Hello and welcome to the Second Quarter Bank of Hawaii Corporation Earnings Conference Call. My name is Joe and I will be your operator for today's call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. Please note that this conference is also being recorded. I will now turn the call over to Ms. Cindy Wyrick. Ms. Wyrick, you may begin.

Thank you, Joe. Good afternoon everyone. Thank you for joining us today as we review our financial results for the second quarter. Joining me this afternoon is 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 in our earnings announcement earlier today. But 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.

Thanks, Cindy. Good afternoon everyone. Thanks for joining us today and we certainly appreciate your interest in Bank of Hawaii. The company continued to have good financial results in the second quarter of 2014. Outstanding loan balances increased 3.5% from the previous quarter and were up 9.7% from last year. We also continue to grow deposits during the quarter, up 7% on average and up 10.7% on a spot basis. Asset quality and credit recoveries were particularly strong and resulted in a negative provision for this quarter. Liquidity and capital levels continue to be robust and our expenses remain well controlled. And now let me the turn the call over to Kent who will add some additional details on our financials and then we’ll go to Mary Sellers to talk about asset quality. Kent?

Thank you, Peter. Net income for the second quarter was $41.5 million or $0.94 per share compared to $38.6 million or $0.87 per share in the first quarter and $37.8 million or $0.85 per share in the second quarter of 2013. Our return on assets in the second quarter was 1.17% and return on equity was 15.9%. Our efficiency ratio was 58.4%, a reduction from 60.5% in the first quarter, year-to-date net income was $80.1 million or $1.81 per share compared to $73.7 million or $1.65 per share in 2013. Year-to-date return on assets was 1.14% and return on equity was 15.5%. Our year-to-date efficiency ratio was 59.5%. Our net interest margin in the second quarter was 2.86% compared to 2.87% in the first quarter and 2.77% in second quarter of 2013. The slightly lower margin was primarily due to higher premium amortization and lower reinvestment yields in our securities portfolio. Premium amortization was $13.5 million this quarter compared to $13.3 million in the first quarter. The reinvestment yield differential was a minus 24 basis points. Strong loan growth served to partially offset these factors. There was a negative credit provision of $2.2 million in the second quarter of 2014. And this was due in large part to positive net recoveries in the quarter of $1.9 million. Our allowance for loan and lease losses at the end of the second quarter was $113.8 million or 1.8% of outstanding loan and leases. Non-interest income for the second quarter was $44.5 million compared to $44.8 million in the first quarter and $48 million in the second quarter of 2013. The slight decrease compared to the prior quarter was primarily due to decreases in mortgage banking and insurance income offset partially by higher trust and asset management income. Mortgage income was $1.8 million…

Thank you, Kent. For the second quarter, loan and lease charge-offs of $4 million were offset by recoveries of $5.9 million, resulting in positive net recoveries of $1.9 million. Comparatively, charge-offs for the first quarter of this year totaled $4 million which with recoveries of $2.7 million resulted in net charge-offs of 1.3. Net charge-offs for the second quarter of 2013 were $2.3 million with charge-offs of 4.7, offset by recoveries of $2.4 million. Recoveries this quarter included $2.3 million related to residential mortgage loans primarily on the Neighbor Islands where property values have been recovering and a $1.7 million related to commercial loans. Non-performing assets totaled $34.4 million, down $2.7 million from the first quarter and down $2 million from the second quarter of 2013. Both periods decreases were due to resolutions, primarily in our residential mortgage portfolio. At quarter-end, loans past due 90 days or more and still accruing interests totaled $9.7 million, down slightly on a linked quarter basis and down $1 million year-over-year. Restructured loans not included in non-accrual loans or loans past due 90 days or more totaled $43.6 million at quarter-end, down $848,000 from the prior quarter and up $4.5 million year-over-year. Residential mortgage loans modified to assist our customers accounted for 22 million of the total at the end of the quarter. We continue to see improvement in what we consider to be the higher risks segments in our portfolio. In total, these segments were down 1.7 million for the quarter and 7.5 million for the year. We recorded a 2.2 million negative provision in the second quarter which reducing allowance for loan and lease losses were 113.8 million or 1.77% period end loans and leases outstanding down from 1.84% to the previous quarter. Each quarter, we estimate the required levels of allowance based upon the economic environment, asset quality dynamics, portfolio growth and composition. I'll now turn the call back to Peter.

