Bank of Hawaii Corporation (BOH) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Bank of Hawaii Corporation Fourth Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I'd now like to introduce your host for today's conference, Cindy Wyrick. Please go ahead.

Thank you, Kat. Good morning and good afternoon, everyone. Thank you for joining us today as we review the financial results for the fourth quarter 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. 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. And now I would like to turn the call over to Peter.

Thanks, Cindy. Good morning and aloha everyone. And I too want to thank you for joining us here this morning. Bank of Hawaii finished 2015 with solid financial results for the fourth quarter. Total loans grew to $7.9 billion at the end of the quarter, up 2.5% from the previous quarter and an increase of 14.2% from last year. For the full year, commercial loans increased 11.5% and consumer loans grew by 16.1%. Deposits finished the year at $13.2 billion, up 4.9% from last year. Overall asset quality, liquidity, and capital levels remained strong. Now let me turn the call over to Kent to provide you with some additional details on our financial performance for the quarter. And then Mary will touch on asset quality. Kent?

Thank you, Peter. Net income for the fourth quarter was $42.8 million or $0.99 per share compared to $34.3 million or $0.79 per share in the third quarter, and $41.2 million or $0.94 per share in the fourth quarter last year. Our return on assets in the fourth quarter was 1.11%, the return on equity was 15.41%, and our efficiency ratio was 58.55%. Our net interest margin in the fourth quarter was 2.85%, up eight basis points from the third quarter and up one basis point from the same quarter last year. Premium amortization was $11.6 million in the fourth quarter, a decrease of $2.7 million from the previous quarter. The investment portfolio reinvestment differential was a negative 77 basis points this quarter. This quarter, we purchased $190 million in securities including a high proportion of floating rate securities. As Mary will discuss later, we recorded a credit provision of $1 million this quarter. Non-interest income for the fourth quarter of 2015 was $44.8 million compared to $43.2 million in the third quarter and $45.8 million in the fourth quarter of 2014. The fourth quarter of 2015 included a $1 million distribution from a low income housing partnership. The previous quarter included a loss of $1 million related to the sale of an aircraft lease. Noninterest income in the fourth quarter last year included Visa stock sale gains of $2 million. Noninterest expense totaled $85.7 million in the fourth quarter compared with $91.9 million in the third quarter and $81.2 million in the fourth quarter of 2014. The fourth quarter included net gains of $3.9 million related to 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 expenses of $500,000. Noninterest expense in the third quarter of 2015 included a $9.5 million impairment on the residual values of six aircraft, in which the leases had expired, and a gain of $1.7 million for the sale of two properties in Guam. The fourth quarter of 2014 included insurance adjustment of $2 million, a gain of $200,000 from the sale of a Guam property, and a reversal of $200,000 in severance expenses. Adjusted for these items, noninterest expense in the fourth quarter of 2015 was up $2.7 million from the previous quarter, and up $3.2 million compared with the same quarter last year. The increase was primarily due to higher salaries and benefits expense, resulting from the strong loan production and higher overall operating income. The effective tax rate for the fourth quarter was 28.23% compared with 30.37% in the previous quarter and 32.71% in the same quarter last year. The lower effective tax rate during the fourth quarter of 2015 was related to the sale of a low income housing investment. Taxes in the third quarter of 2015 included benefit related to the aircraft impairment charges of $4 million. Adjusted for these items, the effective tax rate was 29.8% in the fourth quarter of 2015 and 31.7% in the third quarter of 2015. As Peter mentioned, we continued to see strong growth in our loan portfolio during the fourth quarter. As a result of loan growth slightly outpacing deposit growth, our investment portfolio decreased to $6.2 billion. The average duration of the AFS portfolio was 2.7 years, and the overall portfolio duration was 3.4 years. Deposit growth was strong in nearly every category during the fourth quarter. Consumer deposits increased 3% from the previous quarter and 5.8% compared to last year. Commercial deposits also increased 1.9% from the previous quarter and up 6.6% compared to last year. Our shareholders equity was $1.1 billion at the end of the fourth quarter. We paid out $19.5 million or 45% of net income in dividends during the quarter, and we continued our share repurchase program by repurchasing 214,000 shares of common stock for $13.9 million. At the end of the fourth quarter, our Tier 1 capital ratio was 13.97% and our Tier 1 leverage ratio was 7.26%. Finally, our Board declared a dividend of $0.45 per share for the first quarter of 2016. Now, I'll turn the call over to Mary.

