Cindy Wyrick - Executive Vice President, Investor Relations Peter Ho - Chairman, President and CEO Kent Lucien - Vice Chairman and CFO Mary Sellers - Vice Chair and Chief Risk Officer.

Ebrahim Poonawala - Bank of America Merrill Lynch Casey Haire - Jefferies Joe Morford - RBC Capital Markets Jackie Chimera - Keefe, Bruyette & Woods Jeff Rulis - D. A. Davidson & Company Brett Rabatin - Sterne, Agee & Leach Aaron Deer - Sandler O’Neill.

Welcome to the Q3 Bank of Hawaii Corporation Earnings Conference Call. My name is Eric. I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Cindy Wyrick.

Cindy, you may begin..

Thank you, Eric. Good afternoon everyone and thank you for joining us today as we review the financial results for the third quarter. Joining me this afternoon is Chairman, President and CEO, Peter Ho; Vice Chairman and Chief Financial Officer, Kent Lucien; and Vice Chair and Chief Risk Officer, Mary Sellers.

The comments today will refer to the financial information included in our 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. And now, I’d like to turn the call over to Peter Ho..

Thanks, Cindy. Hello and good afternoon everyone. Thanks for joining us and as always thank you for your continued interest in Bank of Hawaii. We’re pleased with our financial results this quarter. We grew our loans 2.8% from the previous quarter and average deposits by 1.4%. Including in that number is 3.5% growth in demand deposits.

Our net interest margin was relatively stable decreasing by 1 basis point from the last quarter as strong loan growth partially offset the impact of the flatter yield curve. Asset quality remains strong and reduction in the specific reserve for one commercial client resulted in a reporting a negative provision this quarter.

Liquidity and capital levels continued to be robust and operating expenses remained well-controlled. I’ll now ask Kent to provide you with some additional details on our financial performance this quarter and then ask Mary to comment on our asset quality.

Kent?.

Thank you, Peter. Net income for the third quarter was $41.8 million or $0.95 per share compared to $41.5 million or $0.94 per share in the second quarter and $37.7 million or $0.85 per share in the third quarter of 2013. Our return on assets in the third quarter was 1.15%, and return on equity was 15.6%.

Our efficiency ratio was 57.7%, a reduction from 58.4% in the second quarter. Year-to-date net income was $121.9 million or $2.75 per share compared to $111.4 million or $2.50 per share in 2013. Year-to-date return on assets was 1.15%, and return on equity was 15.5%. Our year-to-date efficiency ratio is 58.9%.

Our net interest margin in the third quarter was 2.85% compared to 2.86% in the second quarter and 2.83% in the third quarter of 2013. Year-to-date net interest margin was 2.86% compared to 2.81% last year. The reinvestment yield in our investment portfolio and the differential this quarter was a minus 5 basis points.

So, it’s a negative credit provision of $2.7 million in the third quarter of 2014. And this was primarily the result of a reduction to the reserve for a commercial credit. Our allowance for loan and lease losses at the end of third quarter was a $110.4 million or 1.7% of outstanding loan and leases.

Non-interest income for the third quarter was $45 million compared to $44.5 million in the second quarter and $45.1 million in the third quarter of 2013. The increase compared to the prior quarter was primarily due to increases in overdraft fees and insurance income offset partially by lower trust and asset management income.

Mortgage income was $1.6 million compared to $1.8 million in the second quarter and $4.1 million in the third quarter of 2013. We sold 23,000 Visa Class B shares in the third quarter for a gain of $1.9 million versus a gain of $2.1 million in the second quarter. We also contributed 5,700 Visa Class B shares to the Bank of Hawaii Foundation.

Non-interest expense totaled $81 million in the third quarter compared to $81.1 million in the second quarter and $83 million in the third quarter of 2013. The decrease compared to the third quarter of 2013 was primarily due to a decrease in salaries and benefits, occupancy expense and professional fees.

Year-to-date, non-interest expense was $245.7 million compared to $248.5 million in 2013. The effective income tax rate was 32.6% in the third quarter compared to 30.9% in the second quarter and 28.9% in the third quarter of 2013.

