We also received a large recovery on loans previously charged off to a single commercial client.

Asset quality remains strong. NPAs to total loans, leases, and foreclosed real estate was 27 basis points as compared to 40 basis points a year ago. The ratio of annualized net charge-offs to average loans and leases was minus 19 basis points versus positive 7 basis points a year ago.

And now let me turn the phone over to Kent, who will provide you with further detail on our financial performance for the quarter. Mary will also provide further color on our asset quality profile. Kent?

Thank you, Peter. Net income for the first quarter was $50.2 million or $1.16 per share, compared to $42.8 million or $0.99 per share in the fourth quarter, and $42.4 million or $0.97 per share in the first quarter last year. Our return on assets in the first quarter was 1.30%, return on equity was 17.88%, and our efficiency ratio was 54.88%.

Our net interest margin in the first quarter was 2.86%, up 1 basis point from the fourth quarter and up 5 basis points from the same quarter last year. Net interest income in the first quarter of 2016 included interest recoveries of $1.3 million, which had a positive impact of approximately 4 basis points on the net interest margin.

Premium amortization was $11.7 million in the first quarter, up slightly from $11.6 million in the previous quarter. The investment portfolio reinvestment differential was a negative 43 basis points this quarter.

During the first quarter we purchased $218 million in securities, including a high proportion of floating-rate securities. As Mary will discuss later, we recorded a negative credit provision of $2 million this quarter.

Noninterest income in the first quarter of 2016 included a net gain of $11.2 million from the sale of 100,000 Visa Class B shares and a $1.9 million net gain on the sale of equipment leases. Noninterest income in the fourth quarter of 2015 included a gain of $1 million due to a distribution from a low-income housing partnership.

Noninterest income in the first quarter of 2015 included a net gain of $10.1 million from the sale of 95,000 Visa Class B shares. We do not anticipate further sales of Visa shares in 2016.

Noninterest expense totaled $87.4 million in the first quarter of 2016, compared with $85.7 million in the fourth quarter, and $86.9 million in the first quarter of 2015. Results for the first quarter of 2016 included seasonal payroll-related expenses of approximately $2.5 million, an increase of $500,000 to the provision for unfunded commitments, and severance payments of $300,000.

Expenses during the first quarter were partially offset by a net gain of $1.5 million from the sale of a real estate property in Guam.

Results for the fourth quarter of 2015 included net gains of $3.9 million related to the disposal of two branches, partially offset by $1.3 million for the rollout of chip-enabled debit cards, operating losses of $1.1 million, and severance payments of $500,000.

Noninterest expense in the first quarter last year also included seasonal payroll-related expenses of approximately $2.5 million and $1.9 million in severance payments. Adjusted for all these items, noninterest expense in the first quarter of 2016 was down 1.3% from the previous quarter and up 3.8% compared to the same quarter last year. The increase from the previous year was primarily due to higher salaries and benefits expenses resulting from continued strong loan production and higher overall operating income.

In addition, expenses were impacted due to increased investments in solar tax credit partnerships, which resulted in tax benefits that reduce our income tax expense. The effective income tax rate for the first quarter of 2016 was 32.01%, compared with 28.23% in the previous quarter and 31.72% in the same quarter last year. The lower effective tax rate during the fourth quarter was related to the sale of a low-income housing investment.

As Peter mentioned, we continued to see good growth in our loan portfolio during the first quarter. Our investment portfolio decreased slightly to $6.2 billion. The average duration of the AFS portfolio was 2.2 years, and the overall portfolio duration was 2.9 years at the end of the quarter.

Deposit growth also remains strong. Consumer deposits increased 1.9% from the previous quarter, and up 5.6% compared to last year. Commercial deposits also increased, up 3.2% from the previous quarter and up 4.3% compared to last year.

Our shareholders equity increased to $1.14 billion at the end of the first quarter. We paid out $19.5 million or 38% of net income in dividends during the quarter and repurchased 297,000 shares of common stock for $18.7 million. Our Board authorized an increase of $100 million in our share repurchase program, resulting in a remaining authority of $104.3 million as of the end of first quarter.

