First Hawaiian Inc (FHB) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Community First Bankshares Incorporated fourth 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 will you need to press the star key followed by the one on your telephone. As a reminder, this conference is being recorded Thursday, January 15, 2004. I would now like to turn the conference over to Mark Anderson, Chief Executive Officer. Please go ahead, Mr. Anderson.

Thanks Jeff, and thanks all of you for joining us on this conference call where we will talk a little bit about our fourth quarter and full year 2003 earnings. As Jeff mentioned, I am Mark Anderson, President of Community First and joining me will be Craig Weiss, our Chief Financial Officer and Ron Strand, our COO. It goes without saying that 2003 represented some challenges and impediments to industry performance. While we at Community First made great strides in numerous key areas in our strategic initiatives, soft loan demand due to weaker economic conditions hampered performance.

While record low interest rates were a boone to real estate activity, the yield curve presented some margin compression challenges for us and many others in the industry. In many respects, fourth quarter for us was a continuation of the significant factors that we experienced all year. In our loan portfolio, total loans on a year-end to year-end basis actually declined 7.1%. While the strength of real estate finance activity aided the performance of Community First Mortgage, our mortgage origination subsidiary, 2003 saw a decline on the volume of loans that we carried in our real estate loan portfolio. That amount actually was a 22% decrease. With a strong business banking orientation in many of our markets, softer commercial and construction lending activity also resulted in a decline in those balances in 2003. As we enter 2004, we are seeing signs of renewed activity that lead us to believe that we will shortly reverse the 2003 trend of lower loan balances. We are encouraged about prospects for increases in most loan categories.

Among those, we have strong expectations for increases in consumer loans, primarily indirect. With our loan centralization initiative nearing completion, we are encouraged about the impacts we are seeing both in terms of asset quality, asset origination and efficiency. We anticipate relatively strong increases in these balances in 2004. Also, prospects for commercial, commercial real estate and other consumer loan opportunities have returned. As we move to take a look at the year and the quarter, on a stand-alone basis we recorded some excellent results. Fourth quarter return on equity was 20.3% and marked the 11th consecutive quarter with return on equity in excess of 20%. We were able to realize a 47% increase in SBA loan fees from the 2002 to 2003 period.

Also, another area of fee income for us that's been very strong in terms of its growth in contribution is that of insurance commissions which rose 10.1% during 2003. While we were able to stabilize our net interest margin from third to fourth quarter, we did witness a year over year decline of 25 basis points. In light of a very difficult set of circumstances, we are pleased with our progress and our performance. I'd now like to turn the call over to Craig Weiss, our Chief Financial Officer. Craig?

Thank you, Mark, and thanks to all of you for joining us on the call today. Despite the difficult operating environment that Mark referenced, our 2003 financial performance was noteworthy. We achieved a return on assets of 1.34% and a return on average equity of 20.5%, both comparing favorably to our peer group. Total shares on return was 13% for the year, nearly 19% over the last three years and nearly 18% since becoming a public company.

We continued our commitment to dividend growth by increasing our quarterly dividend to 23 cents per common share, marking the 15th dividend increase since we became a public company. We also repurchased 1.7 million shares during 2003, bringing the total shares repurchased to 14.3 million since 2000. Financial results reflect the adoption of FIM46 R as of December 31, 2003, wherein our business trust subsidiary and the trust preferred securities issued by the subsidiary are no longer consolidated for financial statement purposes. The effect of the deconsolidation is a reduction in non-interest expense and an increase in interest expense.

The adoption of FIN46 had no effect on net income. Net interest margin was 4.84% for the year, down 25 basis points from 5.09% last year. As noted earlier, this was a result of declining interest rates which accelerated prepayments and premium amortization and lowered reinvestment rates as well as continued shrinkage in our loan portfolio. After losing seven basis points during third quarter, net interest margins stabilized during the fourth quarter at 4.80%. This is welcome relief after steady margin compression during the past year. The major factor behind the margin stability in the fourth quarter is higher long-term interest rates, a steeper yield curve and what appears to be a more stable interest rate environment.

