Bank of Hawaii Corp (BOH) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2005 Bank of Hawaii corporation earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded for replay purposes. I would now like the turn the presentation over to your host for today's call, Mrs. Cindy Wyrick, Head of Investor Relations. Please proceed, ma'am.

Good morning, everyone, and thank you for joining us today as we review the fourth quarter financial results for Bank of Hawaii Corporation. Joining me today is Chairman and CEO, Al Landon; Vice Chairman and CFO, Rick Keene; Vice Chairman and Chief Operating Officer, Dave Thomas; Vice Chairman and Chief Banking Officer, Peter Ho; and our Vice Chairman of Corporate Risk, Mary Sellers. The comments will refer to the financial information that was included in 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. 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. Now I would like the turn the call over to Al Landon.

Good morning and happy new year, everyone. 2005 was a very good year for Bank of Hawaii as reflected in our strong financial performance. Our revenues increased, core expenses decrease and operating leverage was over 10%. Our efficiency ratio was approaching 53%. In the fourth quarter our return on average equity improved to over 25%. Our asset quality remained strong and stable. The Hawaii economy in 2005 continued to be dominated by record tourism, strong job growth, low unemployment, strong construction, and a healthy housing market. With the strength of our results for 2005 and a solid Hawaii economy, we believe that we're on track to surpass the original goals of our 2004 through 2006 plan. Now Rick will provide some additional information about our financial results and expectations for 2006. Rick.

Thanks, Al. Hello, everyone. I am pleased to report very solid financial results for the fourth quarter and the full year of 2005 for Bank of Hawaii Corporation. Net income for the year was $181.6 million, 4.7% higher than last year's net income of $173.3 million. Diluted earnings per share for 2005 were at $3.41 up 10.7% from $3.08 per share in 2004. The return on equity for 2005 was 24.8%, return on assets was 1.81%, and operating income which we define as income before the provision for credit losses and income taxes was up 10.5% in 2005 over 2004.

Fourth quarter 2005 net income was $44.8 million or $0.86 per share. This compares to 2004 fourth quarter earnings of $46.2 million or $0.82 per share and third quarter 2005 earnings of $44.8 million or $0.85 per share. Net interest income was $103.5 million in the fourth quarter, up from $102 million in the third quarter and $99.9 million in the fourth quarter of 2004. For the full year net interest income was $407.1 million, 4.2% higher than in 2004. The fourth quarter increase in net interest income was the result of an increase in interest rates which increased the yield on our loan and investment portfolios partially offset by an increase in the cost of deposits. The year-over-year increase was due to higher average balances of loans and investments. An analysis of the change in net interest income is provided on table 6 of the earnings release.

The net interest margin for the year was 4.37%, an increase of 5 basis points from 4.32% in 2004. For the fourth quarter the margin was 4.42% up 12 basis points from last quarter and up 2 basis points over last year's fourth quarter. The bank's asset sensitivity was beneficial to the margin as we realized higher yields in our loan and investment portfolios.

In comparing the 2005 results to the prior year, a noteworthy item is the provision for credit losses. As most of you know, we began recording provision expense in the third quarter of 2005 for the first time in about three years. Our provision expense for 2005 was $4.6 million. This compares to a release of reserves of $10 million in 2004. That is almost a $15 million change year-over-year. In the fourth quarter the provision was $1.6 million compared to 3 million in the third quarter. The fourth quarter provision equaled net charge-offs which benefited from some commercial loan recoveries and you may recall these recoveries were mentioned in last quarter's conference call.

Non-interest income for 2005 was $209.3 million up from $205.1 million last year. There were some special income items in both years. In the third quarter of 2005 income totaling $3.4 million was realized from the sale of assets under a leverage lease. Special income totaling $10.9 million was realized in 2004 from a limited partnership distribution, the sale of leverage lease assets, and the sale of a parcel of real estate. Excluding these items, 2005 non-interest income was 6% higher than in 2004. This increase is attributable to year-over-year increases in almost all categories of non-interest income including trust and asset management income, mortgage banking income, deposit service charges and other fee based income.