Thank you, Kent. Net charge-offs for the fourth quarter totaled $2.2 million, a $190,000 increase on a linked quarter basis and a $484,000 increase year-over-year. Full year 2015 net charge-offs totaled $6.8 million or 9 basis points on an annualized basis. Comparatively, 2014 net charge-offs totaled $1.9 million or 3 basis points on an annualized basis largely due to several larger non-recurring recoveries totaling $4.4 million. At the end of the fourth quarter, non-performing assets totaled $28.8 million, down $744,000 from the third quarter and down $1.3 million year-over-year. Residential mortgage accounted for a $15 million of the total at the end of the year. Loans past due 90 days or more and still accruing interest totaled $7.6 million, down $571,000 and $1.1 million for the linked period and year-over-year respectively. Restructured loans not included in non-accrual loans or loans past due 90 days or more totaled $49.4 million at the end of the fourth quarter of 2015, up $100,000 quarter-over-quarter and up $4 million year-over-year. Residential mortgage loans modified to assist our customers accounted for $21.1 million, up in total at the end of 2015. We recorded $1 million credit provision to the allowance for loan and lease losses in the fourth quarter. Accordingly, the allowance totaled $103 million at the end of the fourth quarter, down $1.1 million from the third quarter and down $5.8 million year-over-year. The ratio of the allowance to total loans and leases was 1.31% at year end [Technical Difficulty] down four basis points for the linked period and down 27 basis points from December 31, 2014. The decrease in the allowance reflects the commensurate improvement in our asset quality metrics, strengthened the Hawaii economy over this period, as well as growth in our portfolio. The total reserve for unfunded commitments was unchanged from the prior quarter at $6.1 million. I'll now turn the call back to Peter.

Thanks, Mary. The Hawaiian economy continues to perform well as Mary alluded to. The visitor industry continues to be healthy with visitor spending through November 2015 up 2.2% and visitor days up 3.7% compared to the same period in 2014. Construction activity continues to be active in both the private and public sectors. The real estate market also remains strong and prices reach new record levels on Oahu, our primary market during the year. The medium price for the single family home on Oahu increased 3.7% and the medium price for condominium increased 2.9% in 2015. The volume of single family home sales on Oahu in 2015 increased 5.2% while condos increased 4.5%. Months of inventory at 2.6 months for single family homes and 2.9 months for condominiums combined with median days on market of 20 and 24 days for single family home and condos indicate Oahu continues to be supply constrained. Gains and employment at Hawaii continued to outpace the labor force growth, outpace labor force growth in our state wide seasonally adjusted unemployment rate declined to 3.1% in November compared to 5% nationally. Thanks again for joining us today. And now we will be happy to respond to your questions.

[Operator Instructions] Our first question comes from the line of Casey Haire with Jeffries. Your line is open. Please go ahead.

Hi, good morning, guys. Question on the C&I loan bucket, looks like it was down point to point, the loan yield were up, just wondering did you guys get some pay downs there that hurt the growth but helped the yield?

Yes. So probably the one sore spot in the entire loan portfolio was C&I this quarter, it wasn't a great quarter so they had some pay offs. There was also about half of the loss or half of the reduction really was as a result of the reclassification of a loan, so there was C&I loan that we had, there was an acquisition done several years back. And then it was restructured as the company prospects improved, and we took real estate collateral there so it got reclassified from the C&I into commercial mortgage, but even netting that out case it wasn't a great quarter for C&I for us.

Okay. And just extending that towards the loan growth outlook. I know Peter, you have been talking towards a normalization of loan growth from mid teens annualized pace. Is this 10% growth rate, is this fair or do we have more downside as we look forward?

Well, first of all, 2014 was I think just one of those years where everything on the growth side came together, but if you look at our four-year average of loan growth, it is 8.75%, and I think that's probably a reasonable proxy. I am not sure I would think that we've similar year to 2015 that we have, but I think if you look at the longer term growth in the portfolio with past several years, that's probably a pretty good proxy for us.

Okay, great. And then Kent just you mentioned the reinvestment yields were 77 bps tighter on the quarter. It sounds like you are shortening up duration with some floating rate asset buys. Just curious where is that yield in the new year today?

