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Bank of Hawaii (NYSE:BOH)

Q3 2009 Earnings Call

October 26, 2009 2:00 pm ET

Executives

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, Chief Financial Officer

Mary E. Sellers - Vice Chairman, Chief Risk Officer

Peter S. Ho - President, Chief Banking Officer

Analysts

Ken Zerbe - Morgan Stanley

Brett Rabatin - Sterne, Agee & Leach, Inc.

Joe Gladue - B. Riley & Company

Aaron Deer - Sandler O’Neill & Partners

Craig Siegenthaler - Credit Suisse

Brian Zabora - Stifel Nicolaus

Robert Bohlen - Keefe, Bruyette & Woods

Albert Savastano - Fox-Pitt Kelton

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Bank of Hawaii Corporation earnings conference call. My name is Anne and I will be your coordinator for today’s call. (Operator Instructions) I would now like to turn the presentation over to Cindy Wyrick, Director of Investor Relations. Please proceed.

Cindy G. Wyrick

Thank you, Anne, and good morning, everyone. Thank you for joining us as we review our financial results for the third quarter of 2009. Joining me this morning is our Chairman and CEO, Al Landon; our President and Chief Banking Officer, Peter Ho; Vice Chairman and Chief Financial Officer, Kent Lucien; and our Vice Chairman and Chief Risk Officer, Mary Sellers. Our comments today will refer to the financial information that was included in the earnings announcement released 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'd like to turn the call over to Al.

Allan R. Landon

Thank you, Cindy. Hello, everyone and thanks for joining us today. Well, given the economic conditions, Bank of Hawaii had a pretty good quarter. We increased net interest income and controlled our core expenses. We added to our reserves and capital during the quarter. I am going to ask Kent to give us some comments on the factors affecting our financial performance this quarter and then Mary will discuss our credit quality measures. Kent.

Kent T. Lucien

Thank you, Al. Good morning. Net income for the third quarter was $36.5 million, or $0.76 per share, compared to $31 million or $0.65 per share in the second quarter, and $47.4 million or $0.99 per share in the third quarter of 2008. Last quarter’s results included FDIC insurance pretax expense of $9 million, compared to $3.3 million this quarter. Last year’s third quarter results included a net income tax credit of $8.9 million related to the company’s resolution of its silo leases with the IRS.

Year-to-date, net income was $103.5 million, or $2.16 per share, compared to last year’s $152.9 million, or $3.17 per share. Last year’s results included pretax gains of $25.3 million from the redemption of Visa shares and the early buy-out of an aircraft lease.

Net interest income was $108.9 million, up $6 million from the second quarter and our net interest margin improved 12 basis points to 3.85%. Average earning assets were up $245 million in the quarter, with investments up $811 million, funds sold down $343 million, and loans down $223 million. Our margin increase was due mainly to lower deposit costs.

Our credit provision in the third quarter was $27.5 million, including net charge-offs of $22.3 million, and an increase to our allowance of $5.2 million. Our allowance for loan and lease losses is now $142.7 million, 2.41% of outstanding loans and leases. This year we have increased our allowance by $19.2 million.

Non-performing assets increased to $48.5 million this quarter, up from $39.1 million in Q2, primarily in commercial construction loans. Included in non-performing loans are $16.7 million in residential mortgage loans.

Our investment portfolio now stands at $5 billion. The average duration of the portfolio is 2.26 years. We continue to invest on a conservative basis, primarily in treasury securities and [Jenny Nays], and we have unrealized gains of $102 million.

Non-interest income for the third quarter was $56.8 million, down $3 million from the second quarter and slightly lower than the third quarter of 2008. Second quarter results included a $2.8 million gain on the sale of our equity interest in an air cargo carrier and a small gain on the sale of our retail insurance agency.

Year-to-date, non-interest income is $16.7 million lower than 2008, primarily because of the gain on the redemption of Visa shares last year and a reduction in trust and asset management fees. Mortgage banking income was $4.7 million for the quarter versus Q2 income of $5.4 million.

