Bank of Hawaii Corp (BOH) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three, 2007 Bank of Hawaii Corporation earnings conference call. I will be your coordinator for today. At this time, all participants are in listen only mode. We will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Cindy Wyrick, Director of Investor Relations. Please proceed.

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

Thank you, Cindy. Good morning, everyone, and thank you for joining us today. Third quarter of 2007 was another solid quarter for the Bank of Hawaii highlighted by a positive operating leverage and a return on equity that continues to exceed 26%. Our bank performed well during the period of market turbulence in the third quarter. During the quarter, we increased non-interest revenue, controlled expenses, and maintained solid asset quality. The good credit profile at Bank of Hawaii reflects the stable economy in Hawaii and our disciplined approach to underwriting and portfolio management.

Now I'd like to ask Dan to provide you with some additional information about our third quarter results. Following his comments, we will address your questions. Dan?

Thank you, Al. Hello, everyone. For the third quarter of 2007, Bank of Hawaii's net income was $47.8 million compared to $47.7 million last quarter and $46.9 million in the third quarter of last year. Diluted earnings per share were $0.96 in the third quarter, our return on equity was 26% and our return on assets was 1.79%. Net interest income was $98.6 million in the third quarter, $300,000 lower than last quarter and $1.8 million lower than the third quarter of 2006. Though net interest income was down over last quarter, the decrease caused by margin compression was substantially offset by increases in earning assets and deposits.

The challenging rate environment we've experienced over the past several quarters has put less pressure on our margin this quarter as compared to prior quarters. A substantial portion of the decrease in our margin directly correlates to the short-term duration of most of the increases in average deposits of $206 million over the second quarter. The increase is attributable to two factors--an excess of short-term liquidity due to market turbulence and one large short-term savings deposit. As the duration of these deposits were considered to be short-term, the funds were invested in short-term assets at lower yields than we would have earned on loan equivalence. These factors were primary contributors in the reduction in our net interest margin of 9 basis points to 4.03% this quarter compared to last quarter. We have included analysis of the change in net interest income as Table 6A and 6B to our earnings release.

We also recorded a provision for credit losses of $4.1 million in the third quarter up from $3.4 million in the second quarter and $2.8 million in the third quarter of 2006. The $700,000 increase this quarter compared to last quarter was primarily due to increased losses and indirect auto and home equity loans in Taipan. Non-interest income for the third quarter was $61.2 million, a solid increase over last quarter and over the third quarter of last year. The increase of $3.2 million over last quarter was due both to seasonal contingent insurance commission income and a $1 million increase in the net fair value of designated securities and hedge mortgage servicing rights. In past the last year's third quarter, the $4.4 million increase incurred in every category of non-interest income except for other, remember that last years other income included a gain of $1.5 million on the sale of leased equipment.

Non-interest expenses in the third quarter were $81.5 million, a $1.6 million increase over both the last quarter and the third quarter of last year. The increase over last quarter was the result of increased net occupancy expense, insurance claims reserves, and marketing expense. These increased expenses were due to timing of expenditures, compared to last year the higher level is attributable to annual salary increases.

Our effective tax rate this quarter was 35.68% and included the benefit of tax credits related to our investments in the State of Hawaii qualified high technology business improvement program. Tables 11A in our earnings release provides summaries of business segment performance. The retail segment continued its solid performance as compared to the third quarter of last year primarily due to higher fee income from transaction volume, growth in the number of transactional deposit accounts and interchange from debit card sales. The commercial segment performance was comparable to the third quarter of last year and the investment services segment results decreased from last year's third quarter as an increase in non-interest income for this segment was more than offset by increased salaries and other operating expenses. The rest of our operations are represented in the Treasury segment which includes our corporate asset and liability management activities.

Our credit quality remains strong. Nonperforming assets were $4.3 million at the end of the quarter down from $6.3 million last quarter and $5.4 million at the end of the third quarter of last year. Nonperforming assets represent only 6 basis points of total loans at the end of the third quarter. Commercial nonperforming assets were less than 1 basis point of standing loans and our consumer portfolios also reflect solid credit quality. The two largest consumer portfolios, mortgage and home equity, have weighted average credit scores of 755 and 748 respectively. 94% of our residential mortgage portfolio has a loan to value ratio of 80% or less and both portfolios have nominal delinquency and loss rates, and as a reminder, the bank has not offered payment option adjustable rate mortgage loans for loans of negative amortization.

