Bank of Hawaii Corporation Q1 2008 Earnings Call Transcript

Apr.21.08 | About: Bank of (BOH)

Bank of Hawaii Corporation (NYSE:BOH)

Q1 2008 Earnings Call

April 21, 2008 2:00 pm ET

Executives

Cindy Wyrick -Investor Relations

Allan Landon - Chairman, Chief Executive Officer and President

Daniel Stevens - Vice Chairman, Chief Financial Officer

Mary Sellers - Vice Chairman, Corporate Risk

Peter Ho - Vice Chairman, Chief Banking Officer

Analysts

Brett Rabatin - FTN Midwest

Ken Zerbe - Morgan Stanley

Erika Penala - Merrill Lynch

Brent Christ - Fox-Pitt

Justin Maurer - Lord Abbett

Andrea Jao - Lehman Brothers

Operator

Welcome to the first quarter 2008 Bank of Hawaii Corporation earnings conference call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today’s call, Ms. Cindy Wyrick, Director of Investor Relations. Please proceed.

Cindy Wyrick

Thank you and good morning, everyone. Thank you for joining us as we review the results of the first quarter. Joining me this morning is our Chairman and CEO Al Landon; our Vice Chairman and CFO Dan Stevens; Vice Chairman and Chief Banking Officer Peter Ho; and Vice Chairman of Corporate Risk, Mary Sellers.

Our comments today will refer to the financial information that was included in the earnings announcement this morning. Before we get started, let me remind you that today’s conference call will contain some forward-looking statements. While we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected.

With that I would like to turn the call over to Al Landon.

Allan Landon

Thank you, Cindy. Good morning, everyone. Bank of Hawaii enjoyed very solid results for the first quarter of 2008. We achieved our major financial performance objectives. As Dan will discuss, we benefited from some extra revenues and we recovered some of the litigation costs recognized in the fourth quarter.

These gains allowed us to reward our people, provide for increased risks and attend to some other needs. Dan will also review highlights of our first quarter operating results and I will add some comments on the Hawaii economy.

Our bank’s credit profile remains just as strong as last quarter when Mary provided a review. Although there are no significant changes in credit to discuss this quarter, you can be assured that we continue to focus on risk reduction. As Cindy indicated, Peter and Mary are also with us this morning and will be happy to respond to your questions.

Daniel Stevens

Thank you, Al. Hello, everyone. As Al mentioned, Bank of Hawaii’s financial results for the first quarter of 2008 were very solid, both on an operating basis and as a result of two items that had a positive impact on our bottom line.

Net income for the first quarter was $57.2 million, up from $40.9 million in the fourth quarter and $47.3 million in the first quarter of 2007. Diluted earnings per share were $1.18 compared to $0.83 last quarter and $0.94 for the first three months of last year. Our return on assets was 2.16%, and return on equity was 29.9%. I’ll explain the two items that impacted our first quarter results as well as how that gave us the opportunity to use the related proceeds and then comment on our operating results for the quarter.

First, as you are aware, Visa completed its initial public offering in the first quarter of 2008, which resulted in the bank receiving $13.7 million for the portion of our shares that were redeemed. These proceeds were booked as a gain in the first quarter.

In addition, as a result of its IPO, Visa funded the litigation escrow that has enabled us to reverse $5.6 million of litigation expense that we booked in the fourth quarter of 2007. Our remaining restricted shares will be held in other assets at zero carrying value and we have no plans to sell these shares. The total impact of the Visa IPO in the first quarter including the redemption proceeds and the litigation expense reversal was $19.4 million pre-tax and $12.5 million after-tax.

The other gain we recorded in the first quarter involved a lease transaction. In March of this year the lessee of an aircraft owned by Bank of Hawaii exercised its early buyout option. We recognized a pre-tax gain of $11.6 million on the sale. In addition, the early buyout allowed us to reverse tax accruals resulting in a net tax benefit of $1.4 million for a total after-tax impact of $13 million. Together, the two gains were pre-tax $31 million. We used a portion of these proceeds to invest in our people, to contribute back to our community and to book additional provisions related to risk management.