Non-interest income increased 6.7% in fourth quarter of 2003 from fourth quarter of 2002. For the year, non-interest income increased 8.9%. Fourth quarter non-interest income was driven by a 26% increase in securities sales commission resulting from stronger equity markets, a 7% increase in insurance commissions, the second highest quarter of SBA premiums and a relatively strong level of security gains. These positives are partially offset by losses recorded on the sale of two bank buildings. The YTD increase in non-interest income was driven by a 10% increase in insurance commissions, a 47% increase in SBA premiums noted by Mark, security gains, and a $1.2 million demutualization distribution that we discussed in the third quarter conference call.

These increases were partially offset by a 5% reduction in security sales commissions. The growth in non-interest income is a result of our strong focus on improving clients lives through financial solutions and building long-term client relationships. We believe this is what will differentiate Community First from our competitors. Keeping costs under control is especially critical when facing a challenging revenue environment. Non-interest expense decreased 6% in fourth quarter of 2003 from fourth quarter of 2002. For the year, non-interest expense also decreased slightly. These results reflect the continued success of our internal initiatives to reduce costs while continuing to invest for the future.

Although although we are not pleased with a efficiency ratio which has increased from 60.9% in fourth quarter of 2002 to 63.7% in fourth quarter of 2003, it is a result of revenue compression over that time period, not increasing expenses. We will continue to monitor expenses closely as we work through this challenging revenue environment. As reflected in our vision and values, we will prudently invest capital to achieve profitable and sustainable growth for our shareholders. I will now turn the call over to Ron Strand, our Chief Operating Officer.

Thank you, Craig, and welcome to all conference call participants. I would like to share some comments on credit quality and volume. Consistent with previous quarters, loan volume remains a challenge. To some extent, this is a result of a week economy and to some extent an increased emphasis on credit quality which has impacted loan volumes as we continue to exit relationships that do not meet our credit standards. While loan volume is down in both the [inaudible] quarter and year-over-year basis, we continue to enjoy strong activity in select markets and loan segments.

Specifically, commercial real estate opportunities remain strong in several southwestern markets such as Las Cruces, New Mexico, Cheyenne, Wyoming, San Diego metro and many Colorado markets. As we discussed on previous calls our commercial real estate portfolio is very diversified with the vast majority of our loans to small or mid-size companies. Small Business Administration lending continues to be strong and as noted in the earnings release, Community First enjoyed a record $4.1 million in SBA premium income during 2003. We believe this is an excellent solution for commercial clients in all markets served by Community First. We continue to monitor a discussion between Congress and the SBA regarding the seven A program, volume caps and funding.

Consumer loan growth is due to an expanded network of automobile dealers served by our indirect loan center. We anticipate this segment to provide continued growth going forward. The quality of this portfolio continues to improve due to centralized decisions and excellent performance of collection and recovery departments. Residential real estate refinancing activities slowed measurably during the fourth quarter. On the positive side, we are seeing increased purchase activity in many markets. The resort markets, which slowed considerably after September, 2001, are showing signs of increased activity. However days on market for high-end homes continues to be an issue. We remain very cautious with speculative real estate construction.

The agricultural sector remains favorable and while the beef industry showed considerable strength during 2003, the mad cow situation has impacted prices recently. Our exposure to this sector is modest as agricultural production loans represent only 5.4% of our entire loan portfolio as of 12/31/03. Commercial volumes remain a challenge which is reflective of softness witnessed in this sector throughout the banking industry. With respect to credit quality, nonperforming assets represent .48% of total assets at December 31, 2003, compared to .50% at the same quarter last year.

The allowance for loan losses was 1.57% of total loans and 251% of nonperforming loans at the end of fourth quarter compared to 1.57% and 245%, respectively, at December 31, 2002. Net chargeoffs were $4 million or .48% of average loans for the fourth quarter of 2003 compared to $3.2 or 5% for the fourth quarter of 2002, and for the year 2003, net chargeoffs were .48% of average loans compared to .33% in 2002. Total nonperforming assets of $26.3 million as of 12/31/03 is down from the 9/30/03 balance of $32.4 million, or a $6.1 million reduction which we believe is reflective of our effort to exit troubled assets.

