Bank of Hawaii Corp (BOH) 2005 Q2 法說會逐字稿

Welcome to the Bank of Hawaii Corporation second quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] A coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's conference, Miss Cindy Wyrick, Head of Investor Relations. Please proceed.

Hello, everyone and thank you for joining us today as we review Bank of Hawaii Corporation's financial results for the second quarter of 2005. Joining me today is our Chairman and CEO, Al Landon; Vice Chairman and CFO, Rick Keene; Vice Chairman and Head of Retail Banking, Dave Thomas; and our new Vice Chairman of Corporate Risk, Mary Sellers. Our comments today will refer to the financial information included with our earnings announcement we released earlier this morning, much 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 that we have 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 would like the turn the call over to Al Landon.

Good morning, everyone. We're pleased to report to you that Bank of Hawaii had another quarter of solid financial performance. As a result of the great job by our employees, our businesses are performing well. Our return on equity approached 26% this quarter. Our efficiency ratio declined to 52%, and our loan portfolio continues to reflect solid credit quality. Our Hawaii economy continues to be strong with another record quarter for tourism and home prices. Hawaii unemployment rates remained low at 2.8%, and we continue to see growth in jobs and personal income.

Recently we offered our best wishes to Bill Nelson who retired as Vice Chairman, and Chief Risk Officer. Bill did a great job and helped us through some very challenging times. He made a significant difference in Bank of Hawaii. Succeeding him and joining us this morning is Mary Sellers. She brings a lot of talent to this key role and will keep us right on track. Now I would like to ask Rick to provide you with some additional information about our second quarter results and our expectations for the remainder of the year. Rick?

Thanks, Al. Hello, everyone. The second quarter was another good quarter for Bank of Hawaii Corporation. Our net income was $46.4 million, $900,000 higher than last quarter, and $2.2 million higher than the second quarter of last year. Diluted earnings per share was $0.87 in the second quarter, return on equity was 25.98%, and our return on assets was 1.87%. Net interest income was just over $101 million in the second quarter, a small increase over last quarter and a $5.2 million increase over the second quarter of last year. Solid loan growth and an increase in loan yields contributed to the increase in interest income over last quarter.

Partly offsetting the increase in interest income was an increase in interest expense. That resulted from higher average balances of deposits and short term borrowings and an increase in average interest rates. We've included an analysis of net interest income as table 6 to the earnings release. The net interest margin for the second quarter was 4.36%, down 7 basis points from last quarter but up 19 basis points over the second quarter of last year. In short, the decline in the margin from last quarter was primarily due to the flat yield curve. Like many others, we expected that as short term rates continued to rise, long-term rates would also increase. But instead, the ten year rate declined during the second quarter and our margin was impacted.

We think that we may see some additional compression in the margin next quarter for two reasons. First we expect a decline in deposits of about $100 million in the third quarter caused by a reduction in escrow deposits related to real estate sales and second, we placed a $43 million deposit with the IRS which is a non earning asset. The tax deposit is primarily for deferred taxes that we have set aside related to some leverage lease transactions. Industry wide the IRS continues to challenge the tax treatment of this type of lease. We decided to place this deposit not in settlement of the matter but rather to avoid the accrual of interest on the deferred payments. The interest rate used for tax payments is at a much higher rate than other funding sources.

We continue to expect long-term interest rates to increase during the latter part of the year and because our balance sheet continues to be asset sensitive, we expect our margin to improve in the fourth quarter. Accordingly we expect the margin for the full year to be close to the second quarter margin. In the first and second quarters of 2005, we did not record a provision for loan losses. This compares to the second quarter of 2004 when a $3.5 million reversal of a portion of the allowance was recorded. Non-interest income in the first quarter was $50.7 million, a decline of $1.6 million from last quarter. The decline was due to lower insurance income which was largely due to the timing of commission income from insurance carriers, a decline in deposit account analysis fees and lower trust income due to seasonal tax preparation fees that typically are highest in the first quarter.