The lower rate in the third quarter of 2013 was primarily due to release of reserves related to the closing of a tax audit for prior years. Our investment portfolio decreased slightly to $6.8 billion this quarter. The average duration of the AFS portfolio is 2.9 years and overall portfolio duration is 3.5 years.

Loans balances were $6.6 billion at the end of the third quarter, up $180 million or 2.8% compared to the end of the second quarter and up $600 million or 10% from the end of the third quarter of 2013.

Average deposits were $12.2 billion in the third quarter, up $171 million compared to the second quarter and up $721 million from the third quarter of 2013.

Our shareholders’ equity was $1.1 billion at the end of the third quarter and we’ve paid out $20 million in dividends and continued our share repurchase program in the third quarter, repurchasing 341,000 shares of common stock or $19.8 million. Our Board declared a dividend of $0.45 per share for the third quarter.

At the end of the third quarter, our tangible common equity to risk-weighted assets was 15.2% and our Tier 1 leverage ratio was 7.2%. Now I’ll turn the call over to Mary Sellers..

Thank you, Kent. For the third quarter, loan and lease charge-offs of $3.7 million were offset by recoveries of $2.9 million resulting in net charge-offs of $800,000. Comparatively, in the second quarter, charge-offs of $4 million were more than offset by recoveries of $5.9 million, resulting in net recoveries of $1.9 million.

Recoveries in the second quarter included $2.3 million related to residential mortgage loans on the Neighbor Islands and $1.7 million related to a commercial loan. Net charge-offs for the third quarter of 2013 were $900,000.

Non-performing assets totaled $33.3 million, down $1.1 million from the second quarter and down $525,000 from the third quarter of 2013. The linked period decrease was primarily due to $1.3 million payment on the commercial loan.

At quarter-end, loans past due 90 days or more and still accruing interests totaled $9.1 million, down $564,000 and $2.3 million for the linked quarter and year-over-year respectively, primarily due to reductions in residential mortgage.

Restructured loans not included in non-accrual loans or loans past due 90 days or more totaled $45.2 million at quarter-end, up $1.5 million from the prior quarter and up $5.3 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 risk segments in our portfolio. In total, these segments were down $5.5 million for the quarter and 12 million year-over-year.

As we discussed for the third quarter, we recorded a $2.7 million negative provision to the allowance for loan and lease losses which with net charge-offs of $800,000 reduced the allowance to $110.4 million or 1.67% of period end outstanding loans and leases. I’ll now turn the call back to Peter..

Great. Thanks Mary. The Hawaii economy remained healthy during the quarter due to a growing construction industry, positive job growth, low unemployment, stable tourism and a strong real-estate market. Construction activity is gaining momentum and the overall labor market continues to improve.

Our state-wide seasonally adjusted unemployment rate declined to 4.3% in September compared to 5.9% nationally. For the first eight months of 2014, the total number of visitors to Hawaii was relatively unchanged. Visitor spending however increased 2.1% compared to the same period in 2013.

Real-estate market continues to look strong, Oahu’s single-family home and condominium median sales prices or median prices rose 4.6% and 5.4% respectively for the first nine months of 2014. The volume of home sales in 2014 have increased despite very low inventory levels, up 1.6% for single-family homes and 0.4% for condominiums.

This concludes our formal remarks. We’ll be happy to entertain any questions..

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Ebrahim Poonawala. Please go ahead..

Good afternoon guys..

Hey, Ebrahim..

Hi..

Hi. So, I guess first question, I guess Peter you had sort of guided for commercial loan growth to slow after sort of a strong 2Q. I guess C&I balances stayed essentially flat quarter-over-quarter.

Any color on the slowdown; was that fully anticipated as you sort of headed into this quarter or were you surprised by how much slower it got? And this outlook seems like you have a pretty beat outlook on the economy per se. So any color would be helpful..

Yes. Well, we had some chunkiness particularly in the C&I portfolio. So, I was looking at the average balances for the quarter. And there our view has been that we were hopeful of maintaining the trajectory and commercial that we have now for the better part of the year and then begin infilling on consumer and residential mortgage.

