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Bank of Hawaii Corporation (BOH)

Q4 2007 Earnings Call

January 28, 2008 1:00 pm

Executives

Cyndy Wyrick - Investor Relations

Allan Landon – Chairman, CEO and Pres.

Dan Stevens - Vice Chairman and Chief Financial Officer

Peter Ho – Vice Chairman and Chief Banking Officer

Analysts

Erika Penala - Merrill Lynch

Brent Christ - Fox-Pitt Kelton

Brett Rabatin - Ftn Midwest Securities Corp.

Andrea Jao - Lehman Brothers

Frederick Cannon – Keefe, Bruyette & Woods

Operator

Welcome to the Fourth Quarter 2007 Bank of Hawaii Corporations Earnings Conference call.

(Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Ms. Cyndy Wyrick from Investor Relations, please proceed.

Cyndy Wyrick

Hello everyone and thank you for joining us as we review Bank of Hawaii Corporations financial results for 2007. With me this morning is our Chairman and CEO, Al Landon, our Vice Chairman and Chief Financial Officer, Dan Stevens, Vice Chairman and Chief Banking Officer, Peter Ho and Vice Chairman in Corporate Risks Mary Sellers.

Our comments this morning will refer to the financial information that was included in the earnings announcement. 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 as outlined in our form 10K and now, I would like to turn the call over to Al Landon.

Al Landon

Bank of Hawaii achieved our major financial performance objectives for 2007. Our return on equity was 25%, return on assets was 1.75% and for the year, our operating leverage was positive. Our financial performance which was particularly strong in the first three quarters was diminished by unexpected cost recognized in the fourth quarter. We expect to recover some of those costs in the future following the Visa public offering. Our Chief Financial Officer, Dan Stevens will tell you more about our 2007 results and these costs.

It has a special feature and in light of everyone’s interest in credit risk, our Chief Risk Officer, Mary Sellers, will discuss our credit provision profile. I will add some observations about the Hawaii economy and our expectations for 2008. Then we will be happy to respond to your questions.

Dan Stevens

Bank of Hawaii’s net income for 2007 was $183.7 million up $3.3 million from $180.4 million in 2006. Diluted earnings per share were $3.69 for the year. As Al mentioned, the Bank of Hawaii recognized some cost in the fourth quarter that require explanation.

The Bank of Hawaii is a member of Visa and receives shares of restricted stock as a result of its participation in the global restructuring of Visa. Member banks are obligated to share on the potential losses resulting from certain indemnifiable litigation involving Visa.

Visa announced that it had established contingent liabilities related to these matters and accordingly, we recorded a charge of $5.6 million or $0.07 after tax per diluted share as our proportionate share. We also incurred $1.7 million in expenses related to our customer fraud loss. Together, Visa and the fraud loss represented $7.3 million of expenses recorded in the fourth quarter.

Now turning to other components of the income statement and balance sheet, both our net interest income and margin improved in the fourth quarter. Net interest income on a taxable equivalent basis was $99.7 million in the fourth quarter, up $900,000.00 in the third quarter and net interest margin was 4.12%, up 9-basis points from the third quarter.

As market rates declined, our deposits compromised of lower rates at a slightly faster pace than our loans as 61% of our loans and over 70% of our earning assets have fixed rates. Our effective cost of funds decreased by 18-basis points in the fourth quarter while the yield on earning assets declined 6-basis points.

Although earning assets declined in the fourth quarter, average loans increased $11 million, but the proportion of non interest bearing demand deposits to total funding was constant.

For the full year 2007, our net interest margin declined by 17-basis points to 4.08% due to higher funding costs, although earning assets grew in 2007, particularly in loans and leases and our yield increased by 17 basis points, our cost of interest bearing liabilities increased by 41 basis points resulting in a reduced spread for the year. This increase in funding cost was primarily due to the continued shifts of deposits into higher costing time products.

