Bank of Hawaii Corp (BOH) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bank of Hawaii Corporation second quarter 2007 earnings conference call. My name is Akia, and I'll be your operator for today. At this time, all participants are on a listen-only mode. We will conduct a question and answer session towards the end of the conference. (OPERATOR INSTRUCTIONS) As a reminder , this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Head of Investor Relations, Ms. Cindy Wyrick. Please proceed,

Hello, and thank you for joining us today as we review the second quarter financial results for Bank of Hawaii Corporation. Joining 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, Vice Chairman and Chief Operating Officer, Dave Thomas, 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. 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 the Form-10K for the year ended December 31, 2006 filed with Securities and Exchange Commission. And now I'd like to turn the call over to Al Landon.

Good morning, everyone. Thank you for joining us today. Our first order of business this morning is to introduce Dan Stevens, our new Chief Financial Officer. Dan is an experienced CFO and we're delighted that he's joined our management team. Although this is his first earnings conference call with us, he's been on board about two months. Dan is a great addition to our management team. Now to the results. Second quarter of 2007 was another solid quarter for Bank of Hawaii, despite a continuation of the challenging interest rate environment. We increased noninterest revenue, controlled core expenses, and maintained solid asset quality. Both loans and deposits grew, especially toward the end of the quarter. Our return on average equity for the quarter was over 26% and our operating leverage ratios were positive. Now I'd like to ask Dan to provide you with some additional information about our second quarter results. Following his comments, we will address your questions. Dan?

Thanks, Al. Hello, everyone. It's a pleasure to be here for my first earnings call with Bank of Hawaii. For the second quarter of 2007, Bank of Hawaii's net income was $47.7 million, up from $47.3 million in the first quarter and $37.2 million in the second quarter of last year. Diluted earnings per share were $0.95 in the second quarter, the return on equity was 26.3%, and the return on assets was 1.84%. You may remember that last year in our second quarter 2006, our earnings were impacted by an $8.8 million one-time charge resulting from a tax law change related to income from foreign sales corporations. The change primarily affected the provision for income taxes, although it also included a $600,000 reduction in net interest income. In the second quarter of 2007, we reached agreement with the IRS related to our LILO leverage lease that results in the recording of a $1.5 million credit to net income. $1.1 million of the total credit is included in pretax net interest income with an additional $400,000 netted against the provision for income tax.

Excluding the effects of these changes, net income for the second quarter of 2007 was $46.3 million, up slightly from $46 million in the second quarter of '06. Diluted earnings per share were $0.92 per share for the second quarter, up from $0.89 last year. Net interest income was $98.9 million in the second quarter, $700,000 higher than last quarter and $1 million lower than the second quarter of 2006. Our reported net interest margin improved to 4.12% this quarter compared to 4.07% in the first quarter, but excluding the impact of the tax issue previously mentioned, margin was 4.07% mirroring first quarter's and down 21 basis points from last year. The challenging interest rate environment continues to put pressure on our margin net interest income. However, we are beginning to see the signs of a leveling off of the impact of the inverted yield curve as the average cost on total interest-bearing deposits and total interest-bearing liabilities increased just 1 basis point and 3 basis points respectively.

Total funding needs declined this quarter driven by a reduction in average earning assets totaling $73 million, as we reduce balances, investment securities, and funds sold. Average loan balances also experienced a decline of $29 million this quarter in both commercial and consumer loans. However, the good news is that period end loans are up $59 million, with strong growth in commercial loans and leases. We recorded a provision for credit losses of $3.4 million in the second quarter, up from $2.6 million in the first quarter and $2.1 million in the second quarter 2006. The provision equalled net charge-offs in all quarters. The $800,000 increase in provision over the first quarter was primarily due to a large recovery recognized in the first quarter. Noninterest income for the second quarter was $58 million, a decrease of $2.9 million compared to the first quarter and an increase of $4.8 million over the second quarter of last year.

