Bank of Hawaii Corp (BOH) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2005 Bank of Hawaii earnings conference call. My name is Alicia and I will be your Operator.

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. If at any time during the call you require assistance, please press star followed by zero and an Operator will be happy to assist you. As a reminder this conference is being recorded for replay purposes.

I would now like to introduce your host for today's call, Ms. Cindy Wyrick, Senior Vice President and Manager of Investor Relations. Please go ahead, ma'am.

Good morning, everyone, and thank you for joining today us as we review the third quarter financial results for Bank of Hawaii Corporation.

Joining me today is our Chairman and CEO, Al Landon, our Vice Chairman and CFO, Rick Keene, Vice Chairman and Head of our Retail Banking Group, Dave Thomas, and our Vice Chairman of Corporate Risk, Mary Sellers.

The comments today will refer to the financial information included with our earnings announcement.

Before we get started let me remind you that today's conference call will contain some forward-looking statements. And while we believe the assumptions we've made are reasonable there are a variety of reasons that 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 Al Landon.

Good morning, everyone.

The third quarter of 2005 was another good quarter for Bank of Hawaii as indicated by the strength of our financial measures. Revenues were solid, core expenses remain within a normal range, and our operating leverage was positive.

As anticipated, we charged off our investment in the fully reserved leverage lease to an airline that filed for bankruptcy protection during the quarter. Overall, however, our asset quality remains strong and stable as the Hawaii economy continues to perform well.

Consistent with the strong performance and economy, our board has increased our quarterly dividend to $0.37 per share, up $0.04, or 12% from the previous dividend of $0.33 per share.

And now I'd like to ask Rick to provide you some additional information about our third quarter results and our expectations for the remainder of 2005. Rick?

Thanks, Al. Hello, everyone.

I'm pleased to report that the third quarter was another good quarter for Bank of Hawaii Corporation. Net income was $44.8 million, $1.8 million higher than the third quarter of last year but $1.6 million lower than last quarter.

Diluted earnings per share was $0.85 in the third quarter. Return on equity was 24.61%, and our return on assets was 1.74%.

Net interest income was $102 million in the quarter, a $900,000 increase over last quarter, and a $3.2 million increase over the third quarter of last year.

Growth in loans 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 interest 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 our earnings release.

The net interest margin for the third quarter was 4.30%, down 6 basis points from last quarter and 9 basis points from the third quarter of last year. The decline in the margin from last quarter was in line with our expectations and was primarily due to unusually high liquidity during the first part of the third quarter, and to a lesser extent the placement of the deposit with the IRS at the beginning of the quarter.

We expect our margin to improve slightly in the fourth quarter and our balance sheet continues to be asset sensitive.

During the third quarter we recorded a provision for credit losses of $3 million. No provision was recorded in the second quarter of 2005 or in the third quarter of 2004.

Non-interest income in the third quarter was $55.5 million, an increase of $4.8 million from last quarter. Included in this amount was a $3.4 million gain realized in connection with the sale of assets that had been under a leveraged lease. Also contributing to the increase were insurance income and deposit service charges.

Non-interest expenses in the third quarter were $84.6 million, $5.6 million higher than last quarter. Included in the third quarter expenses was $3.8 million in legal and other costs associated with the mutual fund matter that was recently announced.

Other than the legal accrual our expenses were up $1.8 million over last quarter and were within a reasonable range for us. This increase was due to a variety of reasons including an increase in incentive compensation, timing of some facilities costs, and increase in miscellaneous operating losses.

For the third quarter our efficiency ratio was 53.7%, an increase from 52.1% last quarter, but down from 55.5% in the third quarter of last year. Operating income for the first nine months of 2005 was 11.6% higher than for the same period of 2004.

Table 11 in our press release provides a summary of business segment performance. The business segments each achieved positive returns on their allocated equity.

The Retail segment had a return of 42% for the quarter. The Commercial segment had a return on capital of 36%, and the Investment Services segment had a return of 7%.

The returns of the Retail and Commercial segments were up over the third quarter of last year. The Investment Services segment was down slightly due to costs associated with the mutual fund matter.

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 16% in the third quarter. The third quarter NIACC measure for the total company was $23 million compared to $19 million for the same period last year.

Credit quality continues to be very good. Non-performing assets were $8.3 million at the end of the quarter, down from 10.9 million at the end of last quarter and down from 16 million at the end of the third quarter of last year.