Non-interest expenses in the second quarter were $79 million, $1.9 million lower than last quarter. Expenses were down across all categories from last quarter which is reflective of ongoing expense control. The largest component decrease was salaries and benefits which was down about $900,000 from last quarter. For the second quarter the efficiency ratio was 52.07%, an improvement from 52.9% last quarter and 56.5% in the second quarter of last year. Operating income for the first six months of 2005 was over 13% higher than for the same period of 2004. Our effective tax rate for the second quarter was 36.1%.

Table 11 in the press release provides a summary of business segment performance. The business segments each achieved good returns under allocated equity. The retail segment had a return of 42% for the quarter. The commercial segment had a return on capital of 31% and the investment services segment had a return of 18% for the second quarter. Each of these returns was up over the second quarter of last year. The rest of our operations including corporate level expenses and interest rate risk management are represented in the treasury segment which had a return of 14% in the second quarter. The second quarter NIACC measure for the total company was $23 million compared to $18 million for the same period last year.

Credit quality continues to be very good. Non-performing assets were $10.9 million at the end of the quarter, down from 13.4 million at the end of last quarter and 21.2 million at the end of the second quarter of last year. Non-performing assets represent 0.18% of total loans at the end of June. Gross charge-offs in the second quarter were $5.6 million and recoveries were 1.9 million resulting in net charge-offs of $3.7 million which represented an annualized loss rate of 25 basis points. Net charge-offs were also 3.7 million last quarter.

At the end of the second quarter the allowance for loan losses was $101.6 million and represented 1.65% of loans. We will continue to evaluate the economic environment and the level of risk in our portfolio each quarter and recognize a provision for loan losses as necessary to maintain the allowance at an appropriate level.

Our exposure to the air transportation industry is summarized in table 8. This exposure was down slightly from the amounts at the end of last quarter. In the evaluation of the allowance for loan losses, we continue to consider the financial pressure being faced by some air carriers which tends to offset the strength in the rest of our portfolio. With respect to the balance sheet, assets totaled $10.1 billion at the end of June, $152 million higher than last quarter. Total loans outstanding were up $135.6 million over last quarter. Commercial loans were up 95 million and consumer loans were up $41 million from the end of March.

Most of our growth has been in floating rate loans which generally have lower short term yields than fixed rate products but position us better for the longer term. Average deposit balances were $59 million higher in the second quarter than in the first quarter. However, at the end of the quarter, deposits were almost $34 million lower than last quarter. Specific transactions near the end of the quarter by some corporate, education, and governmental clients reduced the end of period balances by approximately $40 million. We expect most of these balances will return and we also expect to continue to grow our core deposits. We continued our share repurchase program by purchasing 1.3 million shares during the second quarter. Since quarter end we've repurchased 75,000 additional shares. Through July 22, the Company has repurchased 38.6 million shares and has returned over $1.3 billion to our shareholders since the program began in 2001. We have an unused authorization of $85 million as of this morning. We plan to continue to make repurchases in a disciplined manner.

Our capital position continues to be strong, the leverage to capital ratio was 7.18% at June 30. Our 2005 earnings guidance remains unchanged at approximately 176 to $179 million. Our estimates are based on several assumptions including trends and interest rates and the appropriate level of the allowance for loan and lease losses. And last week, our Board declared our third quarter dividend of $0.33 per share. In summary this was another very good quarter for the Company. Al, that concludes my comments.

Thank you, Rick. Now we would be happy to take any questions you may have.

[OPERATOR INSTRUCTIONS] Your first question will come from Brett Rabatin with FTN Midwest Research.

Hi, guys, good morning.

Good morning, Brett.

A couple of questions, first off, I wanted to start with the loan loss provisioning. Earlier in the year we were talking about a provisioning rate of up to 10 million and obviously that was going to be back end loaded and you guys haven't really talked about a number this quarter so I was curious if you feel comfortable giving any thoughts on second half of the year loan loss provisioning?

Well, we're going to stay pretty much where we thought we would be even though credit quality is pretty good. It is starting to look like it is time to return to provisioning, so right now, Brett, our forecast and guidance presumes that we'll return to provisioning here in the third quarter. We've not updated the guidance from the 10 million we've talked about previously although as you can see our loss rates have run a little bit better than that so we're optimistic maybe we can beat that a touch.