First, we took advantage of the opportunity to invest $9 million in our people. About half of the $9 million went to senior officers by awarding them cash grants to buy stock in Bank of Hawaii. The remainder of those will go to a broader group of employees as performance awards under our traditional incentive pay plans.

We accrued $3.6 million to provide for legal and other contingencies.

We added $9 million to our allowance for loan and lease loss reserves as a result of economic factors in our market that Al will comment on in his remarks.

To reduce our funding costs, we exercised our option to call the last $26 million of our outstanding trust preferred securities. We incurred a call premium of $1 million, but with a rate of 8.25% on the securities, the payback for us on this transaction is less than six months. I also want to point out that even though these securities were included as tier 1 capital, we continue to be adequately capitalized and will maintain our 7% leverage ratio.

Finally, we invested in our community by providing for $2.25 million of contributions, most of which benefit the Bank of Hawaii Charitable Foundation. The after-tax impact on first quarter’s net income of the two gains net of the investments in risk management, people and our community was $9.5 million, or $0.20 per diluted share.

Excluding these highlighted items, our return on assets was a solid 1.8% this quarter and our return on equity was 24.9%. Both ratios improved compared to the fourth quarter.

Turning now to the other components of the income statement, our net interest income and margin both improved in the first quarter. Net interest income was up $2.7 million in the fourth quarter, and net interest income benefited from the steeper yield curve and lower deposit costs due to decreased rates and core deposit growth.

Net interest margin was 4.17%, up 5 basis points from the fourth quarter and 10 basis points from the first quarter of 2007. The analysis of the change in net interest income is included in Tables 7(a) and 7(b).

Non-interest income for the first quarter of 2008 was $86.1 million, up significantly because of the gains mentioned previously. Excluding the Visa proceeds and asset sale gains from both quarters, non-interest income was $60.8 million in the fourth quarter, up 3.6 million or 6% compared to $57.2 million in the fourth quarter of 2007. The increase was primarily due to a $2.3 million increase in mortgage income, largely due to refinancing activity and $1.7 million increase in seasonal contingent insurance commissions.

Non-interest expenses increased over the fourth quarter of 2007 because of the use of proceed related to the items I discussed earlier. Adjusting for the use of those proceeds, non-interest expense totaled $83.2 million in the first quarter, down from the fourth quarter and only $1.1 million higher than the first quarter of 2007.

Our efficiency ratio dropped below 50% on the strength of the gains. On a normal operating basis, our efficiency ratio was about 51% for the quarter.

Moving over to the balance sheet, outstanding loans totaled $6.6 billion at the end of the period, essentially flat from December 31, 2007 reflecting some slowing of the economy and more stringent underwriting standards. Compared to the first quarter of 2007, loan balances reflect modest growth, increasing $72 million on a period-end basis and $26 million on average. Our construction exposure has declined $55 million since the end of the first quarter last year and is now $191 million.

Our investment securities portfolio which was approximately $3 billion at March 31, 2008, is strong from a credit, duration and liquidity perspective. The size of our investment portfolio increases or decreases subject to loan growth. Since the fourth quarter of 2007, we reduced our exposure to foreign corporates by $124 million or 57%.

Our $125 million par value and subordinated notes mature on March 1, 2009 and they no longer qualify as a component of total capital. As of January 1, 2008, we elected the fair value option for our subordinated debt.

Period end deposits increased $160 million compared to December 31 to $8.1 billion at the end of March. Savings deposits were up $98 million this quarter due to several factors, including a successful deposit acquisition campaign. Average deposits also increased this quarter up $150 million from the fourth quarter, including a $15 million increase in non-interest bearing demand accounts. A portion of the increase in deposits is attributable to one large commercial deposit.

The solid growth in our deposits this quarter contributed to a strong liquidity position. Most of the liquidity was held in short-term assets. At quarter end, our loan to deposit ratio was 81%.

Asset quality remains strong. The additional provision we booked reflects increasing risks in our small business, unsecured consumer and air transportation portfolios. We believe that the risk factors outlined in our press release may negatively impact the collectibility of both our small business and unsecured consumer portfolios. We also believe that increased fuel costs and a softening nationwide economy will place further stress on airlines, potentially negatively impacting the remaining airline-related leases in our portfolio.