Well, it probably depends on what you buy. But for the quarter, the yield that we put on to the books was 1.45%. So that's a combination of fixed rate securities, and as I mentioned, a pretty high proportion of floating rate securities. I think as of this moment compared to the fourth quarter, you have to say it's probably a little bit lower if you repeated exactly the same composition, and that's the key. This differential is going to move depending upon the composition of what you acquire. But everything equal, it had to be a little bit lower as of this moment.

Okay, understood. And just lastly on the credit front loan loss reserve, we're now kind of below, a little bit below the pre-cycle low of 136. Just at 131 is there more wiggle room lower or is this a pretty good base?

Well, I think we definitely take a look at every quarter, we look at the composition, you recall last time we had a portfolio of leverage lease exposure that we were carrying, so all those factors come into play as well as the growth we are seeing and just the dynamics of healthy asset quality metrics work over that period.

Thank you. Our next question comes from the line of Ken Zerbe with Morgan Stanley. Your line is open. Please go ahead.

Excellent. Thank you. I guess starting off just in terms of expenses, if I understood right, the $3.9 million gain is sort of a contra expense in the expense line. But if we backed that out, it looks like expenses would have ticked up a fair amount. And I get that there were some unusual items there with the severance and the card, the new cards. But how should we think about that on an all-in basis going forward from here?

Yes. And as you mentioned, we did have some one time items, in my remarks I mentioned that we had the EMV, those are the chip cards and that was approximately $1.3 million, severance expense of $500,000, operating losses of $1.1 million. So those would really be out of an equation going forward. Really on a go-forward basis, the way to think about it really is there is some level of inflation in our economy, and perhaps 1% factor is probably the right way to think about that. We are underway with a number of initiatives and which are down the road going to provide benefits in terms of higher revenue and lower expenses. But initially there is some expense there and that perhaps is another 1%. And then finally the business is growing right now. So the commissions associated with that higher volume, some of the incentives on higher income are into that number. So that's the kind of the way to think about it from a very high level going forward.

Got you. Okay, so if we take the $86 million, roughly or $85.7 million and then sort of net out the three unusual items plus the gain, maybe that's $1 million lower but that would imply sort of a go-forward basis, sort of an $86 million, $87 million run rate and then a very modest amount of inflation from here. Just want to make sure my numbers are --

That's orders of magnitude the right way to think about it.

Okay, got you, understood. And then switching over to NIM, just want to make sure I got your comments right. I think I heard that lower premium amortization added roughly $2.7 million to NII this quarter. Was that correct and are we safe to assume that that comes out or was that the NIM at 285, is that more of a sustainable level?

What happened -- the comparison was to the third quarter, and so we -- it was unusual in third quarter and that we had a couple of securities really pay off ahead of time, and that bumped up the amortization in that period. So, hopefully the level of amortization here in the fourth quarter is closer to the steady state. Now things going to happen, securities can perform differently than you expect, but absent that kind of stuff, the fourth quarter is more typical I think than the third quarter.

Thank you. Our next question comes from the line of Aaron Deer with Sandler O'Neill & Partners. Your line is open.

Hi, good morning, everyone. Peter your comments regarding the economy and some of the data that you've put in the press release, it all seems very favorable and I am curious, though, in talking with your clients just given the weakness in Japan and now with the Canada and Australia facing the pain of lower energy and mineral prices and weaker currencies, is any of that starting to affect any of the customers there locally? Or is that still just being offset by strength coming out of the mainland US?

Yes. That's a good question. I think that the performance of the visitor industry last year is a pretty good proxy what's happening economically globally. So the real strength in a visitor last year was the US west so take a town like Seattle and San Francisco and Los Angeles, spending growth was up 6.4% last year from our US west market. Okay and then you contrast that to Japan and obviously dollars impacted spending out of our Japan market that number was down 9.7%, okay for spending. And visitors' days out of Japan were actually up a little bit, 0.4% up. Canada for the year look okay flat actually spending was up 0.1%, visitor days were down just over a percent, but I'll tell you that the statistics out of Canada late in the -- late in 2015 started to trend down and I can only assume that part of that is as a result, the combination of dollar -- US dollar value and what's happening with oil right now. So that's -- that was impacting as we see it the visitor side. I think on the construction side where we are impacted by global forces is really on the highest end condominium and single family home segments. And there we've had seven luxury/ultra luxury projects come out of the ground, some of those are completed, some of those are partially completed, all those seemed to have pretty good buyers in place now. I think what's at risk at this point is future ultra luxury development and actually just recently we have a local developers decide not to move forward to particular project which is of interest to us so I think we are going to be looking at what's happening in the global market to determine what the pace of future luxury construction is going to be, the kind of the workforce housing stuff and middle market stuff I think it's going to be somewhat unaffected by global forces because we just happened to have housing crunch here in the island right now.

