Bank of Hawaii Corp (BOH) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Bank of Hawaii Corporation earnings conference call. My name is Brandy and I will be your operator for today. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Cindy Wyrick, Director of Investor Relations. Please proceed.

Hello, everyone, and thank you for joining us today as we review the Bank of Hawaii financial results for the first quarter of 2007. Participating on the call with me this morning is our Chairman and CEO, Al Landon; our Vice Chairman and Chief Banking Officer, Peter Ho; our Vice Chairman and Chief Operating Officer, Dave Thomas; and Vice Chairman of Corporate Risk, Mary Sellers. Our comments today will refer to the financial information that was included in the earnings announcement. Before we get started, let me remind you that today's conference call may contain some forward-looking statements, and while we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected as outlined in today's release. And now I'd like to turn the call over to Al Landon.

Thanks, Cindy. Hello, everyone, and thank you for joining us today. Bank of Hawaii started off 2007 with pretty good results for the first quarter, even as the unfavorable interest rate environment continues. Our positive operating trends include increased noninterest revenue, controlled core expenses, and positive operating leverage. We accomplished these results while reducing risk. Our asset quality remains strong and stable. First quarter 2007 net income was $47.3 million or $0.94 per diluted share. This compares to 2006 first quarter earnings of $45.4 million or $0.87 per share and fourth quarter 2006 earnings of $50.9 million or $1.01 per share. The decrease from fourth quarter was due to a tax adjustment recorded in the fourth quarter. Bank of Hawaii's first quarter 2007 return on equity was 27% and return on assets was 1.83%. Both of these ratios are improved from the first quarter of last year and consistent with our performance objectives.

Net interest income was $98.1 million for the first quarter, down from $102.2 million for the first quarter of 2006. The reduction in net interest income from the first quarter of last year was primarily due to customers' continued shift to higher cost deposits in response to interest rates. Average deposits in demand and savings accounts were slightly lower than the first quarter of 2006, which was more than offset by balances moved into time deposits. All categories of deposits increased compared to average balances for the fourth quarter of 2006, while the deposit balances at March 31, 2007 were slightly lower than at the end of 2006 due to year end balance buildup. Given the loan and deposit growth rates, we used a slightly higher level of short-term funding in the first quarter of 2007 compared to 2006, which also was a factor in our lower net interest income. Further contributing to the reduced net interest income was the adjustment of our leasing balances, which resulted in a net interest income reduction of about $700,000 in the first quarter. Analyses of the changes in net interest income are provided in table 6A and B of the earnings release. The same factors affected our net interest margin, which decreased 34 basis points from the first quarter of 2006 and 8 basis points from the fourth quarter. The lease adjustment accounted for about 3 basis points of those reductions.

We recorded a provision for credit losses of $2.6 million in the first quarter, which equaled net charge-offs. In the first quarter of 2006, the provision was $2.8 million. In 2007, we benefited from a recovery on a charged off aircraft lease, which more than offset increased losses in our indirect loan portfolio. Noninterest income for the first quarter was $61 million, an increase over the first quarter of last year. The increase occurred in all categories, consistent with our customary seasonal pattern. The only large item was a gain of $2.2 million from the sale of equipment on a matured lease. Noninterest expenses in the first quarter were $82.1 million, which included about $1 million of separation and contingency accrual. Expenses were up slightly from the first quarter of last year as professional fees returned to a more typical level.

For the first quarter, the efficiency ratio was 51.6% and we had an increase in operating income of 4.1% for the first quarter of 2007 compared to the first quarter of 2006. Our effective tax rate for the first quarter was 36.3%.

Table 11 of our earnings release provides a summary of business segment performance. The retail segment had a strong return on its allocated equity of 51% in the first quarter, up from 47% in the first quarter of last year, due primarily to higher consumer loan and deposit balances and higher fee income. The commercial segment had a return on capital of 39% for the quarter and the investment services segment had a return on capital of 33%. Both were up from last year. The rest of our operations are included with the treasury segment, which also carries the cost of unallocated capital. Our first quarter net income after adjusting for the cost of capital, or NIACC as we refer to it, was $26.1 million, 8% higher than for the same period last year.

