Bank of Hawaii Corp (BOH) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2003 Bank of Hawaii Corporation earnings conference call. My name is David, and I will be your coordinator for today.

At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. If you require operator assistance key star 0. This conference is being recorded for replay purposes.

I'd like to now turn the presentation over to your host. Please proceed.

Hello everyone. My name is Cindy Wyrick and I'm head of Investor Relations for Bank of Hawaii Corporation.

I'd like to thank all of you for joining us today as we review our financial results for 2003 and introduce our new three-year plan. Joining me today our Chairman and CEO Mike O'Neill and our President and Chief Financial Officer Al Landon.

The comments today will refer to financial information included in our earnings announcement earlier this morning. In addition there is a more colorful Power Point presentation of these financial information that's also available on the website. It's at www.boh.com.

And now without further adieu I'd like to turn over the podium to Mike O'Neill.

Good morning. Thank you all for joining us today. We've got lots of information to share with you.

I'll begin by summarizing Bank of Hawaii Corporation's performance against the three year objective we established for ourselves in early 2001. Al Landon, our President, will then review fourth quarter 2003 results. We'll also summarize the key elements of our new three year plan. We'll then take any questions that you may have.

But first, greetings to our lawyers in warm and sunny Honolulu.

Our governing objective has been, and will continue to be, maximizing shareholder value over time. Our goal is to consistently achieve top quartile performance for our stock when measured against the 51 banks included in the Bloomberg Bank Index.

As we said in 2001, we continue to believe the that keys to achieving our governing objective will be a function of continuous improvement in customer service and sales, while maintaining our superior risk and capital management strategies and processes. These key themes have served us well in the past three years.

We swiftly resolved our credit problems and instituted new policies and procedures to ensure such problems do not recur. We sold, discontinued or fixed the businesses that were generating returns below their cost of capital.

Without the distractions of an underperforming far-flung international network and a troubled loan portfolio, we were able to concentrate our efforts on the customers in our core markets. Our quarterly consumer and overall customer satisfaction numbers have shown significant steady improvement, as have our employee surveys.

We've also worked hard at improving the efficiency of our business. The most significant achievement of our broad ongoing efficiency program is our systems conversion project, successfully completed in the third quarter of 2003. Al will provide a summary of the financial impact of the conversion in his presentation.

In the past three years we liberated and returned to our shareholders more than $800 million of capital that had been locked up in value-destroying businesses.

As you'll see from the next chart, our operating performance has steadily improved. As a result of the divestiture of unproductive assets, our average balance sheet footings declined from approximately $14 billion in 2000 to around $9.5 billion in 2003.

Despite the significant buy-back activity during the three year period, our capital and liquidity levels remain very strong. Most important of all, our returns have jumped.

Our earnings per share grew at an average compound rate of nearly 20% during the three year period.

In 2000, our net income after capital charge, or NIAC, was a negative $70 million. In 2003 our NIAC was a positive $21 million. That translates into $91 million in annual incremental value creation.

Our return on equity grew from an anemic 9% return to a respectable 15%. As Al will highlight our return on equity rose to 18.5% in the past quarter as the cost of implementing the systems replacement project were fully absorbed in the year -- in the first three-quarters of the year.

As you'll see in the far right column we believe we can continue to meaningfully increase our earnings per share, NIAC, and returns on equity in each of the next three years. The market has rewarded us for our accomplishments. 2001 and 2002, Bank of Hawaii was the best performing stock in the Bloomberg Bank Index. In 2003 we again achieved top quartile performance as we were the 10th best performer. In the three year period as a whole we were comfortably the best performer in the index.

In a down market overall, in a flat market for bank stocks, an investment of $100 made in B O H on January 1st, 2001, was worth $238 on December 31st, 2003. While we're certainly gratified, we're not satisfied. Most importantly we're not complacent.

We have a strong broad management team that is heavily invested in the stock. We have institutionalized the processes we use to manage for value. The resurgent Hawaii economy gives us further confidence that we will perform exceptionally well in the years ahead.

Now, Al will take you through the fourth quarter results and our new three year plan.

Thanks, Mike. Good afternoon, and good morning back in Hawaii to everyone.

As Mike indicated, I have some additional information to cover today, as we address both the 2003 financial results and the 2004 through 2006 plan for Bank of Hawaii Corporation. I'd like to start with some comments about our 2003 financial performance.

Mike indicated we had good year, and a good fourth quarter. For the year 2003 our earnings were $135.2 million, or $2.21 per share. That compares to $121.2 million, or $1.70 per share in 2002. Our return on assets was 1.44% for the year, and our return on equity was 15.02%. Our fourth quarter earnings were $38.7 million, and 66 cents per share. These results compared to net income for the fourth quarter of 2002 of $28.9 million, or 44 cents per share. And compared to the fourth quarter -- and the fourth quarter income for 2003 was also up, from $36.7 million, or 61 cents per share in the third quarter.