Non-interest income in the fourth quarter of 2005 was $50.8 million down $4.7 million from the third quarter. This decline in non-interest income was due to the previously mentioned third quarter gain of $3.4 million from the sale of leverage lease assets and the reduction in insurance income which was due to the timing of commissions received from insurance carriers. Non-interest expenses of $327.6 million in 2005 were $6.8 million lower than in 2004. Fourth quarter expenses of $83.2 million were $1.4 million lower than in the third quarter. The primary reason for these decreases was a reduction in salary and benefit expenses, the components of which are provided in table 7 of the earnings release. In particular, the stock based compensation component of salaries expensed was down in 2005 and in the fourth quarter relative to the previous periods. Professional fees were higher in 2005 due to legal expenses related to the now resolved mutual fund matter. The majority of these expenses were incurred in the third quarter, however, we incurred an additional $1.3 million in legal fees for this matter in the fourth quarter. For the fourth quarter the efficiency ratio was 53.9% compared to 53.7% in the third quarter. For the year, the efficiency ratio was 53.2% compared to 56.1% in 2004. Our income tax rate for the fourth quarter of 2005 was 35.6% which was comparable with last quarter.

Table 11 of the earnings release provides a summary of business segment performance. The retail and commercial segments each had higher fourth quarter returns on allocated equity than in the fourth quarter of last year. The return for the investment services segment was down, primarily due to higher legal fees related to the mutual fund matter. For the full year the 2005 return on allocated equity for the retail segment increased over 2004 as a result of deposit and consumer loan growth -- deposit and consumer loan growth and higher non-interest income. The full year results for the commercial segment improved from 2004 due primarily to the positive impact of deposit growth. The full year results for the investment services segment declined from 2004 due primarily to legal fees. These costs however were partially offset by higher non-interest income from an increase in assets under management and an increase in investment advisory fees.

The rest of our operations including corporate level expenses and interest rate risk management are represented in the treasury segment which had a return on allocated equity of 19% in the fourth quarter and 17% for the full year 2005. The NIACC measure for the total company was $89.1 million in 2005. That was an increase of 32% from last year.

Credit quality continues to be very good. At the end of 2005 non-performing assets totaled $6.5 million down from 8.3 million at the end of September and 13.9 million at the end of 2004. Non-performing assets represented 11 basis points of total loans at the end of 2005. Gross charge-off's in the fourth quarter totaled $6.8 million and recoveries were 5.2 million resulting in net charge-off's of $1.6 million. For the year net charge-off's were $22 million compared to 5.5 million in 2004. Net charge-off's in 2005 were impacted by a $10 million charge-off of a national air carrier that declared bankruptcy in the third quarter. This credit had been specifically reserved for. Net charge-off's represented a loss rate of 36 basis points in 2005. However, without the charge-off of the air carrier, net charge-off's would have represented 20 basis points in 2005.

The allowance for loan and lease losses was $91.1 million at the end of the year, down from $91.7 million at the end of the third quarter. The allowance represented 1.48% of loans at both December 31, and September 30, 2005. 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 continues to be reduced and was down about 3% from last quarter and 22% from the end of last year. 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 $10.2 billion at the end of December. Loans outstanding declined by $34 million from the end of the third quarter primarily due to the pay-off of the $71 million commercial loan. This loan pay-off overshadows the solid loan originations we had in the fourth quarter primarily in consumer lending. Deposit total $7.9 million at the end of the 2005, an increase of $343 million from the end of 2004 and an increase of $151 million from the end of last quarter. The growth has been primarily in non-interest bearing demand deposits and time deposits.

