First Hawaiian Inc (FHB) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Community First Bankshares Incorporated second quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session. At that time, if you have a question, you will need to press the star key, followed by the 1 on your telephone. As a reminder this, this conference is being recorded, Thursday, July 17th, 2003. I would now like to turn the call over to Mark Anderson, Chief Executive Officer, Ron Strand, Chief Operating Officer and Craig Weiss, Chief Financial Officer. Please go ahead.

Thank you, Angela. Thanks to never everyone for joining us today. I'm Ron Strand, Chief Operating Officer of Community First. We're happy to share comments with you on this quarter's financial performance. Joining me is Craig Weiss, Chief Financial Officer, and from the outback of Australia, Mark Anderson, Chief Executive Officer, extends his greetings to all of you. Mark is in Australia where one of his daughters is participating as an athlete on the U.S. team in the down under international games. Currently on another continent, mark passed along his views on the quarter which we will share with you today.

The second quarter is largely a continuation of the economic environment we saw in the first quarter and in fact what we have seen over last few quarters. Low interest rates, a soft economy, and ongoing global concerns all presented challenges for the industry as well as for Community First during the period. With that in mind, we knew the second quarter would be challenging, so some of the positive results we experienced were especially gratifying. These positive results include, cost efficiency improvements, continued strength in mortgage and SBA volume, stability and key lone quality numbers compared to a challenging first quarter. Net interest margin that while down versus last year's second quarter, was within close range of the first quarter 2003. Our third best quarter ever in terms of commissions on the sales of investment products, 9 consecutive quarters with return on equity in excess of 20% and a book value per share of $9.98 on new peek. While the macro economic situation sorts itself out, we continue to focus on those things within our control, namely the successful execution of our strategic initiative. From that standpoint, the second quarter was also successful for us. We filed a shelf registration with the securities and exchange commission, that we believe provides capital management. We completed three insurance agency acquisitions. We continued the successful roll rollout of own on-line teller initiative, and we took steps to ratchet up our market extension plans in the second half of 2003. We will expand on these as well as other initiatives that kept us busy during the quarter. Looking ahead, we still she a challenging second half of 2003, and an additional quarter point cut in the fed funds rate at the end of the second quarter, does not give us reason to alter that outlook. What is clear to us is that our strategic plan is has been well executed. We have talented people dedicate dedicated to our solutions focus focus, and that is keeping Community First near the top among our peers and this will bode well for long-term success. At this time I will ask Craig Weiss to provide additional details on the quarter. Craig?

Thanks, Ron, thanks to all of you for joining us on the call this afternoon. In spite of a challenging operating environment, we are pleased with the results. Return on equity was 20.5% and return on assets was 1.36%. Although down modestly from first quarter these are excellent results. Net interest margin, a primary contributor to the strength of our earnings stream was down 4 basis points from first quarter. Non-interest income was a record $22.1 million, expenses remained under control, and credit quality indicators continued to improve. Net interest margin was 5.11% in second quarter, down from 5.15% in first quarter. The unprecedented low interest rate environment has compressed margins, causing them to fall from near record high levels in 2002.

With the lack of loan demand, the investment portfolio as a percentage of earning assets has increased approximately 15% from second quarter of 2002. Although we already experienced relatively low liability costs, we were able to lower liability costs enough to offset some of the impact of lower yield on earning assets. If a flight yield returns and with liability rates that have nearly bottomed out against still declining earning asset yields, we could continue to see further margin compression in the last half of 2003. If we continue to experience the recent backup in the long end of the yield curve, net interest margin should begin to show greater stability as prepayments slow, premium amortization slows and cash flow is reinvested at higher rates. As you can see, forecasting net interest margin is very much a moving target. Non-interest income was a record $22.1 million in the second quarter. An increase of 5.8% on a quarter basis and up 7.3% from second quarter of 2002. Non-interest income was bolster bolstered by a $1.8 million gain on the sale of investment securities. The security gains were taken to offset approximately $530,000 of penalties incurred to prepay longer term federal home loan bank advances and is a modest portfolio restructuring to limit potential prepayment risk exposure.

Service charges on deposit accounts were up $619,000 or 6.6% from first quarter of 2003. This is due primarily to historical first quarter softness and a fee increase effective march 1st of this year year. Insurance commissions were down $700,000 or 18% on a linked quarter basis. This is due to the strong level of contingent income recognized during first quarter. Year-to-date insurance commissions are up $840,000, or 13% from 2002. Commissions on the sale of investment products were up 13% on a linked quarter basis and represented the third highest level ever with the highest level occurring in second quarter of 2002.

Other non-interest income was down $450,000 or 12% on a linked quarter basis. This was primarily due to the record level of SBA premiums during the first quarter of 2003, which was partially offset by a record level of mortgage income recognized in the second quarter. Year to date, other non-interest income is up $1.9 million or 37%, due to the record level of SBA originations and the success of Community First Mortgage.