Okay. And then secondly, better loan growth this quarter from a couple of different perspectives. Was curious on the commercial real estate average versus end of period. Was hoping for some color on pay downs and what you guys were seeing in that area?

On the commercial real estate portfolio?

Correct.

In the commercial real estate portfolio, we were down about 39 million and that's primarily because we see a number of our borrowers moving to capital markets. In the construction piece we were up and that tends to be driven off projects in the housing development market. Also in the industrial and in the retail.

Okay. And then lastly, the expense fund rate from here, have we reached a floor in terms of where things are going to be with the expenses going forward or do you feel that you can have some additional reductions in the next quarter too in terms of the expense base?

Well, it was a pretty good quarter for us this quarter, wasn't it.

Yes.

Well, I don't expect that we will be at this level again next quarter. Let's put it that way. We talked last quarter when we were closer to 81 million and said that we were approaching a pretty decent range for a run rate, and so I think we're probably at the low end of it now. I think we've demonstrated that we can achieve a sub $80 million quarter but I think on a normal run rate basis it would be somewhat higher than that.

Okay. Great. Nice quarter. Thanks.

Thanks.

Your next question from Jim Bradshaw with D.A. Davidson. Please proceed.

Good morning.

Good morning, Jim.

A couple of questions. In the loan portfolio the C&I growth was particularly impressive relative to what we're seeing from the rest of the West Coast banks. Wondered if you could talk, was that better utilization rates or new customer generation or if you could explore that topic a little bit with me?

A little bit of both but primarily new customer generation in our dealer financing segment we had some strong growth as we saw some of the captives pull back in the local market here. Also we saw some of our customers begin to invest in capital refurbishments in their FF&E.

Excellent. Just a couple other quick ones if I may. It looked like the head count was down a little bit, 30 or 32 something like that, anything unusual going on in the course of the quarter?

I don't think anything unusual. We continue to watch our positions closely, and as we talked about the unemployment here in Hawaii, creates a pretty tight job market, Jim, it is hard to get all of our positions filled.

Excellent. And then the last I had was with the IRS tax situation, does that have any implications for your future tax rate? Or the expected tax rate I should say, for the second half.

This really didn't have an impact on the tax rate. We had already set this aside. This was basically just a deferred payment type situation. So it is really just the timing of the payment. It really doesn't have an effect on the effective tax rate.

Wonderful. Thanks a lot, guys. Appreciate it. Terrific quarter. Certainly one of the best I have seen.

Thanks, Jim.

Your next question will come from Mike McMahon with Sandler O'Neill & Partners. Please proceed.

Good morning to you.

Good morning, Mike.

How much was the amount of the deposit for the deferred tax payment?

43 million.

43 million. Then my other real question, as you approach your 7% target leverage ratio, are you likely to consider alternative less expensive forms of capital in other words, perhaps doing some trust preferred and continuing to buy back stock?

Oh, Mike, we look at it a little bit. We don't have any particular plans there. We think about it, but that would be a pretty small issue if we were to do something there, so for right now we're just continuing to focus on a straight common equity base there. After we get to 7% we'll take a look at it again and see what's the right mix and volume for us.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question from Andrea Jao with Lehman Brothers. Please proceed.

Good morning, all.

Good morning, Andrea.

As a follow up to an earlier question which touched on commercial loans, hoping you could give a bit more color on the drivers of -- on the consumer loan side? So far it looks like home equity continues to be the driver, but towards the end of the year and looking to '06, what do you see in terms of consumer loans and consumer loan products?

This is Dave Thomas, Andrea. Our primary focus in terms of our consumer lending products are the home equity product as you mentioned, and personal unsecured lines of credit and our indirect automobile financing that we do through our dealer relationships. Those would be the three primary products that we've focused on for the last three years. We will continue to focus on those. As we look out into '06, we see opportunity for continued growth in the largest driver our home equity portfolio, a rising interest rate environment actually would be helpful for that portfolio because it would slow down the refinancing of the first mortgages and would put people in a situation of maintaining their first mortgage and looking to second mortgages or home equity lines of credit for additional funding, so we feel pretty confident that we continue to see good solid growth in all three of our components including the home equity portfolio.

