Bank of Hawaii Corp (BOH) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2006 Bank of Hawaii Corporation earnings conference call. My name is Monoshia and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting 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 a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's call, Ms. Cindy Wyrick of Investor Relations. Please proceed, ma'am.

Good morning, everyone, and thank you for joining us today as we review the financial results for the first quarter of 2006. Joining me today is our Chairman and CEO, Al Landon, our 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 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 does contain some forward-looking statements, and while we believe the assumptions we've made are reasonable, there are 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 Al Landon.

Thanks, Cindy. Good morning, everyone, and good afternoon to those of you in the eastern half of the country. Bank of Hawaii completed the first quarter of 2006 with solid financial performance. Our margin was stable, our revenue was up, and our core expenses were down. The return on equity exceeded 26%, our efficiency ratio dropped to 52%, and our portfolio continues to experience excellent credit quality. In addition, we had good loan origination volumes, our deposits continue to be strong, and the Hawaii economy remains very solid. I'd like to ask Rick to provide you with some additional information about our results. Rick?

Thanks, Al. Hello, everyone. I'm pleased to report that the first quarter was another good quarter for Bank of Hawaii, and one in which we achieved very solid financial results. Net income was $45.4 million, up from $44.8 million last quarter, and slightly lower than the first quarter of last year due to the provision for credit losses. Diluted earnings per share were $0.87 in the first quarter, the return on equity was 26.1% and our return on assets was 1.82%. Net interest income was $102.2 million in the first quarter, $1.3 million lower than last quarter, and $1.5 million higher than the first quarter of 2005. The decline in net interest income from the fourth quarter was primarily due to two less days in the first quarter. The net interest margin for the first quarter was 4.41%, relatively consistent with last quarter and with the first quarter of last year. We've included an analysis of the change in net interest income as Table 6 to our earnings release.

We recorded that provision for credit losses of $2.8 million in the first quarter, which equalled net charge-offs. In the fourth quarter of 2005, the provision was $1.6 million and in the first quarter of 2005, we did not record a provision. We currently expect net charge-offs to increase later in 2006.

Non-interest income for the first quarter was $52.6 million, an increase over last quarter and over the first quarter of last year. The increase over the fourth quarter was from higher trust and asset management income, primarily from tax preparation fees and other annual fees that typically increase in the first quarter, higher insurance income, and higher mortgage banking income due to lower amortization and mortgage servicing rights resulting from lower prepayment activity.

Non-interest expenses in the first quarter were $80.8 million, $2.4 million lower than the fourth quarter and down slightly from the first quarter of last year. The primary expense change from the fourth quarter was the reduction in legal fees, which were lower due to the termination of the FCC mutual fund matter in the fourth quarter. Salaries and benefits were higher than the fourth quarter due to higher payroll taxes and stock compensation. The components of salaries and benefits expense are provided in Table 7 of the earnings release.

For the first quarter, the efficiency ratio was 52.2% and we had an increase in operating income of 2.5% for the first quarter of 2006 compared to the first quarter of 2005. Our effective tax rate for the first quarter was 36.3%.

Table 11 in the press release provides a summary of business segment performance. The retail segment had a strong return on its allocated equity of 48% in the first quarter, up from 40% in the first quarter of last year due to higher consumer loan and deposit balances and higher fee income. The commercial segment had a return on capital of 32% for the quarter and the investment services segment had a return on capital of 20%. Both were up 1% over last year. The rest of our operations are represented in the treasury segment, which had a return of 17% in the first quarter.

Our first quarter consolidated net income after adjusting for implied cost of capital or NIAC, as we refer to it, was $24.2 million, 20% higher than for the same period last year. Our credit quality remains strong. Non-performing assets were $5.9 million at the end of the quarter, down from $6.5 million at the end of 2005, and from $13.4 million at the end of first quarter last year. Non-performing assets represent 9 basis points of total loans at the end of the first quarter. Those charge-offs in the first quarter were $4.8 million and recoveries were $2 million resulting in net charge-offs of $2.8 million. First quarter 2006 net charge-offs represented an annualized loss rate of 18 basis points.

At the end of the first quarter, the allowance for loan and lease losses were $91.1 million and represented 1.46% of loans. We continue to evaluate the economic environment and the level of risk in our portfolio each quarter and recognize the provision for credit losses was 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 end of last quarter. In the evaluation of the allowance for loan and lease 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.

Outstanding loans stood at $6.2 billion at the end of the quarter, $78 million higher than the fourth quarter largely due to growth in the commercial portfolio. Commercial loan originations continue to be good, and this quarter loan payoffs were lower than in recent quarters, which resulted in the balance growth. We also had continued growth in our home equity portfolio and had solid residential mortgage volume.