An analysis of this change in net interest income is included in the tables accompanying our earnings release. Non interest income for the fourth quarter of 2007 was $60.3 million slightly down from the prior quarter, although partially offset by a $3.1 million gain in the sale of unused real estate, the decline was due to two factors; $2.9 million of our seasonal contingent insurance commission earned in the third quarter and $1.9 million reduction in mortgage banking income due to rebalancing securities used to hedge the value of our mortgage servicing rights. Although we had benefited rom over hedging our mortgage servicing rights, we rebalanced the portfolio based on our experience in managing the hedge.

For the full year 2007, non interest income was $240.5 million, up $24.3 million over 2006 with significant operating increases in nearly every category.

Non interest expense in the fourth quarter increased $10.6 million over the third quarter. $7.3 million related to Visa and the customer fraud loss. Of the remaining $3.3 million increase in non interest expense, $1 million occurred in salary and benefits driven by $450,000.00 due to one additional paid working day in the fourth quarter and a $600,000.00 increase in performance related restricted stock grant expense. $500,000.00 of professional fees was due to $200,000.00 in legal fees in our investment services group related to the roll out of our anticipated open architecture platform and a trust real estate matter as well as $600,000.00 of professional fees to strengthen diagnostic tools and processes in technology, compliance, retail credit and text. The remaining $1.2 million recorded in other expense relates to seasonal increases in business development and in yearend processing cost.

The increase in non interest expense resulted in a higher efficiency ratio of 57.6% in the fourth quarter compared to 51% in the third quarter. For the year, non interest expense totaled $335.4 million compared to $321 million in 2006, a $14.4 million increase. $7.3 million of that increase is attributable to the unforeseen cost that impacted the fourth quarter’s results. The other large part of the variance, $4.4 million was due to annual salary increases, also, the fourth quarter of 2006 included $4.5 million in recovered legal cost related to various items from the prior years.

Moving over to the balance sheet, outstanding loans decreased by $19 million this quarter compared to last quarter and totaled $6.6 billion at the end of the period, while average loans increased by $11 million.

For the year, total outstanding loans decreased by $42 million. This decrease results from $80 million in credit exits and $42.7 million decrease in leasing balances due to a required change in accounting rules. Adjusted for both the credit exits and lease accounting change, total loans ended 2007 up 1.2% from December 31, 2006.

Our investment securities portfolio, which was $3 billion at December 31, 2007 is in good shape both in duration and in market values. The portfolio does include $312 million in non-agency mortgage back securities. All of these securities were originated in 2005 or earlier, 80% were originated in 2004 or earlier. The 90-day plus delinquency rate at year end was 6-basis points or $187,000.00. Our non-agency holdings do not contain sub prime or all take collateral.

Deposits increased $67 million compared to September 30th. The $7.9 billion as of December 31 is up in all categories except savings. Average deposits decreased $213 million in the fourth quarter related to a block of short-term commercial deposits placed with us at the end of the second quarter that were largely withdrawn by the end of the third quarter.

We continued our share repurchase program by purchasing 591,000 shares during the fourth quarter at a cost of approximately $30 million. Since quarter end, we have repurchased another 175,000 shares, so our remaining authorization was approximately $86 million as of this morning.

Our target tier leverage remains at 7%, and in conclusion, our Board consistent with our October dividend declared a $0.44 per share dividend last Friday.

And with that, I would like to now turn over the call to Mary Sellers.

Mary Sellers

Our provision for credit losses was $5.4 million equal to net charge offs in the fourth quarter. The fourth quarter net chare offs included $720,000.00 in commercial net charge off and $4.7 million in consumer net charge off. Indirect auto and unsecured personal lines and loans accounted for $4.1 million of the consumer total. This represented a $1.1 million increase over the prior quarter accounting for the majority of the lean quarter, $1.4 million increase in total net charge offs.

Increases in indirect and unsecured personal lines and loans were driven by seasonal variations and continued inflationary pressure on consumer incomes in our market. In 2007, we tightened underwriting standards and account management practices, and in the case of indirect auto, significantly reduced the amount of high risk paper we were accepting from the dealers, and in some cases, we began to require dealer recourse.

In light of the economic outlook, we are further tightening underwriting standards and committing additional resources to our collection activities. Net charge offs for the full year were $15.5 million, up $4.7 million over 2006 reflective of a $1.6 million decrease in commercial recovery and a $3.1 million increase in consumer net charge offs. Indirect auto and unsecured personal lines and loans accounted for $1.5 million of this increase in consumer net charge offs. With overdrafts of approximately $1 million, accounting for the majority of the balance, I would note that prior to 2007, overdrafts were accounted for as operating losses.