Our return on assets for the fourth quarter of 2003 was 1.66%, and our return on equity was 18.59%.

Overall, a very solid quarterly performance for the Bank of Hawaii.

Our results for 2003 and the fourth quarter were due to good credit quality, as we recognized no provision for loan losses, completion of our systems outsourcing, which reduced our operating costs, and our other efforts to reduce expenses.

Additionally we had a nice increase in net interest income in the fourth quarter. Our net interest margin was up 20 basis points from last quarter, to 4.35%. Compared to last year's fourth quarter, our net interest margin was up 30 basis points. For the year, net interest margin was up 24 basis points, to 4.23%.

In the fourth quarter, the increase was largely due to improved rates on our securities portfolio, as we reinvested at higher rates and as amortization of premiums slowed significantly. And for the year the improvement was largely due to improvements in funding, where our non-interest bearing deposits increased and rates decreased.

Non-interest income for the year 2003 totaled $198.7 million up slightly from 2002. For the fourth quarter, non-interest income was $49.4 million, down slightly from $53.8 million in the third quarter.

The third quarter included a large loan prepayment fee and mortgage banking income also decreased due to slightly -- due to lower origination and sales volumes. Our fourth quarter non-interest income was generally in line with our recent trends.

For the full year 2003, non-interest expense decreased significantly, especially in equipment and other expenses. The improvement was even better when we removed the cost of our technology replacement project.

We were also able to decrease expenses in the fourth quarter compared to the third quarter and compared to the fourth quarter of 2002.

Regarding salaries and benefits, we've included some additional information in a new table to our earnings release, table number 7. As you can see, our salary expense declined in both the fourth quarter and for the year 2003. These decreases are in line with decreases in the size of our work force. However, other compensation costs have increased, most notably equity-based compensation. That increase is largely due to performance accelerated vesting of restricted stock granted to our management team to strengthen the link between their interest and our investors' interests.

During the fourth quarter we also increased incentive compensation, which is linked to specific income levels. We also recognized a gain of $2.4 million on the curtailment of a retiree life insurance benefit. That served to offset the effect of separation expenses.

For those of who you follow Bank of Hawaii regularly, you know we have outsourced our mainframe technology since the middle of 2003. That initiative was accomplished on schedule and at our budget of $35.5 million. The benefits have been very noticeable.

We now have an integrated technology platform, a simplified operating structure, we've improved customer service, and we're saving over $17 million a year. We want to again congratulate our people and our vendor Metavante on a job very well done.

Tables 11-A and B provide a comparative summary of business segment results for the fourth quarter and the year 2003.

In the fourth quarter the retail and commercial segments both reported good performance and significant improvement when compared to the fourth quarter of 2002. Compared to the third quarter, our retail net income after capital charge decreased slightly, due mainly to lower mortgage originations. Our commercial NIAC increased due to reduced loan losses and expenses. Both of these segments benefited from a higher level of assets.

Our investment service group nearly covered its cost of capital, as expenses increased just slightly. The treasury segment reflects the impact of movements in market rates, given the company's interest rate sensitivity. With the changes in interest rates in the fourth quarter, we repositioned more of our portfolio, thereby increasing interest income in this segment.

We incurred no systems replacement costs in the fourth quarter, which in addition to the cost of excess capital, have been allocated to the treasury segment. As our capital levels continue to be reduced, the amount of excess capital and its cost also decreased, further improving the NIAC of the treasury segment. And with our improved performance in reduced capital levels, we're now seeing growth in the positive NIAC for the company as a whole.

Got to wet the whistle here a bit.

I'd now like to comment on credit quality. During the quarter our nonperforming assets decreased to $31.7 million from $40.1 million at the end of September and $54.4 million at the end of 2002. Contributing to the quarterly decrease was the sale of a parcel of foreclosed real estate, completing the resolution of that credit. We recognized a $2.6 million gain on that sale.

There was also a decrease in the inflow of nonperforming loans, $2.3 million compared to $3.2 million in the third quarter of 2003. The elements of our nonperforming assets are summarized in table 9 to our earnings release. Our nonperforming asset levels are now at the lowest level in many years, and represent 55 basis points compared to total loans.

As I mentioned, we recorded no provision for loan losses in 2003. Net charge-offs were $13.8 million for the year, and $3.6 million for the fourth quarter. Both are significant improvements from comparable periods of 2003, which included the write-off of an $8.8 million investment in a leveraged aircraft lease. Our credit quality and loan losses continued to benefit from the stable Hawaii economy as well as our improved credit processes and collection procedures. For the year, net charge-offs represented a loss rate of 25 basis points.

Our higher risk exposures, including air transportation, are summarized in table 8. These exposures remain approximately the same as at September 30th. However, we continue to see other improvements in credit quality.

