Welcome to the Bank of Hawaii Corporation Second Quarter 2015 Earnings Conference Call. My name is Karen 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 Ms. Cindy Wyrick. Ms. Wyrick, You may begin.

Thank you. Good afternoon and good afternoon everyone. Thank you for joining us today as we review the financial results for our second quarter. Joining me today is Chairman, President and CEO, Peter Ho; 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. And 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 remained 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, liquidity and capital levels remain strong. Now let me turn the call over to Kent, to provide you some additional details on our financial performance and Kent will pass than on 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%; the 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 five basis points from last year. The investment portfolio or 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 risk losses at the end of the quarter, was $106 million or 1.43% of outstanding loans and leases. Non-interest 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-V 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 gains, non-interest revenue was up $3.7 million or 8.8% compared to the first quarter and up $3.4 million or 8.1% compared with the same quarter last year. The increase in non-interest 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…

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 totaled $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 from 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 occurring 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 due 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 our sister customers accounted for $22 million of the total at quarter end. 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 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 state-wide 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 medium price of single family home sales on Oahu was 2.3% higher during the first half in 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, inventories 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 our job market remains strong as well. So thanks again for joining us today. And we'd be happy to respond to your questions.

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

[Operator Instructions]. Our first question comes from Ebrahim Poonawala from Merrill Lynch. You may go ahead.

Good morning guys.

Hey Ebrahim.

I was wondering if you could just touch upon -- you mentioned of the loan growth outstrip deposit growth this quarter, and seems like that had sort of supported 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 -- its really the loan growth piece that was on the heavy side this quarter, and that's what created the discrepancy. So loans were up, on an average year-on-year basis, 16%, which was pretty -- its 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 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 are continue to be constructive in terms of the margin on the swap between loans and investments. But would 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 in the back half of 2015, is 1% year-over-year growth expectation for the full year still consistent with how you're thinking about it?

You know, I will jump in and Kent can clean up. You know, 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 are going to continue to see the commission and incentive side, put pressure on the expense line, which is not a bad thing. Its 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 retail 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.

Thank you. And our next question comes from Aaron Deer from Sandler O’Neill.

Hi, good morning everyone.

Hey Aaron.

Kent, you gave the variance on the new securities purchases relative to the portfolio in the quarter. I am not sure if 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'd have to get back to you on that.

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

There is about two thirds of the run-off.

Okay. And then the -- as you kind of look out towards the back half of the year, what are you guys seeing in terms of the pipeline? I know there is another big project that's starting up here in August, I know I am going to mess up the pronunciation, but I think its Keauhou Lane; and are you guy 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 is a little room for expansion. But what happens Aaron, as you know, as soon as we fund up eight projects and another one pays off, 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 and to longer term residential mortgage outstandings, as these projects sell-off and sell out. And so that's also an opportunity for us; in fact was a good part of our story this past quarter. I would say that the next couple of quarters is a bit of a flat spot for us, in terms of bad activity. We have a couple of projects coming to market, but that's going to be into next year.

Okay. That's it [ph]. I appreciate the color. Thank you.

Thank you. And our next question comes from Casey Haire from Jeffries. Casey, you may go ahead.

Good morning guys, thanks. So just wanted to follow-up, I guess, on the loan yields question. I understand Kent, you don't have a 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 am just curious, do you feel like loan yields have stabilized at this point, and we will get some stabilization going forward?

Well, it’s a function of the environment. So 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 to the first quarter, or even up compared to the first quarter. So that resulted in a very modest overall loan yield decline of only two basis points, compared to the first quarter.

Okay. And then, the reinvestment differential, the 55 bips was last quarter. Just one month into the third quarter here, what has been sort of the blended average yield on placements into the securities book this quarter, versus that of 220?

I don't normally quote interim figures, so I hesitate to give you a number. But the environment has been fairly productive and 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 are going to keep the duration fairly low. So I wouldn't look for anything spectacular on this differential.

Okay. Great. And switching gears to credit quality, with the 143 [ph] loan-loss reserve, you guys are now pretty close to your -- sort of the pre-crisis level. I know you have been saying that provisions are coming at some point. But the metrics continue to be very benign. I am just -- if you guys continue to get good news on the credit front, would that prevent you from going below the pre-crisis floor, so to speak, on the LRR? Would you be willing to go through that, if the credit metrics 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 one 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.

So X that, a $4 million run rate is good for that line item?

Well also I mentioned, we had basically a sale on 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.