Gross charge-offs in the third quarter were $5.9 million and recoveries were $1.8 million resulting in net charge-offs of $4.1 million. Third quarter 2000 net charge-offs represented an annualized loss rate of 25 basis points.

At the end of the second quarter the allowance for loan and lease losses was $91 million and represented 1.38% of loans essentially unchanged from the prior quarter. We continue to evaluate the economic environment and the level of risk in our portfolio each quarter and recognize a provision for credit losses necessary to maintain the allowance and appropriate level. Outstanding loans increased nearly $34 million this quarter compared to last quarter and totaled $6.6 billion at the end of the period. Average loans also increased by a similar $38 million across most of our portfolios.

Period end deposits decreased $439 million this quarter compared to last quarter to $7.9 billion. The decrease was largely as discussed previously. The results are both temporary liquidity deposit into the Bank of Hawaii and a short-term large deposit. Average deposits on the other hand increased $206 million this quarter related primarily to the factors outlined previously. Given the recent events in the mortgage market, it is important to note that our investment securities portfolio, which was just under $3 billion at September 30, 2007, included $323 million in non-agency mortgage backed securities , all AAA rated, prime jumbo paper, with an average loan to value ratio of 65%. There were no subprime or Alt alt-securities in our non-agency mortgage back securities portfolio.

We continued our share repurchase program by purchasing 550,000 shares during the third quarter at a cost of approximately $28 million since quarter end, we have repurchased another 82,000 shares and our Board approved another $100 million in repurchase authorization, so our remaining authorization was approximately $120 million as of this morning.

Finally, I want to mention that on Friday, our Board increased our dividend to $0.44 per share. And Al, that concludes my

Thank you, Dan. Now, we would be happy to respond to any questions that you might have.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Andrea Jao of Lehman Brothers. Please proceed.

Good morning, everyone.

Good morning.

Last quarter, LILO credit to net interest income contributed 5 bips I believe to margin expansion, so this quarter, I assume that went away in the drag on the margin was 5 bips?

Last year, last quarter, about 5 bips was attributable to LILO. This quarter, we've had a 2 to 3 bip drag on our margin based on the excess liquidity, short-term excess liquidity in our deposits that I mentioned in my talk.

Okay, so the rest of the 9 bip decrease is the LILO credit going away?

Yes.

Okay, and then there's recently been a disconnect between LIBOR and Fed funds. I was hoping you could talk a bit more about the impact on that, on the asset side of your balance sheet, on the funding side, and if this has been a drag or a benefit to your margin?

Well, as of this morning, there's about a 40 basis point spread between LIBOR and Fed funds, and the way our balance sheet is structured, it has a slightly beneficial impact but not much. We're pretty well balanced in our balance sheet structure.

Okay, perfect. Thank you very much.

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

Good morning.

Hi, Jim.

Al, I've been seeing some of your competitors offering some, a bit more aggressive CD rates than historically we've seen in your market. Can you talk about what the deposit pricing market has been like over there recently?

We've noticed that too.

I'll bet.

I think deposit supply may be tightening up a little bit, and that may be what we're seeing, but we haven't seen it long enough to really reach any conclusions about it. It may be just one institution or another at a point in time feeling the need for more funding.

Okay, and I've sort of woven into that when I saw folks having thirstier demand for deposits, I wondered if we were seeing an increase in internal loan generation in the islands? Just want to get a feel for how the pipeline looks compared to a quarter ago and are you seeing anything unusual in pay-off activity or as the economy gets a little tighter in some markets, are you starting to see that pay-off activity is starting to stretch out or slowdown a bit too?

Peter, would you like to give comments there?

Sure. On the -- in terms of funding, things seem to be relatively stable. C&I growth is pretty strong. On the paydown side, we are seeing paydowns in our dealer book. We've got a reasonably sized book of dealer loans and what we're seeing is that they aren't purchasing inventory for '08 as aggressively as they have in years past and they are really winnowing down to '07 levels. So that's one factor that's a bit different from quarters past. The other area on the paydown side that we're seeing some activity on along the construction side and in our book, we've got a reasonably small construction portfolio but we saw about a 35% paydown rate annualized in the third quarter by which I think probably just volatile market conditions right now.

And your next question comes from the line of Brent Christ of Fox-Pitt Kelton. Please proceed.

Good morning.

Good morning.

Just in terms of the recent Fed rate cut, could you talk a little bit about how that's kind of impacted your balance sheet dynamic in terms of the repricing, at least in a couple weeks since the Fed is cut and how you see that playing out, I guess, over the next quarter or two in terms of impacting the margin?