With the overall improvement in credit quality we were able to continue the reduction of our allowance for loan losses. The allowance was $129.1 million at December 31st, down from $3.6 million at September 30th, and down $13.8 million from year-end 2002. Although we did not take provision for loan losses in the last six quarters, the allowance still represents 2.24% of total loans. We'll -- we will continue to evaluate the economic environment and the level of credit risk in our portfolio each quarter. And we will recognize a provision for loan losses to the extent necessary to maintain the allowance at the necessary level.

As to our balance sheet, we had both loan and deposit growth in the fourth quarter. Near the end of the fourth quarter we purchased approximately $120 million worth of second mortgage loans to replace purchased loans that had repaid faster than we had expected. We continued the trend of the last two years by reducing the level of higher costs, longer term funding, both in deposits and borrowings.

These actions helped to mitigate some of our asset sensitivity, which had increased earlier in the year due to a decline in short-term interest rates. Our balance sheet at December 31 remains positioned to benefit from rate increases.

Our liquidity position remains quite strong, which gives us flexibility to respond to changing market conditions.

We were satisfied with the results of our share repurchase program in the fourth quarter. We purchased $1.6 million -- 1.6 million shares, which brings our year-to-date total for the repurchase to 9.7 million shares. Through January 23rd we've returned over $865 million worth of excess and liberated capital to our shareholders. We plan to continue to make repurchases in a disciplined manner. As we've previously indicated, the volume and timing of share repurchases depend on market conditions that are very difficult to predict.

Another significant development in 2003 was the increase of our dividend level. Our board declared our first quarter 2004 dividend of 30 cents per share, consistent with the dividend level of last quarter, but up from 19 cents that we maintained prior to that.

Now I'd like to provide some additional information on our three year plan.

As you can tell from Mike's introductory comments our management and directors are very enthused about our plan for 2004 through 2006. Our entire management team was involved in preparing our 2004-06 plan. We began by evaluating the results of our current strategy and the economy in Hawaii. Every unit proposed ways to improve their business. Most in ways that build on the progress we've made over the last three years. So from a broad perspective we've reaffirmed our strategy of building value by improving the elements and the whole of Bank of Hawaii.

We also reaffirmed our vision, exceptional people building exceptional value for our customers, our island communities, our shareholders, and each other. And as Mike said we also reaffirmed our governing objective, maximize shareholder value over time.

Our plan is built on concrete and specific actions in each business unit. Those actions are not bold or risky, but taken together will continue to improve our performance and build value.

The plan can be summarized to include five major actions. Accelerate growth in our markets, better integrate our business segments, continue to develop management teams, improve operating efficiency, and maintain our culture of dependable risk and capital management. Our plan for 2004 through 2006 does not change the direction or pace of Bank of Hawaii. And it builds on the strategies that have been successful for us over the last three years.

In a few minutes I'll tell you more about each of these major themes but first, what do we think will result from this plan? We believe that we can increase operating income and net income at a 10% average rate over the next three years. By providing this guidance, all the customary cautions apply. And we recognize that lots of changes can and probably will occur over the next three years. However, our management tam's -- management team believes that it's realistic that we can achieve further growth and improvement for Bank of Hawaii, even when we consider the eventually return to provisioning for loan losses, as we illustrate here in 2006.

Of course, our view of future performance has to be put into context of the economy. So what do we see for Hawaii? Our plan is based on rising interest rates that we believe will occur gradually, starting in mid-2004. We expect inflation in Hawaii to raise above its recent 1% level, but to remain below 2%. We've had lower inflation than national levels for the last few years. Our economy has been growing in Hawaii as has employment. We expect those trends to continue.

We've seen tourism and other sources of revenue increase in the last two years, and we expect that will continue. And lastly, we did not include the effects of potentially adverse geopolitical or other events in assessing our financial results for the 2004 through 2006 plan. We found that the Hawaii economy is pretty resilient to shocks, and expect that will continue.

Now I'd like to elaborate a little bit on each of the five major elements of our plan.

Accelerating growth and revenues is fundamental. Hawaii is a good source of deposits, and loans in our market have tended to perform well. Our plan includes initiatives to improve our service levels, including our convenience, attractiveness, and accessibility. We will be evaluating the positioning and functionality of all of our delivery channels. We're continuing to improve our products, such as broadening the type of consumer loans that we offer.

Our people have been participating in a structured program we call Excellence In Sales and Service for over a year now. This program gives all of us improved sales tools and focuses on better understanding customers' needs. This needs-based sales approach has produced encouraging early signs of progress, like improved customer satisfaction levels and growth in accounts and fees. And as we better understand our customers' needs, we're deepening our relationships and increasing the number of services we provide.

Our high market share and low cost/sell ratio give us a good opportunity for revenue growth, but we've kept our growth expectations reasonable. Our anticipated scenario is a 4% growth rate in revenue. This is about the same rate we expect for real growth in the Hawaii economy .