Non-interest expense was $84 million in the third quarter, down $5.6 million from last quarter and down $2.8 million from the third quarter of last year. Last quarter’s FDIC expense totaled $9 million, including $5.7 million for the industry-wide assessment compared to $3.3 million in FDIC expenses this quarter.

Compared to the third quarter of last year, all categories of non-interest expense declined, except for FDIC expense. On a year-to-date basis, total non-interest expense is down $2.6 million from the first nine months of 2008, including a decline in salaries and benefits expense of $10.6 million. FDIC expense is up $13.3 million this year.

Based on end-of-quarter balances, deposit growth was again strong this quarter in all segments, primarily in saving deposits. Consumer deposits were up $29 million, commercial deposits were up $174 million, and public and other deposits increased $28 million. Our funds sold balance was $401 million at the end of the quarter.

Shareholders’ equity increased $56.9 million to $903 million. The increase included appreciation in our investment portfolio. Our tangible common equity to risk-weighted assets ratio was 14.56%. We paid out $21.6 million in dividends.

Our return on average assets improved to 1.21% this quarter. Return on equity was 16.44%, and our efficiency ratio was down to 50.69%.

The year-to-date return on equity is 16.24% and our efficiency ratio is 52.74%. After the end of the quarter, the company signed an agreement to sell certain assets of the company’s wholesale insurance business, Triad Insurance Agency, to a third party. The sale of Triad closed on October the 22nd this year and resulted in a pretax gain of approximately $1.6 million, to be included in Q4 results. Net income for Triad in 2008 was approximately $4.5 million.

Finally, our board declared a $0.45 per share dividend last Friday.

And now I’ll turn the call over to Mary Sellers.

Mary E. Sellers

Thank you, Kent. As Kent shared with you, net charge-offs this quarter were $22.3 million, down $3.4 million on a linked quarter basis. The decrease was primarily attributable to a $3.9 million decrease in net charge-offs in our commercial portfolio. Commercial net charge-offs totaled $12.5 million and included $4 million related to the sale of three syndicated credits and $5.8 million in partial charge-offs related to three non-accrual construction loans. Consumer net charge-offs increased $0.5 million.

Non-performing assets totaled $48.5 million, or 81 basis points at the end of the quarter, up $9.5 million from the second quarter of 2009. The increase was largely in two commercial construction loans, a residential project on the neighbor island, which we discussed last quarter, and a self-storage facility on Oahu, which has not achieved expected occupancy levels.

Loans past due more than 90 days and still accruing interest totaled $12.3 million, up $2.7 million on a linked quarter basis. The increase was primarily due to a $3 million commercial construction loan for a neighbor island residential project with a current loan to value of 33%. Credit quality in our portfolio continues to reflect weak economic fundamentals both nationally and locally. Year-over-year increases in unemployment, coupled with declines in real estate values, particularly in the neighbor island residential market, have placed stress on the consumer mortgage portfolios and residential home building exposures. However, at the end of September, the state-wide unemployment rate improved slightly to 7.2% on a seasonally adjusted basis compared with 7.3% at the end of June. Residential real estate prices have continued to hold their value better than many in the U.S. mainland markets, particularly on Oahu, where year-to-date the median home price has declined 8%.

At the end of the quarter, residential mortgage loans outstandings totaled $2.2 billion and home equity outstandings totaled $952.1 million. $21.1 million of these loans are secured by homes outside of our market. To date, delinquencies and losses in our residential mortgage portfolio have been driven by land loans and loans on the neighbor islands, primarily second home and investor properties.

As we’ve discussed previously, neighbor islands have experienced higher unemployment rates and greater real estate value to clients than Oahu. At the end of the quarter, our land loan portfolio totaled $43.1 million, with $36.6 million located on the neighbor islands, $21 million of this to non-resident owners.

Neighbor island residential mortgage loans totaled $691 million at the end of the quarter -- $9 million of this exposure is considered higher risk. These loans originated after 2004 now have monitoring credit scores less than 600 and loan to value ratios greater than 70% based upon origination values; $5 million is for second home or invested properties.

