Bankoh earnings slip 3.2%

Technology upgrade costs the
company $10.1 million last quarter

Bank of Hawaii Corp., putting the finishing touches on its $35 million technology systems conversion, said yesterday that net income slipped 3.2 percent in the second quarter after taking a $10.1 million charge associated with that project.


However, the bank's efficiency and loan quality continued to improve as it made strides toward year-end goals previously set by Chairman and Chief Executive Officer Michael O'Neill.

Bank of Hawaii's net income in the quarter was $30 million compared with $31 million a year ago. There was no technology systems charge in the second quarter of 2002. The bank, which repurchased 2.2 million shares last quarter, had earnings per share of 48 cents, up 14.3 percent from 42 cents a share a year ago.

Excluding the charge, O'Neill said net income would have been "comfortably up" over last year. He estimates the bank's after-tax earnings would have been between $36 million and $37 million.

The conversion to Milwaukee-based Metavante Corp., which was completed July 7, is expected to provide the bank with annual cost savings of $17 million. Bank of Hawaii, which has been taking charges over a five-quarter period, will take a charge of approximately $4.4 million in the third quarter.

"Obviously, there are two reasons to do something like this," O'Neill said. "One is the cost savings. The other is to have a fully integrated system with lots of functionality, and the ability to be more responsive to customers."

O'Neill, who initially said there would be about 250 jobs lost due to the project, later revised that total to less than 200. He said the majority of those affected employees already have left, with fewer than 100 to leave the bank during the next three months. Bank of Hawaii had 2,879 employees as of the end of the quarter.

Bank of Hawaii also announced it was reviewing its current dividend level and was anticipating an increase when it announces its third-quarter earnings in October. In the meantime, the bank's board of directors maintained the dividend at 19 cents a share, payable Sept. 15 to shareholders of record at the close of business on Aug. 22. The dividend has now been at 19 cents for four straight quarters.

O'Neill said that since 70 percent of the bank's investors are institutions that are unaffected by the change in tax laws, the anticipated dividend increase pertains to the 30 percent who are individual investors.

"There's a trend in banking to increase dividends, and we're reviewing that," O'Neill said. "Today, about 40 percent of our earnings get paid out in dividends, and that's about average."

As of March 31, the bank's total assets were down 2.8 percent to $9.6 billion from $9.8 billion a year ago, but O'Neill said that was expected.

"We're right where we said we would be," said O'Neill, who has been streamlining operations. "We are making the same amount of income on a balance sheet two-thirds its size. Our return on equity is improving quite significantly and, by the fourth quarter, we'll see the strength of the franchise coming through."

Net loans rose 1.6 percent to $5.34 billion from $5.25 billion and total deposits increased 10.6 percent to $7.1 billion from $6.5 billion.

O'Neill, who said he's encouraged by the bank's ongoing improvement, said previous earnings guidance of $131 million in net income for the year "remains realistic."

"I've always said there are three critical parts of our strategic plan -- fix the loan problems, get rid of operations that didn't carry their weight, and improve our efficiency," O'Neill said. "With two quarters to go, I'm not declaring victory yet, but the objective is in sight."

Bank of Hawaii's return on equity, which measures how well it used reinvested earnings to generate additional earnings, rose 30.1 percent to 12.93 percent in the second quarter from 9.94 percent a year ago. O'Neill expects that number to be at 18 percent by the end of the year.

The bank's return on assets also improved as it rose to 1.27 percent in the quarter from 1.23 percent a year ago. The return on assets indicates how effectively the assets are working to generate a profit. The bank's efficiency ratio, which measures in percentages how much it costs the bank to make a dollar of revenue, worsened to 67.6 percent from 63.5 percent a year ago. However, excluding systems replacement costs, it improved to 60.4 percent from 63.5 percent a year earlier.

Net interest margin, the difference between what the bank earns on loans and the interest it pays depositors, rose in the quarter to 4.12 percent from 3.97 percent a year ago, largely due to selling refinanced mortgages to Freddie Mae or Freddie Mac rather than keeping them on the bank's books.

Bank of Hawaii's asset quality also improved as its ratio of nonperforming assets to total loans, plus foreclosed assets and nonperforming loans, was 0.77 percent compared with 1.45 percent a year ago.


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