Bank of Hawaii Corp (BOH) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2004 Bank of Hawaii Corporation's earnings conference call. My name is David, and I will be your coordinator for today. [Operator instructions.] I would like to now turn the presentation over to your host for today's call, Ms. [Cindy Weyrich], Senior Vice President. Please go ahead, ma'am.

Thank you, David. Hello everyone and thank you for joining us today as we review Bank of Hawaii Corporation's financial results for the first quarter of 2004. Joining me today is our Chairman and CEO, Mike O'Neill, our President and COO, Al Landon, Dave Thomas, our Vice Chairman of Retail Banking, Bill Nelson, Vice Chairman Risk Management, and Rick Keene, our new CFO.

The comments today will refer to the financial information included with our earnings announcement released earlier 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 the assumptions we've made are reasonable, there are a variety of reasons that the actual results may differ materially from those projected as outlined in today's release.

And now I'd like to turn the call over to Mike O'Neill.

Hello, everyone.

First quarter 2004 financial results represent a very good start of the year for the Bank of Hawaii. We continue to see positive progress on all fronts. Our return on equity is now at 20%. Our efficiency ratio improved to 57%. Our credit quality measures remain very solid, and we generated positive operating leverage as a result of increased revenues and well controlled expenses. In addition to the strong progress reflected in these financial results, our business environment continued to improve due to the strength in the Hawaii economy. Importantly, our businesses are growing.

Our management succession plan continues to evolve. We announced today the appointment of Al Landon as President and Chief Operating Officer. Al is a strong and capable leader, and will now have responsibility for our Commercial and Investment Services businesses, as well as Operations, Human Resources, and Finance. He will be giving up the CFO title and be replaced by Rick Keene, our Controller for the past several years. Rick, as CFO, will continue to report to Al. Retail Banking and Risk Management will report directly to me.

And now I'd like Al to provide you with a more detailed review of Bank of Hawaii Corporation's financial performance in the first quarter of 2004.

Thanks, Mike. Good afternoon and morning, everyone. As Mike said, Bank of Hawaii Corporation had a good first quarter. Our net income was $39.8 million, 33% higher than last year's first quarter net income of $29.8 million. Excluding the system's replacement costs of $7.4 million that were included in the first quarter of 2003, we had an approximate 14% increase in net income over last year.

On a per share basis, our net income was 69 cents, up 46% from 47 cents per share in last year's first quarter. These earnings also increased from fourth quarter net income of $38.7 million, or 66 cents per share. The increase in earnings from the fourth quarter was primarily attributable to a higher level of net interest income. Our return on equity for the first quarter, 2004, was 19.98%, up from 18.59% in the fourth quarter. Our return on assets for the quarter was 1.65%, compared to 1.66 last quarter.

Net interest income was $2.7 million higher than the fourth quarter, primarily due to a higher level of average loans outstanding during the first quarter and a higher yield on our investment portfolio. Net interest income was $5.1 million higher than the first quarter of 2003, primarily due to a decrease in interest expense on deposits and a reduction in loan term debt. The decrease in interest expense was partially offset by a reduction in interest income due to the lower interest rates.

Our net interest margin for the first quarter was 4.30%, down just five basis points from last quarter. Compared to last year's first quarter, our net interest margin was up by one basis point. We've included an analysis of the net interest income changes from last quarter as Table 6, accompanying our earnings release.

Again in the first quarter of 2004, we recorded no provision for loan losses. Net charge-offs were $1.9 million for the quarter, compared to $3.6 million in the fourth quarter and $2.8 million in the first quarter of 2003. Our credit quality and loan losses continue to benefit from our risk management processes and the good Hawaii economy. Noninterest income for the first quarter totaled $48.8 million. This was $4.1 million higher than the first quarter of 2003. Nearly all categories of noninterest income are up.

The decline in noninterest income from the fourth quarter was primarily because of lower gains realized from sales of mortgage loan production in the first quarter. Aside from the expected reduction in mortgages sold, we were very encouraged with increases that we saw in all of the other components of noninterest income.