At the end of the quarter, Oahu residential mortgage loans totaled $1.3 billion -- $12 million of this portfolio is considered higher risk. These loans were also originated after 2004 and now have monitoring FICO scores less than 600 and loan-to-value ratios greater than 70%, again based upon origination values.

In our home equity portfolio, $24.3 million is considered higher risk. These loans were originated after 2004 and now have monitoring credit scores less than 600 and combined loan to values greater than 70%, based upon origination values. $17 million of the higher risk exposure is on Oahu.

Across our consumer portfolios, we continue to see no clear indicators and delinquency trends that would tell us anything at this point.

At the end of the quarter, commercial construction loans totaled $137.4 million, with $85.4 million in residential home building exposure. 38.6 is considered higher risk. Given sales in these projects have slowed and equity margins have contracted. $16.5 million of the higher risk exposure is for projects outside of Oahu, with 10.3 non-performing at the end of the quarter.

The largest higher risk residential home-building exposure is $22 million, and is for a borrower with diversified real estate operations, including home building on Oahu, whose financial performance is constrained by current market conditions, primarily in the other markets they operate in. The borrower and sponsor are working to sell assets to deleverage.

In keeping with our focus on [inaudible], we increased our reserve for loan and lease loss by $5 million to $142.7 million, or 2.41% of total loans. The allowance considers these assets with higher risk and our legacy aircraft leveraged lease exposure, which presents greater risk, given our equity position in these assets is structurally subordinate to the debt. We continued to aggressively manage credit risk in this environment and accordingly continued to opportunistically exit higher risk assets to reduce future credit risk.

During the quarter, we elected to exit three syndicated loans, given the potential downside risk in each.

I will now turn the call back to Al.

Allan R. Landon

Thanks, Mary and Kent. As we look to the end of 2009, we see continued economic softness in our markets. Some customers have adjusted to the reduced level of business activities while others continue to face challenges. We did see an increase in non-performing assets, as Mary reported, and it became clear that we will have to stimulate resolution of a couple of problem credit exposures.

Risks are at elevated although manageable levels in most parts of our loan portfolio. We remain focused on controlling risk and expense as we look for business opportunities.

We plan to maintain our strong liquidity reserves and capital, all important measures of soundness. We think that our capital levels are now quite strong.

Bank of Hawaii remains safe, balanced, and prepared for opportunities in the future. We’d be happy to respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ken Zerbe with Morgan Stanley.

Ken Zerbe - Morgan Stanley

Thank you. Al, just your last comment there that you expect to I guess stimulate resolution of problem credits. Should we make the assumption A, that those are construction credits and B, that that would imply fourth quarter charge-offs would be at elevated levels, either at or above current charge-off levels?

Allan R. Landon

I think it’s safe to say that it is centered in the construction area but not exclusively and I made the comment because we are trying to get out in front of these things and push people along. Mary reported that we took some charge downs here in the third quarter. We think we’ve got these things at pretty sound levels right now, though I wasn’t trying to telegraph any increased charge-offs here in the fourth quarter. The process of stimulating action on the part of some borrowers can take some time. We think we’ve got these where they belong but we’ll find out more as we see what happens here in the resolution process, Ken.

Ken Zerbe - Morgan Stanley

Okay, and then the other question I had was can you remind us the balance you have in terms of syndicated credits right now and after the [inaudible] sales and are you worried about any of those individual credits?

Mary E. Sellers

We have $281 million in syndicated credits. That’s down from $362 million at the end of the second quarter. $33 million is what I would consider higher risk, $22 million of which was the homebuilder I referenced in our -- residential homebuilding exposure.

Ken Zerbe - Morgan Stanley

Okay, great, sorry. All right, perfect. Thank you.

Allan R. Landon

And I would add we have learned that while there are no imminent danger signals, you should always be worried.

Ken Zerbe - Morgan Stanley

Fair enough.

Allan R. Landon

That’s the nature of that business I think, Ken.

