First Hawaiian Inc (FHB) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Community First Bankshares Inc. first-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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded, Thursday, April 15, 2004.

I would now like to turn the conference over to Mark Anderson, Chief Executive Officer. Please go ahead, Mr. Anderson.

Thank you, Amanda. Thanks to all of you for joining us on today's conference call regarding our first-quarter earnings and earnings release. On the call with me today will be our Chief Operating Officer, Ron Strand, and our Chief Financial Officer, Craig Weiss.

I would like to start by saying that there are some very positive aspects of the quarter. But that, overall, the result fell short of our expectations and we are disappointed by our level of net income and earnings per share.

On the positive side, we continue to perform well in certain key fee income areas. Namely, insurance and investment income. The gains that we've made in the area of SBA guaranteed lending, however, struggled during the quarter due to the uncertainty facing the SBA guarantee program at the government level. SBA fees for the quarter fell far short of our targets. With the resolution of the government funding of this program in place, we see positive signs in this area for second quarter and beyond.

Another disappointment was in our overall loan volume, and as a related factor, our loan fees. Both contributed to a net interest margin that was below our expectations. While we have seen a very good pipeline over the course of the past few months, new originations did not reach their targeted levels and contribute to loan growth that we had anticipated during the quarter. We are, however, cautiously optimistic regarding additional loan volume during the quarters ahead. We believe that the stronger demand, a better loan pipeline, and our lender incentive programs will contribute to a resumption of loan growth in the next quarters.

A brighter spot in our loan origination activity was our Loan Center, which has been able to register steadily increasing loan origination levels, primarily consumer lending opportunities. We believe this will be a source of incremental loan volume in the coming months. From our perspective, the most encouraging aspect of our loan portfolio is summarized by our asset quality indicators. As noted in our release, we had the lowest level of net charge-offs in 17 quarters, a result not only of the work done through our Loan Center, which is virtually fully installed, but also due to the efforts of our bankers and our Special Assets Group.

We continued to record impressive results in the area of insurance income, achieving a record quarter. Additionally, we completed the acquisition of an agency on January 2nd, and three additional insurance transactions were completed already during the month of April. Historically, we have seen adverse seasonal impacts on loan deposit volumes during first quarter. Unfortunately, this held true again this year. However, we are encouraged about the expected levels of loan volumes in the quarters ahead.

With that, I would like to turn the call over to Craig Weiss, our Chief Financial Officer. Craig?

Thanks, Mark. As Mark noted, we are disappointed with our first-quarter financial results. Return on assets was at 1.25 percent, and the current equity was 19 percent. Although all these are strong performance measures within the industry, they are below the expectations we have said internally.

Net interest margin was 4.7 percent in first quarter of 2004, down 10 basis points from last quarter and down 20 basis points from first quarter of 2003. This is due primarily to a reduced interest spread, as downward replacing of assets has outpaced the ability to replace liabilities, and a reduced level of loan fees during first quarter. This is the reflection of the current interest rate level as well as the competitive environment in which we are operating for the generation of quality loan assets.

As we have previously noted, we will not sacrifice credit quality in our pursuit of loan assets. We are relatively pleased with our noninterest income level for the quarter, which increased 5 percent from first quarter of 2003, but was down 1 percent on a linked quarter basis. As Mark noted, increased noninterest income was driven by a strong level of insurance income and commissions on the sale of investment products.

The increase in commission on the sale of investment product was driven by a stronger stock market, more effectively positioning ourselves as the primary financial adviser for our clients, and improved reporting efficiencies by our third-party provider.

During the quarter, we also recognized 1.5 million in security gains, which was comparable to a level of security gains taken last quarter. The gains were used in part to offset front-loaded (ph) expenses related to a deposit checking promotion and to modestly reposition the investment portfolio in light of the current interest rate environment. Partially offsetting these positives was a disappointing level of premiums related to the sale of SBA loans, which was below historical levels and our internal expectations. On a linked-quarter basis, service charges on deposits were down 6 percent, which is consistent with the seasonality of this income source.

The efficiency ratio increased to 65.8 percent from 61.3 percent in the first quarter of 2003. This was primarily the result of the challenging net interest income environment discussed earlier, and not the result of significantly increasing noninterest expense. On a linked-quarter basis, the efficiency ratio increased from 63.7 percent to 65.8 percent with flat noninterest expenses. Noninterest expense increased 2 percent from first quarter of 2003 and was flat on a linked-quarter basis. The increase in noninterest expense was primarily attributed to normal recurring personnel costs and increases in occupancy cost. On a linked-quarter basis these increases were offset by reductions in professional services-related expenses and reduced OREO expense.

The Company repurchased 582,000 shares of its common stock during first quarter, but has suspended its repurchase program and does not expect to repurchase additional shares. The leverage ratio was 6.8 percent at March 31, 2004, with a total risk-based capital ratio of 11.3 percent, both in excess of well-capitalized (ph) by regulatory definition.

I will now turn the call over to Ron Strand, our Chief Operating Officer.

Thank you, Frank, and welcome to all conference call participants. My comments today will focus on credit volume and credit quality. As, Mark indicated, we did not see the loan growth we anticipated during the quarter. We continued to witness runoff in our residential real estate portfolio, due to refinancing on the secondary market. We did, however, achieve modest growth in our HELOC portfolio, due to a repositioning of our product line and a more aggressive approach to offering this solution to our client base. Construction and land development volumes dropped, due to our cautious approach to lending into this sector. While we remain active in this market, we are maintaining our discipline and only finance developers with strong liquidity and equity.

Commercial activity was down modestly on a linked-quarter basis, due to our continuing effort to reduce problem credits. And the volume also reflects the national trend of diminished commercial loan demand. We continue to witness growth in our commercial real estate segment. 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 midsized companies. And, loan losses in the commercial real estate portfolio continued to be modest, which we believe is the result of sound credit underwriting and credit administration.

Residential real estate activity remains robust, driven by refinancing and new loan activity. Year-to-date closings are approximately 50 percent refinanced and 50 percent new loan activity, which is encouraging as the refinance percent during 2003 was in the mid to high 70 percent range. The vast majority of residential real estate volume was sold into the secondary market, and therefore does not impact our balance sheet.

SBA fee income was less than anticipated, in part, due to the impact of program caps and uncertainties surrounding funding of the 7(a) program. Congress recently approved a new program and funding, which we believe is a favorable turn of events and should enable our branches to improve volumes and fee income during the second quarter of 2004.

Indirect consumer lending remains 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 to the lowest level in several quarters.

With respect to credit quality, I am pleased to report significantly less charge-off activity, which we believe is the result of our ongoing effort to reduce classified assets. As noted in the earnings release, nonperforming assets represented .47 percent of total assets at March 31st, 2004, compared to .61 percent in the same quarter last year and .48 percent at December 31st, 2003. The allowance for loan losses was 1.59 percent of total loans, and 264 percent of nonperforming loans at March 31st, 2004, compared to 1.57 percent and 195 percent, respectively, at March 31st, 2003, and 1.57 percent and 251 percent, respectively, at December 31st, 2003.

Net charge-offs were $2 million, or .25 percent, of average loans for the first quarter of 2004, compared to 4.7 million, or .54 percent, for the first quarter of 2003. And $4 million, or 4.8 percent, at December 31st, 2003.

Finally, nonperforming assets of 25.4 million, as of 3/31/04, is down from the 3/31/03 balance of 35.2 million. All of these improvements in credit quality, we believe, are reflective of the efforts of our Special Assets Group and lenders to closely monitor and exit (ph) problem assets to reduce loss exposure. The loan centralization initiative remains on schedule and we anticipate completing the roll-out during June, 2004.

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 Anderson.

Thanks, Ron. Thanks, Craig. As all of you know, the most significant development during the quarter was the March 16th announcement of the execution of a purchase agreement with BancWest Corporation. Since that time, we have been working diligently to establish the timelines and transition teams for the proposed transaction. At this point, we continue to project a closing during third quarter. The proposed transaction is progressing well. The Federal Reserve application has been filed and we're finalizing our proxy statement for the merger. Additional details regarding the merger will be available once the proxy statement is distributed.

With respect to our performance, we continue to expect quality performance in insurance and investment sales and believe that the environment is conducive to contribute to quality loan growth and a resumption of the progress we have made in our SBA program.

During a quarter, we successfully opened a new branch in Land O'Lakes, Minnesota and are schedule to open additional locations in Blain, Chaska, Chanhassen, Lakeville, and Inver Grove Heights, Minnesota in 2004. This will expand our client base in the growing Minneapolis suburban market.

We've always been committed to evaluating all avenues to create value for our clients and shareholders and appreciate your interest in Community First. I would like to thank you again for joining us on this call, and open it up for questions.

Jon Arfstrom, RBC Capital Markets.

Good afternoon, guys. Quick question on the SBA activity, it sounds like that's more of a temporary item, rather than a permanent item. And curious if the backlog (technical difficulty) going into the second quarter.

John, this is Ron. Thanks for the question. We believe it is temporary. We went from having a million-dollar cap on the 7(a) program to 750. And then there was actually a halt for a while in the funding of these programs.

And the question as to dollars available -- to now, Congress has not only passed a new law which increases the amount that can be guaranteed -- which is a million 5 versus the million -- but also has authorized, I believe, just shy of $13 billion. So, we feel comfortable that we're going to see increased activity. We do, to your question, have a good SBA pipeline. We continue to enjoy great referral activity from our branch locations. This is a solution that has proven to be a very viable one for our client base.

So, aside from that, is there really anything in the numbers that you think would surprise your buyer? Aside from the SBA issue, (technical difficulty) this quarter?

Again John, in trying to respond -- this is Mark -- to your question, I think we highlighted the key things that we would characterize as a disappointment. They really fall into three categories, all of them related. In some respects, the SBA program, as Ron mentioned, has been a great source of revenue for us over the course of the past few years. That was clearly a disappointment to us. And I think, as we had a chance to visit with our counterparts at Bank of the West, that was definitely something that we pointed out to them.

The other two that are very closely related really are those issues of loan activity. We had anticipated a modest increase in our loan volume. We've got a relatively good level of loan growth projected for full-year 2004. Again, I think that, as Craig highlighted, it definitely had impact on our interest margins because loan fees were below the levels that we anticipated. We do see a good pipeline. We were very, very fortunate, as Ron pointed out, to see some good activity in our home equity program, which we think is going to continue to show some gains for us.

Our indirect activity is stepping up. We are seeing record levels of volume come through our loan center for consumer loan opportunities. So that should bode well for second quarter and beyond. And again, commercial real estate activity has been relatively strong, so as we see it, we think that there's a good framework for us to see some loan growth in the quarters ahead. And that's really the key point that we have conveyed to the acquirers in the transaction.

Okay. So really no big surprises to them?

No, I think these are very consistent with a lot of the issues that we conveyed to them as we went through the discussion and due diligence process.

Okay, that is helpful. And then the last question -- I don't know if you can do this, Mark. But, is there any way to tighten up the dates on the plan closing date and the shareholder vote timing? I mean, you might not be able to do that, but if -- third quarter is three months, obviously, and that's pretty broad.

Well again, I think, as we conveyed early on, our timeline was to target something in the first half of third quarter, which tightens it up a little bit. But it's a little premature for that. We're working very diligently. There's really a handful of key elements to it. One of them is the regulatory process, which Bank of the West is moving down with good dispatch, and do not believe it to be a delay.

Second piece is our shareholder vote. We are moving well with our proxy. We believe that that proxy will be able to be distributed reasonably soon. We actually have a Board meeting next Tuesday. So again, I think once the proxy is completed and sent out, that is going to be able to establish the shareholder meeting date. And subsequently, we will be able to target much more closely what that closing date looks to be.

The final element, obviously, is really centering around operational activity. And that is where the transition teams have come in, and we and Bank of the West are working diligently to make sure that the transitional aspect and the operating effects are not a reason to slow the transaction.

Okay. All right. Thank you, and congratulations on the sale. The four-year chart looks terrific, and your shareholders should be very happy.

Well, thank you John, appreciate it. If there are no further questions, I do appreciate all of you participating in this call. Hopefully you can see that, again, Community First has made significant strides over the course of recent years. We have invested heavily in a number of key initiatives that we believe are paying fruit. We do believe that we will see a resumption in some of the key activities that were a little bit softer during first quarter, as we get into second quarter, namely our SBA production and loan opportunities.

So, with that, I'd like to thank all of you for your time and interest, and wish you well. Thank you.

This concludes Community First Bankshares Inc. first-quarter earnings conference call. You may now disconnect.