Great. Thank you. If I may follow up with another question, the balance sheet, could you talk a bit about the jump in short term borrowings or the increase in short term borrowings, especially since the cost of short term borrowings also jumped?

We did enter into some repo transactions this quarter, about $100 million actually and we wanted to take advantage of the rate environment. Actually we got a pretty good rate on that. It is a ten-year repo with a two-year floating rate attached to it that's a sub set fund rate and at the two-year mark it can be put back to us or locked in at about a 385 rate I think it is so we looked at it as pretty short term borrowings and that's the reason that line item jumped up.

Great. Thank you.

Your next question will come from Fred Cannon with KBW. You may proceed.

Thanks. Good morning. Just real quick, it was really just a follow up. I think you answered most of the questions. On the, Rick, following up the previous question, you did go into the market to borrow money and I am wondering how we should think moving forward you're thinking about funding your loan growth. This quarter it looked like you funded the loan growth more with borrowings and CDs than in the past -- most recent quarters. Do you think that is going to be a trend that kind of core deposit growth will be a little bit slower and if you get this strong top line loan growth continuing that you will have to go into the market for borrowing.

Well, we may have to and we continue to look at what's available. As you can imagine we have a lot of people pitching us on deals. We think the core deposits are going to continue to help fund. We did have a drop. Or as I mentioned we're expecting a drop in the third quarter related semester of funds and that's one reason we went ahead and did some this quarter was to prepare for that.

And then on the C side, could you talk about the drop off in insurance and then also on the truck C side if that was more of a seasonal issue and we should start to see some pick up along some of those line items.

On the insurance side we have seen some fluctuation quarter to quarter and a lot of that is due to some commission income that we received from some third party carriers and we don't record that income until we actually get it and it seems to come about every other quarter or so, so that was simply a timing issue. I do expect that in the next quarter insurance income might bounce back up a little bit. On the trust fees, a lot of that in the first quarter and somewhat in the second quarter was due to tax preparation fees. Those are highest in the first quarter. They do trend down some. That was the biggest driver in the trust fees. I think that overall we're pretty well positioned there. We've seen some good growth. Some solid earnings out of the trust area, especially when you compare it back to the last couple of years, and we expect that to be pretty solid going forward.

We could expect that fees should kind of lift from this second quarter seasonal lull, is that fair?

Yes, but a pretty small number, I think.

Thanks so much and congratulations.

Thank you.

Your next question will be a follow up from Brett Rabatin with FTN Midwest Research.

I had a follow up. I just wanted to ask the last quarter we were talking about the competitive landscape for deposits on the islands and noting that I think you guys were talking about it was over 100 credit unions and the deposit rates over there are relative to most areas are still pretty minimal, and just wanted to get some color if possible on what you guys were thinking about deposit campaigns and where your rates were relative to where they might be if you have less liquidity going forward and so forth?

This is Al. I will start. We continue to see a rational market here. The liquidity in the economy continues to be very strong. I maintain that due to a lot of outside sources that bring cash and money into the islands and at a relatively low cost. You can count on us to continue to optimize the deposit structure as I would call it. We will tactically increase rates in proportion to market movement and what the competition does here. Dave, any particular campaigns you're aware of coming up?

Well, we typically run two to three deposit campaigns a year, not primarily rate focused but relationship focused. Building core accounts as the focus of those campaigns. Our strategy would continue to do that. We feel that we still have opportunities to gain small or move small amounts of share in the marketplace in terms of opening new account with core account relationships, certainly don't anticipate in any of our campaigns going forward to be rate focused. That's not the position that we've taken in the past four years. It is not the position I see to take any time in the future. We feel it is much better for us to grow the core relationships based upon the overall value and offer that we have in the market but not do it based on rates and no reason for us to change that point of view.

Okay. Great. That's great color. Thank you.

[OPERATOR INSTRUCTIONS] There are no further questions. I would like to turn the conference back over to Miss Wyrick for any closing remarks.

Thanks to everyone for joining us today. As always if you have any additional questions or need further clarification on any of the issues we discussed here today please feel free to contact me 808-537-8430. Take care, everyone. Thanks.

Ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a great day.