Ken Zerbe - Morgan Stanley

Okay, great. Thank you.

Operator

Your next question comes from the line of Brett Rabatin with Sterne, Agee.

Brett Rabatin - Sterne, Agee & Leach, Inc.

Good morning, everyone. I wanted to first ask from a fed fund perspective, if it is fair to assume that that dollar amount continues to atrophy in the fourth quarter, or can you give us a little color on your thoughts about liquidity going forward?

Allan R. Landon

Well, we’ve been bringing down the fed funds over the last couple of quarters, so we are very liquid right now. It will depend on deposits and other factors into the fourth quarter, but in general we’ve been reducing the level of fed funds that we’ve needed.

Brett Rabatin - Sterne, Agee & Leach, Inc.

Right. Okay, and then secondly, can you give us some thoughts on the loan pipeline vis-à-vis your current outstandings? Is it fair to assume that atrophy continues at similar levels, given the economy or can you give us some color on where you see the loan portfolio from here?

Allan R. Landon

Peter.

Peter S. Ho

Actually, we think about it we think along two paths, right? If you look at the past year, on an average basis we are down in the loan portfolio kind of mid-single-digits, right? All of that decrease can be explained across three asset categories -- CNI, residential mortgage, and dealer indirect. So when you think back on what’s happened in each of those categories, I think we’ve seen some pretty extraordinary circumstances. CNI obviously has been impacted as companies have shifted down their trading levels, deferred their investments in CapEx. On the resi mortgage side, we’ve gone through kind of a boomlet-and-a-half of re-fis. The impact of that has been to make [performing] loans, which out here is up to 6.255, pretty attractive relative to the jumbo rates, and obviously that has had a somewhat dilutive impact on our portfolio of residential mortgages. And then obviously on the indirect side, we all know what has happened to overall demand for new car units, so looking back it’s easy to see how we got into the declines that we got into at kind of the mid-single-digit level across both the commercial and the consumer side.

Looking forward, it’s tough to tell. I mean, I think certainly on the commercial side, we’ll begin to see loan growth again when our clients, our strong clients begin to see opportunities again down the investment side and begin to build up their asset levels down the current account side. Not seeing that right now but hopeful and certainly we talk to our clients regularly and they are really taking more of a wait-and-see approach.

On the consumer side, I think that’s really a function of when consumption returns, we have a pretty good share of the consumer balances here in the state and as that activity picks up, we should see our activity pick up as well.

Brett Rabatin - Sterne, Agee & Leach, Inc.

Okay, great, thanks and just last quick one, I was curious if you might give any commentary on capital targeted ratios, if you might use any management strategies in the next quarter or two?

Allan R. Landon

Well, we’ve been following the practice that more is better. It’s kind of -- there becomes a limit to that and while we may not be there yet, I think we can see where that limit might be. That is what we are looking for. We will see how the equity levels hold up, the appreciation levels hold up. At some point in time, we think about returning back to share repurchase. We don’t have a date on that yet. Clearly that is part of our management philosophy and we’d like to get there but we are going to have to see a little bit more indication of where the economy is going and of course we continue to dialog with our regulators as they [seek] the new level of capital reality for banks across the country.

We think we are in pretty good shape with that, maybe a little bit ahead of the game but it’s going to take some more time before we change anything in that formula.

Brett Rabatin - Sterne, Agee & Leach, Inc.

Okay, great. Thanks for all the color.

Operator

Your next question comes from the line of Joe Gladue with B. Riley.

Joe Gladue - B. Riley & Company

One area I guess I’d like to expand a little bit on on Brett’s questions on the balance sheet. Just noticing I guess beginning of the year sort of the ratio of loans to securities was up about 70-30 and I guess as the balance sheet has grown so far this year, it’s pretty much been all in the securities side and now that I guess that ratio is about 54% to 46%. I’m just wondering if you could give us some idea of where you expect that to go, if those trends continue and I guess trying to get some idea of how that mix will affect the net interest margin.

Allan R. Landon

Kent, why don’t you start us out on that?

