Bankoh’s income lifts despite write-off

The bank took a $10 million charge for an aircraft lease in the third quarter

Bank of Hawaii Corp. raised its earnings guidance for the year yesterday and said net income rose 4 percent in the third quarter despite a $10 million write-off for a mainland-based airline's aircraft lease.

The bank cited increases in revenue, loans and deposits, as well as reasonable expenses levels, for achieving earnings of $44.8 million, or 85 cents a share. The results included a $3 million provision for credit losses and a $3.8 million pretax charge for legal and other expenses related to possible penalties it is facing from the Securities and Exchange Commission. The provision and charge reduced the bank's earnings per share by 9 cents.

Bankoh's results beat analysts' forecasts of 83 cents a share, according to a survey of nine analysts by Thomson Financial. In the third quarter of 2004, Bankoh had net income of $43.1 million, or 78 cents a share.

The bank, which as recently as last month reiterated its full-year earnings guidance of $176 million to $179 million, said it now estimates net income for 2005 to be $179 million to $181 million.

"The third quarter had pretty good fundamental strength to it and our insight into the fourth quarter is more accurate as we get into the quarter," said the bank's chairman and chief executive, Allan Landon.

Bankoh's board also announced it was increasing its dividend to 37 cents a share from 33 cents a share. It will be paid on Dec. 14 to shareholders at the close of business on Nov. 30. The board decided against splitting its shares despite some shareholder pressure to do so. Bankoh, whose stock has been hovering around $50, hasn't split its shares since 1997. Bankoh's stock rose 82 cents yesterday to $50.50.

"None of the investment banks we spoke to thought (a stock split at this time) would be a very big help to shareholders," Landon said.

The $10 million charge for the aircraft lease involved either a plane from Delta Air Lines or Northwest Airlines, both of which filed for bankruptcy in the third quarter. Landon, however, declined to identify which airline was responsible for Bankoh taking the charge.

He said the bank owned the plane as part of a leveraged lease transaction that involved other lenders.

"The allowance for the charge had been fully reserved some time ago," Landon said. "We had anticipated airlines having difficulty and we had reserved for this particular loss."

Bankoh, which took a $3 million provision for credit losses last quarter, has previously estimated it would take a $10 million provision for credit losses for the entire year. That would leave Bankoh with another $7 million to take for the fourth quarter., though Landon said the bank may not take the entire $7 million claim.

"The credit picture looks pretty good, and so we could end up with a smaller provision here in the fourth quarter than what we had earlier calculated," he said.

Bankoh took the $3.8 million pretax charge to account for legal and other expenses related to possible penalties it is facing from the SEC. In September, Bankoh announced it had received "Wells notices" from the SEC's Pacific Regional Office following an investigation into alleged excessive and late market trades at Pacific Capital Funds, a mutual fund managed by the bank's Asset Management Group. The bank, AMG, three current executives and one former executives all received notices.

The company, which discovered and publicly disclosed the questionable trading in February 2004, said the allegations concerned trades made during 2002 and 2003 by an unnamed former employee, who was later fired. The employee may have increased the value of his retirement account by about $110,000 with the improper trades, the company said. A Wells notice indicates the SEC staff has made a preliminary decision to recommend that the commission authorize the staff to take enforcement action.

Net interest income, which reflects the difference between what the bank pays depositors and what it brings in from loans, grew 3.2 percent to $102 million from $98.8 million a year earlier. The net interest margin declined to 4.3 percent from 4.39 percent a year ago. Noninterest income, which includes revenue from service charges and fees, rose 4.6 percent to $55.5 million from $53.1 million.

Noninterest expense rose 0.5 percent to $84.6 million form $84.2 million.

Landon said the bank hasn't really been affected by the Federal Reserve's string of interest-rate increases.

"It increases both the cost of our deposits and return on some of our assets," Landon said. "On a net basis, it did not have a significant impact. We've got some loans that have adjustable rates on so when markets rates goes up, the return of some of those assets increases by contract."

Collectively, the bank's revenue rose 1.3 percent to $157 million from $155 million.

The bank's assets grew 5.1 percent to $10.1 billion from $9.6 billion a year ago and deposits increased 4.6 percent to $7.8 billion from $7.4 billion.

Total loans and leases gained 6.7 percent to $6.2 billion from $5.8 billion. Commercial loans outstanding gained 9 percent to $2.2 billion from a year earlier while consumer loans rose 5.5 percent to $4 billion.

"We continue to think that the local economy is strong and that creates a positive lending environment regardless of the rates," Landon said. "On a historical basis, interest rates are still rather reasonable."

Bankoh's return-on-assets ratio, which indicates how many dollars of profit it achieves for each dollar of assets it controls, fell to 1.74 percent from 1.77 percent a year earlier. Bankoh's return on equity, or earnings divided by shareholder equity, rose to 24.6 percent in the quarter from 23.4 percent a year earlier.