Non-performing assets were $6 million at the end of the first quarter, up from $5.3 million as of December 31. As a percent to total loans, non-performing assets were 9 basis points, 1 basis point higher than the fourth quarter and comparable to the first quarter of 2007. Net charge-offs during the first quarter were $5.4 million, unchanged from the fourth quarter and up from $2.6 million in the first quarter of last year. This increase is primarily due to higher losses in home equity loans and a $2.1 million partial recovery on an airline lease in the first quarter of 2007.

Our allowance for loan and lease losses was $100 million at March 31, representing 1.52% of loans and leases. We also continued our share repurchase program by purchasing 652,900 shares during the first quarter at a cost of $31.4 million. Since quarter end, we have repurchased another 65,000 shares so our remaining authorization was approximately $59.8 million as of this morning. Our target tier 1 leverage ratio remains at 7%.

In conclusion, our board, consistent with our March dividend, declared a $0.44 per share dividend last Friday.

I will now turn the call back to Al.

Allan Landon

Thanks, Dan. In January we indicated that the Hawaii economy was in pretty good shape, even though there were some signs of slowing. Our earnings announcement this morning indicated that the signs of economic slowing have become more clear. Consistent with these indications of a slowing economy, we remain cautious about the credit risks we face.

As Dan mentioned, we have increased our liquidity and reserves. We continue our efforts to reduce credit risk in our portfolios. We are less clear as to what changes may occur in our local competitive conditions.

Although we expect economic slowing may reduce our opportunities slightly, we continue to see Bank of Hawaii’s capital generation from income as strong. As Dan said, we expect to maintain our capital levels at 7%. With our very solid first quarter, we maintain our goals of positive operating leverage and earning 1.7% on assets and 25% on equity.

Now we would be happy to take your questions.

Question-and-Answer Session

Operator

The first question comes from Brett Rabatin - FTN Midwest.

Brett Rabatin - FTN Midwest

Congratulations on the results in the current environment, I know it is fairly tough. I wanted to make sure of one thing on the excess liquidity; the $240 million of Fed funds at the end of the quarter and the average balance is higher during the quarter -- is that commercial account shorter-term in nature? Can you give us some color on whether that can be deployed into higher yielding assets or whether it just is shrunk off the balance sheet?

Allan Landon

It is a combination of a couple of things, Brett. A demand deposit, as Dan mentioned, a pretty large denomination, I think it is between $50 million and $75 million. That has moved in and out of banks around town. It tends to move to us in certain economic conditions and elsewhere in other economic conditions. And not money that we would count on for the long term. We also get seasonal tax flows out of some of our public institutions and we basically take those funds more as an accommodation than as a profit source.

So both of those are not sources that we would bank on with steady long-term retention at those levels. Then when we take a look at what we see in the asset marketplace, this just didn’t feel like a good quarter for us to be going out very long. We have the sense that retaining some liquidity probably has some advantages to us so it is the combination of those two factors, Brett.

Brett Rabatin - FTN Midwest

You mentioned in the press release and in your commentary more conservative thoughts on the economy and a slightly higher level of criticized loans obviously off of [Q4]. Can you put some more color around that? Then 90 past due was a little lower, but just curious on any additional color in the indirect portfolio and then obviously aircraft as well.

Mary Sellers

I’ll start with the indirect portfolio. As you can see, Brett, the net charge-offs were down dollar wise from 4Q to 1Q. We have made numerous changes in underwriting over the past year and we are starting to see some benefit from that. We do see the 2005 and 2006 vintages still rolling through and those are showing a higher loss rate than what we are seeing from ‘07.

The other part of your question, very modest increases.

Brett Rabatin - FTN Midwest

Modest increases in criticized?

Mary Sellers

Yes.

Brett Rabatin - FTN Midwest

You have never disclosed really, obviously the one you had come off the quarter was not local. You never really disclosed too much about the aircraft lease portfolio. Can you give us a sense today of the credit ratings of the aircraft portfolio and just what you see in that portfolio relative to the current environment?

Allan Landon

Yes, the credit ratings are terrible. They are all the airlines that you read about. Not all the airlines you read about. If you remember, Brett, we had a larger portfolio and this quarter we got down the good way. We got down the bad way, got our exposure down the bad way a couple of times before.