On a year-over-year basis, nonperforming assets have been reduced $2.7 million, through efforts by our special assets division to closely monitor and exit problem assets to reduce loss exposure. With respect to loan centralization, the roll-out is scheduled to be completed during the second quarter of 2004. We remain very pleased with this initiative. In summary, we are very committed to not only maintaining but also working to improve our loan quality through rigorous underwriting strong credit administration processes and loan center initiatives. Now I will turn the conference call back to Mark.

Thank you, Ron. Thanks, Craig. While we are disappointed that we did not realize an increase in earnings per share during 2003, we are very pleased with our performance and progress in a number of areas. One year ago on the very same conference call we recognized that 2002 was a tremendous year, a record-setting year in so many categories, among them earnings per share. On its own merits, 2003 was also a very, very strong year for us. We leak at many of our accomplishments and financial performance. We did realize our best year ever for SBA fees and insurance commissions.

It's also interesting to note that during 2003 we realized four of our seven best quarters ever for earnings per share performance. We continue to look for quality acquisition opportunities, insurance agencies and banks. In the banking sector, we observed additional upward pressure on prices and industry information we've seen confirms the observation that we've gotten anecdotely, but still our expectations are at the highest levels in recent years. We will not waiver from from our pricing discipline that suggests current bank sale multiples are excessive. We have, however, been very fortunate in our ability to find additional opportunities to expand our insurance footprint through additional insurance agency acquisitions.

On January 2, we announced two additional agency acquisitions in the state of Colorado and are confident that we will see additional viable opportunities come to fruition during the course of 2004. A significant element of our growth strategy is our market extension initiative. After considerable research and due diligence, late last year we announced the first three location which is will open this year. Today we are announcing two additional locations in the rapidly growing Minneapolis, St. Paul suburb of Chanhassen and Amber Grove Heights.

We've made excellent progress with staffing the initial offices and expect all five to be open during 2004 and are excited about the prospects for contribution to aggregate performance of Community First. We believe that we are well-positioned to take advantage of what appears to be a strengthening economy and look forward to the opportunities to serve our clients and shareholders during the course of 2004 and beyond. We've repeatedly stated that were we are focused on building the best Community First possible over the long run.

Despite the challenges of 2003, we have not waived from that missive, and are pleased with the progress made during 2003 and how were are positioned for 2004 and beyond. With that, again, I would like to thank all of you for participating on this conference call and ask if there are any questions. Jeff?

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jon Arfstrom with RBC Capital Markets.

Good afternoon. A question for you, maybe you, Ron, on nonperforming loans. It looks like there was a big drop sequentially and there was some movement between categories. I was wondering if you could comment on what's happening there and give us a little more outlook.

Well, obviously John, our chargeoffs were up modestly from the previous quarters though some of that movement was unfortunately through that category but we continue to through our special assets division exiting problem credits is a real key focus for our company. Obviously we've been very careful moving out of some segments. We've been very careful in the agricultural sector for several years. Speculative lending last six, eight quarters we've been very cautious with that. We just have been very fortunate to be able to have some of the nonperforming assets get refinanced with some of our competitors and/or move on through other sources.

We feel we made great stride throughout 2003 and actually what you are seeing in the fourth quarter is more or less the culmination of all the efforts we put forth throughout the year.

So market share you are willing to give up in some cases.

We are in certain segments, no question about that. We've been very cautious, well on the commercial side of the ledger, the industry is down about 8% year-over-year. So we are not alone in that regard. But certain segments, yes, we are just being very careful. The resort market after 2001, as I discussed, the high-end homes, the days on market, Jon, are not necessarily days, they are months and sometimes actually years, so we've been cautious on high-end homes as it relates to speculative lending.

