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

Thank you, Christine. Good afternoon 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. And now I would like to turn the call over to Peter Ho.

Great, thanks, Cindy. Good afternoon 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 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, the balance growth coming from both our consumer, commercial and institutional segments. Asset quality, liquidity and capital levels continue to be strong. Now let me turn the phone over to Kent who'll provide you some addition 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 of 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 portfolio run-off and the majority of that went to treasuries and flooding 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 counter parties minimum transaction requirements. Currently, we don't anticipate further Visa share sales in 2015. We also contributed 4,700 Visa Class B shares to the…

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 non-accrual 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 a $107.5 million represents 1.5% of total quarter end outstanding loans and leases. I’ll now turn the call back to Peter.

Great. Thank you, Mary. The Hawaii economy continue 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 in prior years, the current level of visitor activity still reflects a healthy tourism industry despite the mixed year-to-date results. And with note however, the 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 Japanese -- of the dollar versus the Japanese Yen. To give you some perspective, Japan’s spending or the Japan market represents about 16% of overall spend and 12% of visitor days in the State of Hawaii. Medians real estate front also looks 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 single-family home on Oahu rose to $676,000 during the first quarter of 2015, an increase of 3.2% compared to the first quarter of 2014. The median sales price for 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 remains steady. Jobless claims are now at a seven-year low and unemployment is at a better rate for the overall country as a whole. Thanks again for joining us today. And now we’d be happy to respond to your questions.

Thank you. [Operator Instructions] And our first question is from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.

Good morning, guys.

Hi, Ebrahim.

So I guess, Peter, if you could start with loan growth in terms of it was a very strong quarter for loan growth this quarter and I think everything that you talked about in terms of the economic backdrop 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 depends this time last year?

Well, we were actually as I recall last year, we were pleasantly surprised with our first quarter growth results in lending simply because generally as a seasonal downturn as you know coming out of the quarter where a lot of transitional activity is completed. Same thing happened to us again in this year. Good results both on a linked based basis and on a year-over-year basis, I’m not sure that we’re 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 kind of in the lower single digit levels is certainly achievable kind of given where we track 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 the 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 release those. 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.

Yeah thanks Ebrahim.

Thank you. Our next question is from Joe Morford of RBC Capital Markets. Please go ahead.

Thanks. Good morning, everyone.

Good morning.

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 -- on the balance sheet going for the next few quarters. Is that being a major contributor to growth?

Okay. I'll 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 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 that really -- 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 cost and some seasonal items in there and you continue to invest in areas like technology, but what’s 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 in the separation expenses. You know we do sometimes have some other items creep into the -- any particular quarter. So we had a little bit higher medical expenses in the first quarter. I don’t think that’s necessarily indicative of what we would expect going forward. So that's an example of something that might also come off the run rate.

Okay. And is that something quantified off as a material item this quarter or…

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

On the medical?

Yeah, on the medical.

Okay. Great thanks so much.

Okay. Take care.

Thank you. Our next question is from Jackie Chimera of KBW. Please go ahead.

Hi. Good morning, everyone.

Hi Jackie.

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

I did yes.

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

Sure Jackie. Well, a couple of things. First of all the amount of dollars that we reinvest were pretty light. So only about one third or so of portfolio run-off was reinvested and when we did reinvest we were at 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's really in respect to couple of things. The interest rate environment which has the potential to change here over the next whatever several quarters and the fact that we were putting more mortgages on to the balance sheet. So we have a little bit longer duration on the loan side or we’re bringing down the investment duration and consideration of that fact.

And were those purchases meaning 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 refinancing and everything.

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

Okay. So you're not -- you didn’t notice in the quarter any uptake in prepayments and it's not the expectation that it will increase going forward. It should stay…

Exactly there has been a little bit of the many refinance boom. I wouldn’t say it is large of some of the other refinance activities that we’ve seen and so, that happened kind of late fourth quarter of '14. There is some timing associated with that. It could have a modest impact in the second quarter, but again, I’m not expecting any huge change.

Okay. Great, thank you for the added color. I really appreciate it. I’ll step back now.

Welcome.

Thank you. Our next question is from Jeff Rulis of D. A. Davidson. Please go ahead.

Thanks good morning.

Good morning, Jeff.

I notice the -- on the fee income side, ex the securities gains, just the trust mortgage banking service charge fees down, sequentially is that -- would you point to seasonality there or was there anything that particularly led to the decline in linked quarter.

Well, it’s not a very big change. So may be 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. So yeah they were modestly lighter sequentially, but nothing to just…

Nothing dramatic there.

Okay. And then Ken on the Visa sales, I guess your guidance has not, I guess not expecting further sales for the year would expect given that you got a balance there to resume in '16, is that reasonable at the point in your level.

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

Okay. And then Peter just interested in your comments about the, I guess as it pertained to Japan visitor account and spending, but the strong dollars it affects other international, I guess the kind of the near and may be medium term your expectations for that, that impact.