We experienced a shift in the mix of deposits in the first quarter. Average deposits in savings accounts, both commercial and consumer, declined from the fourth quarter. However, these balances largely moved into time deposits and into managed cash accounts. Commercial deposits, in particular, fluctuated during the quarter with average deposits being down during the quarter but increasing again late in the quarter. At the end of the quarter, total deposits were $8.1 billion, up 3% over last quarter.

Our balance sheet remains positioned to benefit from interest rate increases and our capital position continues to be strong. We continued our share repurchase program by purchasing 652,000 shares during the first quarter at a cost of just under $35 million. Since quarter end, we have repurchased 130,000 additional shares. As of this morning, we have $76.4 million of remaining authorization and we plan to continue to make repurchases in a disciplined manner.

Our 2006 earnings guidance remains unchanged at approximately $187 million, based on an estimated $17 million provision for credit losses. This guidance is based on several assumptions including, among other things, trends and interest rates and the appropriate level of the allowance for loan losses. And finally, I want to point out that lastly, the Board declared a second quarter divided of $0.37 per share. In summary, this was another very solid quarter for the Company.

Thanks, Rick. Now we'd be happy to take questions that any of you may have.

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question will come from the line of Brett Rabatin of FTN Midwest. Please proceed.

Hi, good morning.

Hi, Brett.

Couple questions for you. First off, was curious on the end of period balance sheet, was there a unusual deposit at the end of the quarter that may have come off after the end of the quarter? Can you guys talk some about the Fed fund position at the end of the quarter some?

Well, we did have some fluctuation in commercial deposits, as I mentioned. We had some temporary deposits throughout the quarter that were coming in and out, and that's not really unusual. At the end of the quarter, we did have a large deposit come in that did impact the asset side of the balance sheet too and the Fed funds position, and that particular deposit did roll out in the second quarter. However, overall during the second quarter, through the month of April, we've had some nice increases in deposits. While that did happen right at the end of the quarter, it wasn't really an unusual transaction.

Okay. So is that position on the left hand side of the balance sheet back down to more normalized levels or do you guys still have what you could call some excess -- ?

Fed funds position has come down during April. I guess that's what you mean by the left-hand side of the balance sheet?

Right. Yes.

That has come back down to more normal levels.

Okay, and then secondly, you mentioned less pay downs on the loan portfolio, and clearly the period ending balances were better than the averages for the quarter. Are you seeing volumization pick up and can we expect or extrapolate a little faster loan growth than you've had the past few quarters going forward, or can you give us some additional color on what you see with the pipeline, et cetera?

This is Peter Ho. The pipe for the second quarter looks similar to what we had in the first quarter. We're expecting some good performance on the commercial mortgage side as well as on the leasing side. First quarter, you'll notice that C&I was quite strong. We're looking for that to be flat. But it's always tough to tell. You can never quite forecast unexpected payoffs, so we're optimistic, but cautious.

Anything on the consumer side?

On the consumer side, I wouldn't expect to see anything stronger than what we've had in the past couple of years. As a matter of fact, may be moderating just slightly. I don't expect a whole lot of change over the next couple of quarters from what we've seen.

Okay. And one last question, on the expenses. The -- you obviously had the reduction in the professional fees, but was there anything unusual this quarter in the other expenses bucket? Was there anything that reduced that amount this quarter?

Rick, you want to -- ?

Nothing reduced that amount this quarter. We did refer in the earnings release to an accrual that we made for potential legal settlements. That is sitting in the other line. However, on an overall run rate basis, we think the run rate for expenses are pretty good this quarter. We did have a reduction in legal fees. We did do a true up of some of our accruals, and we, net net, when we trued the amounts up, we think the overall run rate is pretty clean.

So Rick, that's a run rate that you're comfortable with as we look forward?

Yes. We've talked about the run rate in the past, and a kind of a range of run rate, and where we are right now, I think is a pretty good and pretty reasonable run rate for us.

Thanks.

Okay, great. That's great. Thank you.

And your next question will come from the line of Jim Bradshaw of D.A. Davidson.

Good morning.

Hi, Jim.

Couple questions. Brett got most of mine, but on the net charge-offs this quarter, looks like you did have a nice drop in the consumer categories, but then in your prepared comments, you suggested that you thought charge-offs might rise in the -- over the rest of the year. Is that related to the consumer side or is there something perking up in other areas that causes you some concern?