Community First has always been very successful in controlling non-interest expenses. No interest expenses were up $900,000 or 2% on a linked quarter basis, and down $900,000 or 1% year to date. Most of the increase on a linked quarter basis was due to the timing of certain professional, legal and account accounting fees. Capital securities expense was down $400,000 on a linked quarter basis, due in part to additional expense recognized in first quarter of 2003, relating to the timing of the issuance of C of B cap 4 and the redemption of CFB cap 2 securities. Although the company has experienced increases -- expenses related to strategic initiatives, such as on-line delivery tellers, on-line tell tellers and platforms to name a few, we continue to strive for opportunities offset these expenses and operate more efficiently. Successful implementation, such as our centralized law SB&A centers, the increasing success of Community First Mortgage, and the ongoing process improvements implemented by Community First technologies and other departments and subsidiaries are further evidence of our commitment to manage risk while operating in a more efficient manner.

As we noted before, strong expense control is one of the key components of continued financial performance. We continue our commitment to prudent use of shareholder capital. The leverage ratio increased to 6.98% which is the highest level since first quarter of 2000 when the stood at 7.51% which occurred prior to the implementation of the share repurchase program. In second quarter, we repurchased 357,000 shares and have approximately 3.4 million shares remaining under current authorizations. We will continue to execute our share repurchase program, which continues to be a prudent use of shareholder equity while looking for opportunities to leverage our capital base. I will now turn the call back to Ron Strand our Chief Operating Officer.

Thank you, Craig. I will now share some comments on credit quality and volume. Consistent with first quarter results, the weak economy has impacted our loan volume and to some extent our credit quality. As noted in the earnings release, nonperforming assets represented 0.58% of total assets in the second quarter of 2003, compared 0.43% in the second quarter of 2002 and 0.61% in the first quarter of 2003. Nonperforming assets to. End loans was 0.94%, versus 0.66% in the second quarter of 2002 and 1% in the first quarter of 2003. Net charge-offs were 4.2 million or 0.49% of average loans for the second quarter of 2003 compared to 3.1 million or 0.34% for the second quarter of 2002 and 4.7 million or 0.54% for the first quarter of 2003.

While we are disappointed with the increased in non-performers and charge-offs during the first two quarters of 2003, both increases are the results of two credits in the portfolio. We continue to believe that our loan portfolio is very strong from a quality perspective and the losses associated with these two credits are isolated and not due to systemic weaknesses in the portfolio. At the end of the second quarter quarter, other real estate owned was reduced to 6.5 million from 7.1 million at the end of first quarter 2003. Our special assets group continues to position these for disposition as we move through the remainder of this year. With respect to volume, residential real estate activity remains robust driven by refinancing. During the second quarter of 2003, we enjoyed a record number of mortgage closings and the highest dollar volume of closed loans since the inception of Community First Mortgage. We continue to stay in close contact with our markets to determine the level of construction and real estate activity and the general mood of home buyers and investors. While most markets reporting -- report a slowing inactivity. Homes in the 400,000 and under price range continue to sell at a fairly brisk pace. Some markets, notably California and New Mexico, continue to witness very strong single family home activity. Small business administration lending continues to be strong, however, it has been impacted by the weak economy. We continue to belief that this is an excellent solution for our commercial clients in all communities served by Community First.

Commercial real estate activity remains robust in select markets, as we have stressed on previous calls, we have a very diverse commercial real estate portfolio with the vast majority of our loans to small or mid-sized companies. Indirect consumer lending remains very strong, which is a testament to the service provided by our centralized lending process. Our collection and recovery department continues to perform to expectations with net consumer losses dropping for the third consecutive quarter and the second lowest level during the last 12 quarters. We find this very encouraging during weak economic times. In summary, we remain committed to improving our lone quality through disciplined underwriting, strong credit administrative processes, loan centralization, and when appropriate, rigorous workout strategy to reduce problem assets. Our approach to credit, remains one of quality versus quantity. Craig will now join me to take any questions on this quarter's results. Angela, if you would please open the call for any questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad. Please hold while –

Your first question comes from Jon Arfstrom .

Question on your nonperforming loans. It looks like there was a fairly big drop in the commercial popped up last quarter, but can you talk about what's happening there?

Well, we're seeing a, you know, through the special assets division, which we've enjoyed great success during the last several quarters, there were able to resolve a few credits during this quarter John. We anticipate that we will see additional resolution to some of hour larger problem credits, hopefully, in the third quarter, but as you know, credit has a way of -- when you are in the business, you have somewhat of an annuity built in, but we're optimistic that we will continue to see resolution to credits. We've been able to get some credits refinanced. Obviously we've had reduction in some of these through charge-offs. It's a combination.

Okay. And then maybe a question for Craig on the securities portfolio. Can you talk a little bit about your plans there? I know you took some gains this quarter to offset some other items, but in terms any plans to grow, it, plans for future gains in the third quarter, just touch on that.