Kent T. Lucien

I think Peter gave you a good description on the demand for loans and that’s really the driver here. I mean, and that’s the first priority. To the extent loans continue to move down and our deposit and funding moves up, quite naturally the only place to go is into the investment portfolio.

Now, to the extent that loan demand should increase and funding, if that stays constant, then our investment portfolio would come down. But it’s really a function of what is happening with loans.

Allan R. Landon

I think to give a little context over the year, back last year at this time we felt rather uncertain where the economy was going to go, how it was going to affect the banking industry. But then we’re a little bit unique by virtue of our geographic location. So we as a team felt that increasing our liquidity and our deposit funding was important. We felt we had had a useful off-balance sheet asset, if you will, in funding that we could draw upon and so we decided to see how that would work out. Frankly, our funding capability probably even surprised us a little bit on the upside. To the point that we came into the third quarter saying gee, we’ve got the liquidity we need, we’ve got the funding ability and levels we need, so we tried to sort of plateau that, given that there wasn’t a whole lot of loan upside and we had gotten a great deal of liquidity in our securities portfolio. As we look at where interest rates are going or what is happening there, accumulating more securities now probably seems like it has some risk associated with it but we would look at a stable balance sheet right now, trying to shift more into lending but not to force that until it is time for that to occur. And then just maximize the profitability at an appropriate risk level around our securities holdings.

A little bit of a wildcard there is the repo market. We provide a lot of services to public sector organizations here and so some of that is done as an accommodation to customers rather than a need for funding and that affects us on both sides as well. But as Kent said in his comments, we’ve stayed pretty conservative trying to keep our duration short and our re-marketing risk low in those investment securities so if we need to move as interest rate changes, we think we can be pretty adept at that going forward.

Joe Gladue - B. Riley & Company

Okay, thank you. And I was wondering if you could tell me what the trend was in 30 to 89 day delinquencies from second quarter to third quarter?

Mary E. Sellers

It’s actually a little mixed across our various consumer portfolios. We saw some improvement in residential mortgage. We saw a slight up-tick in home equity. So on whole, we really just see it continuing to be relatively --

Joe Gladue - B. Riley & Company

Okay, and I guess lastly I’ll ask one other quick one, is I guess among compensation and benefits expenses, it looks like there was a doubling of expenses for medical, dental, and life insurance benefits from the second quarter to the third quarter. Was there something specific driving that? Is that a sustainable rise or is that -- an ongoing rise or was that just some lumpiness there?

Kent T. Lucien

It’s really lumpiness. We had reduced our accruals a little bit in the second quarter, so you know we had evaluated the year-to-date reserves at that time, had brought them down a little bit. And so by comparison to the third quarter, medical and dental is higher than the second quarter but it’s pretty much in line with expenses year-to-date.

Allan R. Landon

The outlayer there is the second quarter when we had an accrual adjustment and that’s been a consistent pattern over several years for us. Each year we get an actuarial report about that time of the year that shows how we have done in estimating our premiums versus our employees’ health care expense for the prior year and that’s when we true-up those balances.

Joe Gladue - B. Riley & Company

Okay. All right, thank you.

Operator

Your next question comes from the line of Aaron Deer with Sandler O’Neill & Partners.

Aaron Deer - Sandler O’Neill & Partners

Most of my questions have been asked and answered, but I was curious about the mortgage origination activity in the quarter. Have you guys seen any of that pare back yet now that we are approaching the end of the home buyer tax credit? And what are your thoughts on that business going into the fourth quarter?

Allan R. Landon

Peter.

Peter S. Ho

Actually, purchase volume, purchase activity here is pretty strong into the mid segment. Where we are seeing obviously slow down is in the re-fi side. We had great activity last quarter. That’s really pretty much through the pipe at this point but purchase activity is actually in the past several months been pretty strong relative to what we have seen in the past year.

Allan R. Landon

Overall, Peter, we are expecting to see that the mortgage origination volumes go down as we get through the credit period here.

Peter S. Ho

Yeah.