Our capital position continues to be strong. We continued our share repurchase program by purchasing 631,000 shares during the fourth quarter at a cost of $32.3 million. Last Friday our Board authorized an additional $100 million for the share repurchase program which leaves our remaining authorization at approximately $115 million as of this morning. We plan to continue to make repurchases in a disciplined manner. Also last Friday our Board declared a dividend of $0.37 per share. 2006 is the last year of our current three year plan. The solid performance of 2004 and 2005 enabled us to already meet many of the financial targets that were set forth in that plan.

We expect 2006 to be another solid year for the Company. We expect net income in 2006 to be approximately $187 million which will be $9 million higher than our initial guidance for 2006. Our estimates are based on several assumptions including trends in interest rates, operating expenses, and the appropriate level of the allowance for loan losses. Again, as a reminder, provisioning for credit losses resumed in the third quarter of 2005 which will compare to a full year of provision in 2006. We currently anticipate a provision of about $17 million in 2006. In summary 2005 was another good year for the Company and we're looking forward to 2006. That concludes my comments, Al.

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

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Jim Bradshaw of D.A. Davidson. Please proceed.

Good morning.

Good morning, Jim.

Could you talk a little bit about the separate announcement you had this morning, or I guess Saturday morning on the American Express transaction?

Dave, do you want to--?

I would be happy to, Jim. We're really excited about our new joint marketing agreement with MBNA. As you recall, in -- I guess it was the year 2000 we actually sold our credit card portfolio to American Express. When we converted the cards here in the local market, there was some concern by many of our customers about the fact that we provided them American Express rather than Visa, and it is really good news here in the local market for us to be able to now bring the Visa brand back and also continue to support and issue the American Express card which we've been doing now for the past five years.

What's the size of the American Express portfolio?

I don't know that we really want to share that information because that's owned by MBNA. We don't have an ownership interest in that at all.

That wasn't on or balance sheet. American Express owned that portfolio.

Good. A couple other if I may, in the air transport portfolio, how many relationships are -- is that 102 million or so represent?

Mary, do you happen to--? Jim, I am going to say it is around a dozen. But Mary may have a more precise number for it.

About eight.

About eight. Less than a dozen, Jim.

And then the last one for me, I noticed a fairly significant commercial mortgage recovery this quarter. Maybe you could talk a little about that and give me a hint if there is anything else substantially recoverable in the previously charged-off buckets.

That related to an asset in our West Pacific business that was sold and refinanced and no, we don't see any significant recoveries coming from our discontinued business.

And, Mary, was there any -- maybe you could quantify how much bankruptcy law changes had an impact on you in the third or fourth quarter.

In the fourth quarter the net impact was about 1.5 million. Into January we're seeing in our consumer businesses that it is significantly lower in terms of filings here in Hawaii and Guam. Our business banking group we see a little bit of spill-over, and that's basically because of the complexity related to the guarantor relationship there.

Excellent. Thanks very much. Congratulations, a really solid quarter.

Our next question is from the line of Brett Rabatin of FTN Midwest Research.

Good morning, everyone.

Good morning, Brett.

A couple of questions. First off, wanted to ask about the provisioning guidance of 17 million. Would it be safe to assume that somewhere in the background is -- in terms of that assumption is that you're basically matching net charge-off's of 25 basis points or so in barriers or some other way that we should be thinking about the provisioning level?

Yes, I think that would be an appropriate way to look at it. That would be approximately what we would expect our net charge-off's to be next year.

Brett, we've got a pretty good economy here, and we're assuming that that stays stable, and with that assumption, our allowance is expected to remain sort of in the current neighborhood, so covering charge-off's was the model we used as we put together an expectation for next year.

Okay. And then secondly, on the expense line items, I thought I heard mention of a other expense this quarter for the previous mutual fund stuff and 3Q. Was that 1.3 million for this quarter?

That's correct. That's what we incurred in the fourth quarter.

Was there any other miscellaneous items in 4Q that you might consider nonrecurring in the other bucket.

Nothing significant. We did some true-up's at the end of the year that we normally do but nothing with a lot of significance that came out of the fourth quarter.

