Bank of Hawaii Corp (BOH) 2007 Q4 法說會逐字稿

Great day, ladies and gentlemen and welcome to the fourth quarter 2007 Bank of Hawaii Corporation's earnings conference call. My name is Katina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Cindy Wyrick from investor relations. Please proceed.

Hello everyone, and thank you for joining us as we review Bank of Hawaii Corporation's financial results for 2007. With me this morning is our Chairman and CEO Al Landon; our Vice Chairman and Chief Financial Officer Dan Stevens, Vice Chairman and Chief Banking Officer Peter Ho, and Vice Chairman and Corporate Risk Mary Sellers. Our comments this morning will refer to the financial information that was included in the earnings announcement.

Before with we get started, let me remind you that today's conference call will contain some forward-looking statements, and while we believe that our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected as outlined in our Form 10-K. And now, I'd like to turn the call over to Al Landon.

Thank you Cindy, and good morning, everyone. Bank of Hawaii achieved our major financial performance objectives for 2007. Our return on equity was 25%, return on assets was 1.75% and for the year, our operating leverage was positive. Our financial performance, which was particularly strong in the first three quarters, was diminished by unexpected costs recognized in the fourth quarter. We expect to recover some of those costs in the future following the Visa public offering. Our Chief Financial Officer, Dan Stevens, will tell you more about our 2007 results and these costs. And as a special feature, and in light of everyone's interest in credit risk, our Chief Risk Officer, Mary Sellers, will discuss our credit provision profile. I will add some observations about the Hawaii economy and our expectations for 2008. Then we'll be happy to respond to your questions. Dan, would you like to start?

Thank you, Al, and hello, everyone. Bank of Hawaii's net income for 2007 was $183.7 million, up $3.3 million from $180.4 million in 2006. Diluted earnings per share were $3.69 for the year.

As Al mentioned, the Bank of Hawaii recognized some costs in the fourth quarter that require explanation. The Bank of Hawaii is a member of Visa, and received shares of restricted stock as a result of its participation in the global restructuring of Visa. Member banks are obligated to share in the potential losses resulting from certain indemnified litigation, involving Visa. Visa announced that it had established contingent liabilities related to these matters, and accordingly, we recorded a charge of $5.6 million or $0.07 after tax per diluted share as our proportionate share. We also incurred $1.7 million in expenses related to our customer fraud loss. Together, Visa and the fraud loss represented $7.3 million of expenses recorded in the fourth quarter.

Now turning to other components of the income statement and balance sheet, both our net interest income and margin improved in the fourth quarter. Net interest income on a taxable equivalent basis was $99.7 million in the fourth quarter, up $900,000 from the third quarter, and net interest margin was 4.12%, up 9 basis points from the third quarters. As market rates declined, our deposits were priced at lower rates at a slightly faster pace than our loans, as 61% of our loans and over 70% of our earning assets have fixed rates. Our effective cost of funds decreased by 18 basis points in the fourth quarter, while the yield on earning assets declined 6 basis points. Although earning assets declined in the fourth quarter, average loans increased $11 million, but the proportion of noninterest bearing demand deposits to total funding was constant.

For the full year 2007, our net interest margin declined by 17 basis points to 4.08%, due to higher funding costs. Although earning assets grew in 2007, particularly in loans and leases, and our yield increased by 17 basis points, our cost of interest bearing liabilities increased by 41 basis points, resulting in a reduced spread for the year. This increase in funding costs was primarily due to the continued shift of deposits into higher costing time products. An analysis of this change in net interest income is included in tables accompanying our earnings release.

Noninterest income for the fourth quarter of 2007 was $60.3 million, slightly down from the prior quarter. Although partially offset by a $3.1 million gain on the sale of unused real estate, the decline was due to two factors, $2.9 million of a seasonal contingent insurance commission early in the third quarter and a $1.9 million reduction in mortgage banking income, due to rebalancing securities used to hedge the value of our mortgage servicing rights. Although we had benefited from overhedging our mortgage servicing rights, we rebalanced the portfolio based on our experience in managing the hedge.