Non-performing assets represented 0.13% of total loans at the end of September.

Gross charge-offs in the third quarter were $15.3 million and recoveries were 2.3 million resulting in net charge-offs of $13 million, which represented an annualized loss rate of 84 basis points. Third quarter charge-offs included a $10 million loss recognized on a lease with a national air carrier that recently declared bankruptcy.

This exposure was fully reserved and this component of the allowance was not replenished with a provision. Excluding this charge-off, the annualized loss rate would have been 19 basis points for the quarter.

At the end of the third quarter the allowance for loan losses was $91.7 million and represented 1.48% of loans. We will continue to evaluate the economic environment and the level of risk in our portfolio each quarter and recognize the provision for credit 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 14% from the amount at the end of last quarter in part due to the charge-off that I mentioned earlier. In the evaluation of the allowance for loan losses we continue to consider the financial pressure that some air carriers are facing.

With respect to the balance sheet, assets totaled $10.1 billion at the end of September, slightly higher than last quarter. Loans outstanding were up $51 million over last quarter primarily in the consumer loan portfolio.

In the commercial portfolio new loan volume was good but was offset by payoff activity. Most of our new volume continues to be floating rate loans which generally have lower short-term yields than fixed rate products but position us better for the longer term.

Deposit balances were $30 million higher in the third quarter than in the second quarter. This is more favorable than we expected.

I mentioned last quarter that we expected a reduction in deposit balances due to the withdrawal of some escrow deposits. Some of these escrow funds remained with us longer than we expected and we benefited from continuing core deposit growth during the third quarter.

We expect some additional escrow deposits to be withdrawn in the fourth quarter, but we also expect these reductions to again be offset by core deposit growth.

Our capital position continues to be strong and is in line with our targeted range. Material and leverage capital ratio was just under 7% at September 30.

We continued our share repurchase program by purchasing 800,000 shares during the third quarter. Since quarter end we've repurchased 75,000 additional shares.

Through October 21st the Company has repurchased 39.4 million shares and has returned over $1.3 billion to our shareholders since the program began in 2001. We have an unused authorization of $46.6 million as of this morning. We plan to continue to make repurchases in a disciplined manner.

We are increasing our 2005 earnings guidance to be approximately 179 million to $181million. One factor in this increase is that we are expecting an increase in loan recoveries in the fourth quarter which may result in a lower provision amount than we had expected.

Our estimates are based on several assumptions including trends in interest rates, operating expenses and the appropriate level of the allowance for loan losses.

And finally, as Al mentioned, the dividend was increased to $0.37 per share, an increase of 12%. In summary, it was another very good quarter for the Company.

That concludes my comments. Al?

Thank you, Rick. Now we'd be happy to take your questions.

[OPERATOR INSTRUCTIONS] Please allow a few moments while we queue up the questions. The first question comes from the line of Brett Rabatin with FTN Midwest Research. Please go ahead.

Hi, guys. How are you?

Just fine, thanks, Brett, how are you doing?

Doing well, thanks. Couple questions for you. First off, on the margin guidance you mentioned the slightly higher margin in the fourth quarter. Is that a result of more focus on margin over balance sheet and [inaudible] you continue to buy stock back you're going to restrict somewhat the growth of the overall balance sheet in the fourth quarter? Would that be a good summation of your thesis in the near-term?

Well, we think that in the fourth quarter the rates are going to go up a little bit more and that will help us slightly. And we also think that some of the liquidity that we had in the third quarter will come back down.

If you remember last quarter's call we expected some escrow deposits to go down so we did increase our liquidity in the first part of the quarter. We realized those escrow deposits weren't going to come down so we backed off on that, so that will flow through in the fourth quarter as a positive to us.

And our fourth quarter expectation pretty much in line with what we talked about last quarter, too. We did talk then that we expected an increase in the fourth quarter and we still expect that increase.

Okay. And then secondly, can you guys talk about the C&I portfolio, and was the ending period decrease, was that partially a result of the one airline credit coming off, or was there any trends going on in the C&I portfolio in terms of pre-payments, or what were the trends there?

Actually, we just had several large pre-payments in our corporate book that represented interim funding that we had done that closed.

Okay. And then lastly on the expenses, I heard you mention some operating losses higher. Were those fraud type situations or, I mean, should we expect the expenses to maybe trim back a little bit in the near-term?

