Bank of Hawaii Corp (BOH) 2004 Q4 法說會逐字稿

Welcome to the fourth quarter 2004 Bank of Hawaii Corporation earnings conference call. My name is Alicia and I will be your operator. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to introduce your host for today's call, Miss Cindy Wyrick, Senior Vice President and head of Investor Relations. Please go ahead.

Hello, everyone, and thank you for joining us today as we review Bank of Hawaii Corporation's financial results for the fourth quarter 2004. Joining me is our Chairman and CEO, Al Landon, Vice Chairman and CFO, Rick Keene, Vice Chairman and head of our Retail Banking group, Dave Thomas, and our Vice Chairman of Corporate Risk, Bill Nelson.

The comments today will refer to the financial information that was included with the earnings announcement released this morning, but before we get started, let me remind you that today's conference call will contain some forward-looking statements, and while we believe the assumptions we have made are reasonable, there are a variety of reasons the actual results may differ materially from those projected as outlined in the released today.

And now I would like to turn the call over to Al Landon.

Good morning everyone. I'm pleased to report that Bank of Hawaii closed the year 2004 with a solid performance, accomplishing our primary objectives for the year. We completed the first year of our three-year plan with growth in our businesses, good financial results, improved processes and excellent asset quality.

We are especially pleased by the improvement in our financial measures. Our margin was stable, total revenue was up and expenses were down, resulting in operating leverage that exceeded 14 percent compared to 2003. Loans and deposits also grew during the year. Our return on equity exceeded 23 percent in the fourth quarter, our efficiency ratio is approaching 55 percent, and our already strong credit quality got stronger. Contributing to this performance was the robust Hawaii economy.

And now I would like to ask Rick to provide you with some additional information about our 2004 financial results. Rick?

Thanks, Al. Hello everyone. As Al said, Bank of Hawaii Corporation had a good year in 2004 and a good fourth quarter. Net income for the year was $173.3 million, 28 percent higher than last year's net income of $135.2 million. Diluted earnings per share for 2004 was $3.08, up 39 percent from $2.21 per share in 2003. Our return on equity for 2004 was 22.78 percent, up from 15.02 percent last year, and our return on assets was 1.78 percent, up from 1.44 percent last year.

Fourth quarter 2004 net income was $46.2 million, or 82 cents per share. This compares to 2003 fourth-quarter earnings of $38.7 million, or 66 cents per share, and third quarter of 2004 earnings of $43.1 million, or 78 cents per share.

The income statement of both the third quarter and the fourth quarter of 2004 included unusual items. In the fourth quarter, we returned to income $6.5 million from the allowance for loan and lease losses, which I will discuss further in a moment. And last quarter, if you recall, we recognize a gain of $5.2 million from the sale of some assets at the end of a leveraged lease. Excluding these two items from the two quarters, our fourth-quarter net income increased 5.8 percent over the third quarter.

Net interest income was $99.9 million in the fourth quarter, up from $98.8 million in the third quarter and $93.4 million in the fourth quarter of last year. For the full year, net interest income was $390.6 million, a 6.7 percent increase over last year. The fourth-quarter increase in net interest income was primarily due to an increase in both the average balances and the yields earned on the loan portfolio and the investment portfolio. The year-over-year increase was due to higher average balances of installment and home equity loans and investment securities, as well as a decrease in interest expense on deposits. Partially offsetting these positive factors was a decline in interest income on the mortgage portfolio. An analysis of net interest income is provided on table 6 of the press release.

The net interest margin for the year was 4.32 percent, an increase of 9 basis points from 4.23 percent in 2003. For the fourth quarter, the margin was 4.4 percent, up 1 basis point from last quarter and up 5 basis points over last year's fourth quarter. The margin benefited from growth in our loan and investment portfolios and from an increase in investment portfolio yield.

As I mentioned, we returned to income $6.5 million from the allowance for loan losses in the fourth quarter, which brought the total to $10 million for the year that was returned to income from the allowance. The fourth-quarter return was recognized after considering such factors as our strong credit quality, positive economic trend, and our lower-than-expected charge-offs in 2004.