Jim, Mary Sellers. Actually in first quarter, I think we saw some benefit from the accelerated losses from the change in the BK law on the consumer front. Nothing out there on the commercial front that we see. Just return to a more normalized level.

Okay. Good. And I noticed also the nice jump in your commercial C&I portfolio this quarter. Can you talk about it? Is that new relationships or just better utilization rates on existing lines for folks?

It was really a combination of both. For the quarter we had -- we tracked the larger changes, we had 33 transactions, and really kind of a combination of new relationships as well as fund-ups from existing loans.

And then, thanks for that. And the last for me is, Al or somebody, could you talk about the cross-selling initiative, how things are going in that regard, are you getting any additional, significant initiatives that you're phasing in this year?

Dave, you want to talk about that? That largely applies in our consumer retail division.

Right.

No, we don't have any major initiatives scheduled for this year. It's a real fundamental area of focus for us in terms of trying to deepen the shared wallet with our existing customers. We have such a large penetration in the market that gathering new consumer households is a bit challenging for us, and so we concentrate on our existing customers and do what we can to expand those relationships. And we've seen slow but steady growth in terms of customer relationships over the past few years, and we're going to continue focusing on that.

And Dave, you've got folks pretty well trained at this point on the initiatives in place and so it's just a matter of getting out on the street and marketing harder, or are you still in the process of employee development and things like that too?

Well, we're always going to be in the process of employee development. It's a constant area of focus for us, but the -- the education programs about what we're trying to accomplish have been fully rolled out now, and it's a matter of executing that, and continuing to get better at execution so that we do it flawlessly, which obviously we'll never achieve, but we want to continue to get closer to it.

Thanks a lot, I appreciate it. Congratulations on a really solid quarter, guys.

Thanks.

Thanks.

And your next question will come from the line of Andrea Jao of Lehman Brothers.

Good morning, all.

Hi, Andrea.

Back to internet charge-offs. At this point, could you tell what kind of ramp-up you see there? I can't imagine it would be something huge.

No, not something huge, Andrea, the good news is still forecasting at 17 million in total. Coming off our consumer book, we've had some growth in various portfolios and some other initiatives around those products, so that's really what what we're expecting.

Got you. I was going to ask whether 17 million is a little high, given the run rate over the past quarter and past few quarters.

Andrea, I could appreciate how somebody might look at that and say it might be a little bit high. And to be honest, I would sort of hope that it is. But it's just a little too early to make that call with the change in the law and the impact that had in the fourth quarter, and then the apparent dip here in the first quarter, so we're going to wait another quarter before we feel comfortable making any change in that.

Okay.

But I would -- I would understand your view that it might look to be a little bit better than 17 and we hope that that's what will bear out here in the second quarter.

Got you. Okay. Earlier you had mentioned that certain seasonal factors affected trustees, kind of helped trustees, so should we expect trustees to take a modest dip or to dip in the second quarter?

They may come down a little bit in the second quarter, but not really a whole lot. I'm not expecting a noticeable dip. In the first quarter each year, we have a little pickup in trustees from tax fees, and really those fees hit both in first quarter and second quarter, usually the larger impact in first quarter and then it kind of tails off some, but that will carry over some into second quarter, so I'm not really expecting a huge change there.

Okay, thank you very much.

And your next question is from Brent Christ of Fox-Pitt.

Hi, a couple of quick questions. I guess, first on the charge-offs and provision. Is the expectation that going forward you would see provision probably match charge-offs, whatever level of charge-offs that you have?

That's as good of an assumption as we can come up with right now. As Rick said in his comments, we take a look at that each quarter, calculate what we need for an ending allowance and that drives our provision, but for the sake of giving some guidance and trying to be clear about that, that's the assumption that we've modeled.

Okay. And then, secondly, in terms of the loan growth that you had a nice pick-up in the C&I balances on an end-of-period basis, yet the overall of the average growth was still pretty flattish, was there much of an impact from that big pay down that you had in the fourth quarter of about $70 million or so? and also --

Yes.

Okay.

Yes. That was a big impact. We did see growth throughout the first quarter, but that pay down occurred late fourth quarter, so that certainly did impact the average balance.

Okay. Was there much of an impact due to the weather this quarter?

On the commercial side, not really noticeable.

Okay. All right. Thanks a lot.

Sure.

And your next question is from Mike McMahon of Sandler O'Neill. Please proceed.

Hi. Good morning, everyone.

Hi, Mike.

A big part of your story the past few years, among other things, has been your expense control, and as I look back in my model now, uncovering a number of columns, 91 million in quarterly expenses in the first quarter of '02, and it's down to roughly 81 million now. I heard earlier that the first quarter run rate is, I don't want to put words in your mouth, Rick, but a good run rate going forward. Is the expense reduction over and done with now?