The decline from the first quarter was the result of two factors, a $2.3 million first quarter gain on the disposal of some leased equipment and about $1.1 million in seasonal, contingent insurance commissions. The improvement over '06 was widespread over several income categories, primarily in trust and asset management fees. In addition, despite fairly volatile rate movements during the second quarter, the securities trading account used to offset the fair value of the mortgage servicing rights was largely effective. We continue to monitor the net position and make adjustments accordingly. Noninterest expense in the second quarter was $79.8 million, $2.3 million lower than the first quarter and $1.1 million higher than the second quarter of last year. The change from the first quarter was mostly seasonal. The result of lower payroll taxes due to annual bonus payouts in the first quarter. Compared to last year, the increase is primarily attributable to the reversal of some legal expenses in the second quarter of '06.

Our efficiency remains strong, down from 51.62% from the first quarter and excluding the aforementioned tax adjustments mirroring last year's second quarter ratio of 51.24%. Our effective tax rate this quarter improved from the first quarter and was significantly lower than last year second quarter because of the tax law change in second quarter '06 and the LILO resolution this quarter. Adjusted for these items, the effective tax rate was essentially unchanged from the first quarter. Business segment information is included in tables 11A and 11B in our earnings release. The retail segment continued its solid performance this quarter with a 53% return on its allocated equity, up from 50% a year ago on the strength of higher fee income and net interest income. The commercial segment was also strong with a risk adjusted return of 35% this quarter, up from last year's second quarter when it carried the full impact of the tax charge.

And the investment services segment improved its return to 34%, up from 24% last year, primarily due to improved market conditions resulting in increases in both the market value of our assets under management, as well as investment advisory fees on money market accounts. Our credit quality remains strong. Nonperforming assets were $6.3 million at the end of the quarter, up only slightly from last quarter and up $900,000 from the end of the second quarter of last year. The increase was largely due to the addition of a lease collateralized by construction equipment, which is in the process of resolution. Nonperforming assets represent only 10 basis points of total loans at the end of the second quarter. Gross charge-offs in the second quarter were $5.2 million and recoveries were $1.9 million, resulting in net charge-offs of $3.4 million. And second quarter '07 net charge-offs represented an annualized loss rate of 21 basis points.

At the end of the second quarter, the allowance for loan and lease losses was $91 million and represented 1.39% of loans. And as always, we continue to evaluate the economic environment and the level of risk in our portfolio each quarter and recognize that provision for credit losses is necessary to maintain the allowance at an appropriate level. Outstanding loans increased $59 million over the first quarter and totalled $6.6 billion at the end of the period. The period end growth occurred in commercial industrial loans, commercial construction and lease financing, which are areas of particular focus for us. We've also had some growth in our residential mortgage portfolio. Period end deposits increased $361 million this quarter to $8.3 billion. The increase occurred largely in commercial and public deposits. Approximately half of the increase in public deposits occurred late in the quarter and is not expected to be long-term.

Average deposits declined $111 million this quarter in all categories, including time deposits. We continued our share repurchase program by purchasing 400,000 shares during the second quarter at a cost of approximately $20 million. And since quarter end we have repurchased another 95,000 shares. Our remaining share repurchase authorization was approximately $47.3 million as of this morning. And finally, I want to mention that on Friday our board declared our third quarter dividend of $0.41 per share. And that concludes my comments, Al. I'll turn it back to you.

Thanks, Dan. Now we're happy to respond to questions.

(OPERATOR INSTRUCTIONS) And our first question comes from the line of Brett Rabatin. Please proceed. With FTN Midwest.

Hi, good afternoon or good morning, gentlemen.

Hi, Brett.

Couple questions for you. First off, I missed the number on the short-term deposit that, I assume, was in the savings number. Was that -- it looks like it probably was about 100 million, given the Fed Funds sold from quarter to quarter. Is that close?

Yes.

And as it relates to that, you mentioned the limited increase in the cost of interest-bearing funds for the quarter. And it sounds like you're getting more optimistic that that may be topping out. Is that indeed the case and just any thoughts on where you're seeing opportunities to keep that from happening further given just that so difficult to grow core deposits in the industry right now?