Non-interest income for 2004 was $205.1 million, a 3.2 percent increase over last year. There were several factors that contributed to this increase. Special income items totaling $10.9 million were realized in 2004 from a limited partnership distribution, the sale of leveraged lease assets and the sale of a parcel of real estate. These items were discussed in prior quarters. Also, trust and asset management income and service charges on deposit accounts increased $2.5 million and $3.2 million, respectively, in 2004. These increases resulted from our continued focus on improving our core business operations.

Partially offsetting these increases was a decrease in mortgage banking income of $7.5 million in 2004 due to lower mortgage origination volume compared to the record year of 2003. And finally, we recognize losses of $800,000 on the sale of investment securities in 2004 compared to securities gains of $1.8 million in 2003.

Non-interest income in the fourth quarter of 2004 was $48.4 million, down $4.7 million from the third quarter. This decline in non-interest income was due to the previously mentioned third-quarter gain of $5.2 million on the sale of leveraged lease assets and a fourth-quarter loss of $757,000 on the sale of investment securities. Offsetting these increases -- or excuse me -- offsetting these items were increases in trust and asset management fees, which increased 10 percent over last quarter, and service charges on deposit accounts, which increased 7 percent over last quarter.

After considering the systems replacement costs that were incurred in 2003, non-interest expenses were $1.6 million lower in 2004 than in 2003 and were $2.1 million lower in the fourth quarter of 2004 than in the third quarter. The primary reason for these decreases was the reduction in salary and benefit expenses, the components of which are provided in table 7 of the press release. As a result of the systems replacement project, net equipment expense declined in 2004, but was partially offset by an increase in the cost of data services, which is a component of other non-interest expense.

We continue to be pleased with the increase in operating income, which is 26 percent higher in 2004 than in 2003. Excluding the expenses related to the 2003 systems replacement project, our operating income was up over 14 percent, which is nearly half of our three-year plan target. For the fourth quarter the efficiency ratio was 55.37 percent, which was down slightly from the third quarter, and for the year the efficiency ratio was 56.14 percent compared to 63.4 percent in 2003. The 2003 efficiency ratio was 59.5 percent after excluding the systems replacement costs.

Our income tax rate for the fourth quarter of 2004 was 36.4 percent, consistent with last quarter.

Table 11 of the press release provides a summary of business segment performance. From the Retail, Commercial, and Investment Services segments, each had higher fourth-quarter returns and allocated equity than in the fourth quarter of last year. On a full-year basis, the 2004 return on equity for the Retail segment was consistent with 2003. The results were positively impacted by deposit and consumer loan growth, offset by a decline in mortgage banking income. The full-year results for the Commercial segment improved from 2003, largely due to a gain on the sale of assets and a partnership distribution that positively impacted non-interest income. The full-year results for the Investment Services segment also improved from 2003 due to an increase in trust and asset management income.

Net interest income in the Treasury segment was positively impacted by higher average balances in the investment portfolio. The results of the Treasury segment include the impact of changes in market interest rates on the Company's interest rate sensitivity, as well as the cost of capital and certain expenses that are not allocated to the other business segment. The 2004 NIACC measure for the total Company more than tripled in 2004, to $67.6 million compared to $20.7 million in 2003.

Now some comments on credit quality. During the quarter, our non-performing assets declined to $13.9 million from $16 million at the end of September and $31.7 million at the end of 2003. Non-performing assets represent 0.23 percent of total loans.

Gross charge-offs in the fourth quarter were $6.7 million and recoveries were $2.1 million, resulting in net charge-offs of $4.6 million. This compares to net charge-offs of $300,000 in the third quarter. For the year, net charge-offs were $5.5 million compared to $13.8 million in 2003. Net charge-offs in 2004 were impacted by higher-than-expected recoveries and represent a loss rate of only 9 basis points, compared to 25 basis points in 2003.

The allowance for loan losses was $106.8 million at the end of 2004, down from $124.7 million at the end of the third quarter. During the fourth quarter, the allowance was reduced by the net charge-offs for the quarter, by the $6.5 million returned to income from the allowance, and by a $6.8 million reclassification of a portion of the allowance to other liabilities.