Good question, John. Historically , the way we've approached security gains, we've typically matched them off against something on the other side, prepayments on federal home loan bank advances, first quarter we took some gains to premiums that we incurred to redeem some subordinate debt that matures in June of '04. We don't foresee this level of Charge-offs going forward. I mean, we think this was a window of opportunity to help limit our exposure to prepayment risk in the mortgage backed portfolio. You know, if we saw the opportunity and felt that it was the prudent thing to do, we could step up our gains in the portfolio again, but at this point, John, we don't see that as being the case. It is much more of a normalized level going forward.

And the size of the portfolio, it's probably safe to say that that won't change materially?

I would say it's pretty safe to say that the portfolio will not see material change from where it's at today.

Okay. And then the other question was one the securities revenue. Did you run any type of campaign during the quarter? Or is this sustainable level?

John, yeah, there was -- there were some mini-campaigns that have taken place, taken place in the marketplace. Some of the resulting increase in commission on the sale of investment product would be due to a little bit of a market rebound. One of the other things that we've been doing over the course of the last few quarters is we're now getting some additional investment sale management coverage throughout our footprint. We had some pretty decent locations in the past. Were we didn't have adequate coverage coverage. We did a nice job of being able to not only recruit but retain talented investment reps. So I think it's a combination of a number of things. Going forward, again, a lot of our success will be dependent upon what happens in the marketplace, but irregardless of the market marketplace, we are doing a better job of hiring, recruiting and training and just becoming more aware internally of how this fits our solutions culture.

Okay, thanks a lot, you guys.

Thanks, John.

At this time, I would like remind everyone, in order to ask a question, press star and then the number one on your telephone keypad.

Your next question comes from David Konrad.

Good afternoon.

Hi, David.

I think, I apologize if I miss missed part of this going through the prepared remarks, but insurance commissions as well as SBA and the mortgage approach, I think is in the other income item, but it looks like both of those items were down sequentially. I was wondering if you could go over that a little bit again, and then if you could also go over the offsets again to the securities sales. I'd really appreciate it.

Okay. That's a good question, David, and you're right, on a linked quarter basis, insurance commissions are down about $700,000, about 18%. Much of that is due to the level of contingency income that we received during the first quarter. This is a historical trend, if you go back and look at previous quarters, that's the primary contributor as to why you're going to see activity in the insurance side down on a linked quarter basis. If you look at year to date, we're actually up on a year over year basis modestly. If you look at a year to date basis, we're actually up about 13, 12 to 13%, David, so it's really due to season seasonality that occurs typically third quarter is a step up from second quarter as we see some additional insurance activity if in the way of crop hail insurance and things of that nature. So it's due much more to seasonality than anything else. As you look at the security gains, some of the offsets there there -- the primary offsets was about $530,000 in expense that is we incurred to prepay some longer term federal home loan bank advances. The rest of it was due principally to some moderate modest restructuring of the investment portfolio, exposure to some potential prepayment risk within the mortgage backed sector.

And other income also. That was down sequentially, probably despite some strong growth in SBA and the mortgage side. What happened?

There again, David, on a link linked quarter base, sequentially it was down about 12%. A lot of that again is due to timing, first quarter was a record quarter for us in the generation of SBA premiums. Although premiums this quarter also ranked up fairly high, I think it was the third or fourth highest quarter that we had. It was down on a linked quarter basis. Part of that was offset by the continuing success that we had from Community First Mortgage. We did have a record level in the second quarter of fundings, as well as a number of loans and the activity or the income from that subsidiary also rolls through the other non-interest income line.

Okay.

Again, if you look at both of those on a year to date basis, we are up fairly significantly. Other non-interest income, year to date through June, compared to last year is up about 37%. Again primarily a attributed to the strong performance of SBA and Community First Mortgage.

Okay, thank you.

At this time, I would like to remind everyone, in order to ask a question, please press star and the number 1 on your telephone keypad. At this time, there are no further questions.

Okay. Thank you Angela. In closing, I'd like to share a few accolades that we received during the first half of the year. Community First was named to the Forbes 500 list for the 5th straight year. This is an asset based measure. It was also ranked 13th of the top 100 banks by U.S. banker, based on 2002’s return on equity. Community First was also ranked 18th by the ABA banking journal on its list of banking's top performers, based on return of equity among publicly traded bank holding companies and banks and thrifts over a billion dollars in assets. One other accolades is that Community First was named a merchant dividend achiever for the second straight year. 10 year average compound growth rate of its dividend of 16.75%. Community First remains committed to the long-term performance rather than short-term gains. We look forward to meeting any challenges and taking advantage of opportunities ahead. We believe our current course will position us well into 2004 and beyond. Thank you for joining us on the call today and thank you for your interest in Community First First.

This concludes today's conference. You may now disconnect.