Brett, while we may be optimistic, don't consider that to be factual.

Okay.

Our market is like all the others, I think, it moves from time to time. And in the second quarter it moved a little bit less than what we had been seeing. But I think future interest rates will probably tell more of what happens there, maybe a little bit of what's going on with funding and our competitors. But I think you captured the spirit right. We're optimistic, but it's a pretty thin fact base that that's drawing from.

Okay. And then, the other primary question I wanted to ask was on the credit side everyone's worried about credit at this point. Can you give us some color on risk migration and the C&I portfolio and just give us a flavor for what you might have seen in the quarter in terms of any loan downgrades and just a little better view of what's obviously an opaque pool of assets.

Sure, Brett, this is Mary. Actually the weighted average risk rating across our portfolio remains stable quarter-over-quarter and for the year-to-date. We did not have any significant downgrades in this quarter. In fact, our classified assets are at the lowest level with probably the last 20 years. In terms of fundings, the weighted average we are trading on our large fundings was improved to about 4.0 on a -- we have a 10 point scale versus 5.1 the previous quarter. So we're seeing solid credit stats across our businesses.

But we're also tightening down on credit.

Yes, we are.

We've mentioned last quarter and Peter just alluded to it again, we're watching our credit even more closely now than we have been earlier in the cycle, perhaps.

Yes, we did exit about $40 million in credit exposure this quarter, primarily for credit considerations.

Okay. Great. That's fantastic. Thank you.

Thanks.

And our next question comes from the line of Jim Bradshaw with DA Davidson. Please proceed.

Good morning.

Hi, Jim.

Besides that public deposit, it still seems like you had a lot of liquidity at quarter end. It doesn't really show up in the averages, though, so it sounds like it came in kind of late. Anything else at work there that would account for it? Loan payoffs or something maybe?

I don't think there was any change in our trends. We continue to have healthy borrowers and so we get a good flow of loan payoffs, typically maybe a little bit faster than we would expect just because the refinancing market is pretty aggressive out there.

No, there's nothing -- no, I think we had a couple - we had one large deposit come in at the end of the quarter of several hundred million dollars or $300 million, we expect that deposit will run off somewhat, but we'll be able to keep about $100 million on deposit. So our liquidity position at the end of the quarter was probably as strong, if not stronger than it's been the last few quarters.

Jim, we've been continued to be, I think, thoughtful about our reinvestment here of our liquidity. There's a great deal of volatility out there we see in interest rates. And so we're just monitoring market trends and avoiding the tendency to lever up, as we would say.

Can you give us -- give me some color on how the loan pipeline looks now compared to a quarter ago? And you alluded to it earlier, but just wanted to get -- hear a little bit more on how the payoff activity is trending, starting to return to normal a little bit or stretch out and things like that.

Peter, maybe both you and Dave can comment on it from a commercial and a retail perspective.

Great.

On the commercial side, the pipe for the second quarter was pretty strong. Probably in line with what we experienced last year and a little bit better than the first quarter. I would anticipate that the pipeline for the balance of the year should remain reasonably stable. I think the X factor for us is really the payout side. And that's going to be dictated by exactly how deeply we want to get into calling the kind of the bottom-end of our credit portfolio.

Dave, you want to talk retail here?

In terms of our home equity lending, we continue to see pretty stable activity out there. Actually some modest uptick in the second quarter, but nothing spectacular. In the area of the mortgage lending portfolio, though, we have seen the pipeline shorten up a little bit, principally in the area of refinancing due to the run up in rates that we saw in the second quarter, few people have gone to the sidelines. But as rates have now stabilized and come back a little bit, we hope to see them reevaluate their borrowing options now as we get into the third quarter.

And then last for me is the credit on the LILO lease this quarter. Where do you stand in sort of the resolution of the various tax matters that you've been tinkering with the last year or so?