Aaron Deer - Sandler O’Neill & Partners

Okay, and then just trying to understand a little bit on the margin side again, I guess, getting back to the questions about the securities portfolio. Would you anticipate, given that some of the deployment of funds that you’ve had so far and it doesn’t sound like there is going to be much shifting into loan yields or into loans near term, would you anticipate some additional margin expansion here heading in toward the end of the year or is that -- should things kind of flatten out at this point?

Kent T. Lucien

I’d hate to say that it is going to expand. I don’t really see --

Allan R. Landon

You’d love to say that, you just can't believe it, right?

Kent T. Lucien

I’ll know better in January, how about that? You know, it’s pretty much steady as she goes here into the fourth quarter.

Aaron Deer - Sandler O’Neill & Partners

Okay, great. Thanks for the help, guys.

Operator

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Credit Suisse

Thank you. Just two questions left here -- first I just wanted to hit on a big picture question around the reserve methodology, and I’m wondering, do you believe we are kind of close to peak reserve levels now, just looking at the NPL and delinquency data you have, or do you think we have a couple more quarters to build here?

Allan R. Landon

I’ll try that -- I think it’s variable by component of the loan portfolio. We would hope that consumer losses would stabilize and start to decrease but I think it’s a little bit early to make that call yet. We feel pretty good about where we are on the commercial side but given the size of the loan exposures there, sometimes we can get a surprise one way or another.

That’s I guess what I would see from an overview perspective. Mary, anything you want to add to that?

Mary E. Sellers

No.

Allan R. Landon

Peter?

Peter S. Ho

No.

Allan R. Landon

So it’s -- we don’t see any big movements but I am just -- we are just reluctant to make the call that we have seen the end of anything yet, just because there are so many factors out there that could affect us and not the least of which is government policy, right? I mean, for all the stabilization that people are talking about, we really haven’t seen any structural correction in the industry or its sub-components yet and we’ve got to get through that before we would say this is all behind us.

Craig Siegenthaler - Credit Suisse

And then for the second question, I’m just wondering if you can break out -- and you might have done this already but out of the $137 million of construction loans, what percentage or even value of those loans were written outside of Oahu?

Mary E. Sellers

$16.5 million was outside of Oahu.

Craig Siegenthaler - Credit Suisse

Is that the entire portfolio or was that just construction?

Mary E. Sellers

That’s the higher risk element.

Craig Siegenthaler - Credit Suisse

Okay, so it’s construction and some other areas, probably?

Mary E. Sellers

Right, it’s construction on Oahu and we have one mainland exposure for about $3.5 million.

Craig Siegenthaler - Credit Suisse

Got it. All right, great. Thanks for taking my questions.

Operator

Your next question comes from the line of Brian [Zabora] with Stifel Nicolaus.

Brian Zabora - Stifel Nicolaus

Just a question on Triad -- what were the -- do you have the net income numbers for year-to-date 2009 as well?

Allan R. Landon

I want to say it’s sort of in the $3.8 million and that’s a little bit lumpy because it has revenue that comes in on a -- kind of a contingent commission basis so if your loss experience is beneficial, I think those are first and third quarter rewards, so most of the net income for the year would probably have been in the accounts by September 30th, so about the same level as last year if you annualize it.

Kent, does that sound --

Kent T. Lucien

Yeah, that’s about right.

Brian Zabora - Stifel Nicolaus

Great. Thank you very much.

Allan R. Landon

That’s the CFO’s way of telling the CEO his memory is close, that “that’s about right”.

Operator

Your next question comes from the line of Robert Bohlen with Keefe, Bruyette & Woods.

Robert Bohlen - Keefe, Bruyette & Woods

Thank you for taking my question. On the deposit growth that we saw in the quarter, does any of that -- or how much is new relationship and how much of it is higher balances held from existing customers?

Allan R. Landon

On the new checking account acquisition side, on the consumer side we were up 2.5% for the quarter. On the business side, we were up 1.5%, so there was a good amount of new account growth, net new account growth. I’d say though that the preponderance of balanced growth was out of the commercial business and probably mostly out of existing names.

