First Hawaiian Inc (FHB) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Community First Bankshares first quarter earnings conference call. All participants will be in a listen-only mode. Afterwards, you'll be invited to participate in a question-and-answer. At that time, if you have a question, press the star key followed by one. This call is being recorded Thursday, April 17th, 2003. I would like to turn the call over to Mark Anderson, CFO

Thank you, Amy. Thank you for joining us for this quarter's conference call. Joining me will be Ron Strand, our Chief Operating Officer and Craig Weiss, our Chief Financial Officer. Against a backdrop of an industry facing significant challenges, Community First reported good performance and our highest second quarterly earnings. Recognizing the difficulties caused by the sluggish economy, prolonged low interest rates and escalating credit quality concerns, we're pleased with our result goes. Matching our internal expectations of 50 cents earnings per share, we registered our eighth consecutive quarter with return equity in excess of 20.8%. Additionally remarkable is the fact that ten quarters with the highest return on equity and earnings per share in our history as a public company have occurred over the last 11 quarters. Not only do we realize strong performance, we're doing a dramatic transformation in our company. We achieved new peaks in four key financial measures. Book value per share hit $9.83, non-interest income reached $21 million, insurance income at $4.1 million was $300,000 higher than our previous quarterly peak. SBA premiums of $1.5 million for the quarter were better than our previous peak. Our results are consistent with several key initiatives, focus on client solutions rather than raw product sales, emphasis on diverse revenue streams through income and expanding our participation in the delivery of the most viable growth products. Particularly encouraging to us and rewarding was the results we achieved in insurance, commissions and SBA premiums. Both the products we have built and they represent outstanding growth vehicles and strong profit contributors for us. During a time when many in the industry are struggling to minimize the contraction of the net interest margin, Community First was able to modestly increase our margin. I would like to turn the call over to Craig Weiss. Craig.

Thank you, Mark. Thanks, everyone, for joining us on the call. In light of the sluggish economy, a slow economic recovery and a prolonged low interest rate environment, we are encouraged by our first quarter financial performance which reflect the continued execution of our strategic plan. Financial results for the quarter reflected strong return equity of 21% and a return on assets of 1.38%. This is a result of the strong net interest margin management, a record level of non-interest income, disciplined expense management, and prudent utilization of shareholder equity. Net interest margin was 5.15% for the quarter. Although down from first quarter 2002, net interest margin did increase 3 basis points on a quarter basis, while lower interest rates are generally viewed as positive for banks, the reinvestment rates are too slow. In light of slow demand, the investment portfolio continues to become a greater percentage of our earning asset mix. We are encouraged that infraspread increased 8 bases points on a link quarter basis as a reduction in earning asset yield was offset by reductions in liability and borrowing costs. The reduction in liability costs is a direct result of a proactive and disciplined approach to liability pricing. Although net interest margins stabilized from last quarter, a soft economy and lack of better reinvestment opportunities will continue to pressure net interest margin throughout 2003. Non-interest income increased on 10% from first quarter of 2002 to a record level of 20.9-mil. As Mark noted earlier, the primary drivers of the increase were premiums on the sale of SBA loans and increasing insurance income. SBA increased 1.1 million from first quarter 2002 and 600,000 from fourth quarter 2002. The increase is the result of our commitment to SBA lending as part of our solutions culture. Record insurance commission income of 4.1 million was up 25% from first quarter 2002 and up 18% on a link quarter basis. This is a result of continued focus on quality insurance agency acquisition opportunities and an increasingly level of contingency income as we are better able to manage our carrier relationships. Also in the first quarter, the company recognized gains on the sale of investment portfolio securities which offset the premium incurred to redeem $10 million of the 7.3% subordinated notes which mature in June of 2004. The increase in insurance premiums and SBA premiums more than offset the softness and commission of the sale of investment products and continued weakness in the deposit service charge income. Another contributor is our focus on expense control. Non-interest expense was up .7% from first quarter 2002 and down 1.6% on a link quarter basis. Net occupancy increased 9% from first quarter 2002 due primarily to additional depreciation expense. This is a result of the company's initiatives related to on line personal business banking, on line teller, enhanced data communications network and upgrading of banking facilities. The increase in net occupancy was offset by reductions in personnel related expenses and various other expense reductions. We did see an increase oil expense during the quarter which was anticipated due the increase in oil property moving through the collections cycle. A March 4th, the company issued $60 million of 7.6% CFB capital securities. The proceeds of the offering were used to redeem 60 million of 8.2% CNB capital 2 securities. The redemption took place on April 4th. During the quarter, approx. $350,000 of additional capital securities expense was incurred due the timing of the issuance and redemption. The company focuses on strong expense controls as a key component to drive increases and earnings per share while continuing to make capital investments in the execution of a strategic plan. The company is also committed to prudent investment of shareholder capital and maintaining strong capital levels. The leverage ratio is 6.72%, up 20 basis points from last quarter. The company continues to believe the share repurchase program is a prudent use of capital and investment in our future. I will turn the call over to Ron Strand, our Chief Operating Officer