The amount of the allowance that was reclassified to other liabilities was the portion of the allowance that related to unfunded commitments to extend credit. The reclassification was made in order to comply with current accounting guidance.

The allowance for loan and lease losses represented 1.78 percent of loans at December 31, 2004, compared to 2.14 percent of loans at September 30, 2004. If the reclassification of the allowance that related to unfunded loan commitments had been made in the third quarter, the allowance for loan and lease losses would have been 2.03 percent of loans at September 30.

Going forward, we will continue to evaluate the economic environment and the level of risk in our portfolio each quarter and recognize the provision for loan losses as necessary to maintain the allowance at an appropriate level. Our intent has been and continues to be to maintain the directional consistency between credit risk and the amount of the allowance.

Selected concentrations of credit exposures, including air transportation, are summarized in table 8 of the press release. In the evaluation of the allowance for loan losses, we considered the financial strain on the airlines, which tends to partially offset improvement in the rest of our portfolio. Our air transportation exposure decreased slightly in the fourth quarter.

With respect to the balance sheet, assets totaled $9.8 billion at the end of December. Loans outstanding increased by $171 million from the end of the third quarter due to growth in both the commercial and the consumer lending portfolios. We have experienced strong growth in consumer loans all year, and that trend continued in the fourth quarter with a $79 million increase in outstandings. Loan originations in the commercial portfolio have also been good this year, but have been offset by payoff activity, especially from our larger corporate borrowers. While we continued to experience payoffs in the fourth quarter, commercial loan outstandings increased $87 million, or 4.5 percent, from the end of last quarter. We may continue to see some quarter-to-quarter volatility in commercial loan balances as a result of payoff activity.

Deposits totaled $7.6 billion at the end of 2004, an increase of $232 million from the end of 2003 and an increase of $151 million from the end of the third quarter of 2004. Our balance sheet remains positioned to benefit from interest rate increases and our capital position continues to be strong. During the fourth quarter, a high level of shares were issued from stock option exercises, which resulted in an increase in our capital leverage ratio to 8.3 percent at the end of the year.

We continued our share repurchase program by purchasing just over 1 million shares during the fourth quarter at a cost of $50.3 million. Through January 21, the Company had repurchased a total of 35.4 million shares and has returned over $1.1 billion to our shareholders since the program began in July 2001. Last week our Board authorized an additional $100 million for the share repurchase program, which leaves the remaining authorization at $141.7 million as of this morning. We plan to continue to make repurchases in a disciplined manner. And finally, our board declared a dividend of 33 cents per share for the fourth quarter.

Al, that concludes my comments on the financial results.

Thank you, Rick. And now I would like to comment on our expectations for the second year of our 2004 through 2006 plan.

The Hawaii economy is expected to remain strong in 2005, and based on these conditions, we estimate that net income for 2005 should be approximately 174 million to $177 million. Our estimates are based on several assumptions.

One particularly important element of our estimation process is the appropriate level of the allowance for loan and lease losses. As Rick indicated, we perform an analysis of credit quality each quarter, the results of which determine the timing and amount of the provision for loan and lease losses.

Based on current economic conditions, we could see further credit quality improvement, and as a result, the allowance may be reduced further. However, we expect at some point in 2005 to begin provisioning. Accordingly, our net income estimate for 2005 includes a $10 million provision for loan and lease losses. This provision estimate results in a $20 million change in pretax income from 2004, which included the $10 million return to income of reserves. Earnings per share and return on equity projections, among other things, continue to be dependent upon the terms and timing of share repurchases.

And now we would be happy to take any questions you may have.

(OPERATOR INSTRUCTIONS) Brett Rabatin, FTN Midwest Research.

A couple of questions. First, I wanted to just get a little more color on the comment regarding potential continued volatility with C&I. It looked to me like loan period balances at quarter-end were pretty strong, and so I was just curious to hear some additional thoughts on payoffs, if you can elaborate on that a little further.

Bill, you may be closest to that. Do you want to give some color there?