Sure. With the -- in your own construction book how does that break out between the luxury versus the more affordable or workforce housing projects?

Yes. Mary you want to talk about that.

Sure. Actually our housing exposure portfolio is $98 million and 64% of that is low income senior citizen type thing that there is a huge demand for it. Then 36% is really in the market pricing. We only have one luxury condo project

On a construction side.

On a construction side. The balance is really in single family homes in West Oahu where they have been building for many years now and it's kind of controlled inventory bleed and then within the condo area we also have two projects that are geared at workforce housing and kind of mid market housing with about 681price point.

Thank you. Our next question comes from the line of Jeff Rulis with D.A. Davidson. Your line is open.

Thanks. Good morning. Just a couple housekeeping items I guess on the visa gains last year sort of you guys projected that Q1 would be lumpy or we should potentially see substantial gains again is that in the coming quarter, are those expectations intact?

Yes. That's our plan the first quarter.

Got it, okay. And then I guess you spoke on the reserve a little bit but backing into the provision expense I guess if we -- if we are kind of angling towards high single digit growth on a loan portfolio all things being equal on the credit side of that provisioning expectations may be for Mary, could you speak to that?

Well, I suspect that given with the growth that we are having and some of the direction in terms of asset quality we would potentially be looking at a provision through the rest of the year at a moderate level. Assuming that the economic forecast we're looking at hold, that our asset quality metrics performance were expected and that there is really not any other disruption in our market.

Thank you. Our next question comes from the line of Jacque Chimera with KBW. Your line is open.

Hi, good morning everyone. Did you have any depositor behavior changes as a result of rising rates?

Not that we can see. So consumer deposits were pretty stable, trend was about what we've experienced in previous quarters and pricing wise we've not really made much shift there.

Okay. And you're not changing deposit rates all that much if at all I'm assuming?

No.

And then what kind of an impact did the added TRID disclosures have in the quarter just on mortgage banking, the loan portfolio, etc.?

Oh TRID, I think that as with every other lender there is a great deal of complexity and but I think we fielded a team that was able to really power through it. I think we did some preplanning and now we're kind of going back through to do kind of a review, we are keeping kind of the log and make sure we just keep working to get it settled out, it's just it's complex TRID, there is no way you can run it to a few heads storms as you do it.

Do you expect any carryover into 1Q on that or was most of it contained in 4Q?

May be a little bit more and really I would just say would be process improvement and may be a little bit more training to just make it even smoother.

In terms of inventory being back ended because of TRID, is that what you are talking?

Oh no, we are doing pretty good on the inventory, we are staying on top of it just I think we really want to be sure that's a process that's nailed down given the volume of mortgage activity that we have in our portfolio.

Okay and were you able to, all the new regulations and coming up to speed on all of them and the implementation and training, did you have to do any FTE hires on that or were you able to absorb that with people you've already got?

Well, we've been building out some of our residential mortgage team in anticipation given clearly we've been growing our market share and there is opportunity there. So I think we are strategically building in some strength into key position.

Okay, so more for the overall franchise growth rather than something that's specifically related?

Yes. Although we did bring in some experts from the system side to help us too, so we did have some specific industry knowledge to help us through that.

Thank you. Our next question comes from the line of Joe Morford with RBC Capital Markets. Please just go ahead.

Thanks, good morning, everyone. Just a question back on the loan portfolio, it looked like the home equity, growth in the home equity portfolio was a little stronger this quarter, maybe better production there. Just curious, anything specific going on there or promotion or something?