The full year provision totaled $15.5 million equal to full year net charge off maintaining our loan for loan and lease losses at an appropriate level. With credit issues dominating the headlines, I would like to take this opportunity to provide you an overview of our portfolio, key risks we see and the management strategies we have in place to address this given our expectations for 2008.

Our total portfolio of $6.6 billion is diversified with $2.4 billion in commercial outstanding and $4.2 billion in consumer outstanding. The commercial portfolio is 44% commercial and industrial loans, 27% permanent mortgage, 20% lease finance, and 9% construction.

The consumer portfolio is 60% residential first mortgage, 23% home equity and 17% indirect auto and unsecured personal lines and loans. Commercial and industrial loans total $1.1 billion in outstanding. These C&I loans encompass numerous borrowers and industries. In 2007, we reduced exposure to higher risk segments in this portfolio, exiting a total of $54 million in exposure. As of yearend, this portfolio has no 90 days or more past due loans and very modest non-performing assets of $600,000.00. For the full year, net charge offs totaled $2.1 million or 19-basis points. We continue to execute our strong portfolio management processes, which require ongoing evaluation of individual borrowers and industry segments. Given very low levels of internally classified assets in our C&I portfolio, we have no specific concerns at this time. This portfolio outstanding total $482 million. The risk component in this portfolio is primarily airline exposure, which we have discussed in detail in the past. Let me now turn to commercial real estate, an area that has received significant focus recently.

Our commercial real estate portfolio includes $635 million in commercial mortgage outstanding and $209 million in construction outstanding. Our commercial mortgage portfolio is diversified across product type and our island market and has a significant owner-occupant component. Industrial properties primarily on Oahu are the largest concentration at $257 million, 58% is owned or occupied. Mainland commercial mortgage exposure totals $3.5 million, or less than 1% of total commercial mortgage outstanding.

We continue to take a disciplined approach to underwriting commercial mortgage exposure. Our strategy is to lend in small amounts based on cash flow with the real estate value providing secondary protection.

Residential development is the largest component of our construction exposure with $110 million in outstanding. The majority of this or $88 million is in projects with price ranges targeted at local buyers primarily on Oahu and Maui.

Extended permitting and building processes on our island has constrained construction starts and the increases in inventory levels seen in some markets on the mainland. Housing remains under supplied in the market with demand constrained by affordability. Second homes and investor markets in Hawaii cause most of the increase in housing production in the past few years and have a higher risk of meaningful price corrections.

Accordingly, this segment is the one we have been most careful about. During 2007, we exited $5.5 million in exposure, currently, we have three loans with outstanding totaling $21 million per project in the second home segment.

These loans were underwritten with conservative loan to value and/or strong guarantor support.

Mainland construction outstanding total $10 million or less than 5% total construction outstanding. The two mainland projects were also conservatively underwritten with strong guarantor support. As of yearend, our commercial real estate portfolio had no loans of 90 days or more past due, a modest $112,000.00 in non performing assets and no net charge offs.

Our largest exposure to the residential housing market is in our consumer portfolio, in residential mortgage and home equity portfolios. Residential loan outstanding total $2.5 billion and home equity outstanding total $973 million. Only $37 million are secured by homes outside our market. We update credit scores on these portfolios monthly and in addition to looking for evidence of decreases in collateral value. Monitoring credit scores and collateral margins are strong and our residential mortgage portfolio loans with loan to value ratios of greater than 80% total $118 million, 96% of these loans are covered by mortgage insurance or government guarantees leaving uncovered exposure of $5 million.

In our residential portfolio, $2.8 million is considered high risk. These loans have monitoring credit scores less than 660, loan to value ratios greater than 80% and no mortgage insurance or governing guarantees.

In our home equity portfolio $27 million or 3% of total portfolio outstanding are considered high risk. These loans have monitoring credit scores less than 660 and combined loan to value ratios greater than 80%. $800,000.00 of this exposure is in second home investor properties.