Robert Bohlen - Keefe, Bruyette & Woods

Okay. And then the only other question I had, on the trust revenue, I guess I would have expected that to be up a little bit, given the asset value movements we saw in the third quarter. Was there anything --

Kent T. Lucien

On a linked basis you’re talking about?

Robert Bohlen - Keefe, Bruyette & Woods

Yes.

Kent T. Lucien

Yeah, there’s a little seasonality between second to third quarter because of tax preparation but I think you are right -- we would have liked to have seen better performance ourselves in the third quarter and frankly we just have to do a better job selling into what’s a pretty tough market right now.

Robert Bohlen - Keefe, Bruyette & Woods

Okay. Thank you. Those are my questions.

Operator

(Operator Instructions) We have a follow-up question from the line of Brett Rabatin with Sterne, Agee.

Brett Rabatin - Sterne, Agee & Leach, Inc.

I just wanted to follow-up on the restructured loans that you had for the quarter, that $7.5 million. Can you talk about what goes in the process of deciding why and how to restructure those loans and then what kind of loans they are?

Mary E. Sellers

Typically they are residential mortgage loans and we basically look at the customers’ situation and what their ability to carry the loan is, the collateral value, their willingness to [pay] and we work with it from that perspective.

Brett Rabatin - Sterne, Agee & Leach, Inc.

So basically as long as the -- if the collateral value is there, and then it’s variable to maybe cash flow at a slightly lower interest rate, that’s kind of the decision process?

Mary E. Sellers

Kind of the decision process.

Brett Rabatin - Sterne, Agee & Leach, Inc.

Okay. That’s all I had. Thank you.

Operator

Your next question comes from the line of Albert Savastano with Fox-Pitt Kelton.

Albert Savastano - Fox-Pitt Kelton

Thanks for putting the economic data in the release but can you give us just a little more color in terms of how you guys feel about the economy and maybe if it’s different on the islands as well?

Allan R. Landon

Peter, do you want to comment on that?

Peter S. Ho

Sure. On the employment side, we’ve seen a bit of stability of late. Having said that, there’s a good amount of chatter and concern around what is happening with public workers here in the state. There’s furloughs through various sectors of government here. So for now I think that we feel pretty good about where we see employment and income levels but are a bit cautious looking forward to see what is happening on the furlough side.

On the commercial side, we’ve seen drops for most of our clients in the low-single-digit level off the top line. Fortunately for us that’s not optimal for most of our clients but certainly sustainable or survivable. So I think that short of kind of dropping another rung here, the commercial side of the economy should fair reasonably well. On the consumer side, again things have been reasonably stable but we are cautious, kind of looking forward to see the impact of the furloughs at the state level.

Allan R. Landon

I think one of the things that we worry about here is under-employment on the consumer side. So many of our folks work in more than on job and it’s difficult to measure the impact of the reduced hours that comes from people. That’s kind of the equivalent of the furlough -- they keep their job but their income levels go down 8%, 9% I think that’s kind of the prevailing thing we’ve been talking about. And then for small businesses, we see it still a challenging time. Peter mentioned the revenue decrement but they tend to operate off of a smaller margin and oftentimes have lesser reserves and as we see the economic softness continue for a lengthier period of time, it begins to place extra stress on particularly those smaller businesses out there in the economy. So those are -- would be two additional comments I would add.

Kent or Mary, anything you want to add about the economy? No?

Albert Savastano - Fox-Pitt Kelton

Okay, thank you very much.

Operator

(Operator Instructions) There are no further questions. This concludes the question-and-answer session. I would now like to turn it back to Cindy Wyrick for closing remarks.

Cindy G. Wyrick

Thank you, Anne. I would like to thank everyone for joining us today and for your interest in the Bank of Hawaii. As always, if you have additional questions, please feel free to contact me -- 808-694-8430. Take care and have a great day, everyone.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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Source: Bank of Hawaii Q3 2009 Earnings Call Transcript
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