Thanks Mary. The Hawaii economy remains healthy due to an expanded construction industry, positive job growth, low unemployment, stable tourism and a strong real-estate market. For the five months of 2014, total visitor spending increased 3% compared to the same period in 2013, despite very modest increases in total visitor days for the year-to-date. Construction activity in Hawaii is picking up momentum with a significant number of condominium projects, major resale projects, hotel and resort redevelopment, public construction activities and a long awaited $5.5 billion rail project all underway. The labor market continues to improve and the state-wide seasonally adjusted unemployment rate was 4.4% in June compared to 6.1% nationally. The real-estate market also looks strong, Oahu's single-family home and condominium median prices each rose 7.1% in the first half of 2014 and the volume of home sales was also strong, up 1.6% for single-family and 1.3% for condominiums, both single-family homes and condominiums on Oahu set all time medium sales price records in June. Inventories remain at very low levels and are currently at 2.8 months for the single-family home segment and 3.3 months for condominiums. Thanks again for joining us today and now we would be happy to respond to your questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question here comes from Mr. Aaron Deer from Sandler O'Neill. Please go ahead.

Hi, good afternoon everyone.

Hey Aaron.

Looks like a really strong quarter and in particular I guess the loan growth was impressive. I looked and looks to me like this is maybe the best quarter of loan growth you guys had seen since 2003. So wondered if you can maybe just kind of give some color on where the strength came from, particularly since it looks like you had some good growth in your commercial balances? And then what your thoughts are in terms of the outlook for the back half of the year, this momentum that we can expect to see continue or if maybe some expected growth from the back half maybe got pulled into this quarter?

Sure yes, well. So we would agree with your sentiment Aaron on loan growth, it was a great quarter for loan growth, not just in absolute terms, but in terms of participation from the entire portfolio of businesses that we have. And so again we were led by commercial loan growth pretty much throughout the category, so C&I was strong, commercial mortgage was strong, has been strong for quite a while now, construction lending given all this happening here in the Irelands was up 33% in the quarter, up to $121 million. The only category that was down is our lease portfolio and as you know that's a portfolio that we are strategically just deemphasizing at this point. So, commercial was strong, I'm a little hesitated to say that we're going to be able to pull through at these levels throughout the rest of the year, not that I see a downturn in the marketplace or as being less competitive. But I would recognize that we had a strong commercial quarter in Q1, which is a little uncharacteristic for us, we usually have the lighter quarter. And frankly, I was thinking maybe we'd see the result of that here in Q2 and we got the result we did. So activity remains good in the marketplace, but at some point I think we might say, just have an average quarter a versus the good quarter commercial wise. The thing that we're really enthused about, we've been talking about this for at least a few years is as we have seen commercial loan growth pick up, really going back several years now. We sense that the broader economy would start to kick in, we're beginning to see that on the consumer side. So, consumer loan growth this quarter in particular was very strong, up 2.6% linked and 7.9% for the year-on-year. With a lot of participation from just about every consumer loan category that we have. So, we feel good about growth in general like the participation across the portfolio. Looking forward though commercials just had a really good go and it may be tough to sustain that.

Okay, that's helpful. And then also it looks like the that the yields in each of those respective portfolios, for the most part seems fairly stable. If we are seeing the bottom in terms of the loan pricing here, it feel like it's things moving in the right direction on that front?

I am not sure ready to call a bottom. Deals remain very competitive and we're seeing, we've just seen the reference rate move around quite a bit in the past quarter, so I am not quite ready to say that.

Okay. And then may be one last question for Kent. On the other side of the balance sheet, the deposit of course were very, very strong in the quarter and looks like they might have come in particularly strong towards the end. How do you anticipate those funds being deployed, was there any temporary deposits in there you going to get that deployed and if so what kind of rates are you getting on new securities?