Thank you. And our next question comes from Jeff Rulis of DA Davidson. [Operator Instructions]. Jeff, you may go ahead.

Thanks. Good morning. I had a follow-up on the comp expense; and Peter you talked about, I guess, the higher production in the markets 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 could kind of hold true this year? I guess the expectation, to close the year?

Well Q1 was clearly and hopefully the high watermark expense wise. We have got a history of lower operating expenses year-on-year. And I would just caution, that that's 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 over the second quarter. And that to me, given the environment, is kind of probably going to be a typical quarter for us, would be my guess.

Got it.

Frankly for a lot of good reasons, we are investing and the marketplace is just doing really well out here.

And then maybe just to follow-up on that loan portfolio as well. I guess I am looking at any segment that surprised you to-date? I think Peter, you have been pretty vocal about the consumer really coming on in the island. But any segment, you think outside of the construction, you said leveling off. But anything else that sort of [indiscernible] that you're 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 is a midpoint to every cycle, as I have experienced it. And I'd say, we are 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. Versus, as I mentioned earlier to Aaron, that's a bit of a spiky business. So that kind of comes and goes. We are probably not going to have that level of activity for a few or several quarters at this point. So I think that resi was just a really-really strong quarter that, I am not sure I would anticipate seeing 18% year-on-year growth in that portfolio every quarter.

Great. Thank you.

Thank you. And our next question comes from Ken Zerbe from Morgan Stanley. Ken, you may go ahead.

Okay, thanks. I guess just actually from the same resi mortgage question or site. I think you said that you expect to slowdown the pace of resi-mortgage sales. Is that only because you expect resi-mortgage balances to slow in terms of their growth, or I am just trying to reconcile the two pieces; because you have had fantastic growth in resi. Just wondering, why you're not selling more?

Well I was really referring to a level of income, and so, what I am talking about is really pretty modest. But I still want to give an 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 start it, here in the second quarter, it was really the bulk sales, in other words, claims 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're increasingly asset sensitive? And is it meaningfully reducing your asset sensitivity? I know it’s a lot of questions.

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. So we didn't take any turn funding on in this period. Not to say, we wouldn’t do that going forward, that's always a possibility. But this was funded strictly from the reduction of the investment portfolio.

Okay. All right. Thank you.

Thank you. [Operator Instructions]. And our next question comes from Jacqui Chimera from KBW. Jacqui, you may go ahead.

Hi, 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've followed us for a while. You know that for periods, we retain mortgage production. In some environments, we have chosen to sell that. 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 a gain on sale margins. They are still attractive, but not to continue to sell some of the production next quarter?

I think that's what Kent alluded to.

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

Both.

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

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

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

Not really, but I think its just -- we continue to run those and target also some of our clients on utilization activity too.

Yeah so, not much of the way of promotion kind of in the traditional typical sense there, Jacqui. 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. And then just one last quick one; Peter, you continue to have this excellent, excellent deposit growth, and I know that -- you know the funds are coming, and they have continued 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's happening in your market for you?

No. If you look at the rate volume analysis in the packets 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. 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're seeing locally, understanding that its not coming from you, is it more of your bank peers of credit unions?

Both.

Okay. Okay, thank you that's very helpful.

Thank you. And our next question comes from Joe Morford from RBC Capital Markets. Joe, you may go ahead.

Thank you. Hello everyone.

Hey Joe.

Lot has been asked already. I guess, one more stab at kind of question on yields on loans and securities. I guess 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, perhaps? I mean, in the past you have talked about expectation for a steady downward, with the loan repricing and stuff. But do you think we have maybe stabilized here?

Well, that's possible. But no guarantees. We have seen these [indiscernible] in the past, where it sure looks like rates are moving up and margins stabilized; only to find out that, its not really a trend, its an aberration. So its definitely possible that we have hit the bottom here. But as I said, I just can't guarantee that.

I guess, along those lines, so 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 and the benefit you would expect from that, and also the timing? I.e., are you getting a lot of it upfront immediately, or does more of the benefits flow-through after we have had quite a few hikes?

Well, you know its all proportionate. And it does take time to play out. Our models all show we are still asset sensitive. The Q, we will work for it that -- a 200 basis point shift in the curve, that's worth 5% to us in the first year. So that's sort of the dimension of it. So that's about the best I can explain.

Okay. Fair enough. Thanks Ken.

Thank you. And 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 any further clarifications on any of the topics discussed today, please feel free to contact me. Have a great day everyone.

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