Well, as I mentioned in my comments, we've been dealing with a very difficult interest rate environment given the structure of our balance sheet. The Fed funds cut and depending if they cut this month or wait until January has nominally beneficial impact on our margin. I think I had mentioned that when we were at the Lehman Brothers conference and so there is more of a positive impact because of the Fed fund cuts, just based on the way our balance sheet is structured but it's not huge. And also, given just the uncertainty in the market and the impact that could have on the yield curve or Fed decision, we're kind of cautiously looking at this saying, it will nominally help us but we're not looking outside of volume increases and the business side to have a huge impact on our margin.

Yes. Got you. . And then secondly, just from a credit quality perspective, are you seeing anything in your book that would change? I guess you've been matching provision with charge-offs for quite some time that would suggest that would change? Or in other words, do you see anything that would make you feel like you would need to build reserves a little bit? I know you guys have a pretty healthy reserve level as it

We don't see anything on the horizon right now that would change our reserving approach or that would be that kind of observable data that would say we should do an increase. Peter, Mary, anything you want to add to that?

No, I would agree, Al, we revisit every quarter but I would agree, nothing on the horizon at this point.

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

Thanks and good morning. Just a follow-up on the deposits. I noticed that the savings balances, average savings balances were up about 200 million or so I believe, linked quarter and the rate on those moved up. Was there any special kind of money-market rate changes or anything you did in that category?

Well, as I mentioned, a lot of our deposit increase was caused by a single customer deposit of about $300 million, and $200 million of that was with us for most of the third quarter, $100 million still stays but in the middle of September, that $200 million deposit left us. So that increase is largely due to that and also as I mentioned, excess liquidity that came to the Bank of Hawaii during the height of the liquidity issues surrounding the subprime market.

Okay so that was in that category?

Yes.

And then, throughout the liquidity issues, and that will come off?

Yes.

And then just a general question, Al, on the capital management. I know you guys did increase your dividend by I think about $0.03. It was a little less on a percentage basis increase than we've seen the last few years and I was wondering if you could comment on your thought process. Maybe any changes in your thought process regarding capital management?

No changes, Fred, on the capital management, the targets, or the approach we use. You were right, we had a choice between $0.03 and $0.04 and chose $0.03 just looking at kind of all of the economic indicators and anticipating what would happen next year. So our dividend portion of our capital return program should be in that 40% range looking forward.

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

Good morning.

Good morning.

You spoke about your confidence with your consumer portfolio, but is there anything on the corporate side that you're watching more closely?

On the C&I side, Erika?

Or anything non-consumer related.

Oh, down the commercial line then?

Yes.

I would say that probably the portfolio that has the most scrutiny right now is our construction book, just given market conditions and the residential homebuilding segment. That's a $254 million book of business for us and about just under 60% is residential home builders. Looking at that, looking through that portfolio though, we feel pretty good. Most of that exposure is to kind of mid market, mid tier type product and that product continues to move nicely in our marketplace.

Okay, and everything else commercial related is fine?

Yes.

Okay, thanks for the time.

Yes.

(OPERATOR INSTRUCTIONS) Your next is a follow-up from the line of Andrea Jao. Please proceed.

Hello, again. I believe the leverage ratio is at, it's below the 7% kind of benchmark that you have. Does this mean that share repurchases will be a tad slower than they've been in past quarters until your leverage ratio goes back up to 7?

Well, I think we're slightly under at 6.95. Our capital leverage position at maintaining a 7% based either on dividends or share repurchase, we are staying with that and we haven't changed that so we're slightly under but that's still our target.

Okay, perfect.

Andrea, we may have been just a touch below that at the end of the second quarter and when those things happen for any number of reasons, we'll just take a period of time and gradually work it back but the 7% target remains.

Okay, and then my follow-up question would be I know a small portion of your loan book I believe is in California, correct me if I'm wrong, but could you talk about that portion of the loan book and your comfort level and what you're seeing?

You talking I think about real estate?

Yes.

Commercial real estate?

Yes.

It is $15 million in exposure, two credits both in Southern California. One is a multi-family complex in Los Angeles. The other one is a retirement community in the Valley, both performing as we would anticipate, so it's a very small portion of our overall real estate portfolio on the commercial side.

Okay, perfect. Thank you very much.

Yes.

And this will conclude the question and answer session. I'll now turn it back to management for closing remarks.

I'd like to thank everyone for joining us today. As always if you have additional questions or need further clarification on any of the topics discussed today, please feel free to give me a call. Have a great day, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.