Bank of Hawaii Corp (BOH) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2008 Bank of Hawaii Corporation earnings conference call. My name is Nancy, and I will be your coordinator for today.

(Operator Instructions)

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

Thank you, Nancy and hello, everyone. Thank you for joining us today as we review the Bank of Hawaii's financial results for the fourth quarter of 2008. Joining me this morning, is our Chairman and CEO Al Landon , our President and Chief Banking Officer Peter Ho, Vice-Chairman and Chief Financial Officer, Kent Lucien, and our Vice-Chairman and Chief Risk Officer. Mary Sellers. Our comments today will refer to the financial information included in the earnings announcement this morning. Before we get started, let me remind that you today's conference call will contain some forward-looking statements and while we believe our assumptions are reasonable, there are a variety of reasons why the actual results may differ materially from those projected. And now I would like to turn the call over to Al Landon.

Thank you, Cindy. Good morning, everyone. Happy New Year or as we say today in Hawaii, [Kon he Fat choi]. Bank of Hawaii announced this morning our 2008 financial results. For the year our earnings were $192.2 million. That's right. Net income. And for the fourth quarter, our net income was $39.3 million. As Kent will discuss, we continued our strategy of increasing Bank of Hawaii's deposits, reserves, and capital in response to the economic uncertainty. Following Kent's comments on the bank's performance, I will update you on our plans for 2009. Kent? I will update you on our plans for 2009. Kent?

Thank you, Al. Good morning. Net income for the fourth quarter was $39.3 million, or $0.82 per share compared to $47.4 million or $0.99 per share in the third quarter of 2008, and $40.9 million for $0.83 per share in the fourth quarter of 2007. The decrease is due to a return to customary tax rates and accounting for mortgage servicing rights, as I'll explain. For the quarter, net income to average assets was 1.52%, return on equity was 19.56%, and our efficiency ratio was 51.58%. Net interest margin was 4.43%, compared to 4.33% in the third quarter, and 4.12% in Q4 of 2007. Year-end deposits were $8.3 billion, up $634 million from Q3, and up $350 million from year-end 2007.

For the full year 2008, net income was $192.2 million or $3.99 per share, compared to $183.7 million or $3.69 per share in 2007, an increase of 8%. Return on average assets was 1.84% for the year, compared to 1.75% in 2007. And return on equity was 24.54% versus 25.15% last year. Shareholders equity was $791 million at year end, up from $750 million at the end of 2007. This quarter's results included a $4.5 million net reduction in the accounting fair value of mortgage servicing rights, due to a reduction in the assumed life of our servicing portfolio. During the quarter, our loan and lease net charge-offs were $10.6 million, and in addition, we added $8 million to our reserve for credit losses.

Fourth-quarter net interest income increased $2.3 million from the third quarter, due to a higher net interest margin, and slightly higher average loan balances. Our net interest margin was 4.43% for the fourth quarter, an increase of 10 basis points over the prior quarter. Average loan balances for C & I, Commercial mortgage, and home equity were up, while automobile, residential mortgage, leasing and construction were down. Our construction loan portfolio is now at $154 million compared to $209 million at the end of 2007. For the year, net interest income was $23.8 million higher than 2007, as our net interest margin increased 25 basis points to 4.33%. The net interest margin improved because of lower funding and deposit costs, that more than offset lower asset yields. Our funding costs declined 104 basis points in 2008, while our earning asset yields dropped 52 basis points.

Non-interest income for the fourth quarter was $54.5 million, down $2.5 million from the third quarter, and $5.8 million lower than the fourth quarter of 2007, due to the previously mentioned reduction in the accounting value of mortgage servicing rights, and a decline in trust and asset management income of $1.9 million. Non-interest expense was $82.7 million in the fourth quarter down $4.1 million from the third quarter, and $9.3 million lower than the fourth quarter of last year. All expense categories are lower than Q3. Our efficiency ratio improved to 51.58% this quarter, compared to 54.05% last quarter. For the full-year 2008, efficiency ratio was 51.23% compared to 52.78% for 2007. The provision for credit losses this quarter was $18.6 million, compared to $20.4 million last quarter. The provision exceeded net charge-offs of $10.6 million by $8 million.