We also plan to better integrate our businesses. Bank of Hawaii operates on a line of business basis where managers focus on customers, products, and geographic markets. This works well for us and will continue to be our basic structure. But our plan focuses on increasing the number and value of service we provide to each customer.

We're implementing many initiatives focused on helping our business units and their people cross internal organizational boundaries to provide better service and to help each other in selling services that build value for our customers. Today we're beginning our One Bankism program, that will focus us all on using all of the bank's resources to meet customer needs. We're strengthening our systems and procedures to major referrals and cross-sales between business units. We've been measuring customer satisfaction regularly, and we plan to strengthen and broaden our goal setting and measurements in this important benchmark.

Our direct marketing programs have been very effective and we plan to use more direct marketing. And we will focus on streamlining our organization and reducing our organizational complexity and other barriers that could inhibit our ability to refer and deliver excellent services between business units.

We think that Bank of Hawaii has developed a good senior management team over the last three years. We plan to deepen that team and rely less on imported talent over the next three years. We're expanding the internal process we use to identify business leaders and managers and we will focus on providing better education, training, and opportunities to our next-generation of leaders.

We continue to evaluate and improve our incentive program. These include better linkage of incentives to value creation in some areas, and increasing equity-based compensation.

To ensure that we have opportunities for all of our potential leaders, we're developing specific transition and succession plans for all of our key positions. We've worked hard to put improved processes in place so that we are less dependent on individuals.

And importantly we're going to continue our focus of maintaining strong connections with our communities. Our strong support for local activities has been very important in our market .

We can and expect to operate more efficiently. The success of our systems conversion has demonstrated that we can lower our costs and improve our service at the same time. Our plan includes several other initiatives like check imaging, where we can improve our processes and further reduce costs. We'll also be evaluating our partnering relationships to find more efficient ways to provide service to customers.

We plan to use our space more efficiently. We're evaluating our branch and ATM systems to optimize these delivery channels. We also plan to improve our wire cash management and electronic banking systems during 2004.

We've developed good risk and capital management processes that we plan to continue. We're particularly proud of the results of our risk management efforts. Our credit quality is the result of process improvement and controls that are a source of strength, and key to our future plans.

I'll discuss our capital plans more in a few minutes.

But first I would like to mention one of our favorite concepts, operating leverage. This is the impact of the spread between the growth rate of revenue and expense. Growing revenue and controlling expense add leverage to the growth of operating income. Growing business is our preferred strategy. But as you can see, if revenue doesn't grow at high rates, operating income can still increase at double-digit rates when expenses are controlled. Our plan is flexible in this regard.

As I mentioned earlier we plan to grow revenue at 4% and hold expenses flat. But if we find revenue growth risky or elusive, we have room to reduce expenses and still achieve a 10% growth rate in operating income. Our entire management team is increasingly focused on this concept.

Earlier I showed you the level of income that our plan is intended to produce for Bank of Hawaii over the next three years, an increase from $135 million to $178 million in 2006. Again, recognizing all the caveats that must apply to future forecasts, we've presented some other performance indicators that we expect will result from our plan.

Most importantly, we expect our net income after capital charge, or NIAC, will grow from $21 million in 2003 to over $90 million in 2006. Our other performance measures grow to very respectable levels, including return on assets of 1.65%, and efficiency of 53% in 2006. Our return on equity, like our NIAC, improves at a faster rate due to the growth in income and improved use of capital.

For purposes of illustration, our business unit NIAC for 2004 looks like this. Some units with nice returns, a few units where we have opportunities to continue improvement, and on the far right, the cost of excess capital. But when we compare 2004 to 2003, we can see the particular benefit from reducing our excess capital.

Another way to illustrate the improvement in our NIAC and risk-adjusted return on equity is to look at the relationship between our capital, the cost of that capital, and our return on capital. You can see that at the end of the year 2000 we had a lot more capital, over $1.3 billion, compared to $793 million at the end of 2003. In 2000, we estimated that the cost of our capital was greater than our economic income, thus we had negative NIAC. By exiting or improving our poorest performing business units and returning over $850 million to shareholders, our income in 2003 exceeded our calculated cost of capital at 11%. And with the growth in income and decreases in capital by 2006, our risk-adjusted income should exceed the cost of capital by over $90 million, as I said earlier.

I do want to show you the capital levels in our 2004 through 2006 plan. As I indicated, we begin 2004 with $793 million, or an 8.4% leverage ratio. We plan to reduce that to about $733 million at the end of 2004, which we think will then represent about 7.4% of assets. As assets grow, in 2005 and 2006, the leverage ratio reduces to 7%. That capital level still includes a cushion, on top of our internally calculated needs, but we think 7% leverage ratio is a good intermediate level of capital for Bank of Hawaii.