I think on an average basis, Ebrahim, that’s exactly what happened. On a linked basis, we were up 4% on average in commercial and then 3% and 3% in residential and consumer. So, I guess what I would say is, we continue to believe that there is additional commercial growth out there; that’s what we’re seeing in the marketplace.

The markets for now are remaining to look reasonably rational. And what we’re looking forward to I think really push growth a little bit further forward as a fill in if you will on the residential and consumer side..

Understood. And I guess separate question on credit; it seems like credit recoveries and just overall credit trends continue to get better each quarter. I guess as we sort of look through out looking at your sort of reserve levels pre-crisis which were around between around 1.35.

I know it’s hard to say, but in general, should we expect reserve ratio which is about 1.67 today to trend closer to those free cash levels?.

I think we look at that each quarter and that we see improvement within asset quality, our economic environment; and the composition of our portfolio and growth will make that determination, but not would be an unlikely direction..

Got it. Thank you very much..

Thanks Ebrahim..

Our next question comes from Casey Haire. Please go ahead..

Hi. Good afternoon, guys..

Hi Casey..

Hi Casey..

So maybe just a follow-up on the C&I front. Is the -- just wondering because the loan yields were up, nicely up 19 bps.

Was there some success fees in there and was there a prepayment penalty that you guys get some serious, some decent size pay downs, which boosted the yield and at the same time pushed down some of the -- muted the loan growth so to speak?.

There were some success fees and there were some agency fees mixed in there. So really kind of a combination of things in the quarter, Casey..

Okay.

And similarly on the commercial leasing bucket as well that was up decently as well?.

Well, leasings are bit of odd duck, if you will because as you know that’s the portfolio we’ve been shrinking down out for a while. And yields are going to bump around depending on very kind of transaction specific types of element. So that’s the tough one to give you direction on way or the other..

Okay. And then in the securities book, Kent, I was a little surprise to hear you say that the yields delta was only 5 bps on the quarter, obviously the yield curve was not -- didn’t move favorably over the quarter. So I was little surprised to hear that especially given that I think you guys were looking out to pull in duration.

Can you just give us a sense as to how that reinvestment risks sort of narrowed and where is that as we stand today looking forward?.

Yes. First of all thanks we’re a little bit better at that point than they are today. And so I think directionally I have to say that given all the same facts we’d probably be looking at a wider differential at this point in time.

But back to the third quarter, it can move around and it was just one of those things sort of the yield rolling off was fairly low. And compared to the past periods, the reinvestment yield was a little bit higher.

But I think the bigger point here is that with a lower flatter curve at this moment -- the things we’re buying at this point are just going to be lower yielding than they have been..

Okay, understood. And then just one final one, a housekeeping question. The tax rate a little bit higher this quarter than we’ve seen year-to-date. We’re averaging around 31% year-to-date.

Is that a decent rate to assume going forward?.

Well, the rate is going to move up a little bit as income increases. And then conversely to the extent income is lower, the rate is likely to come down a little bit. And that’s just a mathematical result of the fact that we have pretty much fixed levels of tax credit to energy or low income housing credit.

And so the variable is the income level which will drive that rate a little bit higher like I said at higher levels of income..

Okay. Thank you..

Yes, welcome..

Thank you..

And our next question comes from Joe Morford. Please go ahead..

Thanks. Just a different take on the loan question.

You did actually see a pick up in the consumer particularly in home equity and the resi side and I was just curious what drove that, was it reflective of the strong economy or were there any kind of special promotions or anything this quarter?.

Right. A couple of things, Joe. First of all, on the resi side as gain on sale has shrunk, if you will, that’s obviously given us more incentive to retain those loans on balance sheet. So that’s part of what we’re seeing on residential mortgage.

The other thing we’re seeing if you compare back to say a year ago is the refinance activity has definitely slowed. So what that’s creating is reduced churn in our existing portfolio. So those elements just from a balance sheet [decisioning standpoint have been accretive for resi mortgage volume on our balance sheet.

I would say that we’re doing well in the mortgage business so that’s a business driven largely by purchase right now. So it’s a good market for us. The challenge frankly is a lack of inventory. Inventory levels are pretty restrained right now, a [threat in] volumes but activity for us is good. Home equity is benefiting from I think a better economy.