We have a little table in there that breaks it out between U.S. and non-U.S. and we have got an air cargo carrier in there. It is a mix. What I would tell you is that we are pretty comfortable with our reserves related to that. If you look at the rest of our balance sheet and our reserve levels you would conclude we were pretty conservative in our reserves. We have got a higher level allocated to our aircraft exposure portfolio than what we do to anything else in the portfolio.

Brett Rabatin - FTN Midwest

Maybe we can follow up offline about that. Lastly I was surprised, Dan, to hear you were leaving. Can you provide any color? It sounds like you are going to come back to the Mainland? Any thoughts on you leaving and then just for your CFO search if that’s going to be mostly internal or if you are going to again go look outside of the company as well.

Daniel Stevens

Well, I’ll leave the CFO search to my Chairman to my left. I left for personal reasons. The perception of living in Hawaii away from family, et cetera, on the Mainland and the reality once I got here were two different things. So, I’ve enjoyed my working with the bank, the people here. I have had a great time, but more for personal reasons I thought it would be best at this time to head back home.

Brett Rabatin - FTN Midwest

That was my guess. I’ve heard that from another transplant as well. Best of luck to you. Thanks again, everyone.

Operator

Your next question comes from Ken Zerbe - Morgan Stanley.

Ken Zerbe - Morgan Stanley

Can you just give a little more detail in terms of the increase in the compensation expenses? I mean this in the best possible way, but maybe just touch on why you take gains or one-time gains from your portfolio or Visa and give it back to the employees of the company? How should that be viewed as a good thing for the shareholders? Thanks.

Allan Landon

We are in a position right now where looking at equity-based compensation over the last few years seems to be rather bifurcated in its perception. On the one hand, you have investors who say it’s good to have the officers of the company own shares and think like shareholders. On the other hand, you have got this whole world of oversight that is constantly focusing on and pinging on equity compensation.

So what we decided to do was to try to simplify our process a little bit and we gave cash grants to our senior officer team that is about equivalent to a year-and-a-half’s worth of restricted stock amortization. We said, why don’t you use that cash as a windfall like our lease gain and invest in the company and we are going to see how that goes.

The benefit is that when you change from restricted stock, which is a grant upfront and expense over the lifetime to a cash grant which ideally would be accrued upfront and disbursed at the end of an expense stream, you get a gap there. The only way you can cover it is a one-time grant and we happened to have one=time income and I paired the thing up and said we are going to do that.

Ken Zerbe - Morgan Stanley

Is this just this one time or is this something that you might plan to do on an annual basis going forward?

Allan Landon

Well, we are going to see how it works. As I said, it is equivalent to longer than a year’s worth of amortization. So it sort of covers this year’s amortization or the amortization of grants of restricted stock we would have otherwise needed to make this year. If that works out and we get some good satisfaction from our employees, and we have the retention goals we have in mind, then we’ll probably start accruing for it and continue that in the future. If it doesn’t work out quite the way we expect then we’ll take a look at what’s the next best way to incent performance.

Ken Zerbe - Morgan Stanley

Understood. The other question I had was just in terms of the risk of your loan portfolio; I know you are highlighting airlines, small business and unsecured consumers as being why you are increasing your allowance where last quarter you were focused more on the auto portfolio. Are we seeing a material deterioration in the small business and unsecured consumer, or are you just trying to be cautious?

Allan Landon

I think we used the word cautious in our release and in our comments a few times this morning and that’s a pretty good description.

Operator

Your next question comes from Erika Penala - Merrill Lynch.

Erika Penala - Merrill Lynch

Mary, I was just wondering if you could give us some color on the home equity portfolio. I know that it wasn’t mentioned as an area of concern. Could you tell us what early stage delinquencies are shaking out to be in that portfolio and if you have a sense of changing payment behavior or more strain?

Mary Sellers

Actually in our home equity portfolio early stage delinquency is down. In fact, early stage delinquency is down across all our consumer portfolios. It ran about 23 basis points this quarter versus 53 basis points in the fourth quarter and you can see our NPAs are down in home equity too. So we haven’t seen any material shifts in terms of credit score, LTV et cetera, to this point.