Thank you, Craig. Welcome to all conference call participants. We appreciate the opportunity to discuss our performance with you. I'd like to start with some comments on correct volume and quality. The weak economy has impacted our loan volume and, to some extent, our credit quality. The increase in nonperforming asset to .61 of total assets in first quarter of 2003 compared to .50 of total assets in fourth quarter of 2002 is related to single loan which has been put on non-approved status. Net charge-outs were 4.7 million or .54 of average loans for the first quarter 2003 compared to 3.1 million or .35 for the fourth quarter 2002. This increase can be attributed to only two credits. We do not believe our loan portfolio has systemic weaknesses, but, instead, isolated credit issues we are addressing in a timely manner. During the first quarter other real estate owned increased to 7.1 million, an increase of 1.1 million over the fourth quarter of 2002 and reflects the excellent progress made by our special assess group to position the company to dispose of the non-performers as we move through 2003. We anticipate very little, if any, loss on these assets. With respect to volume, residential real estate activity remains robust, driven by refinancing. The joint venture continues to perform according to plan, and we look forward to Paul Olsen's leadership as the new President of Community First Mortgage. SBA initiative generated 1.5 million in premium income during the first quarter and we are pleased with our initiative to provide a small business administration solution to our clients. We continue to witness growth in commercial real estate. However, I do want to stress that our commercial real estate portfolio is very diverse with the vast majority of our loans to small or mid--size companies. The agricultural sector remains under stress, especially in areas impacted by the drought. Our exposure to agriculture is only 5.7% of our portfolio. Consumer loan demand remains soft with the exception of generated paper expanded to our dealer network. The quality of our indirect portfolio has improved considerably since the inception of the loan center. Our allowance for loan losses was 1.5 of total loans and 195% of nonperforming loans at the end of the first quarter compared to 1.57% and 245% of nonperforming loans at the end of the fourth quarter 2002 and 1.52 and 263% of non-performance loans at the end of first quarter 2002. Obviously, the reduction coverage is a result of the loan previously mentioned which moved in un-performing status during the quarter. The roll-out of our loan center initiative is on schedule with an anticipated completion date in the fourth quarter 2003. We remain very pleased with the performance of our loan center. In summary, what we have experienced an increase in non-performing asseting and charge-offs, they are the result of two credits on the portfolio. We remain committed to improve our loan quality through disciplined underwriting, strong credit administration process, loan centralization and, when appropriate, a rigorous work out strategy to reduce problem assets. Our approach to credit remains one of quality versus quantity. Now, I would like to turn the conference call back to Mark Anderson