Net interest expense was down slightly from fourth quarter. Excluding systems replacement cost in 2003, the total noninterest expense was essential unchanged from the first quarter of last year. However, several of the components changed. Some expense categories decreased from last year as expected after the systems' replacement cost was completed. Base salaries were down 5% due to a 7% decline in headcount, and equipment expense declined by $3.8 million or 39%.

Partially offsetting these savings was the cost associated with outsourcing the company's technology services. In addition, a higher level of expense was incurred related to stock-based compensation. Table 7 of our earnings release provides a detailed summary of salary and benefit costs. Lastly, higher professional fees were accrued during the first quarter of 2004 as we reviewed and improved the controls over the mutual fund activities of our Investment Services group.

In January, when we announced our three-year plan, we focused on the concept of operating leverage. This is the impact of relative changes in revenues and expenses on operating income. We demonstrated that a combination of modest revenue growth and flat expenses would result in a solid 10% compound annual growth rate in operating income. We internally measure operating leverage and are pleased with a 16% increase in operating income, compared to first quarter of last year. Our efficiency ratio was 57.3% for the first quarter, down from 58.4% last quarter, and 61% in the first quarter of last year after excluding the systems replacement cost. Our income tax rate was 35.7%, a slight increase from prior quarters and about the rate we planned for 2004.

In the first quarter, each of the companies' business segments performed as we expected. Each segment achieved a higher level of net income after capital charges, or NIACC, when compared to last year's first quarter. The Retail, Commercial, and Investment Services segments were allocated less interest income this quarter due to a reduction in the internal earnings credit, reflecting the lower interest rate environment. The Retail, Commercial, and Investment Services segments each had higher noninterest income than a year ago which positively impacted their performance.

The Treasury segment reflects the impact of movements in market interest rates on the company's interest rate sensitivity. We increased interest income in this segment as a result of purchasing additional securities for the investment portfolio when rates were higher in the fourth quarter. The cost of the amount of capital in excess of that needed by other business segments is allocated to the Treasury segment. As the company's capital levels continued to be reduced, the amount of excess capital and its cost also decreased, further improving the NIACC of the Treasury segment. NIACC measure for the total company was a positive $13.8 million for the first quarter of 2004, compared to a positive $12 million in the fourth quarter and a negative $670,000 in the first quarter last year. Table 11 provides a summary of business segment performance for the first quarters of 2004 and 2003.

Now, I'd like to comment on credit quality. During the quarter, our nonperforming assets decreased to $27.9 million from $31.7 million at the end of December, and from %44.2 million at March 31st, 2003. Contributing to the quarterly decrease was a $2.9 million loan payoff. The elements of our nonperforming assets are summarized in Table 9. Nonperforming asset levels are at the lowest level in many years and now represent 49/100 of a percent of total loans. As I mentioned, we recorded no provision for loan losses in the quarter, the seventh consecutive quarter in which no provision was taken. Net charge-offs were down $1.9 million, compared to $3.6 million in the fourth quarter, and $2.8 million in the first quarter of 2003. Net charge-offs represented an annualized loss rate of 13 basis points.

Our higher risk exposures, including air transportation, are summarized in Table 8. These exposures remain relatively consistent with the amounts at the end of 2003. Our syndicated exposure increased $27 million, which resulted from new lending activity with several Hawaii-based borrowers, partially offset by payoffs of some national credits. With the overall improvement in our credit quality we were able to continue the reduction of our allowance for loan losses. The allowance was $127.2 million at March 31, 2004, down $1.9 million from December 31st, and $12.8 million from March 31st of last year. The allowance still represents 2.2 -- 3% of loans. We will continue to evaluate the economic environment and the level of risk in our portfolio each quarter and recognize a provision or credit for loan losses to the extent necessary to maintain the allowance at the appropriate level. The key is the directional consistency between credit risk and the amount of our allowance.

As to the balance sheet, our assets topped $10 billion at the end of the quarter, driven in part by a higher level of liquidity. Our loan origination was strong during the quarter. However, loan outstandings declined slightly from December, due to accelerated repayments. Loans are about $150 million higher than at the end of the first quarter last year, due largely to growth in the consumer lending portfolios. Deposits increased through increases in transaction deposits, partially offset by the continuation of a managed decline in higher-cost time deposits. Short-term funding was temporarily up at the end of the quarter due to demand for repos by our governmental clients. Our balance sheet remains positioned to benefit from interest rate increases, and our capital position continues to be strong.