For the year, we increased the allowance for loan and lease losses by $32.5 million. The full-year provisioning was $60.5 million compared to $15.5 million in 2007. Our allowance is at 1.89% of outstanding loans and leases. Nonperforming loans are $14.9 million, and the ratio of the allowance to nonperforming loans is 826%. Our effective income tax -- excuse me. Our effective income tax rate of 33.46% for the fourth quarter, was higher than the previous quarter's rate of 11.24%, the third quarter was impacted by a $12.9 million credit related to the SILO tax settlement. For the year the effective tax rate was 28.70% compared to 35.45% in 2007.

Deposit growth was strong this quarter. Period end deposit balances increased by $634 million over the third quarter, and by $350 million over last over the third quarter, and by $350 million over last year. The increase occurred in nearly every category of deposits, as we made a concerted effort to increase both commercial and consumer deposits. As a result, Bank of Hawaii is very liquid with over $400 million on deposit with the Federal Reserve. Our investment security portfolio was $2.9 billion at December 31, down $62 million from the third quarter. Our portfolio consists mainly of debt and mortgage-backed securities issued by GSE's. Non-agency mortgage-backed securities are approximately 9% of the portfolio, and they continue to perform.

The non-agency portfolio consists of 23 securities. Delinquencies remain very low, confirming the solid cash flow of the securities we hold. Consistent with our plan to build capital, we suspended our share repurchase in the fourth quarter. At quarter end, our leverage ratio was 7.30%, up from 7.02% at the end of 2007. Our tier 1 capital ratio is 11.24%. Our plan is to continue to build capital through earnings. Accordingly, we have not repurchased any shares since the end of the quarter. Finally, our board declared a $0.45-per-share dividend last Friday. And now I will turn the call back to Al.

Thank you, Kent. In December, Bank of Hawaii decided not to participate in the US Treasury's capital purchase plan. We could not see how participation would benefit our shareholders. Rather than rely on expensive government funding, Bank of Hawaii focused on increasing deposits and retaining capital. As Kent indicated, we have substantial resources available for investment and lending, and remain eager to invest in land into attractive opportunities as conditions warrant. We do agree with many observers that investment in lending could simulate business activity. But until impaired business models and institutions are restructured, we think concern about undue risk will limit that business activity. Our immediate plan for 2009 is to continue to manage for a weakening economy. That means reducing our credit risk, maintaining liquidity, increasing capital, and looking for opportunities to build value.

Externally, Bank of Hawaii will focus on supporting customers we know with credit and good service. Internally, we plan to improve workforce productivity, upgrade technology to enhance customer service, and manage risk and expense. In our release this morning, we indicated it is impractical for us to set earning expectations for 2009, since we can not forecast how long it will take for conditions to return to normal. Right now, we think soundness is the priority component of financial performance. Bank of Hawaii is safe, balanced, and ready to address the challenges ahead. I want to assure you that we remain committed to delivering superior financial performance. Now we would be happy to respond to your questions.

Nancy, can you check to see if there are any questions?

(Operator Instructions)

Your first question comes from the line of Mr. Brett Rabatin from Sterne, Agee Please proceed, sir.

Good morning, everyone.

Hi, Brett.

I wanted to -- I have got quite a few questions I wanted to ask. Let me just ask a couple. First, I know last quarter you had a reclass from deposits from non-i-interest bearing to interest bearing and obviously very strong growth in DDA this quarter. The interest bearing was mixed with averages down, but ending period strong. Can you guys walk through, "A" no one else has really seen these kind of deposit trends, what that was a function of, and then "B," anything unusual in the quarter that we should be aware of?

Well, a couple of things I would say were going on. Continued promotion of our free checking, which we think is the most attractive free checking product in the market. And I think our customers are picking up on that as well. The second is that, I think as concern in the marketplace increased regarding the safety of some short-term investment vehicles, such as money market mutual funds, we found customers were giving strong consideration to bringing their money into an institution they felt comfortable with and knew. We put a little bit of yield enhancement in that. there was some room in our margin to do it, and made what I think is a pretty attractive on balance sheet product available for customers. And they responded pretty nicely.