Thanks, Ron. Thanks, Craig. It was an excellent quarter for us. In addition to the financial results, we continue to expand our involvement in insurance with the acquisition of the Thornton, Colorado, car agency earlier this month. We will continue to seek out additional opportunities to further expand our insurance network. We also did have occasion to review a few bank acquisition opportunities during the quarter. But again we felt the command in price in excess of a level that would allowed us to provide a proper return to our shareholders. As Craig noted, we completed the offering of cap 4 and used the proceeds to retire cap 2, there by reducing our borrowing cost from the $60 million by more than $350,000 a year. While credit spread were wider, we participated in a good long-term refinance opportunity. We did continue on repurchase activity by repurchasing 330,500 shares of SBX. That brings our total over the course of past three years to more than 13 million shares of stock from initial base three years ago of 351 shares out standing. As Craig mentioned, we are pleased we're able to repurchase 10 million of the 7.3 subordinated debt that matures in June 2004. On a regulatory guideline none of the out standing debt will qualify as tier 1 or tier 2 capital for the year prior to maturity. That year starts in June of this year. This was an opportunity for us to reduce our boring cost without sacrificing capital. We will look for additional opportunities to do so. We're diligent in every aspect of our business. We confront the challenge of uncertainty and economic softness. We're committed to our clients, employees and shareholders and believe the results of the quarter affirm our position. Our focus is to create an organization that performs optimally over the long-term and why you see record performance levels over the past few years, our investments of that time frame are continuing to work throughout this year and will position us in 2004 and beyond. We're working hard to create an organization that lives up to our purpose, improving lives through financial solutions. Our annual meeting will be held on Tuesday, April 22nd in Fargo. We're looking for record attendance. It will be an excellent for attendees to learn more about Community First of tomorrow, our vision and all our initiatives make a better company. It will be an opportunity to look how we're transitioning beyond a sales focus and fold a solutions culture. We want to thank you for joining us. I believe you'll agree Community First provides great performance while creating a company that's built to last. With that, we'll open it up for calls. Amy.

At this time, in order to ask a question, please press star, then the number one on your telephone key pad. Please hold for your first question. Your first question comes from John Aletran from RBC Capital market

Good afternoon guys.

Hay, John. Good to hear from you

On your SBA volume or fees, what's driving the strength? Are the fees hanging in there? Are they stronger than they were 12 months ago or volume driven or both?

John, this is Ron. Actually, both, to answer your question. Your volumes are up over the previous year. Also, the premium we're receiving on these loans has remained steady. Actually, in the high eights, which is remarkable, you know, given where this has been in the past. Anything over 5% premium is considered pretty good. We've had very good success, especially in Colorado, with our SBA solution. Utah continues to be strong. Other states are starting to come on. We have quite a bit in the pipeline. It is both volume and premium

Okay. As long as I've got you, Ron. It seems like some of the war issues have been cleared up. I'm curious if any of our commercial borrowers have been optimistic? Do you see any firming in your pipeline as a result of that?

Again, John, we're seeing a fair amount of activity from the southwest, the southwestern part of our franchise. The upper Midwest, great plains, it's pretty soft up here as far as activity. You get into Denver metro area, you know, Salt Lake City, las Cruces. California is very strong for us. There's pockets. Overall, loan demand is still very soft

Okay. Then I guess maybe a question for Mark. Any income type campaigns you have planned for quarters? It looks like your insurance revenues have hung in there fairly well. I'm curious how you think they will be in coming quarters?

It's a great question, John. We have been going through a series of, basically, all-day, every day promotion activity for a wide range of our products. We have been in each of our divisions currently been working through -- again because of the timing -- some very strong investment promotion activity. Again, it ties well to the April 15tax deadline date for some retirement planning. Given the tone of the marketplace, it's challenging. That being said, we've done well versus where we were two years ago in investment product sales. We are going to continue moving along that basis. The investment product set has been very, very good for us. We continue to believe we're going to make great progress because we've seen some nice opportunities with retirement products. The 549 solution out there for education we think that is definitely going to be an area to continue to work through. Another area that is very, very important for us that we believe will be gaining some good traction through 2003 through a lot of promotional activity will be our check card, the debit card solution. We have less than industry average, less than half the industry average penetration. It is a great profit generator for us, a tremendous piece of convenience and cost efficiency for our clients, and that's one that we have seen great growth in over the past three years without excess promotion on. This year we're going to push that very, very hard. It is going to move nicely along that path. Another area where we were working on finalizing how we approach the promotions process where there hasn't been any in the past is on the insurance side. A lot the of progress we've made has been through the pure sales origination side. There is a wide range of different insurance products that fall into that, whether it be PNC, our main stay, life products or a long-term care solution for some of our clients. We think the insurance franchise has been one that has, to some degree, been left out of the internal campaign or promotion process. We want to give that more of a kick start as we go through it. That will give us more results as we move forward

Last question. If my memory is correct, I think the last bank deal you did was Valley. Is that right?