As you know there are risks in achieving any plan, and ours is no different. We're counting on improved sales and service techniques to increase our revenues. We also get better growth from more closely integrating our business units, what we call a community bank model. We're counting on the effectiveness of our expense and risk management controls as we have in the last three years. And, of course, our plan is vulnerable to the traditional banking and operating risks.

But even with the risks, our management team and directors are very enthused about our 2004 through 2006 plan. We're confident that we can achieve the plan. We have a good economic environment, the best in Hawaii in many years. We're counting on growth, but at a very reasonable 4% rate, and we can adjust if that growth rate isn't practical.

We still have many ways to improve our efficiency. Our team is pleased with our efficiency improvements over the last three years, but we still haven't achieved the industry average for that measure yet.

We have solid management tools and processes that have now been tested. We're far less dependent on outside specialists to determine and implement our strategy. And most important, we have very good hard-working employees, dedicated to building value at the Bank of Hawaii.

That concludes my comments for this afternoon, and Mike and I would now like to take questions. I think we'll begin with questions from the group here in New York.

[inaudible] .

[inaudible] that we've looked at, that business was kind of the last one that we turned our attention to. We had the loan problem, then we had the improvement at retail, and the investment services group, as we called it, it performed quite well in the late 90s, like all investment groups performed well in the late 90s.

When the market slowed, I think some of the shortcomings became apparent, and we, among other things, began to look at our control processes, our compliance, and felt that those could be beefed up. So we have been in the process of doing that here for, what, 15 months? And I think that effort, while not complete, is certainly well underway.

That business, just like many others, I think, can benefit from precisely what you talked about, looking at the efficiency as well, but at the end of the day you've got to sell. And we, with that One Bankism concept, I think we'll have both our retail people, as well as our wholesale people, focusing lots of attention on selling the services that are provided in the investment service group.

We are far and away the largest player in Hawaii, although there certainly are people from the mainland who come in and compete for that business. We are, I think it fair to say, the only fully integrated business of the type in Hawaii, and there are a lot of people who continue to want to work with a local provider.

So it's not one simple answer, it's a variety of things, focusing on both the efficiency incross-sell and finishing up the remediation efforts that we've been undertaking.

Adam, I think you touched on sharing with partnership arrangements during the year. We entered into a venture for equity management and our performance has improved nicely throughout 2003. We think that gives us a little bit better product set. And we're going to continue to look selectively in other areas of investment service for opportunities to partner with people who have a bigger scale or who bring expertise to the table.

Fred.

Just looking through your 2004-2006 plan, I take it that you're planning on 4% revenue growth, which suggests that 0% or flat expenses through 2006. Is that the two operating assumptions to get your operating done?

Yeah. That's sort of what was the synthesis of all of the business units' expectation, Fred, for their growth rate in revenue and what they could do on expenses. We get a little bit of variation among those units.

Couple of questions. One is, can we expect managed revenue to come in a little bit stronger than that, that we could get additional operating leverage? In other words, more flow to the bottom line?

We would love that. We're pretty cautious predictors of the future. Mike, you might want to comment on that.

I think you're familiar with his concept, operating leverage. Yeah, the answer is yes, and what we don't want to do, and we didn't want to do last time, is present a plan that was the edge of the envelope.

What we've tried to do is put up something that is realistic, and obviously we'd like to beat that plan. 4% revenue growth and flat expense growth struck as something that was achievable, believable, and more than that, we were uncomfortable doing, but will we strive to do better? Of course.

One final question on that then. I note in your plan that you have a margin of 412, for 2004, and I think -- 410 for 2004 and 412 for 2006.

Yeah, that sounds right.

Your margin this last quarter was 435, so I guess there's two questions. Why should we think the margin should shrink going into next year, and secondly, do you have a feel for what the normalized margin for Bank of Hawaii should be over time?

I guess we would say that those rates of 4.10 through 4.12, kind of in that 4.10, 415 category, would be what we would expect normalized going forward and probably expect to manage, too, from a risk tolerance standpoint. I think we got very good -- no, we got very fortunate in the fourth quarter with some repositioning that we did. We benefited from the slowdown of prepayments.

We're a little bit cautious on expecting that it's going to drop more dramatically than it has so far. But there probably is a little bit of up side there as well.

Any other questions here from the floor? This might be -- Adam? Another one?

[Inaudible] Expecting the Federal Reserve to raise rates, at least over -- by 2006, which isn't a stretch, but if the Fed doesn't raise rates all during this year, any significant change on your expectations?

Well, rising rates probably help us, and that may be a little bit of an element in why we've come back with a little bit lower net interest margin expectation for 2004, but it's not the only thing that will contribute to us making our earnings for 2004. Mike, anything you want to add to that?

Pretty dicey game.

We've been predicting -- I've learned not to overpredict on what rates are going to do, so we've got a corridor in there. Our treasury people have had very good success. I tip my hat to them every day. They've really helped us out here in the last several quarters.