At the end of the first quarter our Tier 1 Capital ratio was 13.85% and our Tier 1 Leverage ratio was 7.25%. Finally, our Board declared an increased dividend to $0.48 per share for the second quarter of 2016.

Now I'll turn the call over to Mary.

Thanks, Kent. For the first quarter of 2016, we recorded a net recovery of loans and leases previously charged off of $3.8 million, compared with net charge-offs of $2.2 million in the fourth quarter of 2015 and $1.2 million in the first quarter of 2015. The recovery position was primarily due to the full recovery of a commercial loan for a single client which was charged off in 2013.

Nonperforming assets were $22 million at the end of the quarter, down $6.8 million for both the linked-period and year-over-year, with the decrease largely related to the referenced commercial client. At the end of the quarter, loans past-due 90 days or more and still accruing interest totaled $7.9 million, up $364,000 for the linked-period and flat year-over-year.

Restructured loans not included in nonaccrual loans or loans past-due 90 days or more were $50.7 million, up $1.3 million for the linked-period and up $4.1 million year-over-year. Residential mortgage and home equity loans modified to assist our customers accounted for $23 million of the total.

The allowance for loan and lease losses was $104.7 million at the end of the first quarter, an increase of $1.8 million from the fourth-quarter 2015 and a decrease of $2.8 million from the first quarter of 2015. Given recoveries of $3.8 million, a negative provision for credit losses of $2 million was recorded.

The ratio of the allowance of loan and lease losses to total loans and leases outstanding was 1.3 million at the end of the quarter, compared with 1.31 million at the end of 2015, and 1.5 million at the end of the first quarter of 2015. The reserve for unfunded commitments was $6.6 million, up $500,000 for the linked-period and $685,000 year-over-year.

I'll now turn the call back to Peter.

Thanks, Mary. The Hawaii market continues to perform well. The visitor industry continues its trend of steady growth, with February year-to-date visitor spending growth of 3.8% and visitor day growth of 3% from a year ago. Airlift into the Hawaiian market was 7.5% higher in February.

Construction activity remains strong and well diversified amongst both the public and private sector. Residential real estate market remains consistent, as prices continue to reach new levels on Oahu, our primary market.

Median home prices grew 7.2% in the quarter from a year ago, while condominium prices rose 4.5% from a year ago. Inventory continues to tighten, with March inventory levels at 2.1 months for single-family homes and 2.3 months for condominiums, as compared to 2.7 months and 3.4 months, respectively, a year ago.

The seasonally adjusted statewide unemployment rate was 3.1% in March as compared to 5% nationally.

Thanks again for joining us today. Now we'd be happy to respond to whatever questions you might have.

(Operator Instructions) Joe Morford, RBC Capital Markets.

Thanks; good morning, everyone. I guess first on the margin, I was curious if the December rate hike had much of an impact at all this quarter. And given the drop in reinvestment rates, what are you currently thinking in terms of the outlook for the margin from here?

I think we've been able to maintain a fairly even keel on the margin, so year-on-year we're just about flat. The remixing of the balance sheet is really serving to offset the negative differential in the securities portfolio. So, barring any change in market conditions, that's probably the outlook for us.

So pretty stable outlook from here?

I think so. We're seeing a little bit of improvement in the market over the last week or so, but that's a pretty small change.

Right; okay. Then you saw solid uptick in commercial C&I balances this quarter after some softness in the fourth quarter. Just curious; what drove the increase there? Perhaps was it some little better line utilization rates at all?

Yes, Joe, you hit it there. C&I growth on an end-of-period basis, as you illuminated, was pretty strong. On an average basis, though, it wasn't quite as strong. Average C&I loans on a linked basis were down a little over 2%, and down 0.3% on a year-over-year basis.

Basically what happened was we had some very strong fundings at quarter-end which boosted the end-of-period balances. But longer term as we look forward, I think as we've discussed in the past, C&I is probably be one loan category that we feel could begin to flatten out a bit for us.

Not because of any market presence we have here at Hawaii, but really as a result of where we are in the credit cycle right now, number one. And number two, the fact that as we get deeper in the credit cycle, a lot of production on the commercial side is going in -- coming in on a secured basis.

