Good day, ladies and gentlemen. Welcome to the Bank of Hawaii Corporation third quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I will now turn the call over to your host Cindy Wyrick. Please go ahead.

Thank you. Good morning and good afternoon, everyone. Thank you for joining us today as we review our financial results for the third quarter of 2015. 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. Our comments will refer to the financial information 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 materially differ from those projected. And now I would like to turn the call over to Peter Ho.

Great. Thank you, Cindy. Good morning and aloha, everyone. As you may have read in our September 29 8-K, the company made the decision during the third quarter to exit all of our remaining legacy aircraft leases. This action obviously had a disappointing financial impact on the third quarter. The company was active in aircraft leasing beginning in the late 1980s with activity peaking in the 1990s. While the cost of taking these actions has a near-term impact, we obviously believe it's in our long-term interests to be clear of these legacy assets. Net of the aircraft impairment, Bank of Hawaii had a strong third quarter for 2015. Loan growth was balanced across asset categories and up just over 16% compared to last year. Average deposits continued to grow. Asset quality reflects Hawaii's strong economy and prudent underwriting practices of the bank. Annualized net charge-offs in the quarter were 10 basis points. Capital and liquidity remains strong. And now let me turn the call over to Kent to give you more color around quarter and the financials. Kent?

Thank you, Peter. Net income for the third quarter was $34.3 million or $0.79 per share compared to $41.2 million or $0.95 per share in the second quarter and $41.8 million or $0.95 per share in the third quarter last year. Our return on assets in the third quarter was 0.89%, return on equity was 12.45% and our efficiency ratio was 55.12%. Third quarter results include the previously announced impairment charges of $6.5 million or $0.15 per share related to our decision to remove all of the remaining legacy aircraft leases from the portfolio. The charges were comprised of three parts, $1 million of the charge is included in non-interest income and based on the estimated loss of an existing aircraft lease, $9.5 million of the charge is included in non-interest expense and relates to reduction in the net realizable value of six aircrafts whose leases have matured. There is a $4 million income tax benefit associated with the previous two items. Adjusted for the impairment charges, the return on average assets for the third quarter was 1.07%, return on average equity was 14.72% and the efficiency ratio was 58%. Our net interest margin in the third quarter was 2.77%, down four basis points from the second quarter and down eight basis points from the same quarter last year. Higher average loan balances during the third quarter resulted in increased interest revenue compared with the second quarter. It was largely offset by lower yields and balances in our investment portfolio. The investment portfolio reinvestment differential was a negative 33 basis points this quarter. Premium amortization was $14.2 million in the third quarter, an increase of $700,000 from the previous quarter. This was primarily due to an increase in prepayments of Ginnie Mae project loan securities. Interest income in the third…

Thank you, Kent. Net charge-offs for the third quarter totaled $2 million or 0.1% annualized of total average loan and lease outstandings. Comparatively, net charge-offs for the second quarter totaled $1.5 million or 0.08% annualized, while in the third quarter of 2014 net charge-offs were $800,000 or 0.05% annualized. Nonperforming assets were $29.5 million at the end of the third quarter, flat with the second quarter and down $3.8 million from the third quarter of 2014. At the end of the third quarter, loans past due 90 days or more and still accruing interests were $8.1 million, down $1.5 million for the linked period and down $1 million year-over-year. Restructured loans not included in nonaccrual loans or loans past due 90 days or more were $50.7 million, up $2.4 million from the second quarter and up $4.8 million from the third quarter of 2014. Residential mortgage and home equity loans modified to assist our customers accounted for $24 million of the total at the end of the quarter. Consistent with the continued growth of the 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 third quarter. Accordingly, the allowance of $104 million represents 1.35% of total quarter end outstanding loans and leases. The reserve for unfunded commitments was $6.1 million, up $200,000 for the linked period driven off growth in our commercial portfolio. I will now turn the call back to Peter.

Great. Thanks, Mary. As I mentioned earlier, the Hawaiian economy continues to perform well. The visitor industry is showing steady growth with August year-to-date visitor days and visitor expenditures up 3.9% and 3.1%, respectively. Real estate values continued to advance steadily. Year-to-date through September, Oahu median single-family home prices were up 4%, while median condo prices were up 1.4%. Months of inventory at 3.2 months for single-family homes and 3.5 months for condominiums combined with median days on market of 20 and 19 days for single-family homes and condominiums indicate Oahu, our primary market remains supply constrained. Construction activity continues to improve in both the private and public markets and as a result of all of these factors, unemployment on Oahu was now at 3.4%. And now we would be happy to address your questions.

[Operator Instructions]. Our first question comes from Aaron Deer with Sandler O'Neill & Partners. Your line is open.

Hi. Good morning, everyone.

Good morning.

Good morning.

Kent, maybe I will start with you. I want to make sure I heard you correctly about the premium amortization differential this quarter versus the prior quarter. It was $700,000, is that correct?