We have one issue of significance left. And it relates to a similar structure, SILO, sale in/lease out transactions that we booked between '98 and 2002. We've indicated that there are five transactions there that the IRS has challenged the timing as to deductibility. And I'm going to say that that's probably in the early stages of discussion and negotiation. You may recall one of the larger banks had a settlement or had its court case decided earlier in 2007. And I think that prompted the IRS to come back to us on the LILO transaction and prompted us to say let's get that one settled. These SILO transactions have many differing attributes. They're each unique transactions. And I think it's going to take a while longer before we can get at those in any meaningful fashion.

Dan's nodding as I talk about that. It may even be next year before we -- I'm going to pull that back. You just don't know what that schedule is going to be. It's based on actions at the IRS. That's really the only significant exposure that we have or issue that we have with the IRS right now. There's the normal flow of smaller things. Cindy's knocking on wood here now that I've said that publicly. That's the issue we've disclosed. That's what we'll have to address here over future periods. I will say that we have tried to provide for that exposure in our financial statement so that we're in a neutral position as we go into whatever resolution process may exist out there.

Thanks for the color. Appreciate it.

And our next question comes from the line of Andrea Jao with Lehman Brothers. Please proceed.

Good morning, everyone.

Hi, Andrea

Aloha, Dan, and welcome

Thank you, it's good to be here.

First questions is on kind of the pace of buyback. Can you remind me what the capital ratios you look at and take into consideration are? And if we can expect to see a similar pace in the back half of the year as we've seen the first part of the year?

Well, basically, we look at this in terms of about 7% leverage on our capital base. So we basically do it in such a way that we want to get to a 7% capital level. And as is available in the market, we buyback our shares. If we can't use our capital for our expansion of our Company or for investment in our Company, we give it back to our shareholders. Outside of that, it's relatively formulaic base to get to a 7% capital level.

Should the pace of buybacks pick up in the back half of the year, do you think?

Good question. That's a nice leading question. We continue to see trends as historically we've done.

Andrea, there are just a few factors of that and income is one of those.

Fair enough. (Laughter) Let me ask about the margin. Since the 5 bps are nonrecurring, should they expect the margin to go back down and kind of remain stable at the 407, 405 level for the remainder of the year? (Multiple speakers)

During the situation that -- we've come off an impuritive and inverted yield curve. We do see in the market now a slightly uptick in the yield curve. It's not as nice as we'd like it to be because the short end is a little higher than it would be a normal yield curve. Our hope is, barring anything unusual in the market or any kind of reversion back to an inverted yield curve, that some of the margin pressures we've been facing could alleviate a bit.

Okay. Great. And the last question is should the balance sheet kind of be more stable going forward? Because a whole bunch of items kind of came down this quarter.

I would think stable would be a reasonable assumption, Andrea. We take a look at the funding considerations on a regular basis. It has a lot to do, I think, with what goes on in the deposit market here, which our competitors will have some impact on. But if I were you just looking at the future, stable is probably a pretty good description. That gives us a few percentage points either way in terms of up or down. And we'll just manage it as we take a look at the interest rate environment and our competition.

In terms of loan growth that we see on books, an assumption that it will be muted probably fair given you still have paydowns.

I'm sorry, I didn't catch the tail end of your -- .

Given that you're still seeing pay downs, is an assumption for muted on balance sheet loan growth a fair assumption to make?

I would say given where we see the credit cycle, our preference would be to remain stable to muted rather than hanging out there on terms and conditions that we will have to live with for a couple of years to come. I think that's probably a fair statement.

Awesome. Thank you very much.

That depends a lot on competition, doesn't it Peter?

Yes.

We're continuing to see pretty aggressive competition on terms. And this is a time when we remain cautious about that. But we've got a lot of good customers. And when they come to us with solid credit needs and terms, we're happy to move forward on lending transactions. We haven't pulled back any desire there. It is just to make sure that we keep our risk profile in the right perspective.

Well, since you brought that up, who's been most aggressive in terms of credit terms in the Hawaii market?

I don't think we could point to an individual for that award. It's episodic, including a lot of out of market lenders, who seem to be coming in for individual transactions, Andrea.