Well, yeah, it's an interesting thing to be looking at right now and given where currency rates are heading with the dollar, really the big upturn in the Yen occurred in the fourth quarter of ’14. So it went from a 100 into the one teens, 118, 119 call it and that was coming off of a rise from call the 80s to the 100s in 2013. So there really have been kind of two stair steps and it really wasn’t until we saw the upturn late 2014 into the 118, 119 range of the Yen, that we saw a meaningful decline in purchasing. So Yen that’s 16% of the spend in the marketplace. Another thing to note though is that the Japanese in particular have a pretty strong passion for luxury purchases. So a lot of that delta I think is a 13.5% delta and 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, it 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. So it’s something we’re following, but I think kind of the nature of Japanese spending patterns, the fact that it’s a much smaller market than it was certainly 10, 20 years ago as a percentage of the overall pie. As well as the fact that the Canadian dollar, the Australian dollar certainly the Renminbi have been a lot more stable than what’s happened to the yen over the past couple of years has, things should be okay, but we just want to keep our eye on what’s happening with the Japan market.

Okay. Thank you.

Thank you. Our next question is from Aaron Deer of Sandler O'Neill. Please go ahead.

Hi good morning everyone.

Hi Aaron.

Peter if somebody could still elaborate a little bit more on your thoughts in terms of the growth outlook. I think I heard you say that you got an expectation for annualized double-digit growth, that kind of pace could continue. It is said -- or are you suggesting double-digit growth for the full year or did the double-digit pace that continue to happen on a sequential quarterly basis?

Well, you could 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 the -- 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 residentials as you kind of look at the pipeline, do you anticipate any sort of shift in the mix of production whereby maybe say a little bit better stronger growth in the commercial real estate or C&I portfolios?

Well yes, C&I had a really good quarter. I’ll tell you that there were a few large loans that went in that quarter. Great credits, we’re happy to have them, but we may not have that level of activity in C&I moving forward although it’s been a strong contributor for us for a while now. I would anticipate CRE to continue moving along. It’s 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 there’s -- those loans will begin to mobilize up as the Skyline begins to build out around here. And then on the resi side, we’re seeing and we’re seeing good market share participation for Bank of Hawaii and really part of what’s helping the volumes for us is the loan 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. Got great relationships with the sponsors and developers of those projects and we've got a few more or several more slated for this year and potentially in the next year.

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

It’s really mixed and I’m just going to guess it’s -- say it's about -- by units, it’s probably about even.

And then Kent just a couple of quick follow-ups, the Visa sales next year, can we presume then to that given the agreement of it and if it was with the same counterparty that it will be done in a single bulk purchase not for the individual quarters?

I would think so and 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’s probably how we would execute next year.

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

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

Okay. Terrific. Thanks for taking my questions.

You're welcome.

Thank you. [Operator Instructions] Our next question is from Casey Haire of Jeffries. Please go ahead.

Hi. Good morning, guys.

Hi.

I just wanted to follow-up on the expenses. If I have it correct, I think you guys have been talking about expenses being up zero to 1% on the year from about $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 that 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 to us the -- 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, want to follow-up on your comments on the -- 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 an 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's not the issue. The issue is interest rate sensitivity and either playing defense or may be talking advantage of a little bit of an opportunity here to extend rate change. I think that dimension -- we could be talking about a modest increase of a book we already have in terms of cash funding, may be 5% of our balance sheet in that category, but nothing much more than that.

Okay. Great. And then just lastly on the loan yields, what's the new production yield on -- versus I406 within loan book?

It depends on categories. So a 30-year mortgage is coming in at $375 million. 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's indicative of where people are trying to find Safe Harbor in this rate environment.

Okay. Great. Thank you.

Yeah.

Thank you. Our next question is from Justin Maurer of Lord Abbett. Please go ahead.

Good morning, guys.

Hi Justin.

Good morning.

Just -- sorry if I missed early 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 are you putting on, or are you just going to take what the markets giving you. Just -- and obviously relating it to duration, how you think about that.

Well, we're just putting on what we're originating out of the market.

Okay. So you're not trying to focus on say 30-year and trying to keep any of the short stuff or whatever?

No, no.

Okay.

I mean, we'd love the short stuff, but people for obvious reasons are trending towards longer termed assets and 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. And we would -- I think it's little over 37% of the total loan book at the quarter, is that…

Right.

I mean how high could that conceivably be? I mean, could it go over 40% if you kept putting it on or you're trying to keep it mixed properly?

Well, historically it's been above 40%. And as a percentage of earning assets it's been substantially higher in our modern history. But what we've talked about is maintaining -- on the simplest terms, maintaining our mortgage book at about 40% of the overall loan book.

Okay.

And that -- I think that remains a good rule of thumb for us right now.

Okay. Thanks much.

Thank you. And our next question is from Joe Morford of RBC Capital Markets. Please go ahead.

Thanks. I guess you've touched on it, but that was really the 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 is, all right, just in general is where you're 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's a tough environment. So, I think that we're looking for floating or shorter assets, loan assets, and so as everyone else. So the market -- I guess borrowers are benefiting from that. To be honest, I'm not seeing or we're 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. And the commercial mortgage segment, for the most part it's been reasonably stable last year. So, I think much of the commercial segment is stable but for that short/floating area, C&I area which people are seem to be willing to dive to get quality assets there, pricing-wise, by 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'd like to thank everyone for joining us today and for your continued interest in Bank of Hawaii. As always, if you have additional questions or need further clarification on any of the topics discussed today, please feel free to contact me. Have a great day, everyone.