Yes. That's correct. And the total was $14.2 million and it had been $13.5 million in the previous quarter.

Okay. So on a relative basis, that's a couple of basis points, probably in terms of the margin impact?

Right.

Okay. In general then, I guess the margin pressure seems absent that seems pretty modest as the new assets coming on are less variability relative to what's there currently. Has there been any change in terms of where you are bringing on new assets given where the rate environment's been recently and what the competitive pressures are on the island for loans? Or is it comfortable?

As I mentioned, we are reinvesting right now at minus 33 basis points. So it's a little bit tighter in terms of duration and the interest rate environment hasn't been that robust. So that's what's creating that.

Okay. On the securities side. Then how about on the loan side in terms of pricing?

Well, we were down about four basis points on average compared to the second quarter. But as I mentioned in the formal remarks, the fact that we are growing loans at such a strong pace is producing higher total interest revenue.

All right. Okay. And then Peter, maybe if you can just comment a little on the strength that you had in commercial real estate this quarter and then also the outlook for the -- I know the lease financed portfolio that remains is fairly modest, but just curious to know what we might expect to see in that book going forward?

I think the lease portfolio, Aaron, will continue to see bleed down at probably the same rate we have seen for a few years now. So what we are bringing on in that portfolio are good basic operating leases to commercial operations here in town and what's coming off obviously is, as you all know, are legacy national leverage transactions. And the net effect of that is going to be that the portfolios is going to shrink. Overall in all of our asset, all of our lending categories are performing very well right now. So CRE has been the headliner for a good amount of time. It continues to be through the third quarter and we think we still have some space left in this cycle for continued growth. Having said that, we are pretty mature in both the commercial and in particular the commercial real estate cycle and really what you are likely to see is as our core relationships begin to pull back in light of pricing in the marketplace, you will likely see us doing the same. Residential mortgage has been very strong as a result of just the environment. The refinance market had been reasonable and we have also had a good amount of condominium projects, where we have been the beneficiary of good amount of market share as those projects have come to market. We are going to see a bit of a dip in that segment. We are between projects, if you will, in the cycle. So we may see some pressure on residential mortgage loan growth in the next couple of quarters. But we have got some projects down years from now. And then finally, on the other consumer side, home-equity and indirect and installment and credit card, those portfolios are growing very nicely for us. And really, I think a reflection of what's happening with the economy here in town.

That's great. Thank you very much for the color on that.

Yes. Thanks, Aaron.

Our next question comes from Jacque Chimera with KBW. Your line is open.

Hi. Good morning, guys.

Hi.

I want to ask a question on the resi mortgage. Did you sell any of that in the quarter?

We did.

About how much of the production, just a round estimate?

Production? Mary has the number here.

We sold $71 million in total.

Okay. And how were gain on sale margins in the quarter, Mary?

It was about $1.80 million.

$1.80 million.

Servicing rights.

Okay. And is that about what you had expected it to be at?

Yes.

Okay. Then switching over to expenses, I know that Guam had an impact in the quarter, but we have seen a decline now for the last couple of quarters. Could you just give some color on what maybe some other one-time items might have been in the last few quarters? Or if that's a good run rate for us going forward outside of the Guam impact?

Well, as we mentioned, the real estate had an impact. We may have some future real estate transactions that would be one-time in nature. Other than that, the one-time items were really in the second quarter and I mentioned the 401(k) transaction. We had BOLI insurance benefits that were paid in the second quarter. So those types of things that are possible. The BOLI is always possible in to the future. The 401(k) transaction is not going to repeat into the future.

Okay. And do you have a dollar value for what the Guam impact was? I am guessing it was a gain on the sale of the property.

Yes. It was $1.4 million. It was actually two separate transactions and there has been a small transaction in the second quarter. So the swing or the delta was $1.4 million this quarter.

Okay. Thank you. That's very helpful. I will step back now.

Thanks, Jacque.

Our next question comes from Joe Morford with RBC Capital Markets. Your line is open.

Thanks. Good morning, everyone.

Hi Joe.

Hi Joe.

So just clarifying first on Jacque's thing there on the Guam. That's a gain that reduced the net occupancy number this quarter and then going forward we would go back to what had been the more normal run rate. Is that correct?

That's correct. The only caveat to that is that we do have various pieces of real estate that we sell from time to time. And so that could impact it. But you are right on the general principle.

Okay. Fair enough. And then I guess I was curious, the release mentioned there were several large commercial recoveries in the quarter. I guess curious to get a little more detail about that. And just in general the pipeline for recoveries as we think about the growth having been stronger and just when we might start seeing an actual loan-loss provision for the Bank.

Actually I think the recover stream is pretty modest. It's running at $0.5 million a quarter at this point. We really don't have any large commercial recoveries on the horizon. In terms of the reserve, we take a look each quarter. It really will depend on the asset quality metrics moving forward, the growth. All that growth is diversified across various portfolios and really the economic environment here in Hawaii.

Okay. Thanks so much.

Okay.