Okay. Great. This is very helpful. Thank you.

Sure.

And our next question comes from the line of Erika Penala with Merrill Lynch. Please proceed.

Good morning, everybody.

Hi, Erica.

Good morning.

I just wanted -- Peter, if I could put you on the spot with regards to commercial growth. It seems that management's overall tone with regards to lending trends is quite conservative. And you mentioned that the pipeline is expected to be stable. But the commercial growth in the quarter was very solid. Is this a sustainable pace going forward? Or how should we think about the dynamics, vis-a-vis the second quarter?

I think that historically we've discussed our aspirations in terms of loan growth on the commercial side in kind of the mid to higher single digit range. I think that that remains a good bogie for us. I think the top-line from a pipeline standpoint, things remain pretty solid, in particular on the commercial mortgage side and on the leasing side. The issue for us, frankly, is given where we are in the cycle, we're looking at terms and conditions that we don't think have quite or quite reflect the reality in the credit cycle. And we're still looking at pricing that is call it 50% of what it was a year, year and a half ago. And we think that that has the opportunity to trend upward as the cycle turns, as well. We're probably more conservative in terms of what we're -- what we're willing to book simply because we think that there's an opportunity out there for improved pricing and improved credit terms.

Okay. And also, you mentioned during your prepared remarks, growth and commercial construction. Do you count loans to home builders as commercial construction? And if not, could you give us a little bit more color on what projects you're funding on the commercial construction side?

The answer to the question is yes. And for in terms of color, I should probably turn that to Mary.

About 50% of our construction portfolio is exposure to home builders. It is very solid, the weighted average loan to value is about 60%. The profile of the portfolio includes some national builders as well as some large local builders. In terms of exposure to what I'd call the higher risk segment, which is kind of high-end luxury second homes, we have about 25 million in outstanding among the five borrowers.

Okay. And also, Mary, now that I have you on the line, I have a question -- a follow-up question. I know you talked about solid trends on in terms of commercial credit quality, but could you talk about your feeling with regards to the consumer? There was an increase in home equity non-accruals quarter-over-quarter. And I was wondering if that's a particular segment where you see weakness? And what is the overall view in the Hawaii consumer?

Sure, the home equity softness was in our Sipan exposure. It's a relatively small portfolio for us, about 4 million in total outstanding. But their home prices have declined dramatically over the last 18 months. That's the only softness we see in our home equity portfolio at this time. In terms of the mortgage and heckle portfolios, our origination credit scores remain 750 plus, and the loan to values in those portfolios remain on average 60% and 75%, respectively. So it's still solid steps across our home equity and mortgage portfolio. The market here is moderating sales volumes are down about 5% statewide. But prices have held pretty strongly with the exception of the resort second home market.

Thank you, everybody, for the color today.

Sure.

(OPERATOR INSTRUCTIONS) And our next question comes from the line of Brent Christ with Fox-Pitt. Please proceed.

Good morning, everyone.

Hi.

Just a question that you mentioned earlier in the call that you exited about $40 million of loans this quarter. And I think that you had exited some last quarter. Could you give me a sense of what areas you're paring back or taking a little bit closer of a look at?

We pared back in some of the syndicated exposure that was just a little bit covenant lag, a little leveraged and not priced too attractively. Also, we had a couple of classified exposures that we were able to exit nicely.

Okay. And then I think on the previous call you had mentioned looking a little bit more closely at the indirect auto and tightening your underwriting standards in that area. Have you seen any change in terms of the credit quality in that portfolio there?

We have. We initiated a number of changes in our underwriting approach and we are seeing an improvement in our purchase mix. But the softness from the '05 and '06 vintage's is still kind of working its way through the portfolio.

Okay. And then last question. Not on credit quality. You had a nice lift in the trust and asset management fees this quarter. And it seems like in the past you've historically seen a little bit of a decline second quarter from first. How much of a lift this quarter was really related to the markets versus new customer wins?