I think there is -- we've had very good loan originations and growth throughout the year, but we have also had a lot of prepayments of loans in the C&I area. And we would expect some continuance of volatility there, with the backdrop being a continuance of good origination activity. Our pipeline is very strong and robust in commerical banking, in commercial real estate and in most areas of our C&I portfolio. So we're comfortable with the size and pattern that we have seen in the pipeline and the conversion of that to loans. But what we can't really tell is the amount of refinancing and prepayments, or prepayments, on some of the loans. So we would expect continuance of a modest amount of growth in the portfolio.

If you could give any commentary on -- with the share repurchases, if you could just talk about the margin, particularly relative to -- you're pretty asset sensitive from a repricing perspective. If you could just comment about the margin and sort of average balances. Your margin could go up, but you could also be increasing your balance sheet as well. I just wanted to hear your thoughts on the tradeoff there.

Rick, do you want to address that?

Well, we do expect some continued growth in the balance sheet and we expect the margin to be relatively stable. We have been relatively stable most of this year. I think we were up about 5 basis points over last year. The margin in the fourth quarter was 440, which was pretty consistent with last quarter. And we expect that to continue into the future.

Last question. It sounds like the provisioning guidance for 10 million is somewhat of a back-ended guidance, meaning that you could probably continue to have negligible provisioning in the first half of the year. And maybe the provisioning is more weighted to the second half of '05. Does that sound like a fair assessment?

I think that's a fair assessment, but I would put the normal caveat out there about getting into those precise elements. The change there is so significant, its impact on income is so significant, we wanted to mention bit as a specific. But I think you, and hopefully everyone else, can appreciate the sensitivity of that estimate as we look at charge-offs and what is going to happen with a number of the sectors we do business in. I think you have assessed it accurately.

Jim Bradshaw, D.A. Davidson.

A couple of questions if I may, and hopefully you'll talk about one, and I know you'll talk about the other. I wanted to get your thoughts about how the reserve looks now on an unallocated versus allocated basis compared to a year ago. Maybe that will help me sort of get a feel for how much more you may tinker with the reserve. And then the other question relates to severance costs wound down nicely in the fourth quarter. Are we pretty well through those, seeing those on the P&L, for '05 I should say?

Okay. Let's see. Rick, do you want to -- or Bill --

I would say what we have done, Jim, is on the reserve, we have -- we build it up every quarter from ground zero. We look at what we need, and in this last quarter we made some adjustments within the reserving, and a reallocation or a movement within the total reserve to more closely align the reserves against specific lines of business, loan products or geographic regions. And in so doing, we have made some shifts from the general reserve, or the unallocated part, to the allocated part. And our general reserve is down to around 5 percent of the total reserve right now. And about a year ago it was, say, 20-plus percent of the total reserved. But I think what we have made every effort to do is put more precision and analytics around specific risks that we see in loan products and lines of business, and hence, we've made that reallocation within. And the net result, of course, is that return to income of $6.5 million that Rick mentioned earlier.

Excellent. Thank you.

Jim, on the severance costs, I don't have a specific forecast looking forward for severance, but I think it's fair to say that a lot of that has wound down. We did reorganize a couple of areas over the course of the year and had some bumps in severance expenses during '03. That's what you saw in the third quarter versus the fourth quarter. But we expect that a lot of that has wound down. I don't really have a specific forecast looking forward for that, though.

It is safe, Jim, to assume that there will be some in 2005, however.

Joe Morford, RBC Capital Markets.

First just a follow-up to Brett's question on the C&I growth. Is most of the increase coming from new customers or are you actually seeing much increase in line usage at this point?

I'd say there's a great deal of growth coming from new customers and -- but some additions in line growth, but I would say more from the former rather than the latter, spread among Hawaii commercial, business banking and commercial real estate mostly.

The question is just kind of a smaller item. The service charge line item in the fee income category was up nicely quarter-to-quarter. A lot of banks that have reported so far have actually seen decreases due to lower account analysis fees, whatever. Is this any new products like overdrafts fees or something like that, or just reflecting growth in deposits?