The Hawaii economy also remains relatively strong and stable. Visitor arrivals increased during the first quarter. Construction and real estate are at positive factors, and unemployment is now at 3.9 %, an improvement from the fourth quarter. Barring a major event, we continue to expect that 2004 will be another good year for the Hawaii economy, in spite of recent inflationary pressures. Last quarter, when we announced our three-year plan, we indicated the Bank of Hawaii expected to earn net income of $157 million in 2004, and we continue to believe that that target is realistic. We may benefit from some asset sales gains and loan loss recoveries that could allow us to exceed the $157 million level, but it is too early for to us change our guidance.

Our earnings estimates are necessarily based on several assumptions. We continue to forecast that interest rates will increase slightly in the latter half of 2004. We expect economic conditions will remain solid in Hawaii and improve in Guam, and as a consequence that loan losses and credit quality will allow continued reserve reductions. There are many other assumptions that affect our estimates, including the absence of major geopolitical events.

The share repurchase program continued to be successful in the first quarter. We repurchased 1.3 million shares during the quarter. Through April 23rd, the company has now repurchased 32.1 million shares and had returned over $956 million to our shareholders since the program began in July, 2001. Our Board approved an addition of $50 million to our repurchase program, which leaves an unused authorization of $93.9 million at April 23rd. We plan to continue to make repurchases in a disciplined manner. The Board also declared our second quarter, 2004, dividend of 30 cents per share.

To conclude, this was a very good quarter for the company, and we remain optimistic that we're on track to achieve and possibly exceed our 2004 earnings and performance targets.

Mike, that concludes my comments.

Thank you, Al. We'll now take any questions that you may have.

Thank you, sir. Ladies and gentlemen, if you wish to ask a question at this time, please key star 1 on your touchtone phone. If your question has been answered or you wish to withdraw your question, please key star 2. Once again, that's star 1 for questions, and we'll pause just a moment for questions to queue up. Thank you. Our first question comes from Mike McMahon from Sandler O'Neill & Partners. Please go ahead.

Good morning to everyone, and congratulations on a very nice quarter. You didn't give us any room to beat you up on anything.

I hate that when that happens, Mike.

I'm just kidding, obviously. Perhaps I didn't hear it clearly, but with the strength in the economy -- and the economy has been strong for quite awhile now, I think, at least for a year or so -- I'm a little surprised I don't see a little more strength on the commercial side of the loan portfolio. Am I missing -- are there loans prepaying that are masking the underlying trends that are not clear when I look at quarter to quarter ending balances?

Yeah, that's exactly what's going on. I mean, we've got a lot of cash-rich companies that are paying off, you know, fixed-rate loans, among others, that were contracted at a different stage in the cycle, but, Bill Nelson, who is our Chief Risk Officer, have you got anything to add to that?

I would say that the -- there is a lot of refinancing activity that has sort of offset the strong evidence of loan growth in our pipeline as we have added new loans, and we've done that across the board in Commercial, Industrial, Commercial Real Estate, and some Leasing. As Mike said, we've seen the evidence, particularly on mainland credits, with a lot of refinancing that has reduced their outstanding balances, and attributable to the low interest rate environment and access to other capital markets and the like, but we continue to see here, locally, good pipeline and evidence of continued demand for new credits, but that would be the way we'd characterize the atmosphere right now.

If I could, the real estate environment in your lovely state is on fire again, and I'm wondering, would we expect to see you continuing to participate on the construction side? How do you feel about the market, and just some added color on that, and I'll be quiet.

We've -- as I've said -- we've got a good pipeline for commercial real estate, some construction, and some of those are short-term duration, and we've seen some payoffs in those as they have matured and been refinanced longer term money. But there is plenty of opportunities to continue to participate in commercial real estate market, and they have booked quite a bit of new credit in the last three to six months, and -- but it's in some ways replacing some other credits that have rolled off naturally because of maturity and other financing.

Thank you very much.

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

Good morning. Couple of questions, if I may. Seemed like an unusually large number of shares were issued this quarter related to options plans. Can you give us any color, anything unusual in that number? And maybe a guess as to what you thought the second quarter issuance number might look like?