Third thing I would say is that, as we watched what unfold late fall, early winter, it became clear to us that a focus on deposits was going to be an important aspect of our business. Lending demand had slowed down in many of our product sets. And so we asked our people to put a special effort out there on deposit gathering. And you saw as the quarter went on, a pretty nice momentum build for putting deposits on our balance sheet. As we got down to then looking at whether to participate in the government lending program, the ability to raise deposits and generate our liquidity internally, was an element of our decisioning.

So thats -- Brett, that is kind of four features that went into it. That is what I would say as a summary. Peter, Kent, either of you want to add anything to that?

I would just add on the -- on the management piece, we really turned all of our management metrics, deposit focused. Both on the Consumer side as well as on the Commercial side and we have shifted a good amount of Commercial side, and we have shifted a good amount of talent within the organization into deposit gathering in parts of the Company.

Okay. Maybe we can follow up off line a little bit, off line I mean. Also wanted to ask on credit. Maybe a few questions for Mary. I was hoping to get some color on what the auto -- I know there was some color in the press release about the changes in the Consumer portfolio. I was curious what auto was at the end of the quarter. I think it was a little under $400 million last quarter, and just any commentary on the pass dues for the HELOCS.

In terms of our indirect portfolio, Brett, as you know we have been driving down that portfolio with tightening underwriting.

Right.

You also realize that auto sales are declining pretty dramatically, both in Hawaii and in our Pacific island division. So that's really the driver behind the decreases in that portfolio. In terms of our HELOC -- did you say NPA's or net charge-offs?

No, the past dues seem to be moving up. What is the number for the indirect auto? Do you have that?

369.

I'm sorry?

369.

369, okay.

Okay. And in terms of the past dues, they are up about 780,000 on a linked quarter (inaudible) for year-over-year. And really, that is seven loans, 60% of which we have the first, all pretty much in Hawaii, weighted average LTV about 70%. Just softness in the local economy kind of contributing to migration into that.

Okay. And, Mary, have you been stress testing the portfolio and the different components and, if so, what is the -- what is the analysis telling you in terms of what's happening to both the Commercial portfolio, the CRE portfolio from loan to values, and that sort of thing, and then what kind of stresses are you seeing on the consumer side?

Brett, she has been testing this thing weekly. Stress would be the word.

Yes, okay.

Mary, a little color for Brett on that?

Okay. Well, in our home equity portfolio, you realize that the majority of that is owner occupant.

Right.

And a good 95% is on Oahu, and Oahu has seen modest median price declines of about 3%. We really don't have the luxury of some of the models the mainland banks have, that we can load in, and do an update. So we are kind of working through various segments and trying to do that ourselves. So I don't have a lot more color around that, at this point in time. Residential portfolio, again, primarily on Oahu. Primarily owner occupant, billion originated prior to 2004, and any run-up in appreciation, so very low LTVs at origination.

We know we are kind of stressing different pockets, but right now we really see most of the losses being driven off event. In terms of somebody has an illness, spouse, death, or loses a job. In the residential portfolio, I would indicate that the land loan segment is one in which we did see additional stress, and that contributed primarily to our net charge-offs this year. Our land portfolio is $56 million, down from $76 last year, and $100 million the previous year, 52% of it is non-resident owners, which is really the most problematic. But that is the only segment right now that I would say has the most stress that we are concerned about.

Okay. Great. Thanks for all the color and congrats on all the results and environment.

Thanks, Brett.

Your next question comes from the line of Mr. Aaron Deer from Sandler O'Neill. Please proceed, sir.

Hi, good morning, everyone.

Hi, Aaron.

I guess I was just hoping to get a little bit more information on the mainland construction loans. It sounds like you have a couple of them, but just wondering if the second one is also a participation. I suspect that it is. And where are those projects located?

Both are in California. The second one is only a $1.4 million, and it is closing out. So we expect absolutely no problem with that. The other one is in L.A. The balance is $5 million. It is our largest non-accrual.