What we concentrate on, Mike, is operating leverage. And so we would prefer to focus on growing our revenues, but that's the function of what the market gives you sometimes, and every time we try to crowd that, we realize that there's a quality of earnings as well as quantity of earnings that are important to us. So we'll continue to monitor expenses as it aligns with growth in revenue. When revenue growth picks up, you can expect to see our expenses, some of which are directly related to revenue in terms of incentives, pick up, and should revenue growth turn out to be elusive, I don't want to promise any great reductions, but we'll continue to focus on our efficiency and do everything we can to bring it on down. As we get toward an $80 million a quarter run rate, it's hard for us to see any major reductions from that level. We've been working hard over a couple of years to get to that level, and I think that's why Rick said that would be a reasonable level to assume as a run rate going forward.

Yes, and I'm not being critical at all. You've done a fantastic job in cutting expenses, and I just wanted some additional clarification on that and I appreciate that.

Yes. I wanted to share with you how we look at it philosophically and it's a little bit of change, you're right, from where we've been in the past. We've talked consistently about expense reduction, and now it's more the balance between expense control and revenue growth.

Understood. Thank you.

Thanks, Mike.

And your next question is from Jackie Reeves of Ryan Beck. Please proceed.

Good afternoon.

Hi, Jackie.

Hi. Just wanted to get your thoughts more, more color on the trust and asset management side, maybe different initiatives that are going on there. Longer term to try and enhance that revenue stream in addition to the brokerage and insurance side. And then the second question really focused on pricing in the market, and if you could discuss any changes on the deposit pricing side in terms of competition and in addition to the lending side, if there have been any changes that you've seen notably in the first quarter verses other quarters.

I'll handle the trust and asset management side. We've, as you may know, we've placed a lot of resource in the past couple of years back into that business, both on the asset management side as well as on the fiduciary management side. So our hope is to begin, to begin harvesting returns off of those investments. We have very good connectivity from the -- what we call the investment services side, back into our commercial side, a fair amount of cross selling going on, and some good performances, and we look to continue to roll that out throughout the organization. So we're hopeful that a lot of the, a lot of the activity of the past couple of years in rebuilding that business will begin to take hold.

Jackie, we've added some very talented people, both on what I'll call the technical side as it relates to fundamental processes as well as compliance, and on the marketing or sales side. So what we see now is a product set that's performing nicely, and people who have the ability to go out and present that performance in the proper perspective to our marketplace. So we're optimistic about the up side there. In Hawaii, there's always a question of do you use local providers or do you try to go for mainland expertise, and most investors here strike a balance of that. We want to be the local provider of choice, and I think we've made, under Peter's direction here, some real nice steps in that direction.

Now, deposit pricing. As you know, our market is a limited number of institutions, all locally based, and has been a market where we've enjoyed, I think, reasonable deposit prices relative to asset growth. I've talked before about this being a very liquid economy. We continue to see, I think, a rational market. Occasionally, an institution will come in with a unique asset liability opportunity and so they'll have a special in one category or another. But I think, overall, I would say that the prices have been behaving about as expected on the deposit side given the increase in short-term rates and more recently in longer term rates. Dave or Peter, anything in the consumer or commercial business on pricing that you would add to that?

No, I think the changes we've seen in deposit pricing really aren't driven by the overall market. The relative pricing positions of the competitors in this market hasn't really changed. And we don't foresee any major change in terms of relative price positioning in the market.

Peter, anything?

No, I would concur with that.

Thank you.

Sure, Jackie.

And your next question is from Campbell Chaney of Sanders Morris Harris.

Good morning, everyone. I didn't quite catch on that deposit that came in at the end of the quarter, how large it was, and was that in non-interest bearing?

We didn't really quantify it. That's why you didn't catch it! But yes, it was in non-interest bearing.

Do you care to quantify it or since it's gone, it doesn't really matter?

It doesn't really matter. It's already gone.

One other thing, on the legal claims, are there going to be more accruals or is it kind of a one quarter event, and that's it?

We got our fingers crossed on one quarter. You know what it's like out there in the legal world. These are, we're in a process of talking about settlements and it's a dispute over investment performance.

Okay. I got you. Okay, thank you.

Sure.

And your next question is from Fred Cannon of KBW. Please, proceed, sir.

Good morning. I think most of my questions have been answered. I was going to ask you about the situation over in Hawaii. We've read about some flooding impacts both in Oahu, the sewage spill in Kauai. I was wondering if that had any affect on the portfolio or the economy, and I was also wondering if you'd seen any signs of slowing in the housing market over there?