Yes. Aaron, we did see a pretty high amount of deposits coming right at the end of the quarter. And you would really have to characterize those as transitory because they were mainly used for either bond payments or other customer needs. So they do believe the bank shortly after the end of the quarter. So that's why I quoted average deposits in my remarks rather than the point to point deposits. Having said that, just using the average number, we're still seeing deposits coming to the bank. So our balance sheet is expanding. Fortunately the expansion is going into loans. And we're kind of just keeping even on the investment side. We're continuing to be conservative with respect to the securities we're buying and in the fact we’re taking a little bit of duration off the table really in difference to the fact that back on the loan side, we’re taking a little bit more duration risk and if I notice that mortgages were higher for example on the loan side, so the investment side is pretty tight in terms of duration. So you saw for example, we went down about 24 basis points in terms of reinvestment yield. That reflects that process -- duration as well as the market just being a little bit lower than it had been in the first quarter.

Okay, great. That’s all very helpful. I appreciate it.

Yes, sure.

Our next question here comes from Ebrahim Poonawala from Merrill Lynch. Please go ahead.

Good afternoon, guys.

Hi Ebrahim.

Hi. So, I was wondering if you can sort of comment in terms of the outlook in terms of share buybacks. I mean I think given sort of the growth we had in balance sheet this quarter, you increased the buyback authorization. If you can just talk about in terms of is the most likely path for future buybacks similar to what the pace we’ve been doing over the last few quarters or is that sense where you could hold buybacks for a certain time where balance sheet growth is picking up? Any color you can give there would be helpful.

Sure. I think directionally, we’re probably looking at a higher level of buybacks relative to what we’ve done over the first and second quarter. I think you can tell that by the fact that the authority granted by the board of $100 million. That's 2X of what it had been in the previous authority. So without quoting a specific number, directionally it's likely to be a bigger number going forward.

And if you can remind us, is there sort of a minimum level of [TCE] that you want to maintain or I'm just wondering then is there potential for doing any sort and doing buybacks, buying back sooner than later I'm just one?

Well, what we have said is that between dividends and buybacks, we want to return all the earnings that we can to the shareholders really subject to a minimum Tier 1 leverage ratio of at least 7%. So that’s really kind of the box that we’re working with. And so that’s how we’re trying that to mention.

Understood. And just quick question on mortgage banking, I believe you’d mentioned last quarter that there is about $2 million in mortgage servicing income, which is where we should expect sort of that line to trough. Is that still the case and should we expect that number to be around $2 million plus or minus over the next several quarter?

Yes, I think plus or minus there could be some small minuses, for example we’re a little bit under that this quarter. And that's partly due to how we account for mortgage servicing rights. So as we portfolio mortgages and that tends to amortize that balance. So that's really what accounted for the small decrease off of that $2 million figure. But right around that neighborhood is the way to think about it, going forward.

Understood, thank you for taking my questions.

Yes. Thank you, Ebrahim.

Our next question here comes from Mr. Jeff Rulis from D. A. Davidson. Please go ahead, sir.

Thank you, good afternoon.

Hey Jeff.

I don’t recall if you guys discussed any kind of intentions on the Visa selling and contributions, I guess at this pace, you’ve got close to four years. Is there any thoughts you could share on your intent for that going forward?

Yes. So we have really started to sell some of the Visa stock in the first quarter. And actually we did mention in the call for the first quarter that we would probably be continuing at that same pace into the future. So that’s where we are -- we’ll likely continue into the foreseeable future. In addition, we are contributing about $500,000 worth of Visa stock to the foundation. So that’s a pretty tax efficient way for us to fund the foundation that will help produce our expenses going forward. So that’s going to continue as well.

Okay, thanks. And Peter, a follow-up on the loan growth and you outlined some of the obviously a lot of construction on the Island. I guess that construction segment for you particularly in the bank swung pretty considerably and maybe you could talk about the type of construction loans that you are underwriting and putting in portfolio, I guess they don’t strike you as a normal traditional construction lender, but what exactly is the production there?

Yes, so that's I think you pretty accurately characterized how we look to hold ourselves in that segment. And so if you look back historically, I think at the last cycle, we may have peeked it just over $200 million in construction outstandings and kind of flexed up and down depending on where we are with certain projects. That the bell where we're looking to be into this cycle. We're really not, I want to consider as to be a headline construction lender, we do it, we do support deep and important relationships that we have with the real estate community here in the islands. And really what we look to do is obviously provide world class support in that form of lending. But really the upside for us that we see within the broader commercial portfolio is just the other types of loan categories that go into play when you are in the middle of a pretty good sized construction cycle at we are right now Jeff.

Okay, that's helpful. That's it from me. Thanks.

Okay. Thanks.