Okay. And then lastly, on the balance sheet, you mentioned the loan pay-off you had this quarter, otherwise you would have had a little better loan growth. I notice that the average deposits were about the same, but the ending period was better. Was there some end of period deposits towards the end of 4Q that drove the end of period balances up? Or just kind of thinking about the margin mix here for the first quarter.

Yes. That did happen, and not as significantly as last year, but that's something that we've seen happen generally each year end and last year it ramped up a little bit more than this year. But we did see some coming in at the end of the year.

That might come off.

Yes, probably some. Last year it kind of tailed off through early the first four or five months, and this year it wasn't as significant as last year. I don't really see a big impact from that.

Okay. Great. Thank you.

Our next question comes from the line of Jackie Reeves of Ryan Beck. Please proceed.

Thank you. Good morning. Just wanted to get some additional color if you could with respect to net interest margin just coming in a bit better. How much, I guess, control do you expect to continue to have on the deposits? I know it is a lag as much as possible if you will, and then I'm thinking the loan pay-off may have hit you a bit more on that side. But could you just give us a bit more flavor with respect to the asset side of the balance sheet?

The asset side of the balance sheet, we just try to keep it pretty simple and try to manage it as best we can, keep it pretty liquid. We did anticipate the margin going up this quarter and we talked about that I think over the last couple of quarters. We had a lot of liquidity sitting on the balance sheet the last two quarters. We anticipated I think maybe a couple of quarters ago we talked about some large escrow deposits that we expected to run off. We built up some liquidity in anticipation of that, and that really pushed our margin down some in the second and third quarters and we knew that as that came off, and then we knew some other changes that were going to be going on on the balance sheet with regard to in particular the loan pay off that we talked about that would impact our margin. So we did anticipate the margin would go up here in the fourth quarter, and it actually came in a little bit better than we expected. But we did expect it to bump back up pretty close to where it was back if you look to fourth quarter of last year and first quarter of this year, it is kind of on par with those now which is about what we expected.

What were some of -- you just mentioned a little bit higher. That's what I am looking for. What was a little bit better coming into the fourth quarter that played out a bit better than your expectations?

Well, when I say a little bit better, probably 2 or 3 basis points is about what we did expect it to go up, but it was -- I didn't expect quite 12. I expected probably 9 or 10.

Okay. And could you provide a little bit more color on the economy? I may have missed some of the comments with respect to, I know it is good, it is stable. Maybe with respect to the privatization efforts going on throughout your markets, are they seeing any additional maybe wage pressure throughout the markets?

We continued to see a little bit of that, a lot of our economy, Jackie, is service based, and we've had pretty good inflow of labor supply. That said, there is clearly more demand than there is supply. That affects at the margin I would say construction and particularly the home building area. That's where we hear about it as bankers the most, but we see it all the way through to our work force as we've talked about a couple times in 2005 finding workers particularly at the entry level is difficult. I would say almost in every sector. Dave, you or Peter may have comments there. Anything you want to add?

In addition to our own challenges with hiring and retaining the entry level positions, I hear those same comments from many of our clients that finding qualified employees is a growing challenge really.

I would agree with Dave. We're running several local positions in most business units. It is not a matter of wanting to keep the lid on the expense side. It is a matter of finding the right people in those jobs.

On the marginal front of the economy, tourism, as we've talked about here in Hawaii is the most notable variable, and it continues to be very strong, 2005 was a record year, and there is optimism that 2006 will be a little bit stronger.

Thank you very much.

Our next question comes from the line of Brent Christ of Fox-Pitt. Please proceed.

Hi, guys, a couple of quick questions. Sticking on the economy topic, can you maybe give us an update in terms of the housing market, how inventory levels are looking right now, and also how you see military spending progressing?

