Thursday, June 18, 2009

Is It Time To Refresh The Definition Of Reg FD?

With Eliot Spitzer selling D.C. real estate these days, and Attorney Generals chasing hundreds of billions of dollar from illegal taxpayer funnels, it is no wonder there is nobody left to monitor potential abuse within the broker/dealer community. Among the items that has been trampled the most in the recent market free for all as everyone tries to make that last dollar before the market's terminal collapse, is none other than Regulation Fair Disclosure, or otherwise known as Reg FD. Taking from the SEC's own definition of Reg FD:
Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis of the information the issuer must make public disclosure of that information. In this way, the new rule aims to promote the full and fair disclosure.
So assuming that Reg FD is still valid and actual, Zero Hedge has some questions of both the management team of Bank Of Hawaii Corp, and Morgan Stanley analyst Ken Zerbe, CFA.

In a report issued early today called: "Bank of Hawaii Corp. Hawaiian Weakness Could Lead to Higher Credit Losses" Morgan Stanley highlights the following:
What’s new: We hosted a dinner meeting with the management of Bank of Hawaii at our offices in NYC. We continue to view BOH as a well-run, conservative bank that has been largely isolated from many of the mainland credit problems, at least up until recently. Following our meeting with management, we expect the pace of credit deterioration to increase, including a potentially large increase in charge-offs during 2Q09.

The key takeaways from our meeting include: 1) the Hawaiian economy could see further weakness in the coming quarters, due to lower tourism, home price depreciation, rising unemployment, and less government spending; 2) higher credit losses in 2Q09 as BOH resolves certain loan exposures; and 3) overall fundamental weakness including ongoing NIM pressure and declining loan balances partially offset by solid fee income due to strong mortgage banking earnings.
What is particularly troublesome is this very selective disclosure from page 3 of the report, italics mine:
Expect Higher Credit Losses in 2Q09

Investors should expect both higher net charge-offs and provision expense in 2Q09. Management expects to resolve two larger credit issues in the quarter, which we suspect are its $17 million net mall exposure and a leasing exposure. While resolving these issues should be a positive, the likely higher resulting charge-offs could be viewed as a short term negative. We are also likely to see further increases in home equity losses, but lower charge-offs in its indirect auto portfolio. Management noted it would likely provision above charge-offs, implying a larger hit to operating income and EPS than we previously expected. Our revised provision estimate of $31 million (up from $23 million) is the main driver of our lower EPS estimates for the quarter.

In terms of overall credit quality and trends, we summarize management’s comments on each of its major loan categories below.

Areas of More Concern

Within its loan portfolio, management highlighted home equity as being the area where they could see the greatest deterioration in credit near term. The company has roughly $1 billion of home equity loans, of which a meaningful (but undisclosed) amount have LTVs in excess of 80%. With rising unemployment and further declines in home prices, home equity credit losses could start to rise noticeably. Land loans, within its residential mortgage segment, could also be at risk, although the company has just over $50 million of total exposure. Overall, residential mortgage loans are still performing well, with just 90 bps of early stage delinquencies as of 1Q09. Management also highlighted potential losses in its aircraft leasing portfolio, although it has already built considerable reserves against this portfolio (reserves of roughly $31 million against $76 million of loans). The risk of loss rises in aircraft leasing as the price of oil increases.
Can some professional working for any of the various US regulators (even input from Larry Summers in his role as Systemic Risk Regulatory Czar-in-waiting) please advise how Bank Of Hawaii is exempt from issuing an 8-K disclosing if nothing else, at least the highlighted pieces of information that it provided to MS' dinner participants? As the company has a $1 billion HELOC book (not to mention a $7 billion total loan book) on an $800 million tangible equity base, all of this information is in fact material, and, previously, non-public.

And while management may believe it has satisfied its fiduciary duty by disclosing a deteriorating loan book to 10 people eating filet mignon compliments of Morgan Stanley, Investor X who buys the stock today, without having access to this research report, and sees the stock tumble subsequently as the news from this reports goes viral, may very well disagree and in fact pursue legal action against management....and maybe the SEC for not enforcing its own regulations.

hat tip Brian Sphere: Related Content
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