The following question comes from Casey Haire from Jefferies. Please go ahead.

Hey, good afternoon guys.

Hi Casey.

Peter, just wanted to follow up on your comment earlier on loan pricing. I was wondering if I know like mainland competitors have been a problem in the past and I was just wondering if that's what’s contributing to your sort of your caution here. And are you seeing mainland competitors start to come into the what's say, heating up Hawaiian economy?

Yes, so I think by now the secret of the growing Hawaiian economy is just about non-secret with everyone. So we are beginning to see some participants that we haven’t seen in a while that we saw in the last cycle I will say. That's predominantly at the $25 million plus end of the spectrum. So most of the marketplace remains pretty contained. The larger end is getting more competitive, getting more competitive with players that were used to dealing with cycle in and cycle out. I guess the only other thing I would add is some of those banks really are frankly more partner than competitor. And we've been pretty effective in working with some of the larger banks in basically sharing syndications with Bank of Hawaii as the lead lender here locally.

Okay. So is it correct to say I think that the mainland competition you primarily see them on the commercial side of the house specifically CRA?

Mostly CRA, a little CNI for much larger transactions, like that's not very deep market out here. But yes, mostly CRA on the commercial. And then -- on the consumer side there have always been national providers in our marketplace.

Okay, great. And then Kent just a couple of questions for you on the loan yield side, just digging a little deeper. On the CNI, the yield only down 1 bp was there any noise there quarter-to-quarter be it loan fees and then similar color on commercial mortgage down about 20 bps as well as Resi mortgage up 10 bps, I know that’s a lot, but just looking for some any incremental noise quarter-to-quarter that drove those yield swings?

Yes, Casey, nothing really unusual to report on those, sorry I can’t give you any additional color on that.

Okay. So, the commercial mortgage was there was no like prepayment penalty in the first quarter?

No.

Yes, I did the same analysis Casey, it’s Peter, kind of what yields fell and what yields went up were kind of all over the place quarter-to-quarter. So, I am not sure I saw any real pattern there.

Okay. Just two last housekeeping questions, one the tax rate and then Kent the -- was there a big MSR adjustment this quarter in the mortgage banking line?

No, not a big one. As I mentioned earlier, it’s about $200,000 or so.

Okay, great.

Yes. And the tax rate I think I mentioned 30.9% for the quarter, a little bit higher than the first quarter, only because we had a State tax settlement in the first quarter, but otherwise very comparable to our experience last year.

Okay. So, 31 is a good number to use going forward?

Well I’ve given guidance in the range so I think the range is -- I can’t tell you 31 precisely, it’s the right way to think about it.

Okay. Thank you.

You’re welcome.

Yes. Thanks Casey.

Our next question here comes from Jacquie Chimera from KBW. Please go ahead.

Hi, good afternoon everyone.

Hi.

Hi, Jacquie.

I've been looking at the mortgage production in the quarter, the mortgage banking. The linked quarter declined in that, was that driven more by the decisions, you put more loans into the portfolio than to book from an income?

Well, let me take a [straight path] on the question. Production is down, it's down because basically we're comping against higher level of refinance activity. And so really what we are down to now is more of a purchase market and a lot less refi, although we still get some refi. And that's what's really driving the volumes. And really on the purchase side with holding back to market is as I mentioned in our earlier comments, inventory levels in Hawaii, in Oahu particular, which is about 70% of the market are just at very low level. So people want to buy home, there just isn't a lot to buy right now.

Okay, good. It’s much more function of the market than shift to try to put more loans on the balance sheet?

Well, yes. So the marketplace is definitely shifted from refi to purchase. In terms of our balance sheet decisioning, gain on sales is not what it was in years passed and we love the quality and the look of the mortgages we are originating. So yes, we're increasingly putting those loans onto our balance sheet.

Okay. So the other thing look out at all the different construction projects that are going on in Oahu. At what point do we start to see those turn into future mortgage generation?

Hopefully they are all opportunities for future mortgage generation. And frankly one of the things that we like about the project nature of this condominiums coming up is that they each have their own unique customer segments. So we've been fortunate to have been on the construction lending side, the commercial side of a number of these projects which obviously gives us a leg up in helping to establish relationships with purchasers with buyers, whether they would be domestic or international. And it’s just been a very nice way for us to try to build out relationships through the commercial side of the business.