Okay. And then also can you give us some color behind the deterioration in the C & I portfolio. Looks like both MPA's and 90 day past dues were up. Any specific industries where you are seeing the problems? And what do you expect for that heading into the new year?

No, really the increase was really just two loans. And it was two clients that had additional stress here in the local market. So that was about a $1.8 million and in addition to the $5 million, that really drove the increase in the commercial segment , so no particular

The $5 million Mary was the construction loan --

-- the construction loan. Outside of that, there was a $1.8 million in our Commercial portfolio that was part of the increase, and that's it.

Okay. Lastly, given the size of the MSR adjustment, I would have thought that the mortgage income would have swung to a negative, but obviously wasn't. Is it just strong origination fees that helped to offset it? Or what was going on there?

A major offset, the activity and refinancings is -- is way up. The pipeline is quite large. And so that's the offset.

Okay. That's helpful, thank you.

Your next question comes from the line of Mr. Bobby Boland from KBW.

Hi, thank you for taking my call. Just two follow-up questions on the deposits. I was wondering, first, if you can tell me where are some of these, because did you say new deposit accounts. Where they are coming from, if they were from banks or if you are seeing any softness in the credit unions on the island.

I would say that our new customers were broad based, financial institutions which would include some credit unions, made some deposits rather than investments. As to credit union weakness, I don't know that we have seen particular signs of weakness, but we have maintained for a number of years a positive relationship with credit unions. I think we have talked about it in prior calls. And -- and I think that has been a positive factor for us right now.

We are finding increasing interest from credit unions. I think it is just natural that everybody looks at their depositories right now, and the further away your relationships and connections are from your home market, the more scrutiny you give them. So we -- I think we have seen some nice response from credit unions, and we are working hard to make sure they understand the benefits of banking with Bank of Hawaii.

Okay. And then my second question is -- it looks like most of -- or a lot of the deposit growth found its way to, funds sold. Is that something that you are waiting to see how sticky those are? And will it eventually move into securities? Or is liquidity kind of king here?

Well, we -- we ended the year with a lot of focus on liquidity, not knowing what conditions were going to be like as we moved into January. I would say that there is less anxiety over stickiness, than there is over the returns of investing at this point. So the desire for liquidity and the -- the yields or the attractiveness of investment alternatives told us this is a good time to stay short. Kent, you manage that. Do you want to add anything to it?

No, that's right. I mean, at the investment rates, given the terms available.\, for the securities we would want to own, we feel it is just better to stay liquid at this point.

Okay, thank you very much.

Thanks, Bobby

Your next question from the line of Miss Heather Wills from Bank of America.

This is actually Erika Penala. Can you hear me?

Hi, Erica.

Hi, Erika.

Yeah, we can hear you fine.

Just a follow-up to Brett's question. For the delinquency trends for indirect auto. Can you give us the past dues for fourth quarter versus third?

I sure can, but --

We can but not from memory. Mary is looking it up, Erika.

Do you have another question, Erika while I look it up?

I do. In terms of the deposit pricing environment in Hawaii. I guess its a two-part question. One is do you still have some peer banks that are out of line, in terms of their deposit rate offerings? And the second, in terms of your ability to rationalize deposit costs do you think we are at a floor?

Let me -- let me address -- as we start off the lunar new year here in Hawaii, I am reminded that we never say anything adverse about anybody in Hawaii, so I don't think anybody's out of line, but there are unique times and initiatives that some of our competitors have shown up with, that we may not fully appreciate. I think as we start the year, everything seemed pretty well balanced. I don't think there is any great outliers Kent.

No, nothing unusual. Obviously it is dynamic, and everyone is competing for share of deposit market.

I think what has happened is lending demand has softened, and investment alternatives have been less attractive. People have responded as you might expect with rates. I think customer expectations similarly have focused a great deal on the certainty of maintaining the value of your principle, and I think the banking system and particularly Bank of Hawaii present a nice opportunity there right now. In terms of further rationalization, there is a time impact depending on what rates do, but I don't is a time impact in terms of what rates do, but I don't think we have an expectation of any significant decrease going forward. Peter or Kent, anything you guys see on the deposit side in terms of further price reduction?