Right. Okay; thanks so much.

Ken Zerbe, Morgan Stanley.

Okay, thank you. I guess just sticking with the NIM question, looking at your securities portfolio, like, a lot of other banks had -- saw pretty noticeable increases in security yields or in the NIM overall just given the rate hike. I know you guys have such a large securities portfolio, why -- is there something in there that prevented us from seeing a bigger increase in your security yields or overall NIM versus some of your peers?

Because I would've thought you guys would have seen more of a step up in margin.

I really can't comment on what the peers are doing, but we have been intending to reinvest into the floating rate area, as compared to in a longer duration fixed-rate security. So that's going to have an impact on the yield within that separate line item.

On the other hand, our loans in the fixed-rate area, including residential mortgages and home equity, there's a tendency for more longer duration, a little bit higher yielding results in that category.

So it's really the total that you've got to take into account.

Okay. Then with Visa I know you said no more sales this year. Should we expect another, I don't know, $10 million in first quarter of next year of sales?

That would probably be the right way to look at it.

Got you. Okay; all right. Thank you very much.

Ebrahim Poonawala, Merrill Lynch.

Good morning, guys. I guess related to margin, but if you could just touch upon -- if you can talk about deposits and what we've seen, if any, real impact from a competitive behavior in deposit pricing off of the Fed rate hike. And what are your expectations around deposit growth as the year progresses?

Our deposits are, obviously, consumer business and institutional, governmental, right? Really -- so let me focus on the consumer and business, because I think that's probably most pertinent to your question. Consumer deposit growth, core deposit growth for us has been quite strong, so we're up. Average year-over-year core deposits, consumer up 6%. Within, embedded in that number is a demand deposit increase of 8.8% on the consumer side, average year-over-year.

On the business side, core deposits are up on average 5.8% year-over-year. And embedded in that core number are demand deposits for our business customers of 7.5%.

So we've seen very strong deposit flow, tending on the lower-priced segment of the product categories. We haven't seen a lot of -- we haven't seen much in the way of price action in the time area. It's just not been an area that we focus on, for obvious reasons.

Got it; Thanks for that. The other question, just shifting to credit, Peter, you alluded to where we are in the credit cycle. I'm just trying to get a sense of if it feels like the economy is doing very well right now just across-the-board. If we do actually begin to see a slowdown, what would be the areas where you would first look at to see any signs of cracks emerging?

Well, I think that generally commercial tends to lead into a cycle and lead down in the cycle. We would anticipate that to be the situation again, if and when we get to that point in the cycle -- which, by the way, we don't think we're at, at this point.

And within commercial, it's the general hierarchy. C&I or unsecured loans are probably going to slow down or have some challenges first; commercial real estate would be second, if at all. And construction, somewhere in -- well, construction is generally a short-term or tended to be a short-term maturity type of deal.

So that's what we would anticipate to see. And to be honest with you, that's what we're building a bit into our underwriting as we move forward.

Got it; that's helpful. Thank you very much for taking my questions.

(Operator Instructions) Jacque Chimera, KBW.

Hey, good morning, everyone. The construction fundings in the quarter, was that new business? Or was it maybe drawdowns on some loans that were previously booked?

Mostly drawdowns on loans that had been previously booked.

So as we look -- and this shifts a little bit of my question, given answer that you just gave. But on the last quarter you talked about moving more towards a four-year average loan growth, and I would have expected 1Q's loan growth to be a little slower, just given seasonal pressures.

Do you still feel that we're going to move towards the average loan growth? Or has anything changed over the past three months and given the strength in the first quarter that leads you to believe you could have a stronger year than that?

I think, Jacque, that we've been thinking in terms of higher single-digit loan growth. I know that's not been the outcome for the recent past; but as we think longer term into our models, that's what we see.

And we see that as a result of -- as we've discussed this morning -- a maturing commercial cycle. Residential still looks strong. Consumer still looks very strong, and we would anticipate those markets and those products to continue to do well.

But when we mix everything together, we still come out to a higher-single-digit level.

Okay. So just a very strong quarter that you had in the first quarter; nothing really to read into it, into future quarters?

I think so.