Well, if you look at our performance year on year. So versus the same quarter last year, we're up just about 11%. The S & P over that period's up call it 20%. So basically the way that we back into the market-driven growth is about 80% of our trust fees come from asset management, charging off of market appreciation and market asset levels. And then within that segment, within the asset management business, about a third of our business is equity-based, two-thirds of our business is bonds and money market securities. So if you do the math there, you get to a call of 5%, 6% level. So probably half of our improvement of the 11% came from market appreciation and the other half came from just adding new business, building business.

Okay, great. That's helpful. Thanks a lot.

And our next question comes from the line of Fred Cannon with KBW. Please proceed.

Thanks and good morning. I just had a couple questions on the noninterest income. The year-over-year trend in the truck business looks quite positive. You saw a pickup from the first quarter that tends to be your strongest. I was wondering if there's something, if there's good traction going in that area or if there was some one-off transactions?

Fred, this is Peter. The fee income for the period was pretty basic stuff, so nothing really extraordinary there. We are getting good traction in that area. That's been an area that we've been focussed on from a management standpoint for a couple years now. And we're starting to see good sales performance. And we would anticipate that that would continue.

And was that up a little bit kind of double digit year-over-year growth in that line? Is that sustainable? Or just have to hope for the best?

Well, no promises, Peter. High single digits are great.

On an organic basis, I think that's what we're looking at. We did get a nice lift off of the market, as well.

Okay. Great. On the mortgage income that was a little bit soft, I'm sorry I missed the commentary on that. Was that servicing or gain on sale driven?

I'm sorry, Fred, could you repeat that again?

The little bit of -- I moving down in the mortgage banking numbers. I missed the comments on that. I was asking if that was as a result of servicing issues or gain on sale?

I think it's going to be just a slightly lower volume on sales. The margins really didn't widen out very much there. And there wasn't any unusual activity relative to our servicing, servicing book there. Our hedge was effective. We went through that process of moving some securities. And now we're valuing them at market. And that goes through our mortgage line. But that basically offset the change in assumptions and market conditions for servicing rights. It's just basic volume of business, Fred.

Okay. And then finally, just your securities gains were a little bit larger than we've seen in the past couple of years, I believe. Anything going on with the securities portfolio there?

Not really. Basically as securities come up for sale, we're basically just liquidating some of our securities and just reinvesting them as the opportunities come up. But nothing unusual, just more in the course of business.

Okay. Great. Nice to see a nice straightforward quarter. Thanks.

Thanks, Fred.

And your next question is a follow-up from Brett with FTN Midwest. Please proceed.

Hi, I just wanted to ask. No one's really gone through the expenses. And I know you had the FICA be lower this quarter, so that's one of the reasons why expense management continues to be strong. I guess I'm just looking for some flavor on expenses. In the past few years, it's always seemed like you've been able to lower expenses. And we keep thinking that is near the bottom of the barrel, so to speak, but you obviously trim the other line a little bit this quarter and maybe that was a function of marketing or something. But I'm just trying to figure out if we can hope for or expect that the expense line item might continue to be a little lower or if like Hadith, we're basically scraping the bottom of the barrel on that.

Scraping the bottom of the barrel. I like that.

Well, just in terms of, you manage expenses and I know you guys have done a fantastic job with that. If there are any areas you still see where you can trim or I notice FTE count was down five this quarter. Is there anything left?

Brett, this will increasingly become Dan's area. All I can say is it is getting more and more challenging. And we're not out here looking every day to see how we can cut expenses, frankly. We're more focussed on the operating leverage. And the approach we use in all of our business units is to grow our revenues. And anything that contributes to that is a justifiable expense increase. And where we can't do that, then it's very hard to justify the expense increase. And I think that has continued to gain traction through the Company. And that's how we're going to look at it as we go forward. Now, what that will do. Is there some way that we can lower our expenses? At the core, I don't think we can cut our personnel cost very much. We continue to watch our capital investments but that's a life cycle sort of thing with putting them on the books and then depreciating them.