For the full year, our mortgage portfolio was in a net recovery position of $52,000.00 and our home equity portfolio had a total net charge offs of $738,000.00 or 8 basis points. Given our outlook, we will continue with our current conservative underwriting tightening at the margins in selected segments as necessary.

Indirect auto loans of $443 million and unsecured personal lines and loans of $262 million comprise the balance of our portfolio. As I shared with you earlier, our plans for 2008 call for continued diligence in reducing risk and less exposure in these assets. As of December 31, 2007, the reserve for loan and lease losses total $91 million, unchanged from December 31, 2006 and September 30, 2007. The ratio of the allowance for loan and lease losses to total loans was 1.38% up from 1.37% at December 31, 2006, and unchanged from September 30, 2007.

In conclusion, our credit risk profiles remain strong and stable. It reflects our continued disciplined approach to client selection underwriting proactive portfolio management and the stable economic environment in Hawaii in 2007.

Al Landon

As we begin 2008, the Hawaii economy is in pretty good shape even though there are some signs of slowing. Visitor spending increased slightly in 2007 in spite of a small decrease in arrivals. For 2008, visitor forecast vary. Some expect small increases while others expect a slight decline in arrivals. Production of housing units was down in 2007 as it was in 2006. Housing prices on average have remained unchanged for the last two years. Commercial construction remains strong. The growth of government receipts is expected to slow in 2008. Unemployment remains low of just over 3% as of the end of the year. Inflation which has exceeded national levels in 2006 and 2007 is expected to be at lower levels in 2008.

On balance, we read the indicators to suggest that the Hawaii economy looks pretty solid as we begin 2008.

We carefully watch the economy on the US mainland as well. We know that if it slows appreciably, we can anticipate such weakness will affect us here in Hawaii. We will continue in 2008 to follow the business plan that we announced in 2007. Our plan focuses on our existing markets. We will maintain a balance between growth and discipline. We expect to see additional growth opportunities in 2008, but we will remain disciplined about controlling credit quality and risk. We will also continue our disciplined management of operating expenses, which will increase due to the effects of inflation and a higher cost of compliance and risk management. We expect our quarterly operating costs to run about $83 million to $84 million, although the first quarter could be a touch higher due to payroll taxes.

We plan to pay for these costs with increased revenue. We expect to maintain our capital levels at 7%, although there are too many variables to make a prediction on 2008 quarterly returns, we believe that our longer term goals remain viable. Positive operating leverage earning 1.7% on assets and a return on equity of 25%.

Now, we are happy to respond to your questions.

Question and Answer Session

Operator

(Operator Instructions)

Your first question will come from the line of Erika Penala representing Merrill Lynch, please proceed.

Erika Penala - Merrill Lynch

I just wanted to make sure that I interpreted it correctly. You mentioned that you would prefer to focus on existing markets, is any expansion in the mainland even an option at this point?

Al Landon

We do not have anything in our plans for that right now, Erika.

Erika Penala - Merrill Lynch

Could you give us a sense in terms of the pace of buy back activity for ’08 and whether or not it would be comparable to the previous year’s pace?

Al Landon

Right now, it looks comparable.

Erika Penala - Merrill Lynch

And also, if I could get some color around how you expect the 75 basis point rate cut last week and maybe additional cuts this week to your first quarter margin?

Dan Stevens

Given the structure of our balance sheet, there will be some pick up in margin related to the recent spend cuts. Clearly, if they continue to cut rates at that level, it gets to an absolute level where it is hard to recover unless we leverage our balance sheet and given where we are in the market and where interest rates are, this is probably not a good time for us to leverage, but these intermediary rate cuts given the structure of our balance sheet will help our margin in the first quarter.

Operator

Your next question will come from the line of Brent Christ representing Fox Pitt, please proceed.

Brent Christ - Fox-Pitt Kelton

I appreciate the color Mary gave on the loan portfolio. Could you talk a little bit about the rise that you saw both in the home equity non performers this quarter as well as the 90 days past due in terms of the residential mortgage portfolio and just really what kind of trends are driving that.

Mary Seller

In the non performing assets in home equity, it was really just a handful of loans. The debt together had a combined weighted average loan to value of 50%, which brought the total for our NPA balances to a weighted average loan to value of 61%.

In terms of our 90 days-plus past due, that was primarily in mortgage. Again, it is several loans that are very conservative in terms of loan to value. In fact, we are at the 50% loan to value window now.

Brent Christ - Fox-Pitt Kelton

And is there any loss of content there or expected at this point or kind of what are you doing to address the up-tick?

Mary Seller

We are actually working very aggressively to resolve those and we do not expect any loss. In fact you would have seen that our NPA sub mortgage came down at half a million bucks this quarter.

Brent Christ - Fox-Pitt Kelton

And then, in terms of the expense guidance that you gave, it seems like it is a little bit above obviously, your run rate over the past several quarters, could you talk a little bit more specifically about what is going to keep that level sustained or be a little bit higher as well as you mentioned the offset really being increased revenue and where you think the greatest opportunities are on the revenue side to offset that?

Al Landon

I will make a general comment, Dan if you want to add anything to it, please do. The main source of increase is our decision to keep our work force levels at the same as we have right now and we need to, with the low unemployment here, we need to make sure that we keep our compensation competitive. We are also focusing on our operating cost related to compliance and risk management as I have said. They have snuck up on us a little bit here in the last couple of years as the expectations for compliance particularly increased and we just made a conscious decision that that risk management activity has served us pretty well over the last couple of years and we are going to keep that momentum.

That usually means professional services cost going up and making sure that we have got our people with the right tools. We have got sort of the right level of education going on and to be honest, we have to defend against competitive desires to hire our people. It seems like everyone of them has one or more offers constantly out there and it is just an increasingly important area, I think for us and all banks, but we are particularly sensitive to it an the last thing I would add is that we do not want to stop spending on our technology in our operations. We know that we need to continuously improve our delivery mechanisms, so things like image where we have got some opportunity in front of us. We are going to keep the momentum going there even though I recognize in the business, there are quite a few pressures to slow those spends.

As far as where we are going to cover those costs, we have had good luck raising our non interest income as you could tell over the last couple of years. We have got some new product offerings coming up particularly our investment services group as we open up our product architecture there and then as Dan mentioned, the recent rate reductions are going to give us a little bit of margin upside throughout the 2008 year. So that is generally what I would say as we look at it. Dan, will there be anything you want to add to that?

Dan Stevens

No, Al covered it very well. We have isolated all of our expense growth and I think you have covered it.

Brent Christ - Fox-Pitt Kelton

And then, just looking at the end of period balances within the loan portfolio, it seems like you had a relatively sizeable decline in the construction portfolio. I just wanted to get a sense of how much of that was intentionally exiting some loans versus just run off and if you are really doing much in the way of origination within that portfolio?

Peter Ho

Sure. The run down for the year was $40 million in our construction segment, about half of that were portfolio management decisions to exit out of the credits. On a length basis, our run down was about $45 million in the construction area and that really was the result of projects coming to completion.

Operator

Your next question comes from the line of Brett Rabatin representing Ftn Midwest. Please proceed.

Brett Rabatin - Ftn Midwest Securities Corp.

My phone was on blank for a couple of minutes there, so I do not know if you addressed some of these, but I wanted to ask you two questions, one on the margin and the cost of funds. Obviously, impressive decline in the different components in the interest bearing deposits, so I am curious, you are somewhat, I would say at least neutral it looks like from an Alco perspective and so, I am curious if you feel like you have some pretty good leverage to cut CD rates and what not going forward and kind of what your thoughts are on continuing to lower your cost of funds in the short term?

Al Landon

Can you spread those rumors down the street? We are optimistic that the trend of increasing deposit cost will slow or reverse here, but frankly, it is more a function of competition in the local market place and so we are going to have to see what that bearing is. It is just a little bit too early to tell. We think we are in a pretty good position to bring those costs down, at least from what we see right now.

Brett Rabatin - Ftn Midwest Securities Corp.

Okay, and then secondly, just wanted to repeat a couple of pieces of the asset quality stuff. In your prepared comments, it sounds like you are getting more conservative on the consumer and to some extent, I guess what you would call the California-effect and so I am curious if you had the numbers for classified loans and how much of that $21 million in the second home segment was in the classified bucket if any?

Al Landon

We have not disclosed classification totals anywhere in the future, so it is not something we want to start this morning to have that complete array, but Mary can you give us a little bit of color about what is in there?

Mary Seller

In terms of the classified exposure within our residential portfolio, Brett?

Brett Rabatin - Ftn Midwest Securities Corp.

Yes, I think everyone expected that your charge offs and provisioning would increase a little bit as we move into 08, but you sound pretty conservative about the economy and so I am just trying to look at your various loan segments and decide if charge off exposure might increase from here or if it can not move up too much?

Mary Seller

Well, I think the majority of what would be internally classified would be what is in the NPA category right across our residential business.

Brett Rabatin - Ftn Midwest Securities Corp.

So special mention in what not would obviously just—

Mary Seller

That does not apply across the residential businesses.

Brett Rabatin - Ftn Midwest Securities Corp.

Maybe we can follow up offline about that. I am just curious, Mary, you indicated you had increased the credit underwriting again on the indirect portfolio and so I am just curious if what you are seeing in terms of the economy is the consumer is a little bit slower if you are just being a little cautious on the California-effect so to speak or kind of what your thoughts are on the conservatives as it relates to hiking things a little more?

Mary Seller

I think on the consumer front, we have seen that our customers have been challenged in this current environment because of the inflationary pressures on there income, so as we move forward, we want to be sure that we are just tightening at the margin to bring down the risk of loss of exposure in that portfolio.

Al Landon

I think the focus of our tightening, Mary is going to be more particularly around the indirect auto and maybe to a lesser extent, some of the unsecured or lesser secured credits and personal line type credits. I would say that the borrowers in those segments in general tend to have lower credit scores and one thing we have seen here in the islands for the last couple of years is softening of automobile sales, and so if that happens, naturally, dealers are challenged to qualify more buyers and I think that is an area where we have a need to be a little bit more conservative than we have been. We have tightened a couple of times and I think as we begin 2008, I would say a little bit more tightening there. It is just hard to price for those kinds of risks.

If that part of our portfolio really does not have too much of what you would call a related economy or I think your term was California-effect that is basically an in-market phenomena and something we just have to control here locally.

Peter does that sound right to you?

Peter Ho

I think so.

Operator

Your next question comes from the line of Andrea Jao representing Lehman Brothers, please proceed.

Andrea Jao - Lehman Brothers

I was hoping Peter could talk about this outlook on loan growth and the drivers?

Peter Ho

Sure. I think Mary touched on it during her discussion. We are pretty cautious at this point given a lot of the color around what is going on in the economy primarily on the national front. We are seeing some improvement on the competitive landscape though I would say. Down the credit structuring side, we are beginning to see structures fall in a little bit more conservatively so that should help us as we are out there in the marketplace competing because we are generally on the more conservative end.

Pricing wise, things continue to be pretty tightly priced. There is a bit of a bifurcation taking place in the market we see. Higher risk assets are beginning to widen on the spread side, but the lower risk assets continue to be pretty tightly priced and that is generally where we intend to play, so that is what we are seeing on the competitive end.

Al Landon

And can I just add, one segment where the competitive landscape has changed pretty significantly out here in Hawaii is on residential finance and we have seen some competitors leave the market as you might appreciate and some other competitors taking a more conservative posture, so just anecdotally as I talked to our mortgage people, we are seeing greater interest now than we have for quite a few years and I think important in that is interest in what I will call conventional credit structures. As we have said, we think the best loans are those that we do not have to worry about nor do our customers and so the traditional home finance structures rates have come down here, I think we are going to be appealing and give us some upside.

Andrea Jao - Lehman Brothers

Okay, so it sounds like loan growth should be muted, but your pricing is much better. Would you agree or am I misinterpreting something?

Al Landon

I think that is about right on the growth side. On the pricing side, we think there is some opportunities for pricing upside, but we are still looking for that to clear out in the marketplace.

Andrea Jao - Lehman Brothers

And if I may ask a follow up to Mary, so you are a little more cautious on the consumer. Will the net charge of ratio pull in next quarter or do you think it will remain elevated because of the consumer?

Mary Seller

Well I suspect that we generally see some seasonality in the fourth quarter and the first quarter in our consumer net charge offs, so I would expect the first quarter to be similar to what we have seen in the fourth quarter.

Andrea Jao - Lehman Brothers

And then it begins to taper off from there is what you expect?

Mary Seller

And it comes down on second and third and then it goes back up.

Andrea Jao - Lehman Brothers

And if I may ask one more follow up question with Dan, will you be holding the securities portfolio steady and are you looking at reinvesting cash flows probably at longer durations?

Dan Stevens

Well, depending on what happens in our loan portfolio in terms of the growth opportunities that might come our way because of the competitive landscape, our investment portfolio might increase slightly as we take our excess deposits that come and invest in our investment portfolio. In terms of going long in our portfolio, we are really going to take a look at what we think the right cycle is going to be, is this going to be a sharp drop in rates in the first couple of quarters of this year followed by an increase in rates towards the end of the year, so we continually monitor our portfolio in terms of its duration depending on our views and where we are on the rate cycle.

Al Landon

Very scientific answer, Dan. Andrea, we do not have any intent to lengthen our duration right now.

Operator

(Operator Instructions)

Your next question comes from the line of Frederick Cannon representing KBW, please proceed.

Frederick Cannon – Keefe, Bruyette & Woods

Most of my questions have been answered, just kind of a general one, Al, as we move forward, you guys have a pretty positive view of the Hawaiian economy. We are seeing the cost of a Hawaiian vacation stay pretty high and the US falling into what looks like a consumer-led recession here, I was wondering if you could kind of talk about what factors could actually make the outlook for the Hawaiian economy worse as we move right into 2008?

Al Landon

Sure, you got your finger on the most straightforward, one of those consumer on the mainland who is the large majority of our visitor starts to feel the pinch, we think that will have some slowing impact. We have said many times that the visitor industry is the marginal factor here in our economy. We were out with some customers here over the course of the last week who work in the visitor industry and they were fairly positive I think is the way to describe that based on bookings, they see, I am going to say three to five months or something like that, Peter, is that your sense of the conversations we had there?

Peter Ho

Yes, I think January is turning up to be a pretty good month for the market.

Al Landon

The main upside has been in room rates and some consumer spending. That clearly could be the first sign of the ability to pass that on becomes a little bit less. Underlying that though, some other things that are underway; construction spending, the business segment continues to be pretty strong and I think has to do with a subdued economy for quite a few years, now some people are replenishing business properties, retailing, lease retail facilities development looks pretty strong right now. We have got some retailers moving into Honolulu here in the next few months.

Military spending continues to be pretty robust. We have got some privatization projects that have worked very well for the military right now and so we would expect to see that continue to contribute to the economy. I mentioned that government receipts have slowed down a little bit, but they are still in positive territory and while there is never enough money to do all the things we need here for infrastructure, we think that is going to be an important component of the economy here this year as well.

So, focus on tourism, but I think there is some other underlying strengths that should give us a little bit of buffer there.

Frederick Cannon – Keefe, Bruyette & Woods

And any update on what is going on over in Guam in terms of the military spending, is that still a go?

Al Landon

Well, the latest we hear is that that is still consistent with the long term plans for the military in Guam. As you can appreciate the reality as the date get closer and closer focus on what that actually means in the typical exchange of views between the Federal government and the local government as to who pays for the infrastructure as they say outside the fence, meaning not on the military base or the military facility itself, so that is an active engagement going on there is to how to make all of that work. That would seem to be the constraint right now and I think the military is very focused on making this happen.

Operator

There are no further questions at this time. I would now like to turn the call back to Mr. Cyndy Wyrick for any closing remarks.

Cyndy Wyrick

I would like to thank everyone for joining us today and as always, if you have additional questions or any clarification on any of the topics that we have discussed today, please feel free to contact me and note that I have a new cell phone number, (808) 694-8430. Thanks everyone and have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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Source: Bank of Hawaii Corporation Q4 2007 Earnings Call Transcript
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