Okay, then just a couple more things. The deposit service charges are down a bit. Is there any seasonality there that I should be aware of?

Jon, typically that tracks pretty closely with levels of deposits and as you can see we, even though we are relatively stable on a link quarter basis, that really isn't any seasonality. I know in third quarter we did have a little bit of an increase in deposit service charges. Part of that is due, if you recall, to our switching to a different vendor for our point of sale transactions and there was a one-time catch up, if you will, of some earnings, some income dollars as we were typically one month in arrears on recording those dollars. I think what you are seeing in fourth quarter is something a little bit more normalized, Jon, which for the most part will follow our deposit balances.

That makes sense. Then I guess just more broadly, it sounds like when I look at your model and just step back, you are more optimistic on lending and it seems like you're a bit more optimistic on the margin, at least for margin stability. It seems to me you were thinking about a stronger '04?

Jon, I think you've hit our observations pretty well. As you look quarter to quarter throughout 2003, we've been frustrated by a couple of key elements. On one obviously as Craig mentioned, was what the yield curve looked like and some of the challenges in terms of pricing both sides of the balance sheet. But really the bigger story for us in terms of net interest income and margin for 2003 was really the contraction of a loan portfolio really driven by what we've characterized as a relatively soft environment throughout most of our market places.

As we look now the general feedback we are getting from more markets than any points in the last couple of years is a stronger sense of a better looking pipeline, more opportunities. We see some great opportunities in commercial, commercial real estate. Pretty encouraged through our indirect lending operation. Interestingly, as we saw the real estate finance activity, it's very, very interesting to see some of the side effects that follow that.

Our real estate loans beyond balance sheet portion dropped tremendously on a year-over-year basis, but in addition to that, we saw a notable contraction just about 10% of home equity lines. What was really happening was a lot of people were going out and refinancing a lot of their personal debt into secondary market salable residential mortgages. With that in mind, we are pretty optimistic for the opportunity for home equity line increases during the course of 2004. Additionally, we are looking at some product issues in terms of some on balance sheet real estate loans. So were do believe that we have a more optimistic approach to 2004 and definitely we will see some increases in our loan outstandings.

Okay. Thank you.

Your next question comes from Ben Crabtree of Piper Jaffray.

Thank you. A couple of questions. One of them relates to the chargeoff and provision level. Obviously, given your nice drop in nonperforming loans, it makes sense that you could have the provision lower than chargeoffs and run the reserve down yet the maintain the reserve rate at a pretty comfortable level. But over a longer period of time that's not a sustainable sort of a thing and when I look at the ratios, the question is, does the chargeoff rate come down from the mid to high 40 basis points or does the provision rate have to go back up to that level, do you think, during 2004?

Ben, you made a great point for us as we look at it and clearly our orientation is to look at full year performance in terms of all of our asset quality performance indicators as well as how we see our nonperformers fluctuating and decreasing as time moves on. As we look at it, Ron touched on one of the issues that plagued us traumatically with just about 30% of our chargeoffs were comprised of two key credits that were originated in banks that really reflected the biggest element of the chargeoff story during 2003. The other thing that we've commented on a number of times is that historically our consumer losses have represented a very significant and disproportionately high net percentage of our chargeoffs. We have seen significant progress and great success with our consumer loan initiative and our success in that regard.

If we look at it and just to give a few tighter statistics to kind of give a direction as to where this is going, as we look at those consumer loans originated through the branch network, that is precentralization, preindirect loan center, our average loss ratio was just about 94 basis points. Again, if we look back a year ago, our five-year average suggested that about half of our net chargeoffs were consumer loans even though they represented about 16, 17% of our portfolio. That 94 basis point chargeoff level is pretty consistent with what we've seen over the last five to six years. Now, the great improvement that we are seeing is really coming in the area of those loans that have been originated and administered through our loan centers. We are now at a year-to-date live-to-date performance level of 42 basis points of net chargeoffs. We've seen better than a 50% improvement in terms of net chargeoffs in terms of loans that were originated and administered through the branch structure versus indirect loan center.