I would say that in the -- in the time segment, things appear to be pretty stable. On the savings side, we see some interesting rates out there. And we will see what happens to them, as we move through the year within the rate environment we are in.

Yeah, Eric, I did -- I should correct that. We just -- I just addressed our local competitors, Hawaii-based banks. Now with respect to the national competitors, you tell me what kind of asset that somebody is putting on to justify a 3.75 or 4% rate that in this environment. I don't get it, and probably most businesses, I don't get either.

And I guess -- another question is if the opportunities for Bank of Hawaii to buy banks out of receivership presents itself, would you care to go back Mainland or given that your concentration in Hawaii from a deposit standpoint? Or is that a nonstarter? [ laughter ]

It is a pretty interesting question. You know for us, it is about building value. And we try to keep a focus shareholders first, but then balance that with community and customers and employees. And when we look at the risks associated with going outside of our market in an expansion, especially an acquisition, it just seems hard right now to justify that.

In fact, I'll go one step further. As you look at the quarterly result,s and you see the good will impairments showing up, I think it really has to question whether it has ever made a whole lot of sense to try to grow aggressively that way. So we have always left that as an option, if it builds value. We will give consideration to it. We know that there are going to be lower price, and probably some institutions under stress.

We have got a strong solid, well-prepared management team. So could there be some place where our brand works, in combination of attractive pricing and good market? I guess we wouldn't rule it out. But I will tell you, we are far more interested in making sure that our bank operates efficiently, and we got the workforce aligned, and the market and the program set for our markets right now.

Okay. And just --

Long answer to a question, Erika. We address it regularly, but we haven't found an opportunity that makes sense for us, in looking now for quite a while.

Can the regulators force you or compel to you do anything out of market? I am just wondering if you are sort of the -- one of the strong banks standing.

Ah, in case they are listening, you know we are always willing to discuss an opportunity that -- there is some price that could become so attractive, I suppose it will make sense. Yes, our relationship with our regulators have never been one of force. We have good relationships, and good discussions with them.

And we certainly would entertain that, but I don't think they are going to come over here, and say you guys have to go do this. I do see some interesting dynamics in some larger banks, where it appears there are trade-offs. The "if this" and "then that" kind of thing. Maybe that's helpful, but I don't think they see us as a major player of resolution of problem situations.

Okay. Before I remove myself from the queue, Mary, do you have those delinquency numbers?

Yes, I do. 90 plus are actually down year-over-year from 27 basis points to15. And then our short-term from 27 basis points from 15. And then our short-term delinquencies are trending up a bit, but only about 10 basis points year-over-year. But clearly we are cautious going into this year with the economic slowing in Hawaii.

Thank you so much for the time.

Your next question comes from the line of Mr. John Flanagan from Fundamentals.

I think you said that the cost income was down in the fourth quarter. I am a little surprised by that, Al. Could you comment on the outlook?

Yeah, John, it was down in the fourth quarter. And primarily as a result of asset values on the equity side. To a lesser extent, we get into our asset management business in the mutual funds. And you get a compression around your fees. And so you get some fee waivers, as yields get increasingly low toward zero. So those are -- that's what I would say about the revenues in that business. Peter or Kent, anything you want to add on that?

On the asset management. I didn't catch the front end of --

The asset management fees and we got it both ways, right? Lower equity fees and then the money market funds?

Yeah, well, the equity markets clearly aren't helping us. International markets of which we have some funds, are in even worse shape than domestics. We are seeing, as you would might expect people moving their overall asset allegation to a more conservative stance, which gives us a lower weighted fee structure. And then as you mention, Al, as money market rates get narrower and narrower, that starts to put pressure on our fee earning capabilities in that segment.

John, in terms of looking forward, you sure would hope that the equity values have reached a point where they won't be decreasing. We don't have a prediction on that. I think, as time going on, we have opened up our architecture and have an enhanced product there. As people re-evaluate their asset allocation, we may have some more attractive product offerings. And then that gets into sort of the rate and volume mix, and I just don't have -- I think that just gets pretty finite for us to make any prediction about 2009 going forward.