Joe, Dave will give you some color on that.

We have seen -- we continued to see some real strong growth in the activity related to our debit card program, which has helped, I think, in a large part, increase service charges there. And beyond that, we implemented an initiative, or launched an initiative in the first quarter of '04 to do a comprehensive review of all of our policies and levels of fees that we charge, both in the retail and the commercial side of the bank, and about midyear implemented several initiatives -- mostly related to policies and processes around our fees, very little related to price adjustments. But the sum total of those changes, I think, is the second key driver to the growth that we have seen in service charges. And then a third factor, which I think to a smaller extent has helped drive those service charges up, is just core account growth. We have seen some real good growth in our core accounts, both in numbers of households and in total products, throughout 2004.

Joe, that's an area where you may have heard us over the last year or two talk about continuing to improve process. And Dave and his team have done a real good job of focusing on making sure that what we have as a policy or as a pricing program is actually what we apply kind of consistently throughout our customer base. So it's a good example of where we're sharpening process.

Are there other areas where you're kind of setting up for '05 to tackle next?

I think there's no area we are not, just to be candid about it. We're sort of going through everything, making sure that where we've got fee waivers they're appropriately based; where we've got relationship pricing we've tied it together properly. Dave, any particular areas that stand out?

There are none that really stand out. This is a focus on doing a little bit better in everything we do, and the sum total of that will be meaningful improvement.

Andrea Jao, Lehman Brothers.

I'm going to apologize for my overly simplistic math, but here goes. In your 2004 and 2006 profit plan, you mentioned a minimum leverage ratio of 7 percent. So if your leverage ratio increased 60 bits this quarter from 769 to 829, and average diluted shares increased almost by 600,000, does that mean to bring down your leverage ratio to 7 percent at the end of the year, average diluted shares need to fall by around 1.3 million? How should I be looking at that?

Your math is pretty good this morning, I think. I don't have an absolute calculation of that. What was your conclusion? 1.3 million shares?

Yes, thereabout. So that's a fair ballpark, kind of?

That's pretty close from what I see. Maybe just a touch more than that.

That's helpful. Just one follow-up. Also in your '04 to '06 profit plan, you have exceeded a whole bunch of the metrics, from ROE to ROA. I believe in the plan ROE was targeted at 20 percent for '04, ROA at almost 1.6 percent for '04.

Don't hold that against us, Andrea.

I'm sorry?

Don't hold that against us.

Not at all. But aren't you going to update your plan with new targets?

We're probably not going to update our plan, simply because we're looking out there at 2006 and at this point in time it's a little too early to tell. We benefited from some good timing with some things happening in 2004, so we got some real nice growth in our operating leverage. When you look at that you will see we exceeded kind of the average for the three years. We may not get as much growth in 2005, so at this point we are probably in no position to give any revision to 2006 guidance. We thought we would put 2005 out there to help since there was nothing in between. But we'll have to see a little bit clearer what the future looks like before we would update anything. Rick, anything you would add?

The only thing I would add to that is we still expect a good year in 2005. When Al said we may not see as much growth in 2005, that's relative to 2004. We had some, as I mentioned, some special income items in 2004 that really benefited us. With the guidance that we gave this morning for 2005, we're still on track on the 10 percent operating leverage calculation for the three-year plan. We said we would try to achieve a 10 percent compounded growth over the three-year planning period, and with the numbers we had this morning, we are on track on the two years on that goal.

Last question. Your net income projections -- do they include already option expensing of the back half of the year?

Yes they do. We plan to implement that in the second half of the year, and we did include an amount for that in 2005.

Brian Harvey with Fox-Pitt, Kelton.

Just had a couple of follow-ups there. The first one is just on credit. Maybe you could help us understand the thought process, or what you go through on the reserving policy. Because from our vantage point it seems like you have about another 7 years of charge-offs still on the reserve, even if you use that 25 basis points of loss experienced in '03.

You think we can sustain that 25 basis points, Brian?

Past history seems to be a pretty good indicator. You seem to be pretty much on track or even better than that.

I would say recent history, then. If you go back a little ways there's some very variability in that number. Right, Bill?