Could you talk a little bit about your approach towards equity compensation moving forward, the use of options in particular, versus restricted stock, and how the comp plans that went through the fourth quarter reflect that, and any future plans about expensing stock options?

We've kind of transitioned over the three-year period from a heavy use of options at the beginning of the three-year period to a more balanced use here at the end of 2003, Fred. Earlier in the year we granted a large group of our officers restricted stock interests, and put performance accelerators on those.

The significance of talking about where we fall in the performance of banks in terms of total shareholder return is directly correlated to the accelerators that we put in those restricted stock plans. As we go forward we're going to focus on kind of rebalancing that equation. We sense that the market practice has shifted away from such a heavy use of options and a more balanced use between restricted stock or restricted stock units or other equity-based compensation, but lacking some of the heavy leverage that options have. So we think we're moving in a competitive direction sort of with market practices, and I think that's what you should expect to see from us going into 4 and 5.

Mike?

Yeah, as it relates to expensing options, we'll expense -- we will do what we need to do. At this point, I guess we've been less than completely convinced that that was a sensible thing to do, but we will certainly not be out of step with the industry.

Our stock option plan ended this year, the ten-year plan. We are going to go to our shareholders and ask them to approve a new plan. Because we have significant unexercised options out there, there's an option overhang, so we worked with ISS and others to calculate what the appropriate level was, and you think we have come up with an appropriate level, which you will learn about shortly, but as Al said, my guess is in line with the industry we will move, to some extent, move toward restricted stock and less toward options. Fundamentally I'm not sure that's a sensible thing to do from a shareholder perspective, but it is what it is. And I think if you're way out of line people will react, so we'll keep looking at it.

Would this be a good time to take some questions from our telephone base?

Go ahead and let questions come through, operator, if there are any.

Thank you sir, and ladies and gentlemen, if you have a question or comment at this time please key star 1 on your touch-tone phone. To withdraw your question or if your question has already been answered please key star 2. Once again, that's star 1 for questions.

We do have a couple of questions on the phone.

Our first question comes from Joe Morford from RBC Capital Markets. Please go ahead, sir.

Thanks. Good morning or afternoon everyone.

Question was, looking at the projections for, I think 04, it says average assets of $9.94 billion. I was wondering, how much of the increase there is coming from loan growth and how much from, say, leveraging up the investment portfolio?

Most of that, Joe, is coming from loan growth. If my recollection is right, we're about $500 million increase in average assets, and I would say about $350 million of that is from the loan portfolio.

About 7%. A little under.

Yeah, 7% growth rate.

Okay. And what can we expect in terms of the mix, where you might see that increase? And I guess related to that, it looked like in the fourth quarter, the -- much of the growth came in this other consumer category, and I was curious what that is, too.

I think what we're looking for in 2004 is pretty balanced growth across all segments of our portfolio. We would use mortgage to kind of achieve that level, depending on variations of what the economy does and what the interest rate environment portends for loan growth, but our pipelines coming into 2004 look pretty good in all of our industry groups.

One of the things that had happened over the course of the last three years, and I will say it, it has declined. But it has been very difficult to look at our loan statistics without understanding both inflows and outflows.

In other words, there has been growth but there's also been declines based on restructuring of the portfolio that were managed down, and that process continued in 2003 in both the third and fourth quarter, but I'm happy to say that it looks like those assets that we want to manage away, that that effort's largely been done, and so I think it is going to become more transparent to see how we're actually doing in terms of drawing those assets. That's been quite difficult, given the nature of the plan that we had in place, but I think will become much, much easier going foreward. But as Al said, I think what we are counting on is really all of the units, the loan production units, benefiting from the improvements in the economy of Hawaii, and I think you should see some pretty decent growth there.

Just the other consumer this quarter, growth what exactly was that?

Joe, could you repeat, I didn't quite -- ?

Just growth in other consumer portfolio. Was that up $75 million on a base of 580 or something?

Sure. That's, I think where we purchased the home equity loans that I mentioned, and we purchased those towards the end of December so they had a smaller effect on that balance than they will as we go into 2004, but we've had pretty good results all across our consumer portfolios.

I mentioned in my comments, direct marketing. We've really had some very good success in Hawaii with direct marketing in our consumer loan categories, and that, now that we've got some good experience with it, I think we're going to keep that going.

Okay. Thanks very much.

Thanks, Joe.

Thank you. And our next question comes from Mike McMahon from Sandler O'Neill and Partners. Please go ahead, sir.

Hi, good afternoon. Two questions. One, you had some very strong core deposit growth consistently here and I'm wondering where is it coming from and what is the outlook on the deposit growth, over the course of the next year or so?