It really is outside services where we can be effective with that. And inflationary pressures do come up in those. I just can't think of anything that we can say is going to be a breakthrough for us in terms of significant reductions in expenses. We gave credit and that's nice that we do for expense control. We work hard on it, but there's a range in there that expenses are going to vary from quarter to quarter that really are dictated by business needs and by billing cycles. I wouldn't want to try to get in a position of us making any finer call than to say we focus on operating leverage and we do everything we can to hold our costs to a low practical level. I hope that color is helpful, Brett. That's about as much as I think we should commit to or should say here on line.

Okay. That's fine. I just wanted to make sure I wasn't missing any expense initiatives you guys had in place in terms of looking at infrastructure or anything particular.

We looked at it on an ongoing basis. The biggest initiative we've got is a new CFO and you know how those guys can be on expenses.

Yes. (Laughter)

Yes, you're supposed to laugh, Dan.

Okay. Great. Thank you.

Thanks.

(OPERATOR INSTRUCTIONS) And we have another follow-up from the line of Andrea Jao with Lehman Brothers. Please proceed.

Hello, again.

Hello.

Last quarter and again this quarter you mentioned tightening indirect underwriting standards. Wanted to know if you were tightening standards as well in other portfolios?

We have across our retail businesses taken a look at what we're doing. And on the margin made some tightening. But I'd say our plan is to really just be there through the cycle.

Dave, our first mortgage business we've really had good underwriting quality there and haven't had any variation standards, have we?

No, our first mortgage business has been very solid, feel very comfortable with the A) part of the market in which we operate. And anything less than that, we already have established arrangements for brokering that business out to any number of sources. For our portfolio, we stay right at the A end of the business.

Home equity is the other big part, Dave, we're in great shape there, aren't we?

Right. We are in very good shape, solid credit.

Okay. Perfect. Then circling back on the net interest margin, do you think if you get public deposits during the quarter and kind of ramp-up on liquid assets again, will that pressure the margin materially? Or will it just be like a couple of basis points?

We don't envision it pressuring the margin materially. I think coupled with a slightly positive sloping yield curve, I just think discipline in our deposit pricing I don't think will have materially negative impact on our margin. I think you look at both the right, the sloping yield curve and just our discipline on deposit pricing, I think there should be a little bit of lift going forward if all things being equal. But that could change depending on what happens with rates going out in the future.

Okay. Awesome. And then I was hoping Al could talk a bit more about the environment in Hawaii, activity on Oahu (Inaudible) their islands and kind of give an update on military spending to update housing.

Yes, it's going to be 88 this afternoon. We've got a nice breeze out of the northeast. Weekend rains have gone away, Andrea. As to the economy, it's nice and tall. I'd say the only thing that is downsized for us is inflation and that continues to come through our cost structure here. All of our oil is imported. And we've talked about the impact that has as well as increasing housing prices in the prior couple of years. It's going to take another year or so for that to work its way through. Military spending, I think remains pretty solid. We've got a lot of troops from Hawaii on deployment. And we continue to have challenges between the military's need for training and the environmentalists' desire to protect the islands here. But that seems to be pretty manageable. Military's doing what they need to do. The buildup that we've talked about in the past is out in the future and it relates primarily to Guam, at least that's the plan right now. So we don't see any particular spending increase that's eminent. That's probably a year or more away before we see much of that starting to come through.

Any updates on the military modernizing the housing that they use in Hawaii?

Talking about the privatization of the military housing.

Yes.

It's been very effective. I can't tell you where they are in the spending process. I want to say that we have gotten nicely into that part of the cycle. But there is still some more to go, primarily for the navy and marines. I think the army and the air force are a little farther ahead in that category. I don't have numbers I can give you, Andrea, as to what the future spend there should be.

Okay. Very helpful. Thank you.

Sure.

At this time, there are no further questions. I would like to turn the call back over to Ms. Wyrick for any closing remarks.

Thank you very much. I'd like to thank all of you for joining us today. And as always, if you have additional questions or need any clarification on any of the topics we've discussed today, please feel free to call me. Thanks, everyone, have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.