Bank of Hawaii Earnings Call INSIGHTS: Basel III Proposals, Loan Pipeline Update

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On Monday, Bank of Hawaii Corporation (NYSE:BOH) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Basel III Proposals

Aaron James Deer – Sandler O’Neill and Partners: Just wanted to start a question on the, I guess, on the margin. Obviously, the asset yields earned are under pressure and I’m wondering, what more you might be able to find you can do on the funding side to help preserve your margin going forward?

Kent T. Lucien – Vice Chairman and CFO: Yes. There is really not too much more to be done on the funding side. Our deposit pricing is already quite low, so we do see a tick here and a tick there between the quarters. But long-term repos are just that they are long-term. They have make-hold provisions, so I think it’s unlikely that we’ll be able to really reduce that cost in the near-term.

Aaron James Deer – Sandler O’Neill and Partners: Then Kent, I imagine that you probably spent some time looking at the Basel III proposals and how it might affect your capital ratios. Can you talk about maybe to the extent you have done the analysis and can share the results, where your pro forma capital ratios shake out and/or some of the new proposals and what that might mean for your buyback going forward?

Kent T. Lucien – Vice Chairman and CFO: Yes. We have done some very preliminary work and so I don’t want to cite any specific numbers, but generally we think the risk weighted assets may go up a little bit, but not substantially. The unrealized gains in the portfolio through AOCI, if it’s included in Tier 1 capital, might even increase some of our ratios. Now the AOCI portion has rolled out over in its five years in small bits and pieces. So it depends on what the market is at the time, but just based upon that, it would look like it would have a positive impact to us.

Aaron James Deer – Sandler O’Neill and Partners: So you would not anticipate the – as you prepare for that going forward impact in your – the pace of your share repurchase program as it’s been over recent quarters?

Kent T. Lucien – Vice Chairman and CFO: At this point, no, but it’s with a caveat, and the caveat is it really depends on is AOCI included, what are the market conditions and that sort of thing.

Loan Pipeline Update

Casey Haire – Jeffries and Company: Just a question I guess on the loan pipeline and just an update there. It looks like commercial was pretty weak this quarter, resi was very strong, is that what we should expect going forward?

Peter S. Ho – Chairman, President and CEO: Well, what we try to do is effectively keep our loan categories in reasonable balance here. So resi has up for obvious reasons, it had a very strong couple of quarters which is reflecting on our balance sheet. I would look to see that level, at least on the balance sheet moderate somewhat and what we’re hoping is that we see a continued movement in our commercial segment. So, if you look year-over-year, commercial balances are up 3%. That’s a bit impaired by our leasing business, because as you know that’s a business that we are deemphasizing and so we’ve seen a fair amount of shrinkage in the outstandings there. If you net that number out and just look at pure C&I, commercial real estate and construction lending, we’re actually up 5.6% year-on-year which is about the level that we think we can be looking at in the environment that we’re in today. So, I think commercial has some upside, certainly that’s what we’re seeing in the pipeline. Looking at the consumer, kind of home equity, dealer and direct, assuming the economy continues to operate at a level that it is, I think we’ll begin to see growth in that segment, certainly won’t have the reductions that we’ve experienced in that segment for the past couple of years.

Casey Haire – Jeffries and Company: Just on the expense side of things, obviously pretty good result this quarter, looks like your efficiency initiatives have started to filter through. Can you just give us an update as to where that stands right now, is this – are we kind of now at the right run rate or is there more benefits tricking through?

Peter S. Ho – Chairman, President and CEO: We’re going to keep working at it. We’re not done in terms of trying to become as efficient as possible. Now, there can be ups and downs and for example to the extent we are involved in the credit card business, there could be some higher expense levels associated with that business. But as a trend, we’re going to keep working at this and we’re hopeful that we can in fact produce expenses even more.

Casey Haire – Jeffries and Company: Looks like it mostly came from the comp line but headcount was only down very slightly. I know there was some FICA rolloff but what exactly was – how did you guys do it without reducing headcount all that much?

Peter S. Ho – Chairman, President and CEO: Well I think you have to look at the longer term and if you look at kind of year-over-year we are down around 1.5% on the (play) account. So it sometimes takes a while to catch-up in terms of the expenses and that’s we are starting to catch up.

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