Mike, we don't have any specific segment of our deposit base that we see in particular driving that growth. It's pretty broad-based. We've got a great distribution network. We've improved our service quite a bit. And I think our marketing has been fairly effective, but I've got to give Hawaii its due. It's a very good deposit environment. It's deposit-rich, and our people, I think, have done a good job participating in that marketplace, but when we see what the other depositors in Hawaii are doing we're seeing kind of consistent growth throughout that.

We expect to see that continue. As I mentioned the economy in Hawaii is particularly strong, employment is growing, tourism, our most visible factor in the economy, is growing, but real estate is doing fantastic, our neighbor islands outside of Oahu are growing very nicely in real estate area, and increasingly I think we're going to see military spending be a growth factor for Hawaii. The military has a significant presence there and they're continuing to modernize the military and that's going to have a positive spending effect on the Hawaii economy.

On the last point, are you referring to the potential of a new military quick response force, or something like that, in Hawaii?

There are three things going on. Two of them that are well along the way, and the third is a possibility.

The first are housing privatization efforts that are not going on only in Hawaii but that are, given the significant presence we've got in Hawaii, particularly important. That privatization effort will take -- these are 50-year contracts, and every single branch of the military is based in Hawaii and is involved.

It is expected that those programs alone for the next ten years will bring in about $2.3 billion of incremental revenues into Hawaii, and that's, given the size of our economy, that is a significant amount of spending. Most of that work, something like 80% of the work, will be done by local subcontractors, so that money is likely to come, and a significant amount of it will stay.

The second big benefit is the basing of a so-called striker brigade, new modernized rapid response brigade in Hawaii as part of the 25th infantry division, and that process has begun but really they will not be fully operational, I think, until 2006. There are still some EIS studies to finish up, but we expect that will happen and that will be a shot in the arm.

The third possibility is basing an aircraft carrier in Hawaii. It's estimated that would bring an additional 15,000 people to Hawaii. Housing, groceries, etcetera, and be quite a shot in the arm. That is certainly not certain, involves a fair amount of politicking, because there would be no net increase in carriers overall in the Navy, so we would be taking one away from another location, and given the economic impact there, clearly people don't like to give them up, but strategically I think Hawaii is a logical spot. I think the Navy is going to try and make their decision based on strategic logic, and that is a potential benefit but that's certainly not one that is in place.

It sounds like the growth in deposits is coming from the growth of the economy more so than market share gains, which I guess is positive from both sides, in that the economy is growing deposits, plus you have the opportunity for some additional market share gain, recognizing you have a large percentage already.

Right. That's exactly what we tried to do. We didn't want to come up with a plan that showed, you know, a dramatic taking away of business from our competitors, who are all able. Now, do I think we're well positioned to do that? I do. All of the heavy lifting that took place in the last three years is behind us, and we have little else to do but essentially focus on the clients, and that is what we expect to do a better job of.

So were we to get some business from our competitors, in addition to the normal growth of the, you know, from the economy, that operating leverage, as Fred Cannon mentioned earlier, might well work that much more in our favor, but, again, we didn't want to come up with a plan here that looked too stretchy.

Understood. If I could ask one more, I didn't quite hear earlier, there was a question on the margin, is there -- assuming you're asset sensitive, is there a reason why the margin would not remain roughly where it is now going forward?

The reason that we have internally -- why it would not remain exactly where it is, is as rates go up, we probably do experience some prepayment that probably was at a temporary dip here in the fourth quarter. It gets just hard to gauge exactly how high and how fast they're going to go up and what impact that will have on payments. So, as I said to Fred, we were fairly conservative in our expectation there. Left some room for up side on that one.

Thank you very much.

That may be a temporary it for the calls on the phone. Any other questions from the group here in New York?

Pardon me, sir, we do have a couple questions on the phone.

Okay.

Sorry. The next question comes from Brett Rabatin from FTN Midwest Research. Please go ahead sir.

Good afternoon. I had two questions, unrelated.

First, wanted to delve back into the loan growth expectations and wanted to get a little more thoughts on what's going on with commercial line utilization And then also, what the outlook was for installment lending? And then unrelated, wanted to talk about the reserve level, just -- you said you were going to maintain it at an adequate level so I was curious what your SAP 103 methodology was telling you or what exactly you mean when you say adequate.

Let me try and deal with that loan question first. We, like lots of other people, lots of other bankers I've talked to, are getting a much better sense from our customers about their confidence in the future. But as you've seen in the national economy, Hawaii is a bit the same. That confidence has not yet translated into specific plans, into specific borrowing.

If you look at inventory levels they're at all-time lows, technology spending has been deferred. That is likely to -- that must pick up. So the same things that affect the mainland economy affect our economy. So in terms of line utilization we have not seen -- we've seen some increase but we've not seen the increase that I think will be forthcoming.

Obviously this is speculation on my part, but that seems to be the sense of the Fed and of a lot of economists, that things are building up but have not yet reached the point where they're triggering lots of incremental borrowing. That's kind of the situation we're in.