Okay; all right. Then also if I look at the reserve build, this is the first quarter of net new build in about six years. Is it in inflection point that you're seeing, or is it just coincidental?

Well, Jacque, each quarter we do take a look at the reserve and look at the risk profile in our portfolio, the growth in the various segments, and really what's happening in the environment. So clearly -- and then we look at net charge-offs and recoveries to get to the net position.

Okay; all right. That's all that I have right now. Thank you.

Jeff Rulis, D.A. Davidson.

Thanks; good morning. Question on I guess the makeup of the comp expense. Just looking year-over-year, in Q1 you had a higher increase in incentive comp this year than you did last year. Is that a product of maybe a change in how you view retention, or was it really just production-driven on that end?

It was production-driven. We are thinking through our retention items, which I think are going to have the effect -- I think had the effect in the quarter and may have the effect moving forward of some higher comp numbers, which we think is the right strategic move for us. There was maybe $0.5 million in what I would consider to be nonrecurring comp that was paid out in that quarter that probably won't flow through to future quarters.

But in general, to get to your question, yes, we probably will see a somewhat elevated level of comp in that line or number, dollars in that line.

And, Peter, is that in response to anything competitively on the island that you feel you've got to step that up? Or is it competitive on the talent side? Anything in response?

It's really twofold. It is in fact a function of the competitive nature of our industry today. But it's also a bit retroactive in that we've just had really strong performance for a while now. We've needed to reward a number of our key players.

Makes sense. Okay; that was it for me. Thanks.

Aaron Deer, Sandler O'Neill & Partners.

Good morning, guys. Peter, just following up on the last question with the higher comp expectations, are there other areas that might offset some of that in terms of branch downsizing or consolidation or anything else?

Actually, let me -- Kent's really been the person heading up our branch consolidation, so if you don't mind, I'll let him answer that.

Yes, Aaron, I think there are opportunities into the future, in occupancy in particular. So we're underway with a number of projects. The effect of those projects will be to modernize our network.

We may have approximately the same number of locations when we're done, but certainly the number of square feet that we occupy will be lower. It could be up to a third lower than what we have today. So that really is a major source of savings for us.

Okay, that's great. Then also, Kent, on the solar credits, anything that we should think about in terms of the tax rate differentiating from the effective rate of the first quarter, as we look out to the second, third, and fourth quarters?

Well, you get a little bit higher effective rate based upon the level of pretax income. So we had a higher level of pretax income in the first quarter; it was elevated from some of the one-time items that we've talked about. So it tends to blunt a little bit the impact of some of the credits.

If pretax income is a little bit lower, the impact of the credits is that much higher in a proportionate sense. Therefore the effective rate could actually be a little bit lower.

It seems like it wouldn't be too much, though, right? I mean, we're like 31% instead of the 32%, somewhere around there. Is that reasonable?

Well, that's in the neighborhood of what we had in the first quarter of last year. So yes, that's one way of looking at it.

Okay. Then a quick one for Mary. The credit service have been terrific. Any expectation for additional recoveries that might be had, or has that pretty much played out at this point?

It's pretty much played out at this point. We expect to see modest streams still within our residential and home equity, but nothing of the magnitude here.

Okay, terrific. Thanks for taking my questions.

Casey Haire, Jefferies.

Hey, good morning, guys. Kent, wanted to follow-up, just clarify on the stable NIM outlook. By my calculation it's about a 4 bp helper from the recovery this quarter. Are you saying that we can hold flat at 286, or is it -- or 282 and positive mix shift holds it there?

Well, I was really referring to the after-recovery margin, and I was comparing it to the same period last year. We were at 281 last year and adjusted for the recovery 282.

So that's what I was talking about, that absent changes in market conditions -- and we always have changes in market conditions -- I think the effect of the loan growth has been serving to offset the differential in the reinvestment yield. So, like I said, if there's no change in conditions, I think we could see generally the same impact. You can always have a basis point here or there; but generally, that's the result.

Okay, great; thanks for clearing that up. To the changing market conditions, I think heard you say it was minus 43 bps differential in the first quarter. Where is that as we stand today?