[Operator Instructions]. Our next question comes from Ken Zerbe from Morgan Stanley. Your line is open.

Great. Thank you. So I want to just going back to one of the earlier questions on loan yields. So like CRE I think was down, if you just look at the yield, about 6 basis points. Resi mortgage was down 7 basis points sequentially. Where are you putting on new CRE and resi mortgage yields currently versus the portfolio rate?

So resi-mortgage is 4%, in that neighborhood. That would be typical for a 30-year mortgage. Some times there is lending in there and 15-year mortgages which are going to impact that.

Right. And the commercial, let's see, the commercial mortgage space is coming on at about what's on the balance sheet right now.

Got it. Okay. So there were presumably other factors that drove the yield decline in those two areas this quarter?

Well, the resi-mortgage has been 4.14% in the second quarter. So you are blending in at a lower yield and then when you take account of the fact that it's not all 30-year mortgages, there are some 15-year mortgages in that number, that would be the reason.

So somewhere below 4% on the resi.

Right. On average, right.

Right. But I think directionally your sense that pricing is getting tighter news is probably correct. Versus a year ago, I would say the resi-mortgage market is tighter, particularly at the jumbo end of the spectrum. Commercial real estate is, pricing wise, probably tighter. C&I, for obvious reasons, is probably the tightest but it has been for some time now.

Understood. I guess that's why I was asking the question, that if you are doing CRE at 3.79% and that's where the yields are on the portfolio then presumably we shouldn't see any more compression, but it kind of sounds like we still should. That's why I was asking the question. Just trying to understand how much more compression we would see in those lines going forward.

Well, I think it's tough to tell because it's a dynamic situation. But directionally, I would say, the market is getting more competitive, which would allude to the fact that pricing may get tighter.

Understood. Okay. And then just another quick question on the deposit side. I think I saw that your total deposits in the period were actually down just over a percent this quarter. Is that a concern for you guys? I mean, you have such a large securities portfolio that I am sure you could remix from securities into loans for the next X number of quarters or years with no problem. But just wondering how important it is for you to actually increase your deposits? Or if you are fine just remixing for the next few quarters.

Well, I think what we are always looking for are reasonably granular sticky relationship deposits. And so to the extent that we can expand that book of business, we are always looking to do that. Ironically, we are probably the lowest paying deposit institution in this market which is, as you know, pretty low cost of deposit market. And yet we have, over the years, had just a bounty of deposits flow in. And so those will come in and those will go out. We intentionally maintain a good amount of liquidity, because we are really focused on is our relationship deposits. And so if this spot balances balance from quarter-to-quarter, frankly, that doesn't bother us as much as just understanding where we are with the relationship deposits, which as I look at it, core consumer, core commercial have been growing nicely for us on an average basis.

Got you. Okay. Thank you.

Our next question is a follow up from Aaron Deer with Sandler O'Neill & Partners. Your line is open.

Hi, guys. Just wanted to follow up on the Visa shares that you still have available for sale and see if the expectation was still that you might be looking to sell another slug of those in the first quarter of next year. Is that still the plan?

The plan is to sell stock next year. And probably of the same magnitude as we have done this year and really going back one previous year. Whether it occurs exactly in the first quarter, I can't predict that at this moment. But yes, the trend is, the desire to sell another slug of stock.

Okay. That's all I had. Thank you.

Yes.

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

Thanks. Good morning.

Good morning, Jeff.

Peter, a question on the, I don't know if I missed this, but specifically on the C&I segment. It looks like net production slowed from last quarter. Interested in, if there was payoff activity or some seasonality occurring within that segment.

Not much in the way of seasonality, Jeff, because given our economy out here, we don't have a lot of seasonal lending type of activity. But yes, we have had some payoffs. The C&I book is probably our least granular or most chunky portfolio for us. So we do see swings as we close on something or if pays off. And I guess what I would say is, on all of our commercial portfolios, that's probably the portfolio we are looking for just kind of a steady, I want to call it flatlining, but we are looking for that portfolio to be steady versus growth, out in the future.

Okay. And then maybe on your mortgage banking outlook. I guess the MBA posted a 9% to 10% drop in originations in 2016. How does that align with BOH and your expectations?

Well, really for us in this marketplace, there are three factors that come into play. So we have got a lot of project financings in the market right now. And so that in any given quarter can produce a pretty good slug of volume for us, if we are the dominant mortgage provider for a particular project as it comes online. For sale business, purchase business has been pretty steady here in the islands. And as long as sales volumes continue on the path that they have which has been mid single-digit growth, that should be pretty steady for us. Obviously we would like to do more of that business if we can. I think the swing factor is going to be refi and refi is going to be a function of what happens rate wise. And so if we see rates drop or at least remains stable, that should be reasonable business for us. If rates move up sharply, then obviously that's going to have a negative impact on volumes.

Okay. Thank you.

Thank you. I am showing no further questions. I will now turn the call back over to Cindy Wyrick for closing remarks.

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