This is Dave Thomas. I will provide some comments on the housing market. We continue to see a very strong market in terms of pricing, although the median sale price of homes did fall back just slightly in the fourth quarter. Inventories in terms of homes for sale increased slightly as we got to the end of the fourth quarter, but days on market for average sale continues to be extremely short, and there is a very robust market in terms of the purchase side, so we look at 2006 and expect it to look very similar to what 2005 looked.

Okay.

In terms of military, I don't have a quantification of exact dollars, but it is a very important part of our community. Defense spending continues to be strong. We're affected by the transition efforts in the military with redeployment into Hawaii and particularly development of what I will call rapid response segments of the military, so that is adding to our complement of defense personnel here on the islands and particularly affecting their infrastructure buildout as they modernize the military facilities here in Hawaii.

Okay. And then lastly, just in terms of the loan growth, could you give us a sense for how the pipeline ended the quarter at?

Pipeline-wise we're about on par with prior years. The pipeline is running at about 70, $80 million per month which is on par with what we've done historically. I think our challenge in maintaining loan balance is really more on the repayment side and not so much on the origination side, and Rick alluded to a large loan in our C&I portfolio. We also have had some large pay down's in both our construction and commercial mortgage segments. Hopefully we can get a better fix on the origination side which I think we're in good stead on, and that should do it.

Okay. Is there anything more you can provide in terms of some details on that 70 million repayment?

It was a large loan for us. It facilitated liquidity with a real estate based borrower and we knew it was going to be short term during 2005 and while it was a large component of our balance sheet, it is safe to say that at that level it wasn't a substantial impact on our income statement.

Great. Thanks a lot.

Our next question comes from the line of Andrea Jao of Lehman Brothers. Please proceed.

Good morning.

Good morning, Andrea.

Back to the margin, could you share with us how much of the expansion was due to liquidity coming off and how much to other factors?

Rick is shaking his head no, Andrea. I don't know.

Okay. Let me ask this instead. Let me ask this instead.

Rick, anything you want to comment on.

No. I really don't have it quantified in terms of how much of it was attributable to the liquidity. We did anticipate some of that. I think if I recall correctly if we go back to the middle part of the year we talked about the escrow deposits and the liquidity and we talked about for the year we thought we would be pretty close to I think the second quarter if I am not mistaken was 436. We said that it would be for the year right around that. We wound up at 437. I think that you're pretty much right on track with what we were expecting for the year. Even though the fourth quarter ramped up a little bit more than I expected we were pretty much right on track with where we thought we would be for the year. I really didn't go back and try to quantify what that was from a liquidity perspective. If I had to guess though I would say maybe somewhere in the 3 basis point range or something like that.

Okay. Is there anything left to run off?

Well, we had some as I mentioned a minute ago come on at the fourth quarter. Not as significant as last year and certainly not relative to the escrow deposits that we prepared for the summer. So I would say not a whole lot.

Got it. Now, if I could ask Al to kind of step back and take a more macro view. As you think about your next three years, kind of share your thoughts with us with respect to returning capital to shareholders or managing capital and then operating leverage as well as developing your bench?

Well, Andrea, those are--.

Quickly.

Let me say with respect to the next three years, the most important part is to execute in 2006 the current year, and that's where we're focused on maintaining our momentum. The economy in Hawaii holds up very well and that gives us optimism thinking about the future. We're continuing to develop a number of good managers in the Company. We seem to be able in each of our business elements to sort of manage through the challenges and at the same time respond to our marketplace the Visa card here is a good example. As we get into 2006 we'll increasingly focus our attention on the 7 through 9 cycle.

We are not likely to change our construct around capital. We continue to focus on the benefits of efficient deployment of our capital and where we can't earn an acceptable return on that for our shareholders we would intend to continue to send it back to shareholders. That said, we've got to a point now where we're approaching that efficient frontier that we talked about. We view 7% as kind of a proxy simple leverage of 7% for where we would hold our capital levels. I don't see us deviating very much from that as we go forward. We'll always look at alternative forms of capital and see if there is a better structure for us to use, but right now we don't have anything that we're looking at specifically in that regard, Andrea. Is that stepping back far enough?