Jim, this is Al, and we had a number of equity-based compensation arrangements that vested in the first quarter that resulted in issuance of those shares. We've, over the last three years, shifted to an increased amount of equity compensation. It's pretty difficult to focus or to estimate exactly what that would be. My intuition would say it would probably be down a little bit here in the second quarter, but I don't have the specific number for you.

It's weighted towards the first quarter, though, it sounds like.

Yeah, that's --.

-- going forward, as well, I guess.

That's been our normal compensation cycle.

Okay, good.

Jim, this is Mike. One of the things that we did early on is we issued -- in order to sort of change the focus to shareholder value, we gave everyone 100 shares of restricted stock shortly after the new team came on board. And because of the performance of the -- of our stock, that vested early. So that explains a significant amount of the issuance in the first quarter, and that is unlikely -- well, that is not going to repeat itself, although there are other equity plans in place for management, but in some ways that was a one-off.

Excellent. Thank you. Just a couple others, if I may. Was there any -- would you say there was any impact in the loan totals this first quarter from the cement strike earlier in the quarter?

This is Bill Nelson. We didn't see too much impact on that. There was certainly the result of the 56-day strike, which for one of the main suppliers ended about two weeks before the other because of two different settlements, but we didn't really see much impact in terms of loan totals, either in the consumer side or the commercial side. There were just some delays in construction activity, and we really saw hardly any of that manifest itself in terms of asset quality or the like.

Okay. Perfect. And then the last question I had is: If you just annualize this first quarter number you get about 160 million, obviously, instead of 157. Is there anything that you would -- on the asset sales side and reserve issues, that you would consider would be, sort of would dent the run rate of the first quarter rather than enhance it?

No, I don't think we see anything at this point that would be a net negative. Clearly, if you get some gains occasionally, there are things that offset those, but we don't see any net negatives out there, Jim.

Okay, so the asset sales would likely be at modest gains or book value rather than necessarily a loss? That's, I guess, what I was trying to add.

Yes.

Okay, great. Thanks a lot. Appreciate it.

Thank you, and our next question comes from Brian Harvey from Fox-Pitt & Kelton. Please go ahead.

Thank you. Good morning. Just had a couple questions. Al, just firstly, on the trust fees this quarter. There was a pretty significant jump on a link quarter basis. Is that a sustainable increase, or is there anything one-timish in nature?

I think we get a little bit of seasonal in there, Brian, and we've also got a little bit of wind at our back here in terms of asset values and performance picking up in the asset management area. So kind of a combination of the two. We expect to see some better results year-over-year going forward, but there is a little bit of seasonality in that business.

Okay. And then on the equipment expense this quarter, that was also down. You said some of that, say a majority of that was related to the system replacement project. Is that a good run rate going forward?

It's a pretty good run rate. We've got a real nice improvement there, and there's always the impact of maintenance, plus we've got some other systems conversions of things like cash management and wire system that we're going to be going through this year, so it may not be quite as dramatic a decrease for the subsequent quarters, but it's going to be down nicely.

And, just lastly, then, just in terms of the capital ratios. You continue to be a buyer of your stock and the balance sheet was also a lot bigger this quarter. Is the target capital ratio still around 7% tangible, or there is any thought to even moving those down further?

Seven percent has been kind of our guidance and the plateau, as I call it, that we will move toward. We'll take a look at it as we get out there in the future, but at this kind of trajectory it's going to be a few quarters, anyway, before we get to that 7% level.

Okay. Thank you.

Thank you, and our next question comes from Fred Cannon from KBW. Please go ahead.

Good morning. Just a couple quick questions. On the "available for sale" portfolio, it went up in the yield also increased from a linked quarter, I think it was right around 4% last quarter and 420 this quarter, it had kind of jumped into the fourth quarter. Given that rates declined fourth versus first quarter, I was a little bit surprised to see that yield continue to improve. I was wondering if you could comment on that.

Yes, thank you, Fred this is Al. I think it's good fortune in our buying patterns. As you recall, there was some volatility through the second half of last year, and we were able to repurchase in the fourth quarter at higher rates, and then as rates dipped this quarter, that looked pretty good in terms of buying time.