We do continue to tighten though at the margin as Al has mentioned as we really just look to reduce risk moving on out.

Erika Penala - Merrill Lynch

What’s the size of your portfolio that you would consider small business?

Mary Sellers

About $200 million.

Erika Penala - Merrill Lynch

How should we think about the expense run rate going forward, Dan?

Daniel Stevens

Well as I mentioned if you look at our expense run rate from the first quarter of last year to the first quarter of this year, we’re only up to slightly under $2 million on last year first quarter, first quarter this year. We expect to continue to have a strong focus on expense control. Obviously we’ll look at opportunities in the marketplace to hire good people or to invest in products. But I think you still see very strong evidence of a focus on expenses.

Allan Landon

I think Dan we said last quarter that we would anticipate an expense run rate of $82 million to $84 million, maybe $82.5 million to $84.5 million, somewhere in that range, Erika. We’re consistent with that.

Operator

And the next question comes from the line of Brent Christ - Fox-Pitt.

Brent Christ - Fox-Pitt

Just a follow-up on the expense question. Could you give us a sense in terms of some of the employees’ incentive awards that you incurred this quarter, how much of that you potentially brought forward from future quarters versus was just in excess of what you would have otherwise planned to incur over the course of the year?

Allan Landon

We didn’t bring too much forward from future quarters; maybe $1 million or a little bit more. What we did though when we set the budget for 2008 was recognize we didn’t have enough money in it for the shareholder and so we took a little bit out of our bonus pool. The main amount of our traditional bonus plans was to help restore, sort of top off that piece so that at the end of the year if we have good performance in the next three quarters we’ll be able to pay a full bonus. Just an offset to the slowness that we would expect to see in revenue growth.

Brent Christ - Fox-Pitt

Then a follow-up on the airline portfolio, could you quantify how much you have in reserves specifically allocated to that portfolio at this time?

Allan Landon

I don’t think we’ve ever disclosed that, have we?

Mary Sellers

If you look in the K, it’s roughly the same percentage, we give a breakdown on it.

Allan Landon

We give it there?

Mary Sellers

We give out on our total leasing.

Brent Christ - Fox-Pitt

So the total leasing would be primarily the airline portfolio then?

Allan Landon

Yes.

Brent Christ - Fox-Pitt

Lastly, it looked like the loan balances were relatively stable this quarter. Could you give us a sense of how the pipeline looks? It looks like you had a little bit of growth on the commercial side but just curious how the pipeline is at the end of the quarter.

Peter Ho

Really, the loan portfolio breaks out with reductions in outstandings down the construction and leasing side and increases down our C&I and permanent mortgage book. I think as we look out in the next several quarters we look to see that trend continue. We’ve got good pipeline in the C&I book, we’ve put a lot of emphasis into what we would term owner-occupied commercial mortgage activity and we’re seeing some good lift there.

Operator

The next question comes from the line of Justin Maurer - Lord Abbett.

Justin Maurer - Lord Abbett

First on the leverage ratio at 7%, I mean clearly you guys are in an enviable position that most aren’t at this point. What are your thoughts? I know you mentioned just quickly the share buyback that you’re largely there, I guess. I assume you’d prefer to stay on the conservative side of that and just maintain even if you are generating excess capital to hang on to that and maybe the percentage drifts up a bit. Is that fair, or are you still going to try to drive to that number?

Allan Landon

Well we’re going to watch our risk indicators and we stay in touch with our regulators as well, who pay attention. For right now, we have sort of assessed we could let that move up pretty conveniently if we needed to but the steady buyback program has worked pretty well for us.

I guess maybe I’m not really answering your question, here, am I? We’re going to stay where we are at the 7% for right now but we’ve got the flexibility to move that up if the situation suggests we need to.

Justin Maurer - Lord Abbett

Are you finding in conversations with the regulators that’s the number one metric that they’re focused on? Because I know some of the capital raises that have occurred, including one today focus on tangible equity and I know that’s been a controversial point for folks that when banks were making acquisitions the last few years they would tell you that the regulators didn’t really care about tangible capital and all of a sudden you are seeing actions that maybe suggest otherwise.

Allan Landon

It’s funny how that changes, isn’t it? In our case, we don’t have very much goodwill and it’s been quite stable. We’ve not been in the acquisition business and so we really haven’t had to draw those distinctions nor have we had to have any serious conversation -- well, any challenging conversation -- with our regulators about capital levels. All of our conversations are serious but they understand our business plan, they understand where we’re going and at this point they see the risk profile is aligned with our capital levels and flexibility to adjust if we need to.

Justin Maurer - Lord Abbett

Just so I understand the cash grant again to follow up on the earlier question, that is in lieu of restricted stock this year upon which you hope -- or I assume, have sign off from those folks that they will turn around and buy the stock. Is that right?

Allan Landon

That’s pretty close. The word “hope” is something we wrestled with a little bit there and we’re going to disburse this in more than one payment. We’ll see how the first installment goes in terms of utilization for investment purposes and that will help qualify people for future installments.

Justin Maurer - Lord Abbett

I guess the question though is, is there an accounting difference as to the way this flows as opposed to if you had earmarked this amount of stock for the bonus, call it $3 million, that you could have just provided for that as the year went on as opposed to this cash payment now, if you will, to hope to turn the stock later, or expect to turn the stock later?

Allan Landon

I think you’ve got it, yes. The normal thing would be if you have a plan you should accrue it and spread it over the work period. That is what may indeed happen in the future if the program is successful but in this case, looking at the accounting for it where we had gains in one quarter matched up to the expense by making a payment to the employees.

Justin Maurer - Lord Abbett

What typically is the split of restricted stock versus cash incentive compensation on an annual basis? Is it predominantly cash?

Daniel Stevens

Yes. It is heavier weighting in cash traditionally and then the idea of the equity-based compensation is long-term so we worked off with annual grants that have a performance accelerator on it.

Justin Maurer - Lord Abbett

So the $3 million or so that was accrued in the first quarter, how does that compare to what was done in ‘07? I don’t have that handy. I don’t know if it was delineated as a line item.

Daniel Stevens

The line item had several things in it. The element of comparison that we work off of, just what the amortization into expense would be following the restricted stock grants and we are, as I mentioned, a little bit higher. I think over $0.5 million was the cost of our grants, our cash awards this quarter and that is about a year and two-thirds worth of amortization.

Justin Maurer - Lord Abbett

Just one last thing on the comp is, how are you or how is the board thinking about whatever your earnings targets or whatever targets that are being used this year, I know you mentioned the 25% ROE 1.7 ROA and so on as the standard targets. When you guys think about the noise, if you will, of this quarter and the puts and takes to help us understand what’s being included and excluded from a bonus calculation perspective?

Allan Landon

As Dan said, we dropped $9.5 million through to the bottom line for the shareholders. We think of that as giving us some assurance that we will be able to achieve those performance levels when we look at what we think is going to be a slowing economy out here in Hawaii and the risk that that portends.

Justin Maurer - Lord Abbett

Indirect auto, you’ve talked about that the last couple of quarters, hoping to bring that down. Average balance if I’m looking at this right was down $6 million, $7 million. Is that as expected, less than expected?

Mary Sellers

Pretty much as expected, Hawaii is down a bit more. We do have a small piece of Mainland exposure that was up about $6 million for the quarter.

Justin Maurer - Lord Abbett

Directionally, should we expect that order of magnitude every quarter or is it not that linear?

Mary Sellers

You should expect about that direction of magnitude each quarter.

Justin Maurer - Lord Abbett

Mary, on credit, obviously there’s this nice balance that you guys are trying to strike here of being prudent yet I think we are all trying to figure out are there things you guys are seeing that we are not seeing? Clearly you addressed the consumer side of things, that early stage delinquencies are down. I think you guys have been pretty public about what airlines you may or may not have exposure to in terms of the ones that have already filed. So I guess we could take from that that there is no adverse development, if you will, since the end of the quarter on the bigger, bulkier stuff?

Mary Sellers

Exactly, no significant changes on our larger C&I portfolio.

Operator

Your next question comes from Andrea Jao - Lehman Brothers.

Andrea Jao - Lehman Brothers

I was hoping to get your outlook with respect to the margin. How much more expansion can we expect over the course of 2008? What does this improvement hinge on?

Daniel Stevens

Well I think, as Al mentioned before, given the market we are in now we are more interested in liquidity. We have that one large deposit so I would look at our margin holding relatively steady for the year and net interest income as well, but we are not going to be putting a lot of our excess liquidity in going long and buying various securities. We are going to probably keep our powder dry, just given the economic environment we are in both on a national level and Hawaii.

Andrea Jao - Lehman Brothers

What kind of loan growth do you expect and the source of funding then?

Allan Landon

I think on the loan side we would anticipate for the next few quarters that we would look similar to how we looked in Q1. In certain pockets we still see nice risk adjusted return opportunities. Certain pockets, as you know, we are trying to winnow down our outstandings on. On balance, I think we get to zero or maybe slightly positive, though.

Andrea Jao - Lehman Brothers

On mortgage banking, obviously mortgage bank revenues are elevated in the first quarter. How much do you think this pulls in or perhaps you can maintain this higher run rate going forward?

Peter Ho

We would love to, but a lot of the activity was due to refinancing of mortgages. The first quarter may be bleeding into April. But we would love to do that, but just given the economic reality and the housing market in Hawaii, we just don’t expect that to be running through the rest of the year.

Daniel Stevens

I think that’s right. The offset is the housing market is getting tougher so the upside, we are seeing fewer competitors in the market, if you will. The rate environment is pretty attractive.

Peter Ho

Right.

Allan Landon

Andrea, you asked about funding and we didn’t comment on that. It makes sense if we are not looking at a lot of loan growth you wouldn’t have too much incremental funding. But we are continuing to focus on savings and transaction account growth and we are seeing a positive movement in that direction. So to the extent that we can reduce institutional and timed funding, that continues to be our plan as we move forward.

We’ll just have to see. I made a little comment about competition. We are just not sure what all is going to happen there as the mortgage shakeout continues and you see rescue plans of companies that have been active out here, specifically the Countrywide. We just don’t know what that’s going to bring to the mortgage side of things.

Operator

Your next question comes from Robert Bolen - KBW.

Robert Bolen - KBW

A follow up to the margin. If I looked at most of the decline in the deposit rates came through the savings with only a much smaller decline in the time. So I was wondering if you could let us know what is the current prevailing CD rates and what is the average life of CDs currently?

Daniel Stevens

I don’t have the CD rates in front of me. I will have to get back to you on that.

Robert Bolen - KBW

Just on the other item, you mentioned in the Hawaiian economy outlook that there were some cruise ship relocations. What exactly was that?

Daniel Stevens

If my account is right we have been blessed with three large cruise ships, visitor cruise ships that circle the islands here. Over the last few months we have had two of those announce plans to move to other markets so that’s going to reduce the supply business and the transportation business here in Hawaii. So it will cruise overnight between islands and then it will stop during the day and let visitors off to tour the islands. We are going to see some reduced visitor counts as a result of those relocations.

Robert Bolen - KBW

On the two recent bankruptcies we saw, they were both coming out of the West Coast delivering arrivals to Hawaii, have you seen or noticed --

Daniel Stevens

Are you talking about airlines, Bobby?

Robert Bolen - KBW

Yes, sorry.

Daniel Stevens

Yes, Aloha ceased flying here at the beginning of the month and a couple of days later ATA did the same thing. So that’s going to temporarily reduce lift available for most carriers and probably increases the price; although other carriers are increasing their lift on a quick basis here. But it is going to take some time to adjust for that.

Peter Ho

Bobby, just to follow up your question. We have a special time deposit rate of 1.85% which is a five month rate. The average duration of our portfolio is about six months average length.

Operator

We have no further questions. I would now like to turn the call back over to Mr. Al Landon. Please proceed.

Allan Landon

Thank you. I would like to close our discussion this morning, Dan, by thanking you for your contributions to our success. We hope you will take a little bit of aloha with you when you leave the islands. We wish you all the best.

Daniel Stevens

Thank you, Al. It was a pleasure being here.

Cindy Wyrick

I would like to thank everyone for joining us today and for your interest in the Bank of Hawaii. As always, if you have any additional questions please feel free to contact me 808-694-8420. Have a great day, everyone.

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