Great. Thank you. Congratulations.

Thanks.

Our next question comes from the line of Fred Cannon of KBW. Please proceed.

Thanks. Good morning. I think most of my questions have been answered. I just had a couple ones on your fee income line. Insurance was a bit off from last quarter. We don't have a long history of that and I was wondering if there is a seasonal pattern in the fourth quarter on the insurance line.

Not really in the fourth quarter so much as pretty much though, every other quarter. If you go back and look two quarters ago it was down also. It is kind of -- there is not a definite seasonality trend there. It is more a timing of when we work things out with some of our carriers. But it has been about every other quarter that we see a dip in that.

Okay. And so we can -- so we should look at kind of a moving average of it rather than one single quarter as a baseline?

I think that would be a good way to rook at it. It is not set in stone that every other quarter it is going to go down. That seems to have been a track record that we've gotten into. Looking at an average on it would probably be a good way to look at it.

How about on the other non-interest income. Was there anything particularly in there this quarter? I know the previous quarter you had that 3.6 million leverage lease gain. Was there anything in the fourth quarter that was unusual at all?

No. This quarter was pretty clean.

Okay. Okay. And then, Rick, just kind of looking forward, I look back at your 2004, 2006 plan, and I believe your original plan called for a 412 margin in 2006 and you enter it at 442. Obviously you brought up the guidance, too. Is there any reason to think that the margin should be under pressure in 2006?

Not -- we're not expecting it to be. We expect the margin, what we have in our plan right now is expecting the margin to be relatively flat, stable, pretty much around where it is right now.

Thanks and again as everybody else a very solid quarter. Congratulations.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of Campbell Chaney of Sanders Morris Harris. Please proceed.

Thanks and good morning, everyone. My question is regarding kind of the composition of the loan portfolio. Do you expect to see continued weakness in the C&I portfolio, maybe more loan pay-off's and maybe could we expect to see a bigger ramp up in consumer side, maybe seeing the purchased home equity continue to run off in preference for just the originated home equity?

Peter, do you want to address commercial.

Yes. On the C&I side, actually if you net out the large loan that we had in the fourth quarter, our C&I growth was actually quite strong. The commercial mortgage side is also a segment that I think we can grow. I think we've identified some opportunities in the owner occupied segment that should give us some decent growth prospects for '06.

If I am understanding, you're not looking for any large pay off's in the next few quarters in the C&I portfolio.

No, not that I see.

And then I guess the last question, any deep thought on the stock retirement that happened in the fourth quarter?

No, no deep thought on that. It was -- we had plenty of shares sitting in treasury. We continue to buy back shares into treasury, and the fees that you pay for listings are sometimes based on shares outstanding. So by going ahead and taking a retirement on that we were able to save a little bit of expense.

Okay. So it is basically as simple as it looked.

It is as simple as it looked.

Thank you. Very good quarter.

Thank you.

Dave, do you -- in Campbell's question there was a little bit of focus on consumer loans. Do you want to discuss a little bit what we have in mind?

Yes. I just want to make a comment about the growth in home equity. We really see that as the engine of growth for our consumer loan portfolio. As you've seen consistently over the last few quarters, 20% plus gain, we expect to see strong gains in that neighborhood as we look forward in '06 and the purchased home equity just as a reminder, when we did those transactions a few years ago we said they were really just a one shot deal, and that's the way it's been and those portfolios will continue to run off as we go through the next couple of years.

Thanks, Dave.

Ladies and gentlemen this does conclude the question and answer portion of today's conference call. I would like the turn the presentation back over to Miss Wyrick for closing remarks.

I would like to thank everyone for joining us today. As always, if you have any additional questions or need further clarification on any of the issues discussed here today, please feel free to contact me at 808-537-8430. Thanks, everyone, and have a great day.

Ladies and gentlemen, thanks for your participation in today's conference call. This does conclude your presentation and you may now disconnect. Have a great day.