We’re seeing better utilization rates. And again similar to the resi mortgage situation as refi has slowed that’s helped turn off the bottom of our home equity portfolio improved for us so that’s helping us retain loans on the balance sheet..

Okay. That’s helpful.

I also was curious about just to quantify the impact of this one commercial credit on the provision just trying to -- without that what kind of provisioning rate would you be looking at or another way to look at it? Should we be expecting any kind of provision in the next few quarters?.

Let me ask Mary to answer that one for you..

I think again, it will really depend on what we see in activity in the portfolio in terms of loan growth and asset quality metrics and some of the composition of what that growth is and the dynamics behind that..

Okay.

And then I guess maybe one another one just, the investments held-to-maturity were down a little more this quarter, anything driving that and kind of what expectations should we have for future runoff?.

Nothing dramatic there; it’s really been a continuation of the existing strategy. And I mean the only thing to take note of is to extent interest rates continue to be at low levels; we did see some increasing pay downs. That’s always a possibility. We had a little bit more, little bit more higher composition of mortgages in the HTM versus the AFS.

And so that’s the most heavily influenced by pay downs..

Okay, makes sense. Thanks so much..

Yes. Take care..

And our next question comes from Jackie Chimera. Please go ahead. .

Hi, good afternoon everyone..

Hi Jackie..

You’ve mentioned higher rates in the HELOC utilization.

Did C&I utilization move at all in the quarter?.

Not much. So C&I has been driven more by local market M&A type activity. And we’ve not seen a whole heck of a lot of utilization increase as the economies expanded out there. I mean Jackie you know that we’re not a big working capital town, more services oriented. So that’s not surprising to us..

So, is it possible then that some of the small businesses or kind of one man shops are using their home equity lines instead of a traditional C&I line as they expand business?.

Yes. That’s an interesting insight and definitely we’re clearly seeing improved utilization in that part of the business. And as you know a number of small business owners are kind of a hybrid between first/small business clients for the bank..

Okay. That makes sense.

Has it been a study movement over the past couple of quarters that the HELOC utilization has increased?.

Yes, it’s been reasonably smooth and it’s definitely a different dynamic from quality year plus ago..

Okay.

And as part of the growth in the quarter also from just new generation of home equity lines or was it primarily all utilization?.

Some of it was new lines, but I would say that existing utilization is probably a bigger percentage, bigger piece..

Okay, great. Everything else I have has already been asked. So I will step back. Thank you..

And our next question comes from Jeff Rulis. Please go ahead..

Thanks. Good afternoon..

Hi Jeff..

Hi Jeff..

On the mortgage banking side on the income statement, I guess I’m still little baffled about a number. I think you’ve given guidance on the servicing alone is at its trough at about $2 million a quarter number; we’ve had a couple of quarters now below that.

Is there any other adjustment that’s going to that line and would you expect this to pop back north of two?.

If for retaining all the mortgages, I wouldn’t expect that to pop-up. There can be downward adjustments related to mortgage servicing rights. So again, as mortgages are paid down, that’s going to affect the calculation of the servicing rights.

And that can be a variable in the equation and that’s really the other variable that we encountered this period..

So, call it -- are we still holding firm on that $2 million guidance or is that changed? And would you say that the variance is on MSR adjustment?.

Well, since we just had a figure lower than $2 million, I wouldn’t hope to $2 million. So admittedly it could be as low as what we experienced this quarter..

Okay. Maybe I’m not expressing the question right. So the MSR adjustment, is that the difference below the $2 million figure or we’ve broken through and that….

Yes. That’s the difference..

Okay, fair enough.

And I guess related to that, the refi activity so far in Q4 last in recent weeks, have you seen that pick up?.

A bit; it’s picked up a bit. But overall volumes, so I think in the quarter, the MSR issue is what created that delta versus the numbers we’ve been discussing previously.

But as we look forward, our overall production volumes are off from prior high refi periods and that will over time impact our overall servicing portfolio as if less is coming through the door and obviously some stuff goes off that can impact our fee income as well over time..

Sure. Okay, thank you..