Okay. So kind of working on phase one and then once projects are completing that – completed, it makes it easier to move in for phase two, then?

Right, exactly.

Okay. And then just one last quick one on the service charges; was there anything unusual in the second quarter, maybe in the first quarter? I noticed that on a year-over-year basis the last two quarters have had a run rate; is anything particular going on in there or is it just general fluctuations?

She is talking about service charges.

Deposit fees.

Yes. What’s happening is well, there are two things happening. The economy is getting better, so people have more cash and so overdraft activity is down, which all things considered I think is a great statement. The other thing that’s happening is on the commercial side (inaudible) fees are down because as earnings credits are lower because of the rate environment a lot of commercial customers that used to pay for additional cash management services are choosing to forego without those services, so that’s suppressing analysis income.

Okay. That makes sense. Okay, great. Thank you for the color. I appreciate it.

Yes, thanks Jacquie.

And next we have a question here from Brett Rabatin from Sterne Agee. Please go ahead.

Hi, good afternoon.

Hey Brett.

I wanted to talk about expenses for a second. I guess if we kind of look at expenses linked quarter and take out some of the seasonal stuff in 1Q, expenses are kind of flattish to maybe slightly down in the second quarter. And just wanted to get an update on every year you are trying to reduce the expense base a little bit. I was hoping, if you could a spend a second or two talking about any increased regulatory burden you might see with having to comply with anything new versus your efforts to continue to improve operating leverage and efficiency?

Right. And so it's actually true that we are having to expend resources in the compliance area. Fortunately I think we are being thoughtful and efficient in that regard. And we still think that the opportunities out way the risk and burdens in this area. So, I think I've given guidance in the past that at present we can hope to reduce our expenses by about 1% per year. And that be quarters where we don’t exactly get that annualized result. But over kind of the medium or longer -- little bit longer term, I think that opportunity is still there to us.

So, the guidance for 1% still good?

Still good, subject to what I said about quarterly variation.

You are right. Fair enough. Okay. And then I guess the other thing I was curious about, if you gave it, I missed it. But the utilization rate on the commercial book, if you have that handy?

It's up a bit, but not meaningful. We’re not, as at the construct of our economy here just doesn't have working capital as a big component of people's businesses because we're a service economy. So it is up a bit, but it's not a meaningful driver of loan growth.

Okay. And then just last question I heard the duration of portfolio was 3.5 two years, didn’t know if there was any thought on reducing the duration as we go into next year or can you give us any color on the….

Yes I did mention earlier that we are taking the duration down a little bit. And it's mainly a function of what we're doing, otherwise from the balance sheet. So for example as we're growing loans and as we're growing mortgages within the loan portfolio as an offset to that we are taking some of the duration down within the securities portfolio.

Okay, great. Thanks for the color.

You're welcome Brett.

And your next question here comes from Joe Morford from RBC Capital Markets. Please go head.

Thanks good afternoon everyone.

Hi Joe.

First just a follow up on the last question on expenses the other, other category was kind of noticeably lower than spend for the last several quarters. I know that category can be notorious for quarter-to-quarter volatility but I was just wondering if there is anything meaningful in there perhaps pointing towards the new run rate.

Well in the first quarter we did have an operating loss, so that was about $700,000 in the period. So that's why the biggest bolts there in the other line.

Okay. And then separately, I recognized the strong recoveries this quarter drove the negative provision. In the past, you’ve suggested that given the stronger loan growth you might reinstate the provision this year, is that still the mindset or might we see some additional reserve releases, given the portfolio trends?

Well I’ll start and then Mary can come around. I think we obviously have to call in the way we’re seeing. And so it’s based upon the facts and the circumstances as they develop. And so the second quarter was somewhat unusual because of the very large recoveries that we experienced. So, that’s the type of thing that difficult to predict. It’s always possible. But that’s really what drove it in the second quarter here.

I think you did great job, Kent.

Fair enough. Thanks so much.

Yes. Take care.

And at this time speakers, I am showing no further questions from the audience.

Well I'd like to thank everyone for joining us this afternoon and for your continued interest in Bank of Hawaii. As always, if you have additional questions or any further clarifications on any other topics we discussed today, please feel free to contact me. In the meantime, have a great evening fun.

And thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. And you may now disconnect.