That would be correct. In the fall of 1999

What would it take for you to do another bank deal? What hasn't been right? Has it been pricing? I'm just cure curious what the characteristics would be to make a bank deal right in your eyes?

That's a great question. A lot of things need to be right. We have more than 40 bank acquisitions and insurance acquisitions. There is a lot to a transaction. Price is, clearly, the great factor that identifies whether it's going to be accretive or non-accretive or how good a transaction it is going to be. Without a doubt, of the transactions we've seen, the softest pieces have been price related. Return on our investments have not exceeded single digits by our expectations and calculations on any of the transactions we looked at. Part of that is being sure we're realistic with respect to what type of earnings capability is in the underlying franchise. That's been the biggest problem, is the pricing expectations are above the earnings capability. That being said, it doesn't mean all of the price expectations have been sky-high. We've seen a couple that are reasonable. Frankly, the franchises have been poor franchises. They are in marketplace that is have finite limited opportunity, they may be on the decline. The profitability may be modest. We got one yesterday that we looked at that is a very, very poor performer in a flat marketplace that, frankly, whoever buys it will end up with a challenge in three to four years in terms of what to do with their capital. So I think what it comes down to is we need to see an opportunity that represents good value for us as a prospective owner. It has to be a market with vitality. It has to be a franchise with something to offer. It can't be a train wreck. It can't be on the demise. There has to be a price expectation by the seller that is realistic. That's a hard combination to match up over the past three years

Thanks, guys.

Your next question comes from Andy Collins with Piper Jaffrey

Good afternoon, guys

Hello, Andy

Just a couple questions here. First on asset liability management. Wondering how your position currently for rising or declining rates and, also, what your duration is on your investment portfolio? Thanks

Thanks, Andy. It is a great question and something we deal with here on a daily basis. Credit aside, net interest margin or asset liability management is, by far, the item that will impact a company the greatest. Quite frankly, we're modestly surprised, pleasantly surprised that we've been able to increase our interest spread. On the liability side, how much more room do we have to go? Probably not far. We've been able to reduce our interest bearing costs 22 points or so from last quarter. You know, again, some of that is due to the activity, the short-term borrowings with redeeming the notes. We've modestly dropped some of the deposit rates and have been, for the most part, been able to maintain the balances we have in place. On the leading asset side we continue to see loans re-priced downward. Plenty of refinancing activity. On the portfolio side, which is now becoming a more significant portion of our earning asset mix and I believe it is about 32% at the end of the first quarter, about 28% at the end of the first quarter 2002. That is providing one of our larger challenges as we see that portfolio grow. From a liability stand point if you look through the reporting activity, 10-K, et cetera, from a pure GAAP stand point we still are liability sensitive. That's not a measure we put a lot of credence into. We perform on a monthly basis, balance sheet simulation as it relates to a number of interest rate scenarios. Quite frankly, right now if we were to see a 50 basis point reduction from the Fed, which is being talked about, that would continue to put some strain on margins. I don't think we're going to have the opportunity we had in the last quarter to reduce interest-bearing liability costs as rapidly as we did or more than exceed the drop in earning asset yield. When you look at the portfolio. This is more from a weighted average life, the weighted average life in the portfolio is over 5%. That's down from 6, 6.5% maybe a year and a half, two years ago. Most of the portfolio are cash flows being redeployed into the hybrid arm product three one five one CMT product. That is the largest allocation of the portfolio with a modest level going into the fixed rate mortgage back, which had been one of the higher allocation metrics a couple years back

Okay. Thank you. One other question I had. Do you guys have a feeling for how much of the slowdown in terms of loan and, you know, general growth dynamics occurred because of, perhaps, the war, the cold winter, those kind of things? Just a gut feel. Do you think this is a temporary situation, or are we entering a prolonged period of slower growth?