Our overall credit quality remains strong. Nonperforming assets were $5.8 million at the end of the quarter, down from $6.4 million at the end of 2006 and from $5.9 million at the end of the first quarter last year. Nonperforming assets represented 9 basis points of total loans at the end of the first quarter. Net charge-offs for the first quarter of 2007 represented an annual loss rate of 16 basis points. At the end of the quarter, the allowance for loan and lease losses was $91 million and represented 1.4% 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 necessary to maintain the allowance at an appropriate level.

Our exposure to the air transportation industry is summarized in table 8. We continue to seek opportunities to reduce this exposure, which has a higher level of risk than the rest of our portfolio. However, our air transportation leases continue to pay down per their terms.

Outstanding loans stood at $6.4 billion at the end of the quarter, $261 million higher than March 31, 2006, largely due to growth in all categories except indirect and leasing. Average balances also increased. The decrease from year end was due to seasonal factors. Our balance sheet remains liquid, as our loan to deposit ratio was 82%. Bank of Hawaii has a reasonably neutral position to rate changes and our capital position continues to be strong.

As required, we adopted new accounting guidance for mortgage servicing rights, which now will be reported at a calculated fair value. As permitted by this new accounting standard, we elected to transfer specifically identified securities to a trading account. We anticipate the changes in the fair value of the securities could offset a portion of the reported changes in the value of the mortgage servicing rights. We also were required to adopt accounting guidance whereby we reduce the carrying value of our LILO and SILO leases in response to IRS efforts to reduce tax deductions under these lease transactions. Additionally, we provided for possible settlement costs according to the new accounting guidance. These adjustments reduced equity nearly $30 million as of the first of the year. We continued our share repurchase program by purchasing 363,000 shares during the first quarter at a cost of $19 million. The repurchase pace was slowed slightly due to the reduction in equity caused by the accounting changes. As of this morning, we have $69 million of remaining authorization and we plan to continue to make repurchases in a disciplined manner. Our board declared a dividend of $0.41 per share for the second quarter.

In summary, it was another solid quarter for Bank of Hawaii. I would also like to report we are making good progress on hiring a new CFO. We've interviewed some very good candidates and have a very well-qualified finalist who we hope will join the management team soon. Now we'll be happy to take your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Brett Rabatin with FTN Midwest. Please proceed, sir.

How are you doing?

Just fine, Brett, how are you?

Doing well, thanks. A couple questions. First, I wanted to ask you on the reduction, you exited some commercial credits. I was hoping you could give some color on the total dollar amount that you exited and any industry parameters there and whether the exiting was just related to looking at credit differently or if it was pricing or what was the issue there?

Peter, do you want to respond?

Sure. For the first quarter, the amount that reduced out of the portfolio as a result of credit exits was about $12 million, Brett.

Okay.

Generally, those exits were more for terms versus pricing.

Okay.

More on the leverage side. I guess where we're at at this point is -- our feeling is that at this point in the cycle, we're probably pulling back a bit on what we're willing to do from a terms standpoint, as well as from a pricing standpoint. You know that pricing's getting pretty aggressive in the marketplace.

Okay. But you only exited $12 million, is that correct?

That's right.

As it relates to that, can you give some color on credit spreads and what you just mentioned -- if you're seeing them still tighten from a competitive perspective? I saw the loan yields on the C&I construction seemed to ease a little bit in the first quarter?

Yeah. The C&I market's pretty competitive right now. That's where we've seen most of the spread compression. The construction side, I looked at that and I think that's really not so much indicative of pricing out there as much -- we've got a pretty small construction portfolio, so you've got the opportunity for some chunkiness in there.

Okay. But pressure still on C&I going forward in terms of competition or do you feel like that's leveled out?

I hope it's leveled out. We hope it's leveled out. We've seen triple B spreads fall from, call it, 115 basis points in '03 to about 62 today. So I'm not sure how much more room there is for shrinkage there. Our sense is that's stabilized a bit.

