Bank of Hawaii Corporation (BOH)

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Bank of Hawaii (BOH)

Q3 2009 Earnings Call

October 26, 2009 2:00 pm ET

Executives

Cindy G. Wyrick - Senior Vice President, Corporate Secretary, Manager of Investor Relations

Allan R. Landon - Chairman of the Board, Chief Executive Officer

Kent T. Lucien - Vice Chairman of the Board, Chief Financial Officer

Mary E. Sellers - Vice Chairman, Chief Risk Officer

Peter S. Ho - President, Chief Banking Officer

Analysts

Ken Zerbe - Morgan Stanley

Brett Rabatin - Sterne, Agee & Leach, Inc.

Joe Gladue - B. Riley & Company

Aaron Deer - Sandler O’Neill & Partners

Craig Siegenthaler - Credit Suisse

Brian Zabora - Stifel Nicolaus

Robert Bohlen - Keefe, Bruyette & Woods

Albert Savastano - Fox-Pitt Kelton

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Bank of Hawaii Corporation earnings conference call. My name is Anne and I will be your coordinator for today’s call. (Operator Instructions) I would now like to turn the presentation over to Cindy Wyrick, Director of Investor Relations. Please proceed.

Cindy G. Wyrick

Thank you, Anne, and good morning, everyone. Thank you for joining us as we review our financial results for the third quarter of 2009. Joining me this morning is our Chairman and CEO, Al Landon; our President and Chief Banking Officer, Peter Ho; Vice Chairman and Chief Financial Officer, Kent Lucien; and our Vice Chairman and Chief Risk Officer, Mary Sellers. Our comments today will refer to the financial information that was included in the earnings announcement released 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'd like to turn the call over to Al.

Allan R. Landon

Thank you, Cindy. Hello, everyone and thanks for joining us today. Well, given the economic conditions, Bank of Hawaii had a pretty good quarter. We increased net interest income and controlled our core expenses. We added to our reserves and capital during the quarter. I am going to ask Kent to give us some comments on the factors affecting our financial performance this quarter and then Mary will discuss our credit quality measures. Kent.

Kent T. Lucien

Thank you, Al. Good morning. Net income for the third quarter was $36.5 million, or $0.76 per share, compared to $31 million or $0.65 per share in the second quarter, and $47.4 million or $0.99 per share in the third quarter of 2008. Last quarter’s results included FDIC insurance pretax expense of $9 million, compared to $3.3 million this quarter. Last year’s third quarter results included a net income tax credit of $8.9 million related to the company’s resolution of its silo leases with the IRS.

Year-to-date, net income was $103.5 million, or $2.16 per share, compared to last year’s $152.9 million, or $3.17 per share. Last year’s results included pretax gains of $25.3 million from the redemption of Visa shares and the early buy-out of an aircraft lease.

Net interest income was $108.9 million, up $6 million from the second quarter and our net interest margin improved 12 basis points to 3.85%. Average earning assets were up $245 million in the quarter, with investments up $811 million, funds sold down $343 million, and loans down $223 million. Our margin increase was due mainly to lower deposit costs.

Our credit provision in the third quarter was $27.5 million, including net charge-offs of $22.3 million, and an increase to our allowance of $5.2 million. Our allowance for loan and lease losses is now $142.7 million, 2.41% of outstanding loans and leases. This year we have increased our allowance by $19.2 million.

Non-performing assets increased to $48.5 million this quarter, up from $39.1 million in Q2, primarily in commercial construction loans. Included in non-performing loans are $16.7 million in residential mortgage loans.

Our investment portfolio now stands at $5 billion. The average duration of the portfolio is 2.26 years. We continue to invest on a conservative basis, primarily in treasury securities and [Jenny Nays], and we have unrealized gains of $102 million.

Non-interest income for the third quarter was $56.8 million, down $3 million from the second quarter and slightly lower than the third quarter of 2008. Second quarter results included a $2.8 million gain on the sale of our equity interest in an air cargo carrier and a small gain on the sale of our retail insurance agency.

Year-to-date, non-interest income is $16.7 million lower than 2008, primarily because of the gain on the redemption of Visa shares last year and a reduction in trust and asset management fees. Mortgage banking income was $4.7 million for the quarter versus Q2 income of $5.4 million.

Non-interest expense was $84 million in the third quarter, down $5.6 million from last quarter and down $2.8 million from the third quarter of last year. Last quarter’s FDIC expense totaled $9 million, including $5.7 million for the industry-wide assessment compared to $3.3 million in FDIC expenses this quarter.

Compared to the third quarter of last year, all categories of non-interest expense declined, except for FDIC expense. On a year-to-date basis, total non-interest expense is down $2.6 million from the first nine months of 2008, including a decline in salaries and benefits expense of $10.6 million. FDIC expense is up $13.3 million this year.

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