That's right. Brian, in reserving policy we look at it from the ground up every quarter. We have a baseline reserve which is based on our historical loss experience, and we add to that -- the remainder of our allocated reserve is a credit judgment or a management adjustment where we consider seriously all of the parts of our portfolio, where there may be some inherent loss content that could be out there. And that is based on our view of past history, as Al said, that goes back more than a couple of years, through a little bit further deeper into the cycle. And also, we look at things that aren't fully accounted for in the baseline reserve.

For example, our airline portfolio or aircraft portfolio, where we have all witnessed an incredible amount of volatility around that industry, and so we account for that. We also try to account for elements in parts of our consumer portfolio and also commercial real estate based on the growth of that portfolio, and again, taking a backward look through the cycle. And then as we have done that, we' come up with an allocated amount, which as I said earlier is about 95 percent of the total reserve, and we have the remainder left for a general reserve, because we still have other elements that we think are not fully captured in the allocated that we want to reserve for in the general.

Okay, that's pretty descriptive. Second question was just on the stock options. It seems as though there's probably only one person out there who could have exercised that many options. I'm just trying to understand the ability possibly to repurchase some back from him, or just talk about -- your activity levels seemed to really pick up in the early part of this year. Any comments?

Our repurchase activity early in this year, I think, is a function of the market. If you look at what happened price-wise around the end of the year, and then subsequent, Brian, that is really what drove us here in this quarter. As to individual transactions, I wouldn't comment on those. And as to targeted repurchases, we don't do that at all. Our repurchase is through the open market, and we make those decisions kind of on a day-by-day basis.

Okay. But the leverage target is still in that 7 percent range over time?

Yes. It may take us a little bit longer to get there. As you observed and Andrea mentioned, our capital ratios picked up a little bit in the fourth quarter, so it may take us a little bit longer to get down to that 7 percent. But that is still the target.

Jackie Reeves, Ryan Beck.

Two quick questions. One -- and if you addressed this, please forgive me -- but it's on the military spending. Could you give us additional color with respect to how that's progressing with respect to the privatization and the impact on the local economy? And then the second one, I want to beat the dead horse again a little bit on the credit quality, but --

Okay. On the military spending, I think you're talking about the privatization of the military housing here in Hawaii, which is sort of the incremental piece that we've talked about a couple of times. We're at the front-end of that spending. And it's a long-term arrangement, so we think it's going to be an increment that's going to start to show up increasingly in 2005 and probably run for a few years. I am reluctant to put a number on it annually except to say it's probably approaching $1 billion or maybe even more.

Thank you.

The local content of that is being described as pretty significant. How much that adds velocity to the economy and what sticks here in terms of new business is a little bit too early for us to tell yet, I think.

And then on the credit quality, just a little different approach. There is a line in here in your release that says in addition, the Company revised its allocation, the component which I am assuming is just with respect to the unallocated portion. But then the (indiscernible) at the end of that sentence with respect to current accounting interpretations -- was there another change here that I need to be aware of, or is it -- or does this totally focus on the unallocated portion?

It's two things, Jackie, when you look at it. It's the unallocated, and when we file the 10-K you will see an improvement in our process there. Previously we've had some amounts that were judgmentally allocated to components of the portfolio in what we call the general reserve. We have moved those now into the allocated. And as Bill, I think, referred to, the general reserve now is a much smaller number.

5 percent down from the 20?

Yes, I think that's about right. And then the other piece that is current accounting interpretation is this reclassification of the reserve related to the unfunded component. And I think like all companies, we continue to focus on improving our documentation, the clarity and quality of that, and focusing on making sure that our allowance is tied to observable facts. We've -- I think Rick mentioned that we've followed the guidance of making sure that our allowance moves in the same direction as our credit quality, and we're just doing everything we can to tie those two closely together.

Campbell Chaney, Sanders Morris Harris.

I have a question on your trust and asset management fees. There was a nice pickup at the linked quarter. I understand the capital market is improving, but were there any new product roll-outs? Are you getting traction from some kind of products that we should know about?