Andy, this is Ron Strand. I don't know that I can attribute a lot of the slowdown to the war. Actually, we've seen on the consumer side, it's been pretty slow for about the last year. Interestingly, on the indirect side, we've had very good success. We continue to see considerable growth there. On the direct consumer side, it's very soft. We see higher-end housing is very soft. Homes in the $200 to $300,000 range sell fairly brisk. We've seen -- business expansion has been slow. In most parts of our franchise. However, there are, as I indicated earlier, pockets where it's very, very strong. Southern California is extremely strong. I don't know that I would attribute too much to the slowdown of the war. It is more of a general economic.

I think that's fair, Ron. And Andy, It does come down to the economy. It has hit all areas, to different degrees, as Ron pointed out earlier. San Diego, California, continues to be robust. We saw some evidence of slowing in the other parts of the inner mountain Midwest, Utah, Colorado saw some slowing. Again its how this economic slowing has worked its way through the economy and, ultimately, for a turnaround comes back to what the state of the national and regional economy is going to be. What's it going to take to break out of the softness we're in? That's the driver's we see now

One last question. What about non-bank acquisitions, are there opportunities you see now you might not have seen previously, particularly in the insurance area?

In response to that, Andy, I would say we definitely have seen a nice, steady stream of insurance agency acquisition opportunities. We've continued to focus on what we would characterize as a diversifying approach? That is to say, we don't want to over wait and buy something too significant. What we see as having the most value is the agencies of a couple hundred thousand and a million, million and a half. Not have as much risk in a single transaction. We are very, very positive about our prospects to see a notable number of acquisitions over the next couple years. There is a lot of opportunity there. A significant number of transactions out there for a lot of reasons, partially due to what's going on with carriers and marketplaces, difficult for independent agencies to attract carriers to provide the product. That's where we have the product to fit in. I think the most recent statistics suggest that Community First operates the 44th largest insurance operation owned by a bank holding company. We expect to build it. That's going to be the greatest opportunity for us along the insurance lines. We will see more activity

Great. Thank you very much.

Thank you.

Your next question comes from Ron Peterson with Sandler O'Neill & Partners

Good afternoon

Hello, Ron

Without going into too much detail, could you provide more information on background information on the two large credits that led to the increase in non-performers in the industry?

Yes, Ron. Without getting into too much detail, since all of us know we can't go too far. Ron will share some additional color on those

Ron, these two credits have been fairly weak for some time. One is agro business related and the problems with that credit are strictly related to cash flow and we don't really see -- we doesn't see where this was going to improve in the foreseeable future. We elected to place this on non-accrual and take some out of reduction on the principal down to a level where we believe, you know, we are covered based on collateral. The other one is, probably, more related to the economy. That is a contractor loan. We do anticipate that we have recognized the full extent of the loss on this credit, and, also, believe that, for the most part, this credit will be resolved during the second quarter of 2003

Okay. And with respect to the consumer lending, the indirect, are there certain geographies that are seeing the most growth there, and what kind of average FICO scores are you seeing in that area?

the growth is dependent on the dealer. Interestingly, most of our indirect growth for the last, couple three months have been from the state of north Dakota. It is a function of the dealers you're tied into. Average FICO scores are in the 730s, 740s. We're seeing very good credit coming through the pipeline. Our management of the loan center is skilled. They have been in the business a long time. You know, we're controlling any overrides that may be taking on a direct basis at bank level. We continue to refine the process and feel good about the quality of the paper. We have measurably improved the quality of paper coming into our direct and indirect portfolio since the inception of the loan center

Thank you.

At this time, there are no further questions.

Well, with that, on behalf of Ron, Craig, and the balance of the company, I would like to thank all of the conference call participants for joining us to discuss a little bit the results of the first quarter 2003. We feel very, very good of generating earnings per share of 50 cents in a difficult environment, especially in light of the significant investments we continue to make, the transition we continue to make in an organization and building a better company for coming periods. With that, we'd like to thank you and remind you of an annual meeting that's coming up and wish you all well. Thank you.

Thank you for participating in Community First Bankshares first quarter earnings conference call. You may now disconnect.--- 0