Lots of things there. The flood was over on Kauai, and it was a dam break as a result of heavy rains, kind of fifty-year model rains. While it involved some tragedy and inconvenience on the island of Kauai, I don't sense any real slow down. I was over there a week or two ago, and business is going good, both in our branches and when we get out to see customers. We talked about the sewage spill here in Honolulu, and one of those things in the middle of the rain, the sewer line breaks and what are you going to do? I think that has largely mitigated itself. It hasn't had a significant adverse impact on business. There's always a health concern when that comes up, and I think that's been the focal point. I suppose it's inevitable at the margin that you see an interruption in tourism, but we haven't seen anything statistically that's significant nor have we seen any, heard of any significant change in booking patterns for the upcoming season. So good luck to the mayor and the team as they get engaged in getting that fixed up. It's a typical infrastructure challenge, Fred.

Thanks. And are the -- I guess just as a follow-up, are the tourist numbers still looking very strong?

They are, and I was down in Waikiki yesterday. They're looking happy too.

Okay, and then finally, any signs of real estate slow down, similar to what we're seeing in California, with volumes slowing and inventories rising?

Dave, do you want to comment?

We have seen sales of existing homes fall slightly, down about 5%, but nothing dramatic. What we also have seen is a significant slowing in the increase of prices. We haven't seen any significant decreases yet. We don't anticipate any decreases, but we have seen a slowing of the rate of increase in new listing and sale prices.

Great, thanks. Very solid performance, congratulations.

As a reminder, ladies and gentlemen, that's star 1, on your touch tone telephone for any questions. Your next question is a follow-up from Brett Rabatin. Please proceed.

Just on a follow-up. I heard you guys speak recently, and it sounded like you had become a little more interested, or at least weren't really out of the possibility of expansion on the mainland, and so I was curious if there had been any update on thoughts on loan production offices on the mainland or expanding in other markets generally.

Yes, we've been asked about that a few times, you're right. We're not trying to signal any change. We're engaged in working off -- preparing our next 3-year plan, and all I would have wanted there is to indicate that we regularly look at expansion opportunities. I've said before that it's a function of finding an attractive market and a market in which we can compete and that a absolute requirement is that we be able to enter that market on an economically reasonable basis. When you take a look at the convergence of those three, nothing immediately pops out right now that says this is the time to do something different than our current strategy of focusing here in Hawaii. So I hope that clarifies it a little bit. We'll continue to look at it as we work on our 3-year plan, which will be out the first of 2007. But we are not trying to pre-signal any change in strategy or approach here.

Okay. Well, it sounded like you're almost interested, perhaps in, probably a lot of bankers recently say that pricing expectations are too high right now, but it almost sounds like you're somewhat interested in potentially expanding if you find the right situation via acquisition. Would that be a potential, not to push you in a corner on the subject or anything, but a potential fair characterization?

Might be a little bit optimistic on the side of likelihood.

Okay. Okay. Thank you very much.

And your next question is a follow-up from Andrea Jao.

Hello, again.

Hi, Andrea.

Is it too early to ask for an update regarding the joint marketing agreement with MBNA? Do you still plan to roll this out in the third quarter?

Well, I think we're glad you asked. Dave?

We're very excited about that initiative. We actually have already finalized the, all of the agreements, and have launched the the program in a soft launch internally to our employees, just to make sure that all of the operational pieces are running smoothly, and we're looking forward to a public launch very early in the third quarter, and we're very excited about the relationship with MBNA.

Great. Now after this is all rolled out, what would be next on your radar screens in terms of products or, you know, niches?

That's what we're going to be working on in our plan. At this point, we don't have anything that would be a big product announcement or market announcement, Andrea. It's continuing to use our tools to improve service, and grow our market share in Hawaii.

Great. Last question, do you think you would be utilizing your entire [inaudible], your $76 million, over the course of '06?

Yes, I think that would be pretty reasonable. Our repurchase rate here in the first quarter, I think, is in a range that you could look to for each quarter going forward.

Great. Thank you very much.

Thanks, Andrea.

And your final question is from Brent Christ of Fox-Pitt. Please proceed.

Thanks, all of my questions have been answered. Thanks a lot.

Okay. Great.

That concludes your question and answer session. I would like to turn the call over to Ms. Cindy Wyrick for closing comments.

I would like to thank all of you for joining us today, and as always, if you have any additional questions or need any clarification on any of the issues we have discussed here today, please feel free to contact me. Thanks, everyone. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Everyone, have a wonderful day.