Okay. The other question I wanted to ask is -- on the other miscellaneous income bucket, we've had the disclosure on the leased equipment sale of over $2 million. I was wondering if there was anything else that was unusual in that line item this quarter?

No, I think that's about it, Brett.

Okay, great. Thank you.

Your next question comes from the line of Jim Bradshaw with D.A. Davidson. Please proceed.

Good morning.

Hi, Jim.

A couple questions. I noticed the number of offices is down a couple this quarter and head count a little bit. Was that just sort of normal seasonality, or is there some consolidation or changes there?

Dave, do you want to address that?

Jim, we had a couple of our in-store branches that share space in grocery stores. Our partner went through some consolidation and closed a couple of locations. And when they closed the location, obviously, we lose those in-store branches. So it was just a result of the restructuring of one of our grocery store partners.

Okay, thanks. Second on my list, could you give me an update on how your mortgage portfolio is performing? Looks like from nonperformers and losses pretty well, but just wonder if there's any color on shorter-term delinquencies and things like that?

Mary?

Hi, Jim. No, we're actually not seeing any uptick in delinquencies at all and our portfolio remains very strong and stable. Over 70% has a monitoring FICO score of 720 plus. We originate really to the Fannie and Freddie underwriting guidelines, so it's a pretty strong portfolio.

Okay, good. The last thing is, I looked through my notes and I couldn't find it, so maybe I just don't know the answer, but what's the duration on the aircraft portfolio?

Forever?

Seems like it.

Most of those were transactions incepted before the turn of the century, but they were all long-term leases. I don't think I have the number on what's left there. It's going to be a double digit number, though.

Okay, yeah. I was trying to do the math on the runoff rate and I come up with 12 or 13 years.

But if you know anybody who wants a long duration lease, let us know, will you?

I can't think of anybody off the top of my head, but I'll let you know if I do think. That's all for me. Thanks very much, appreciate it.

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

Good morning, everyone.

Hi, Andrea.

Just wanted to get a little more color as to balance sheet dynamics going to the second quarter. Please tell me if the way I'm thinking about this is wrong. Looking at period-end loan levels and deposit levels, it seems that average loans and deposits will be in-line with the first quarter, come second quarter. So given that, if you could give us an early update as to what's going on in terms of deposit generation and loan growth.

Well, we would never tell you you're wrong, so I think your assumption -- steady as it goes -- is the right assumption. Our models continue to show increased number of accounts. Interest rates are probably going to have as much to do with it as anything, and at this point in time, we don't have a clear expectation of change in rates. I think stability through the quarter -- so that being said, we'll probably see a little bit of shift into time away from transaction accounts. We're continuing to focus on growing our number of deposit relationships and we're finding increasing competition for large deposits, bid on large escrow money and similar governmental activity. So that can affect us, Andrea, either up or down, depending on what we decide to do there. Clearly, you see some liquidity. We have not been thinking that this has been a time to make long-term security investments, so we're probably going to stay short-term. We will look at adding assets or reducing borrowings, dependent on what signals the market gives us with respect to near-term interest rates. Hopefully that gives you enough color.

No, that was very helpful. Where is the competition coming from?

Oh, down the street, generally. It continues to be pretty competitive here. As you know, we do not have the presence of national deposit gatherers, at least on a large scale, so it's mostly the local institutions. And they're facing the same growth expectations that we are. We tend to be the pricing leader, so we will oftentimes be a little bit lower on deposits and as a result, may have a little bit slower growth rate, but generally a little bit higher margin.

Is it more competitive in the neighbor islands than on Oahu? Are the conditions different?

No, I don't think so. The same players are there, the same dynamics -- maybe a little bit smaller marketplace, so you could get an aberration one way or another. But pretty consistent.

Okay. That was very helpful. Last follow-up question. Did you adopt FAS 159? That what you were referring to earlier? And if so, how --

We did not, Andrea.