I don't think there's any new products that kicked in there, Campbell. I think we're seeing a little bit of volume increase, we're seeing some pricing improvement, and pretty broadly throughout our product line in trust and asset management.

So if the capital markets stay where they are, could we maybe see a higher level of income from this activity going forward?

On a year-over-year comparison basis, I think that's accurate. We have added some new people and are focused, just like we talked about in retail, on improving our processes there. And we're optimistic that that is going to help our performance and our connectivity to the marketplace through 2005.

Getting back to your outlook for provision for loan losses of 10 million, can you give us an idea of what kind of loan growth assumptions went into that?

I'm going to say kind of mid-single digits.

Terrific. And the rest of my questions have been answered. Thank you.

Mike McMahon, Sandler O'Neill.

Most of my questions have been answered. But, Al, did you just say mid single digits for loan growth?

Yes. It's variable, Mike. I guess there's -- that's a pretty broad range. It would probably be toward the lower part of that range in terms of our core (ph).

That would coincide with, I think, Bill's comment earlier for perhaps modest loan growth. I think he was cautioning us to not expect the commercial to continue at this level. Were there any unusually large, perhaps, loans that were done in the quarter that moved the growth up that may not necessarily be reoccurring, or are you expecting perhaps continued payoffs?

We had a pretty wide range of transactions during the quarter. There was one pretty good-sized one that's transactional-based. And how long that is with us is an element of our comment with respect to volatility. I also took a look here going forward at our loan growth assumptions, and I think my original statement at the kind of mid-single digits is accurate. I was pointing you toward the lower end of that, and I think mid-single digits will work okay. It's variable. Some of our products have much higher growth curve and a little more certainty around them than others do. Home equity would be an example (indiscernible) where that is outside that range on the upside. But then we've got some others that, Mike, are just pretty difficult for us to say. We've built some forecasts that would have us say in the 4 percent range, but it's to that volatile range -- volatility that we talked about earlier.

I understand. And I noticed the securities continued to trickle up, and I would assume the basic model is that deposit growth in excess of net loan growth would simply be funneled into additional securities. Is that fairly accurate?

That's the way we've been looking at it.

That's right. And we plan to keep that relatively flat.

Rick, do you care to give us perhaps a range of what the second half option costs might be?

I really don't want a comment on a number. We did bake into that some -- I guess the amount that relates to current options that are outstanding. And then we've made some assumptions around plans that we will put into place for '05. And we really haven't finalized those plans completely yet, so I don't really want to give a number on that.

One last longer-term question. You continually buy back. You're aggressive with your capital management activities, which is wonderful. Your equity base is predominantly common equity, and I'm just wondering as we -- as you get into '06 or perhaps '07, as you continue to accrete capital offset by buybacks, is it likely at some point that you might consider issuing some alternative forms of capital, trust preferreds for example, to continue to manage that capital down and optimize your capital structure?

We don't have anything in our plan through 2006 at this point, Mike. We would need to complete our repurchase and get down to that 7 percent leverage ratio before we would look at it. And then, frankly, it would be a function of what the market conditions are then, I believe.

Understood. Thank you very much.

Kathy Steinbrecher, Piper Jaffray.

Could you talk about year growth projections for the mortgage-backed security portfolio and what your strategy is in 2005, as far as growing that or reducing that as a percentage of earning assets?

Rick, anything you could add there?

No, I don't really have any projections on that.

Nothing stands out in particular relative to mortgage-backed securities or doing anything unique with those Kathy. We just look at them as a part of our overall asset management process, and I think the equation that was mentioned before is basically deposits minus loans equals investment securities. That's -- there are obviously some (indiscernible) of that. And then, within the investment securities, we take a look at what gives us the best combination of interest rate risk profile and current yield.

As far as on your loans, the loan portfolio as a percentage of fixed versus prime or LIBOR, is there a thought on moving more towards prime at this point, or are you comfortable with what the portfolio looks like?

Bill, is that something you would have in your --?

I think we are comfortable with where we are right about now.

Thanks.

Fred Cannon, KBW.