You won't see those same operating losses come through. My point in saying that was just to indicate that there really wasn't any big drivers in that increase in the expense number this quarter.

We talked about a range last quarter. And if you exclude those legal costs we're still within our range. And there were just a variety of things that came through to cause that increase.

We have operating losses every quarter. Sometimes they're up, sometimes they're down. This time they were a little bit on the high side but that's not anything we expect to continue.

Okay. Great. Thanks. Nice quarter.

Thanks.

The next question comes from the line of Jim Bradshaw with D.A. Davidson. Please go ahead.

Thank you. Good morning.

Hi, Jim.

Couple of questions. Looks like you're excluding the leverage lease loss in the quarter. It looks like the consumer charge-offs were basically flat with last year. Just wondered if you've seen any or expect any exposure from the change in bankruptcy laws?

Jim, this is Dave Thomas. We did anticipate that we would see some spike in the third quarter in anticipation of the change of bankruptcy laws. Frankly, it wasn't there. We really didn't see anything significant.

Our consumer portfolio and all of the products have continued to remain very stable in terms of our delinquency rates and the charge-off rates.

That's great. And then the last question I had was related to your mortgage banking activity. Can you talk about how the pace of production volume went over the course of the quarter and what the production pipeline looks like going into Q4?

Well, I'd be happy to start with the good news. The pipeline that we have right now is as high as it's been all year long. Obviously, the rise in interest rates is of concern to home buyers and us.

We did see a little bit of a slowdown at the beginning part of the quarter. Nothing real significant, but as the quarter went on we continued to see just a real steady, not dramatic, but steady growth in terms of our application intake in our pipeline and we expect that we'll have a fairly strong fourth quarter in mortgage production.

Are you more single-family or condo production over there?

Well, we reflect the overall marketplace. And as the median price for single-family homes has continued to rise, we've seen an increase in the condo production or condo sales, just because it's a more affordable price point.

I mean the popular press over there has sort of been up and down on whether the condo market's fading or expanding from what I've been reading. Just what are your thoughts on the, sort of the health of the market in the condo world over there?

Very strong. There's several large projects that are under construction that are completely pre-sold. We continue to see good price support in terms of resale market. So we feel very, very comfortable with the health of the condo market.

Great. Thanks very much. Appreciate it and congratulations on a solid quarter there.

Thanks.

The next question comes from the line of Mike McMahon with Sandler O'Neill. Please go ahead.

Good morning, everyone. Can you, you've in the past, you've indicated that your target leverage ratio was 7% and you've achieved that and you also mentioned that you will continue to repurchase in a disciplined manner. Are you implying that you will go below that now or is there a new target leverage ratio?

No, I think we're where we're going to be for a while, Mike, and so no implication intended there. 7% was our target. We've gotten there and will continue to use buy backs then as an element of our capital plan but probably at a lower level than when we were reducing our capital ratio.

Okay. That's what I assumed and hence the higher dividend. So thank you very much.

Sure.

The next question comes from the line of Andrea Jao with Lehman Brothers. Please go ahead.

Good morning, all.

Hi, Andrea.

Looks like if we exclude the airline charge-off you provisioned just in line with charge-offs this quarter. I know you mentioned you expect recoveries next quarter, but aside from that, is this a trend we can expect going forward as in provision covering charge-offs?

I would address it this way. We calculate the allowance we need at the end of the quarter based on our overall credit quality, and that calculation, coupled with our charge-off experience, drives our provisioning. So that's the math behind it, Andrea, as we look at this.

That said, credit quality is good. We're comfortable with our allowance in this range, and so absent a change in credit quality, we would generally expect that a provision somewhere in the range of net charge-offs would be a reasonable assumption, but that's sort of a consequence, not a cost.

Okay. Understood. Next question. Noticed that average savings account dipped 80 million this quarter while short-term borrowings increased 130 million. Do you have sweep accounts that are booked to short-term borrowings kind of capturing the runoff in savings? In short, could you share more detail on the increase in the short-term borrowings?

The short-term borrowings, one thing's just from a liquidity perspective, we had a lot of municipal clients, and if you recall the end of last quarter we had a drop-off in deposits right at the end of the quarter and we indicated that some draw-downs were made from some municipal clients as well as some corporate clients.

Some of that came back early, and we anticipated the escrow deposits, as I mentioned a minute ago, so we increased some liquidity there to prepare for that. Once we determined that didn't happen we backed off and we adjusted our repo rates during the quarter.