So what we see as clearly those two credits are definitely behind us. We've made great strides in terms of or consumer quality performance. So I think as we position it, we clearly believe that we are going to see a notable reduction in our chargeoff levels. Our long-term objective is to get into the 25 to 35 basis point range. We believe that that is consistent with where we can achieve our performance level, Ben.

Good. And then one other little question about the margin. Any comment as to what the trends of the margin was during the quarter? Did it get better toward the ends of the quarter or was it fairly stable throughout the quarter?

Ben, we've seen some stabilization, obviously in the last couple of quarters of the year. Don't really have a comment on how it performed during the each of the months within the quarter but we have seen some margin stability. Would continue to expect that to be the case. Obviously it depends on what happens in the interest rates, yield curve and so forth. We are pleased that we have, I think at this point seen some stability and would continue to see that trend and are hoping a modestly increasing trend as we move into 2004, again depending upon a lot of economic variables.

I think again just tagging on to Craig's comments as we look at the loan output, for us that is going to be one of the biggest drivers, we believe, an opportunity to increase and improve margin in 2004.

One final little follow-on question. Tax rate jumped in the fourth quarter was higher. Was that a normal true up and more important I guess, for the year as a whole you did about 33, would you think it would be roughly flat in 2004?

Yeah, Ben, that would obviously the tax calculation isn't an overly fluid calculation as you look on a quarter-by-quarter basis as are some full year estimates being made in each of the quarters in determining the effective tax rate and fourth quarter does tend to be a little bit of a true up quarter. Year-to-date, that 33% range, that's probably pretty reasonable I think as you go back and look at the four previous or three previous quarters in the year. It was just slightly under, slightly under 33 but, yea, that would be pretty reflective of the effective rate going forward.

Okay. Thank you.

Once again, if you would like to ask a question press star then the number one on your telephone key pad. At this time there are no further questions.

Well, Jeff, with that I would like to thank all the conference call participants and, again, to recognize the great performance of the Community First team. We were within an eyelash of setting a records level of earnings per share performance and as I mentioned, did set a number of records in a few key areas. We made great strides in developing a better Community First, I believe. We are the best company that we've ever been and are making additional strides as we move forward. We have a renewed sense of encouragement regarding 2004 and we've just been notified that we have one more question. So we will open up back to you Jeff and see what that question is.

Your next question is from Ron Peterson with Moors and Cabot.

Good afternoon. I'm a little slow reaching the keypad.

We almost cut you off.

A question regarding buybacks. It looks like your leverage ratios you built it back up to the 7% level. I'm wondering what level you're comfortable with running that ratio at and what kind of capacity you have for continued buyback activity?

Again, I think in terms of where we've been clearly we've seen the highest leverage ratio through the course of 2003. So we are comfortable where it is. We think that as we have somewhere between 6.5 and 7% level is a nice range for our leverage ratio. So in terms of that, that basically suggests that we got, in addition to quarterly earnings net of dividends, we've got the ability to utilize 50 basis points worth of capital.

So I think as you look at it 1,000,007 shares that we purchased during the course of 2003 were accomplished and we actually saw an increase in our leverage ratio. Again obviously there's some market timing and pricing differences but believe that will continue to be active in our common share repurchase program to the degree there's not a better opportunity for our capital and pricing opportunities look appropriate and that suggests that, again, if you just run the numbers my sense is that it probably suggests there is somewhere in the range of 1,000,0004 to 1,000,0007 or 8 worht of shares capacity, a much better opportunity coming down the path for 2004.

Thanks.

Thank you.

At this time there are no further questions.

Okay. Now we will sign off. Again, thanks. I do want to recognize the performance of everybody on the Community First team. We have an excellent group employees in this organization. Clearly, we had our second best year ever of financial performance with a number of records in there in a very, very challenging environment. So, again, we are very, very pleased with the performance of this organization. I want to thank all of you for your interest and for participating on this call and look forward to talking to you soon. Thank you.

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