Well, did you have an increase in trust accounts for the year?

Yes.

Meaningful?

No.

My other question, Al, relates to treasury stock. I am amazed at how ironic it is. Every company I deal with in call on has absolutely stopped the treasury stock program, even if they have tons of cash. At the same time that their stocks, in most cases are at the most fundamentally attractive level they have been in five or ten years. Would you restart treasury, if you felt a little more comfortable with the world out there?

Yes.

Thank you for your answer.

Now, John, that's if we feel a little more comfortable. I accepted your condition at face value.

Right now with -- with regulatory -- with regulator oversight, I think their encouragement is to build capital. Our own intuition is to build capital, and for us it couples up with the decision on not taking the government investment.

Yes.

And so in that decisioning, we talked with our board, and everybody who we consulted about our internal capital generation rates. And we think giving that a little bit of time to work makes some sense. We -- we have -- we have mixed feelings. We would like to buy back our stock, particularly when it is an attractive buy. On the other hand, if we lose that window, we think that may bode well for some of our shareholders as well.

Thanks a lot.

Thanks, John.

Your next question comes from the line of Jordan Himewitz from Philadelphia Financial

Thank you for taking my question. Two quick questions. One is what is your reserve for your airplanes on your books in dollars or percentages?

I don't know if we ever disclosed that, Jordan. I would say it's substantial. We haven't made a disclosure of allocation to elements, have we done that Mary?

In the second quarter last year, you gave the number.

Ah, we gave the number?

Yes, in the queue.

It's up a little bit from then.

But approximately the same?

Approximately the same number, but I think -- isn't our airline exposure down from then, Mary?

It was $80 million I think at that point?

Just want to take a peek of that. If we disclosed it before we can comfortably update it, can't we, Cindy?

Yes, it is about -- below 80 now.

So our exposure, Cindy, to the airline is how much?

80 rounded up.

Rounded up to 80. And Mary, where are we percentage-wise? Do you happen to have that with you?

I do.

Mary is looking, so we give you an accurate answer. I have got kind of a percentage in mind, but she will give us a precise allocation, Jordan. Do you have a second question.

I was wondering the credit quality on that book because you don't break it out. Was everything current?

Everything was current. But, we have been consistent in reminding people that we have that exposure. And being current in the airline industry, typically those leases structure with a six-month or annual pay. And so, it is not quite the same as monthly pay lease structures, Jordan. I am sure you are familiar with that, but I wanted to mention that for people who might not focus as much on it.

My other question as you are looking that up, is you got a pretty decent exposure to Guam, and Guam could benefit from military repossessioning. Can you give an update, has there been anything finalized, discussed or where things stand on that, and what your dollar exposure to Guam is as well?

Well, our Pacific island business which is primarily Guam, generally is about 10% of our assets of our loan book. And Guam would be most of that, so maybe it is 8% to 9% in total. The military repositioning, the Marines moving from Okinawa to Guam was announced a couple of years ago and got a lot of discussion and attention. Since then, I think the military has continued to work aggressively on planning and preparation for that. The government in Guam has a lot of infrastructure needs to make that work smoothly. And I think that has been the challenge is for the good folks out in Guam, to figure out how to take care of all of that.

I think that has toned down the discussion here over the last 6 to 12 months. I think now as we look at some of the defense profile versus our budget or expenditures. So a little less clear exactly by how much and what the timeline is. I do know talking to the military folks, they have some -- nice advances in their plans. And I am just not up to speed on what their timeline is, Jordan.

Okay.

So that's a little color around, sort of a maybe a nonanswer, I don't know. Mary, do you have a number? Or are we going to have to do more work and get back to him.

30.7.

30.7.

Almost identical to where it was before?

That is millions of dollars again, the exposure that rounds up to 80, right?

Okay. Thank you very much.

Sure.

If there are no other questions, I would like to thank everyone for joining us today, and as always, if you have additional questions, please feel free to call me 808-694-8430. Have a great day and Happy new year, everyone.

There is one more question a follow-up There is one more question a follow-up from Mr. Brett. And we have no further questions. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.