I think I only have one question left, so here goes. The deposit pricing looked rather contained in the quarter. I think total interest-bearing deposits were up only 7 basis points. I was wondering if you could comment on deposit pricing in Hawaii and the outlook for there, and if you feel like you're going to need to start to raise the deposit pricing moving forward?

Dave, do you want to address that?

I feel almost certain that you will see further increases in our deposit costs as we go through the first quarter here. I would say that given the liquidity of this market, we knew that it wouldn't be necessary for us to aggressively raise rates as the Fed began to raise rates. But I think the pace at which this market has increased deposit rates in general has been slower than what we even expected. But as we look here in '05, I think there probably will be a little bit of catch-up as we go through the first quarter. And we'll see some further increases in our deposit costs to try to -- or to compensate for some of that slow movement in rates in the fourth quarter -- third and fourth quarter.

But you didn't increase like near the end of the quarter; it was just modest increases throughout?

Just a few basis points, yes.

Mark Kehoe (ph), Merrill Lynch.

Just looking at your home equity lending, please, when do you expect (technical difficulty) what's your future growth expectations for this? And then the second question is more longer term. When did the disconnect between the Hawaiian economy and your loan growth coming through connect already? When are we going to see some decent growth? Thank you.

Dave, do you want to --?

In terms of our looking -- forward with our home equity, we continue to expect it to be very robust as we go through 2005. In the fourth quarter we completed one of our most successful home equity origination campaigns to date, and obviously those loans are very immature and will take some time to fund. Our forecast for growth, organic growth, in our home equity would be in the low double-digit range as we go into 2005, and we feel very good about the prospects for continued growth in the home equity portfolio. And Mark, I don't know; was your second question related specifically to the home equity portfolio, or was it related to loans in general?

It was just on loans in general. The problem that I see with, like, Hawaii -- it's just the economy in Hawaii is so good at the moment. But we just don't see the growth coming through in the loan portfolio, and it's really getting that growth to come through that I'm looking for.

I would comment on that just a bit, Mark. Hawaii's economy has done well, but it is primarily a service-based economy -- tourism and construction; real estate has picked up. So the ability to translate kind of percentage to percentage between personal income growth and loan growth in Hawaii doesn't correlate between portfolio types. Dave talked about home equity doing very well. Commercial is a liquidity-based economy, and so as the economy speeds up and more cash comes into it, we get lots more liquidity. That drives transactions, some of which we catch, others of which are cash, frankly. It's a little bit different than some of the mainland economies. Bill, anything you want to add to that?

I think in the consumer areas, and included in that, small-business, as Dave said, solid growth almost across this board. And that would include the small-business area as well. In the commercial real estate, I think, good origination. We're taking advantage of opportunities, and I think we're doing well in terms of market share and so forth. But there's a lot of competition for the loans out there in those areas that are growing, competition from mainland sources of capital, particularly in commercial real estate, that we have witnessed here in the last couple of years. That hasn't kept us from growing that pretty nicely. But as I said earlier, we have had that offset by a lot of refinancing activity as customers, particularly in the middle market and above area, have refinanced a lot of their obligations, and done it through other capital raising-type sources. That's about where we are.

(OPERATOR INSTRUCTIONS).

I'll just add the weather forecast from Hawaii today -- sunny and 82, and a nice breeze out of the Northeast at about 10 miles an hour. There is still room in the hotels if anybody wants to come out and see us.

We have a follow-up question from Brett Rabatin, FTN Midwest Research.

I was just wondering, can you -- maybe, Rick, you can comment on the insurance (indiscernible). Was there a reclassification from the prior quarter? I noticed it moved up to 5.4 million from 3.5.

There was a reclassification, yes. There was also some timing on some accruals for some of the insurance premiums. I think that was part of the difference as well.

We have no additional questions at this time, sir.

This is Cindy. I'd like to thank everyone for joining us today. And as always, if you have any additional questions or need further clarification on any of the issues we discussed here today, please feel free to contact me at 808-537-8430. Thanks everyone. Have a great day.

Ladies and gentlemen, this concludes your conference. You may now disconnect.