As it relates to installment lending, we have very significantly improved our performance there. In 2000 we had -- it was one of the largest contributors to the negative NIAC. We felt we needed to be in the business, we felt we could fix it, we brought in some very talented people, one individual in particular that had long experience in this business. We completely revamped our products, and we have had very significant success, both as it relates to, you know, the home equity lending and a whole range of consumer equity products, as well as doing a lot better job with indirect auto, which this fellow also manages, so that's been good news, and I think we are now perceived as a market leader in an area where we were really a laggard. I would expect whatever we can get from the market, we will get our fair share and probably more.

You want to handle the --. Yeah. With respect to the reserve, we've certainly benefited from the improvement in the Hawaii economy and particularly from our internal processes in risk management. Our risk levels, as you saw from the chart on nonperforming assets, have just improved pretty consistently and pretty significantly. We expect to see that continue.

We have been a little slow bringing the reserve down simply because there's sometimes kind of a lightened effect of improving your processes and making sure that they're standing up. So we've still got room, I think, to see the reserve come down some more.

If you look closely at the information we put on the screen, we do not expect at this point to be taking a provision in 2004. 2005 is going to be dependent upon what happens to our risk profile, and then as you might have noticed, 2006, we expect to be returning to provisioning. Difficult to estimate the level there, but we try to use a conservative number and approximate our charge-offs for that year. So that -- that's about as close as we can answer that question, I think.

Okay. But, Al, no negative provision in the near term?

We don't have that baked in our plan anywhere. That's not to say that we don't get some kind of a break-through, but as we've looked at it, this approach seems to have worked pretty well for us, and I think we'll just continue looking at it, sort of trying to align our reserve levels proportionate to our risk, maybe a little bit of a lag there just to make sure that what our systems and processes are tell us is actually deliverable.

Okay. Thank you.

Thank you and our next question comes from Jim Bradshaw from D.A. Davidson. Please go ahead.

Good afternoon. Couple of questions if I may. Al, when you talked about space usage and sort of relooking at branches and ATMs, are there -- anything dramatic planned in terms of a style and look and feel of your branches and/or the number of branches that you have open right now?

No, I don't think anything dramatic at all. Our retail folks have been spearheading the effort, and over the last two or three years benefit been going in and taking two or three branches a year and fixing them up, modernizing them, increasing the space available for sales and service, and kind of bringing them up to a contemporary standard that we've sort of defined. That's really worked pretty well.

What's worked well is the reaction from customers and employees regarding the new facilities and what also has worked well is sort of a gradual pace of doing that. We would expect to continue that.

There probably is some consolidation. I talked about integrating our business units where we might have -- pick an example, a mortgage office in one building and the rest of our facilities in another building in a neighborhood or in a community, bringing them together in one location should offer us some efficiency.

Private banking is another area where we might combine that with our retail presence, so not expecting to shrink the number of branches but maybe consolidate the people in the branches we have. Modernize those branches and try to use them although bit better.

Also taking a look at the cost side. Are we efficiently using the square footage?

A lot of our branches are in leased facilities, and those leases come up over the next five years. We'll be focusing on what's happened in market rates, but over a period of time Hawaii's market rates have come down, so we -- we're optimistic that there are opportunities to negotiate downward.

And then as we continue to make our infrastructure more efficient, better utilization of our properties there. Certainly with the outsourcing of our technology we reduced our work force, we're using all of our space now, but we may not be using it to its optimum, so to the extent we can use some of that or make that available for tenants, we're going to be focused on that pretty heavily here in the next couple of years. That, as we've found out, is a slow moving process. You're dependent upon other forces at work in the marketplace to look for occupancy, and so that takes some time, but we are focused on that occupancy cost, and that's a great place for us if we can make some reductions there on a net basis to help our efficiency ratio.

Thanks, and then one more if I may. Al, looks like you had about an 85 or 86basis point improvement in yield on your securities held for sale this quarter. And is all of that related to or most of that related to a drop in premium amortization on mortgage-backeds, or is there anything else unusual there?

It's about 50/50, maybe a little bit more of it is amortization reduction. The rest was at the beginning of the quarter and the end of the third quarter. We had built up some temporary liquidity and our people began redeploying that, our treasury focused it and we were fortunate enough, I think, to hit the interest rate movements just right, so we got a nice increase in yield coming out of the replacement investment, combined with lower amortization.

Okay. Thanks a lot.

Thank you. And there are no further questions on the phone at this time, sir.

Any other questions here? Okay. Thank you very much.

Yes, thanks everyone. I would like to add a couple of special thanks.

It's unusual for us to come to New York, and our team, led by Cindy Wyrick, just did a super job arranging this, and thanks to the New York Stock Exchange for hosting us. It's a great facility, a great tradition here, and it's a pleasure to be with them.