Bank of Hawaii Corporation (BOH)

BOH 
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Bank of Hawaii Corporation (BOH)

Q3 2012 Earnings Call

October 22, 2012 2:00 pm ET

Executives

Cindy Wyrick – Director of Investor Relations

Peter S. Ho – Chairman of the Board, President & Chief Executive Officer

Kent T. Lucien – Vice Chairman of the Board & Chief Financial Officer

Mary E. Sellers – Vice Chairman & Chief Risk Officer

Analyst

Craig Siegenthaler – Credit Suisse

Ken Zerbe – Morgan Stanley

Joe Morford – RBC Capital Markets

Aaron James Deer – Sandler O’Neill & Partners

Casey Haire – Jeffries & Company

Brett Rabatin – Sterne, Agee & Leach

Joe Gladue – B. Riley & Company

Analyst for Jeff Rulis – D. A. Davidson & Company

Jacquelynne Chimera – Keefe, Bruyette & Woods

Russell Gunther – Bank of America

Brian Zabora – Stifel Nicolaus & Company

Presentation

Operator

Welcome to the Bank of Hawaii third quarter 2012 financial results conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Cindy Wyrick, Director of Investor Relations.

Cindy Wyrick

Thank you for joining us today. Also with me this morning 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 included in this morning’s 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.

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

Peter S. Ho

Third quarter 2012 was another solid quarter for Bank of Hawaii. Fully diluted earnings per share and return on average assets were up for the quarter on a linked basis. Our average loans grew in nearly all loan categories and our end of period performance was even better. Average core consumer and commercial deposits were up in the quarter and our consumer checking count grew 6% for the third quarter. Risk metrics continue to improve across a number of indicators and we see the economy continuing its move to the better here in Hawaii and I’ll chat a little bit about that towards the end of our comments.


As is our practice, I’m going to ask Kent to review our finances for the quarter and then I’ll ask Mary to comment on credit quality that we saw in the quarter as well.

Kent T. Lucien

Net income for the third quarter was $41.2 million or $0.92 per share compared to $40.7 million or $0.90 per share in the second quarter and $43.3 million or $0.92 per share in the third quarter of 2011. Our return on assets in the third quarter was 1.2% and return on equity was 16%. Year-to-date net income was $125.8 million or $2.77 per share compared to $120.8 million or $2.54 per share in 2011. Year-to-date return on assets was 1.23% and return on equity was 16.5%.

Our year-to-date efficiency ratio was 57.8%, a reduction from 58.9% in 2011. Our net interest margin in the third quarter was 2.98% unchanged from the second quarter and down from 3.09% in the third quarter of 2011. Year-to-date the net interest margin was 3.01% compared to 3.16% last year. The lower margin is due mainly to the lower interest rate environment. There was no credit provision in the third quarter compared to $628,000 in the second quarter and $2.2 million in the third quarter of 2011.

The allowance decreased by $1.5 million in the third quarter which equaled net charge offs. The credit provision for the second quarter included net charge offs of $3.8 million and a $3.2 million decrease to the allowance. Our allowance for loan and lease losses at the end of the third quarter was $131 million or 2.3% of outstanding loan and leases.

Non-performing assets were $40.3 million at the end of the third quarter and represented 0.70% of loans. Included in non-performing loans are $25.5 million in residential mortgage loans as of the end of the third quarter. Non-interest income for the third quarter was $52.4 million compared to $46.8 million in the second quarter and $50.9 million in the third quarter of 2011. The increase compared to the second quarter was primarily due to an increase in mortgage banking income.

Year-to-date non-interest income was $147.3 million compared to $154.2 million in 2011. The decrease was primarily due to lower debt interchange revenue as a result of the Durbin Amendment and $6.1 million in securities gains in 2011 partially offset by an increase in mortgage banking income. Non-interest expense totaled $84.9 million in the third quarter compared to $80.7 million in the second quarter and $84 million in the third quarter of 2011. The increase compared to the second quarter was primarily due to the launch of our new consumer credit card, higher. profit sharing and bonus accruals and higher separation expense. Year-to-date non-interest expenses was $250.8 million compared to $263.8 million in 2011.

The effective income tax rate was 33.6% in the third quarter compared to 33% in the second quarter and 29.6% in the third quarter of 2011. The lower rate for the third quarter of 2011 was primarily due to a $1.8 million release of valuation allowance related to low income housing investments. Our investment portfolio now stands at $6.6 billion and we have unrealized gains in the portfolio of $201 million. The average duration of the available for sale portfolio is 2.26 years and overall portfolio duration is 2.39 years.

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