Okay. And your net interest margin was 430 for the quarter. Given your outlook and most observers' outlooks for steady to higher rates throughout the rest of the year, is there any reason why we could or would expect that margin to decline later in the year?

Hard to get too crystal ballish from our perspective on what's going to happen with rates given the last couple of years, but I guess it's safe to say that our models don't show any significant decline coming in the future quarters. We've been looking for a rate increase in our position to benefit from that, so I would think that this rate is probably pretty close to what we would look for the rest of the year. Now, there's a little margin to tolerance in there, Fred, so don't hold me too tight to that.

Okay. Well, great. Congratulations on a very solid quarter.

Thank you.

Thank you, and our next question comes from Joe Morford from RBC Capital Markets. Please go ahead, sir.

Thanks. Good morning, everyone. Most of my questions have been answered, but I guess one on the mortgage banking line. Do you feel we're down to a level now where this is kind of bottoming out, and with the decline from the fourth quarter just reflecting lower origination activity, did you retain any of your production in the quarter, and would you expect to do much of that going forward given some of the softness in the commercial lending? Thanks.

Joe, this is Dave Thomas, and, you know, clearly the volatility, the interest rates in the first quarter gave us lots of swings with our mortgage production, but I think as we came out of the first quarter, as we went through the first quarter, we do feel like we've seen some stabilization in our prepayments. Clearly, that should benefit us going forward. Production levels going forward we think will be slightly lower than the first quarter because of the benefit early in the quarter of some refinancing activity. But, obviously, this is a highly sensitive area based on interest rates, but our forecast right now for interest rates are that things look pretty stable for that business for the remainder of the year.

Joe, this is Al. I would add that we are looking at the contents of our portfolio. We reduced a little bit through asset sales at an opportune time in the quarter and will continue to monitor that. You had asked about retention of production in the portfolio --

Yep.

-- to, I think you said, offset the softness in commercial lending, and I would like to return to that. We really don't see a soft commercial lending environment. Our pipelines and lending origination are probably as strong as they've been in a long time here. It really is -- the good economy is benefiting all of the companies in Hawaii, and there's a lot of liquidity in everybody's balance sheet, and that leads to some debt reduction. So I just wanted to add a little bit of a comment on there to try and clarify that, because we are in an environment where loan origination actually looks pretty good.

Absolutely. I didn't mean to imply that it wasn't. I guess the balances were down a bit because of the payoff activity you talked about. I just wondered -- you had given this 7% growth target for the year in loans and had mentioned last quarter that should you not see some of the balances on the commercial side, you might retain more in the mortgage and/or do some more purchase home equity, so really just following up on that.

And you're exactly right. We will look at that retention level in the mortgage business as kind of a balancing factor there to the extent we need to.

Okay. Thanks very much.

Thanks, Joe.

Thank you. Once again, ladies and gentlemen, if you have a question or comment, please key star 1. And our next question comes from Campbell Chaney from Sanders Morris Harris.

Good morning. On the purchased home equity, can you give us color, were those prime-based HELOCs, and what did you pay for those, and what was the average maturity in the pools that you bought?

Campbell, this is Dave Thomas again. In terms of the credit quality, yes, this is all prime home equity, mainland-originated transaction. In terms of the purchase premium on the transaction we did in the fourth quarter, I don't have that at my hand right now, but we could obviously be able to get that for you.

If you could, that would be great.

This is Al. I happen to remember, it's just about 4%.

4%? Okay.

Yeah, maybe on the overside of 4%, Campbell.

And then the average maturity?

Well, the average contractual on this thing is, I think, kind of in the 12-year range. Most of them -- there's a good amount of fifteen in there, but the prepayment experience is a lot faster than that. We were looking at -- gosh, Dave, I want to say --.

Three or four years on effective maturity.

I was going to say 36 to 40 month was kind of what we were looking at

So three to four years?

Yeah.

Terrific. Thank you.

Thank you. Once again, ladies and gentlemen, if you have a question or comment, please key star 1. There are no further questions at this time, gentlemen.

All right. Thank you all very much.

Thank you, sir. Thank you, ladies and gentlemen, today for your participation in the call. This concludes our conference call. You may now disconnect. Good day.