Right. So continued promotion into that space would be one factor. Another factor Joe is we've done a lot of product enhancement in that space so we probably have a multiple and different types of products than we've had historically and that seems to helped us from a volume standpoint. So we feel good about where the productions got into at this point and I guess probably the last factor is home values is held up pretty nicely here in the Island and that's been constructive as well.

Sure, okay. That makes sense. The other question was, I guess Kent, and just there's been a little noise in the tax rate the last couple of quarters. I was just wondering any thoughts about what's a more normalized rate going forward for 2016. And any plans for additional low income housing investments that may affect that?

Well, we are always looking to make good low income housing investment and so that's kind of a normal course. So I have to give you a range 30% to 32% in that neighborhood is probably the right way to think about our effective rate.

Thank you. [Operator Instructions] Our next question comes from the line of John Moran with Macquarie Capital. Please go ahead.

Hey, how's it going, guys? The operating losses, just a quick question on that, what drove that? Was that related to the tax investments?

No. Actually it related to two errors that we made in areas related to our customers and in terms of what we've disclosed and in practice had done. So it was just really cleaning that up we are constantly kind of trying to stay on top of that if not the dollars and issues can become big so we have a pretty rigorous review function on that. So just couple of things we caught that we were able to head off.

Okay, thanks. And then you sort of addressed I think in comments about visitation sort of the impact of cheap oil, in terms of folks on island I mean obviously Hawaii burns fossil fuels for energy. Have you seen sort of a trickle down to the consumer or businesses in terms of savings and are you capturing some better economic activity as sort of a derivative play on cheaper oil?

So as I am sure you know Hawaii is the most oil depended state in the country. So we import 80% plus of our energy, 70%-80% of that is in the form of oil, so lower prices have definitely had a positive impact on the island and on the economy. We're still pretty turned high though I think the cost, the kilowatt hour is something like $0.25 still that's down from $0.31 -$.32 few years ago. But still a lot higher than I think the $0.10 national average.

So not really being passed on at this point then, that's --

Right.

That's interesting. Then the last one -- I'm sorry?

No. Go ahead.

I was going to say the last one that I had was just there's a couple of things going on sort of in terms of competitive dynamics in the market I guess. Sort of some folks thinking about there could be E&P looking to maybe monetize something and then the client electric situation, if you could give a quick comment in terms of anything that you've seen changing at the margin in the competitive environment or do you think any of these if they were to happen how does that change things or does it at all?

It's tough to tell. I mean we read the same articles that you folks do. I think you are referring to First Hawaiian and ASB and we would regard both of those competitors as high quality competitors who have pretty darn and good operating statistics, so it's difficult for me to figure how their operations would change under different ownership but obviously that's yet to be seen and determined.

Thank you. [Operator Instructions] Our next question comes from the line of Matthew Keating with Barclays. Your line is open.

Yes, thank you. I guess staying on that track about some of the competitive environment in Hawaii, if you looked throughout 2015 Bank of Hawaii has grown loans at a pace 50% more than the rest of the players on the island. Have you noticed any kind of changes in the way some of your competitors are thinking about originating new loans at this point? And then a second question or maybe I could just ask that first and then follow up with a second question. Thanks.

I think the competitive dynamics been pretty consistent, really the way we are getting to our loan growth is through a consistency of growth across all categories and that's really I think been our advantage over the past several quarters. So but in terms of changes and how the competition is reacting feels -- it was feels to me like that's been pretty consistent quarter-to-quarter.

Okay. And so you talked maybe the historical average of loan growth was in the high single digits, close to 9%. As you think about how 2016 is likely to shape up, would you think more of that will continue to be driven by the consumer book or more from an increase in commercial activity? Thanks.

No, yes, it's a good question that we think about a lot. We are thinking and we thought for a while as the Hawaiian economy improves and has improved and it looks like it's going to be pretty good for a while now, that we would see a consumer lending begin to rise at a faster pace than commercial. Commercial has been strong for us for a several years now. A number of quarters and so at some point you hit that inflection point in the market not that we are there at this point but we are obviously closer to that point than we were last quarter or the quarter before. So our guess is that we likely will see commercial loan growth flatten out if you will, maybe still positive but flatter than it has been historically. And potentially that gets replaced by consumer growth.

Thank you. I am showing now further questions at this time. I'd like to turn the call back over to Cindy Wyrick for any closing remarks.

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