And the next question in queue comes from Brett Rabatin. Please go ahead..

Hi, good afternoon..

Hi Brett..

I wanted to -- I guess just think (inaudible) a little bit, you guys have had faster growth in the loan portfolio in the past two quarters and traditionally strategy has been to reduce expenses 1% or 2% and driving the revenue if you can and it seems like this year you have a more concerted effort actually to grow top-line revenues at least the loan portfolio and maybe expenses are kind of flattish.

Can you guys kind of maybe just talk about if there has been any thought on a change in the operating strategy? Do you want to become more of a growth-oriented company? And as you go into 2015 should the traditional metrics that you guys trying to hit change with more growth with that?.

Yes. So, I think in a vacuum we still believe that all things being equal, we can improve efficiency. But I think you point to a positive development in the market situation here. And that is, I think the market, we think the market is giving us a pretty good set of growth opportunities whether it’s down the loan side or the deposit side.

And so, we’re not going to hesitate to invest where we need to, to further that opportunity.

So, in the past we’ve talked about being kind of if we can pick up call it 2% in savings in a year on an absolute basis that would be our base goal as we look forward and that’s still our goal, but what is going to get overlaid on top of that are the ability to retain talent, the ability to or need to bring on additional systems as volume levels widen out and we’re clearly seeing volume levels widening out in both our residential, retail and commercial businesses.

So, I think we’re still a company that would look to keep expenses flat. But as for creating a net reduction that might be in the path of parallel to just greater opportunity out there for us right now..

Okay. And then I guess the other thing is related is just thinking about expenses run rate and going forward.

How much is increased regulatory oversight having an impact on what you spend these days or can you talk about maybe the contribution of that for keeping you from reducing expenses on an absolute basis maybe?.

Sure.

Mary you want to handle that?.

Sure. Well, I think we are seeing a need to continue to invest given the proliferation of regulation and the changes that are coming out. So, I would say on a direct basis really as we look at what we’re investing, strictly from pure compliance-related professionals, we’re up to about $5.3 million this year and that’s up slightly.

And we’ll continue to see the need to add resources in that area just to stay abreast of that is changing..

Okay. That’s very helpful. Thanks for the color..

Yes. Take care, Brett..

(Operator Instructions). The next question comes from Casey Haire. Please go ahead..

Hey guys, a quick follow-up.

Can you mention you have seen some pay downs in the securities book, just curious premium amortization this quarter what was that number?.

It was the same figure as in the second quarter. So $13.5 million..

Okay, got you. Thanks. And the outlook, I mean given some of this refi way that you’re starting to see kind of crop-up again.

Is there an expectation that we’d start to see that as a headwind going forward?.

It’s definitely possible..

Okay. Thank you..

Yes Casey..

The next question comes from Aaron Deer. Please go ahead..

Hi. Good afternoon, everyone..

Hi Aaron..

I think most of my questions have been answered, I just had one follow-up for you Peter. Your comments about -- I think you referred the market is being reasonably rational.

Just -- is that referring to rates or structure or both if in fact you’re referring to kind of competitive pressures? And then along those lines, where are new loan yields coming on in this past year relative to earlier in the year.

Are we still seeing similar pricing or is there still downward pressure on that front?.

Yes. Well, since Mary sees all the pricing coming over the trans, I’ll push that to her. On the competitive side, I think really my comment was more towards terms and conditions than de-pricing.

And certainly kind of the mid-market level, which frankly is a little bit more of a local phenomena here competitively, we’re seeing what we will consider to be reasonable structures through the pipeline.

And then obviously as you push out to more trophy like sizes then things get a little bit loser, but still I think within the realm of reasonableness.

And on the yield side, Mary you want to touch that?.

I think given the liquidity within the Hawaiian market that there is a great deal of competitions especially on the quality credits. And so we have seen pressure on pricing within that. And consistent with where the curve is moving also..

Okay.

Are we talking relative to earlier in the year a few basis points down or double-digit basis points down?.

I think a few basis points down with a few outliers here and there..

Okay. Thanks guys..

And at this time we have no further questions..

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 clarification on any other topic discussed today, please feel free to contact me. Have a great evening everyone..

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect..