Bank of Hawaii Corporation (BOH)
Q3 2008 Earnings Call
October 27, 2008 2:00 pm ET
Cindy G. Wyrick - Senior Vice President, Corporate Secretary, Manager of Investor Relations
Allan R. Landon - Chairman of the Board, Chief Executive Officer
Kent T. Lucien - Vice Chairman of the Board, Interim Chief Financial Officer
Mary E. Sellers - Vice Chairman, Chief Risk Officer
Peter S. Ho - President, Chief Banking Officer
Brett Rabatin - FTN Midwest
Andrea Jao - Barclays Capital
Erika Penala - Merrill Lynch
Terry Maltiff - Sandler O’Neill & Partners
Robert Bohlen - Keefe, Bruyette & Woods
Justin Maura - Lord Abbott
Brian Zabora - Stifel Nicolaus
Sirin Roylu - Blackrock Financial
John Flanagan - Analyst
Aaron Deer - Sandler O’Neill & Partners
Lisa Walker - Blackrock Financial
Previous Statements by BOH
» Bank of Hawaii Q3 2009 Earnings Call Transcript
» Bank of Hawaii Corporation Q4 2008 Earnings Call Transcript
» Bank of Hawaii Q2 2008 Earnings Call Transcript
Cindy G. Wyrick
Thank you, Nora. Hello, everyone and thank you for joining us this morning as we review Bank of Hawaii’s financial results for the third quarter of 2008. With me this morning is our Chairman and CEO, Al Landon; our President and Chief Banking Officer, Peter Ho; our Vice Chairman and Chief Financial Officer, Kent Lucien; and Vice Chairman of Corporate Risk, Mary Sellers.
Our comments today will refer to the financial information that was included in the earnings announcement earlier this morning. Before we get started, let me remind you that today’s conference call will contain some forward-looking statements and while we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected.
And now I would like to turn the call over to Al Landon.
Allan R. Landon
Thanks, Cindy and good morning, everyone. Bank of Hawaii produced good financial results in the third quarter. As Kent will discuss, our results include the accounting impact of accepting the IRS program to resolve tax issues related to our legacy leasing business. We were fortunate to have that tax recovery which coincided with an increase in credit risk in the third quarter.
As a result of the economic slowing and credit market anxiety, we increased our allowance for loan losses and capital ratios. Bank of Hawaii enjoyed good credit availability and we moved to less expensive short-term funding and reduced our investment portfolio slightly.
When we introduced free checking in July, we also combined some demand deposit products to simplify our offerings. This resulted in a change in classifications of deposits on our balance sheet. Kent will comment on our deposit and balance sheet strategies after we highlight some important aspects of our incomes statement. Kent.
Kent T. Lucien
Thank you, Al. Good morning. Net income for the third quarter was $47.4 million, or $0.99 per share, compared to $47.8 million or $0.96 per share in the third quarter of 2007. Our net income to average assets was 1.82%, net income to equity was 24.17%, and our efficiency ratio was 54.05%.
For the first nine months of 2008, net income was $152.9 million, or $3.17 per share, up $10.1 million compared to 2007.
This quarter’s results included an $8.9 million net credit related to the pending resolution of our sale-in lease-out leverage lease matters with the IRS. These are commonly known as silos. This net credit reduced our net interest income by $4 million and reduced our tax provision by $12.9 million. We also increased the provision for loan losses above net charge-offs by $13 million. We increased our provision primarily due to increased risk in three specific loan exposures and to general risk from the weakening Hawaii and U.S. mainland economies.
Net interest income for the third quarter was down $3.6 million from the second quarter, mainly due to the $4 million charge related to the settlement of the silo leases just mentioned. This charge affected our net interest margin as well, which was 4.33% for the third quarter, compared to 4.41% in the second quarter. The silo adjustment reduced the margin by 17 basis points and therefore excluding this charge, our margin would have been 4.50%. Year-to-date, net interest income was up $17.4 million compared to the same period in 2007 and our margin increased 23 basis points to 4.30%. Net interest income improved because of lower funding and deposit costs that more than offset lower asset yields.
Non-interest income for the third quarter was $57 million, down $3.6 million from the second quarter and down $4.3 million compared to the third quarter of 2007. Increases in deposit fees were offset by reductions in mortgage banking and insurance income. Mortgage banking income was lower due to a $2.4 million valuation adjustment for our mortgage servicing rights. Insurance income was down $1.5 million due to the timing of contingent commission income.
Non-interest expense was $86.8 million in the third quarter, an increase of $2.9 million from the second quarter and up $5.3 million from the third quarter of last year. This quarter’s expenses included an accrual of $2 million for employee incentives. Year-to-date, non-interest expense was $264 million, up $20.7 million over last year. However, excluding the significant expense items as shown on table two of the press release, the increase would have been $8.4 million, or a 3.5% year over year increase. This is partially due to higher expenses associated with expanded service, including our new Waikiki branch, and also to higher utility and general operating expenses.