It depends on whether I replicate exactly what I did in the first quarter. We bought a lot of floating-rate securities in first quarter. If I replicated that exactly into the future, you'd probably see the same kind of differential.

However, having said that, we probably will not replicate exactly what we did in the first quarter. So just to remix or reinvest at exactly the same proportions that we have in the portfolio right now, you'd see a lower differential today than you would have seen in the first quarter.

Okay, great. So yes, just the investment strategy is getting a little bit -- no more floating rate, which would be lower yield; so that helps you out there. Okay.

I wouldn't say no more. I'm just saying the relative --

Yes, okay. Then have you -- can you let us know what the premium amortization was in the quarter? If memory serves that's always been a bit of a lag for you guys. Is that a headwind, I would assume, going forward?

It was $11.7 million in the first quarter. In the fourth quarter, it was $11.6 million. So it's actually been trending down over a longer period of time, just because really the size of the securities portfolio is getting smaller. So anyway --

Okay, yes; all right. Then just last one for me, just switching gears on the expense side. If -- looks like it was up year-over-year 2%.

I believe on the fourth-quarter call you guys outlined a number of initiatives on the -- some investments in modernizing the infrastructure a little bit. That was going to track the expenses to around 3%; coming in a little bit light versus that.

Is that still the expectation for 2016?

Yes; your memory is very good on that point. We've been referencing 3% as an indicator for the future.

It's really comprised of three elements: higher sales activity; general inflation; and the third category, initiatives. In each of those categories roughly -- not exactly, but roughly -- 1 percentage point, so aggregating to 3 in total.

As we go forward, the opportunity is that the initiatives, which we're really making investments now but they're treated as expenses, will turn and we'll see the fruits of those investments, such that we have opportunity to get a little bit lower than that 3%. But that's off into the future a little bit.

Okay; understood. Thanks for taking the questions.

John Moran, Macquarie Capital.

Hey, how's it going? I just -- the OpEx one was actually the question that I wanted to ask, but I'll ask you more broadly. Just the dollar strength, some slowdown in Asia in Canada, are you guys seeing any early impact in terms of visitation? Or are things cooling a little bit here?

Well, really what we've been hit with is a stronger dollar, namely in Japan and Canada. Japan was impacted pretty significantly last year and is not as impacted as much this year.

Now in the first quarter, the yen actually strengthened a bit versus the dollar. So that's what's happening there. We're flat visitor days to slightly up from the Japanese market today, and spend down just under 5% year-to-date.

Out of Canada, last year what we saw -- Canada has been impacted by the US dollar as well as, I'm going to surmise, by what's happening with energy prices. They were down a bit both in terms of spend and visitor days last year, but very nominally.

What we've seen at least so far -- and it's early in the year -- but a pretty substantial decline in both visitor days and spending here in the Hawaii visitor market. Now Canada represents about 13% of our total business here on the islands.

Okay; understood. Then anything out of the military side of things? Any update on what's going on there?

Seems pretty stable. Nothing -- no real news one way or the other. I think post-sequestration, the Hawaiian market has fared pretty favorably.

In some part I think what we're benefiting from is the Pentagon's stated pivot into the Pacific because, as you know, we're home to the Pacific Command in each of the services' separate component commands.

Sure. Thanks very much.

(Operator Instructions) Joe Morford, RBC Capital Markets.

Thanks. Most of my follow-ups have been asked, but just a couple quick housekeeping things. You did book about $1.9 million of gains on sale of leased assets. Is that something we should expect on a more regular basis going forward, or is this more of a one-off?

It's a one-off.

Okay. Then the real estate property sold, was that an OREO property relative to the recovery in Guam? Or was that --?

No, it was a residential property that we had in Guam, but it was an OREO.

Okay. That's it; thanks so much.

There are no further questions. I would now like to hand the call back to Cindy Wyrick for closing comments.

I'd like to thank everyone for joining us today and for your continued interest in Bank of Hawaii. As always, if you have any additional questions or need further clarification on any of the topics we discussed today, please feel free to contact me. Have a great day, everyone.

Ladies and gentlemen, this does conclude today's program, and you may all disconnect. Everybody have a wonderful day.