Okay. To which accounting standards were you referring to earlier, if you don't mind?

Are you testing the CFO to see if he knows those standard numbers? We adopted 156 on mortgage servicing rights, 13-2, and FIN 48.

Perfect. Thank you. Take care.

I had to joke with you there. We're anxious to get a CFO.

Your next question comes from the line of Erika Penala with Merrill Lynch. Please proceed.

Good morning, everybody.

Hi, Erika.

I just had a follow-up question for Peter. You mentioned that you're likely getting more prudent in terms of structuring commercial-related loans. Could you tell us in terms of your outlook for growth, vis-a-vis sort of a more cautious outlook on credit?

For the rest of the year?

For the -- yes.

I can tell you that as we look out into the next quarter -- production-wise, things look pretty good. And I think subject to a normalized credit calling process on the existing portfolio, we should have the kind of growth that we've put out in terms of guidance on the commercial side for a while now. But again the X factor is what's happening on the credit front and what's happening really on the competitive front, in that we've probably been aced a few times from competitors more willing to extend what we would view to be looser terms and/or looser pricing. I think from a production standpoint, things look pretty robust for us still. The market here is still pretty strong, but it's really kind of the underside that we're worried about in terms of hanging on to loan footings.

Is there any particular segment that's more promising than another?

More -- did you say promising?

In terms of the production side, any segment that's more promising than another?

Sure. I think from a product standpoint, in the past year plus we've really put a lot of emphasis into the middle market, and in particular product-wise into equipment finance and owner occupied real estate into the middle market. We're beginning to see some traction there. Although a granular business which is good, but that also takes a bit of time to ramp up.

You talked about -- you earlier mentioned the competitiveness also in pricing. What are pipeline yields on the commercial front looking like versus book?

I would have to defer that. We can do some analysis on that, but I don't have that offhand. Do you have that, Mary?

No.

Okay. I can always follow-up later on.

That's great.

One more question, and this is actually for Mary. Have you changed your outlook on terms of consumer credit since the last conference call?

Yes. I think -- we've seen some underrating issues in some selective vintages from '05 and '06, which have been compounded by an increasing cost of living here in Honolulu. The CPI nationally was up 3.8% last year while we rose 5.8%, and that's eroded some of our borrowers' capacity. In particular in indirect market, as car sales have continued to decline, there's some softness in our recovery rates.

Mary, that's for the indirect portion of our portfolio, right?

Yes, which is the majority of our --

That's where -- yeah, that's where our question would be, but not with respect to mortgage or home equity.

No, not at all.

Okay. I appreciate your time. Thank you.

Sure.

Your next question comes from the line of Brent Christ with Fox-Pitt. Please proceed, sir.

Good morning.

Hi, Brent.

A couple of quick ones. First, just a follow-up on the C&I. You mentioned the $12 million link quarter reduction relating to exiting some credits, but you also pointed to some bridge loans and short-term fundings that declined. I was just trying to get a sense of how much of that $50 million link quarter swing in C&I balances might be related to that?

Yeah. Actually, for the -- on a linked spot basis, the commercial portfolio was down $102 million for the quarter. And as we reconcile that, obviously the biggest piece was a LILO and SILO adjustment of $43 million. You may recall if you were on the last conference call for Q4, we talked about some short-term fundings and bridges that booked up in Q4 that we anticipated coming off at some point intraquarter in Q1. That was about $31 million. Brett asked about the credit exits, that was $12 million as we talked about earlier. And then there was probably another $12 million to $15 million of line paydowns, predominantly out of our auto dealers, our flooring lines. And that's really as a result of the market out here -- things are getting a little bit softer on the auto side, and we noticed a big reduction in inventory levels with the dealers. So that basically reconciles the linked results for the quarters. Most of that -- the bulk of that coming either through the LILO adjustment or on the C&I side.

Anything you're seeing in the auto market that would potentially change that trajectory?

Upwards?

Yeah, upwards.

I think the sentiment of most of the dealers out here is for a flat to down year. We've had things pretty good here on the dealer side for a couple years now.