So the average short-term borrowings were up not necessarily connected with any change in savings.

Got you.

Andrea, what we have noticed on the consumer side is as we've begun to see slight upward movement in interest rates we have seen a bit of shift of our consumers out of savings and into time deposits. And we have had an increase in our time deposits over the quarter reflecting that shift in sentiment by some of the consumers.

Okay. Great. This helps. Thank you very much.

The next question comes from the line of Chaney Campbell with Sanders Morris and Harris. Please go ahead.

It's Campbell Chaney. Good morning, everyone. I have a question on your Investment Services Group. I noticed the mutual fund expenses were flowed through there. I was wondering what the RAROC would be without those one-time expenses, those professional fees and legal costs?

It would be a lot higher.

Yes.

Campbell, I think the best thing for to us do would be to calculate that on a pro forma basis and give you a call back. We don't have it calculated that way now and I'd hesitate to speculate or try to do that on a too quick of a fashion here.

I was hesitant to back into it just backing out the expenses as well. Just trying to measure if it were higher on in line with the nine-month figure the 15%.

And then the next question was kind of your outlook for the rest of the year with one quarter left and a $2 million range for the net income. Is that range kind of swinging or hinged on what the loan loss recoveries are going to be so the provision line would kind of be where the fudge factor could be, so to speak?

That's one of the elements that's, the timing of expenses and some of the things that come through just has enough variability to it, Campbell, that we don't want to get any tighter than that.

Okay. But it's not really on the revenue side.

No, we don't see anything there that's going to be a factor.

Terrific. Thanks a lot. Good quarter.

Thank you.

The next question comes from the line of Brent Christ with Fox-Pitt. Please go ahead.

Hi. A couple of quick questions.

In terms of the deposit pricing environment you mentioned some selective increases in rates. Have you really seen anything more broad-based or just the environment continues to be pretty rational?

The market continues to be very rational. My comments concerning time deposits was just the overall elevation of market rates.

And while the competitive environment here in Hawaii as you have noticed before has our deposit rates, I would say, well in check, we still have followed market trends up. And therefore our time deposit rates have obviously gone up as market rates have and consumers have taken note of that.

Okay. Then in terms of your airline exposure, how much remaining specific reserves do you have allocated to the airlines?

Anybody got that this with us this morning?

Take us just a second to figure it out here, Fred. Mary's quickly going through her research file.

Maybe while you're looking at that, I'll just one last question. In terms of the increase in the funds sold on the balance sheet this quarter, was that driven just by some of the liquidity on the liability side?

Yeah, absolutely.

Okay.

No specific plan or strategy around that.

Okay.

Right now, Brett, we're roughly covered 23% on our airline portfolio in terms of reserves.

Great. Thanks a lot.

As a reminder, ladies and gentlemen, please press star one for your questions. We have a question from the line of Fred Cannon with KBW. Please go ahead.

Good morning.

Good morning.

I noticed in the press release that you didn't include an economic outlook this time and I was wondering if that is any sign that the economy's slowing?

No, it's not.

And is tourism and everything still looking very good, Al?

Yes, it is.

One other question I had was on, you know, you've answered most of the questions, especially on deposit pricing. I was wondering if you're seeing increased competition on loan pricing given the discussion you had about the amount of pre-payments?

I'd say the competition continues to be vigorous on the loan side, both retail and commercial side. I think it's a natural function of our economy with more deposits than loans. People tend to be a little bit more aggressive on the loan pricing side.

Are you seeing any competition come in from outside the islands?

Oh, we occasionally get a visitor or two on a large commercial project and there are some mainland-based organizations that lend here regularly particularly on the residential real estate arena. Dave, anything you want to comment on?

The residential mortgage market is, you know, we face all of the large national players here and have for years. So it's not any new entrants, it's just a continuation of the same competition.

We don't regularly engage in all of the terms of that competition from some of the mainland lenders, Fred. We tend to be a little bit more conservative and traditional in terms of our residential real estate products.

So you guys have not gotten into the option ARM competition or IO competition with Countrywide in particular?

No.

Great. Well, congratulations on another solid quarter.

Thank you.

Those are all the questions we have at this time.

I'd like to thank all of you for joining us today. As always if you have any additional questions or need further clarification on any of the issues we've discussed here today, please feel free to contact me, 808-537-8430. Take care and thanks, everyone.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect. Good day.