Okay. Two other quick ones. First in terms of capital management -- obviously buybacks tracked a little bit slower over the past couple of quarters in anticipation of these accounting changes. Now it goes behind you. Would you expect the buyback to accelerate a little bit from here going forward?

That's the most likely trajectory, Brent. We've got to -- we've set a target of about 7% leverage ratio, and over the rest of the year, we would be working back toward that level. But that still gives us a little bit of room to pick up, I think.

Okay. Lastly, any update on what you're seeing in the real estate market?

The real estate market, I think, continues to hold steady as to prices, median prices are just about flat with last year and I think the expectation at this point is that that should continue. Inventories of property available on the residential side has gone up, on the commercial side has come down. Construction on the residential side has slowed and permits for the next couple of years are lower, so we think longer term that's going to hold us in relative balance, even thought we've got a little bit larger inventory. And on the commercial side with the smaller inventory, we're seeing good construction volume, and we think that's going to continue into the next couple years. A wild card there will be mass transit and military construction, both of which could be upsides for us.

Okay, thanks a lot.

Sure.

Your next question comes from the line of Fred Cannon with KBW. Please proceed, sir.

Thanks, good morning. Most of my questions have already been covered. A couple quick ones. On the mortgage banking, I notice that your fee income on mortgage banking lifted a bit linked quarter. Was that due to the accounting change and the fair value of the MSR due to increases on gain on sale?

There's a little bit of that and then our volumes held up pretty nicely with the loans that we sold, too.

So part of it was going to fair value on the MSR?

Yeah, and we're going to have that. You know how much we love fair value accounting out here, but that's going to be a new element of our income statement.

Okay. Have you seen any benefit yet from the buildup that's going on in Guam?

No.

And when might we expect that to show up, Al?

We would look at that on kind of a cash basis. There certainly is a lot of talk and optimism out in Guam and new organizations coming to town to look, but we tend to be pretty conservative on that. So as the cash shows up, which means about the time the infrastructure contracts get loud and start paying, I'm going to say it's a couple years probably, Fred.

So it weighs off before you actually see the benefits?

Yeah.

Great. Thanks very much.

Thank you.

(OPERATOR INSTRUCTIONS) We have a follow-up question from the line of Brett Rabatin with FTN Midwest. Please proceed, sir.

Hi. I just wanted to ask on the Stryker force and if there was any new developments there -- if you guys heard anything recently?

Gosh, I haven't. Kicking off Military Appreciation Week this week, and so we'll see a lot of the Flag Officers and probably some discussion, but I haven't picked up anything new about it, Brett.

Okay. And any other new economic news in the past month or so we might have missed?

No, I don't think so. We continue to look at Hawaii as slower growth, but continuing the economy at a strong pace.

Okay, great. Thank you.

Sure.

Your next question is a follow-up question from the line of Andrea Jao with Lehman Brothers. Please proceed.

Hello, again.

Hi.

A while back you mentioned that the gross prospects in the neighbor islands are probably better than those in the more established Oahu market. Hoping you could give us an update on what you're doing there and how competition is.

What we've done is in a way maybe returned a little bit to the past. We've named island executive coordinators for Maui and the Big Island. Two of our senior officers who live there have additional marketing and coordination responsibilities -- trying to view those markets just as that, sort of separate markets that get a little bit faster response from our leadership and a little bit more on-site coordination. That's the primary change we've made is sort of organizational and emphasis. We here in Honolulu are spending a little bit more time on the neighbor islands, just trying to make sure we stay in touch with the market and their needs. Other than that -- Dave, anything you would want to add, or Peter from your parts of the businesses?

We've added a few resources on the wealth management side on the big island. We'd actually like to add resources on all three of the neighbor islands, but it's a tough market for talent out there.

That's as much color as we can add this morning, Andrea.

That was very helpful. Thank you, appreciate it.

Sure.

At this time, there are no questions. I will now turn the call over to Cindy Wyrick.

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

Thank for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.