For the full year 2007, noninterest income was $240.5 million, up $24 million over 2006, with significant operating increases in nearly every category. Noninterest expenses in the fourth quarter increased $10.6 million over the third quarter, $7.3 million related to Visa and the customer fraud loss. Of the remaining $3.3 million increase in noninterest expense, $1 million occurred in salary and benefits driven by $450,000 due to one additional paid working day in the fourth quarter, and a $600,000 increase in performance related restricted stock grant expense. $500,000 of professional fees was due to $200,000 in legal fees, in our Investment Services Group related to the roll-out of our anticipated open architecture platform and a trust real estate matter, as well as $600,000 of professional fees to strengthen diagnostic tools and processes in technology, compliance, retail credit and tax. The remaining $1.2 million recorded in other expense relates to seasonal increases in business development and in year-end processing costs.

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

Moving over to the balance sheet, outstanding loans decreased by $19 million this quarter compared to last quarter, and totaled $6.6 billion at the end of the period, while average loans increased by $11 million. For the year, total outstanding loans decreased by $42 million. This decrease results from $80 million in credit exits and $42.7 million decrease in leasing balances due to a required change in accounting rules. Adjusted for both the credit exits and lease accounting change, total loans ended 2007 up 1.2% from December 31st, 2006.

Our investment securities portfolio, which was $3 billion at December 31st, 2007, is in good shape, both in duration and in market values. The portfolio does include $312 million in non-agency mortgage backed securities. All of these securities were originated in 2005 or earlier. 80% were originated in 2004 or earlier. The 90-day plus delinquency rate at year-end was 6 basis points or $187,000. Our nonagency holdings do not contain subprime or alt-A collateral.

Period end deposits increased $67 million compared to September 30th to $7.9 billion as of December 31st, up in all categories except savings. Average deposits decreased $213 million in the fourth quarter, related to a block of short term commercial deposits placed with us at the end of the second quarter that were largely withdrawn by the end of the third quarter. We continued our share repurchase program by purchasing 591,000 shares during the fourth quarter at a cost of approximately $30 million. Since quarter end, we have repurchased another 175,000 shares, so our remaining authorization was approximately $86 million as of this morning. Our target tier leverage ratio remains at 7%.

And in conclusion, our board, consistent with our October dividend, declared a $0.44 per share dividend last Friday. and with that I would like to now turn over the call to Mary Sellers.

Thanks, Dan.

Our provision for credit losses was $5.4 million, equal to net charge-offs in the fourth quarter. Fourth quarter net charge-offs included $720,000 in commercial net charge-offs and $4.7 million in consumer net charge-offs. Indirect auto and unsecured personal lines and loans accounted for $4.1 million of the consumer total. This represented a $1.1 million increase over the prior quarter, accounting for the majority of the linked quarter $1.4 million increase in total net charge-offs. Increases in indirect and unsecured personal lines and loans were driven by seasonal variations and continued inflationary pressure on consumer incomes in our market. In 2007, we tightened underwriting standards and account management practices, and in the case of indirect auto, significantly reduced the amount of high risk paper we were accepting from the dealers, and in some cases we began to require dealer recourse.

In light of the economic outlook, we're further tightening underwriting standards, and committing additional resources for our collection activities. Net charge-offs for the full year were $15.5 million, up $4.7 million over 2006, reflective of a $1.6 million decrease in commercial recoveries, and a $3.1 million increase in consumer net charge-offs. Indirect auto and unsecured personal lines and loans accounted for $1.5 million of this increase in consumer net charge-offs. With overdrafts of approximately $1 million, accounting for the majority of the balance. I would note that prior to 2007, overdrafts were accounted for as operating losses. The full year provision totaled $15.5 million, equal to full year net charge-offs, maintaining our allowance for loan and lease losses at an appropriate level.

With credit issues dominating the the headlines, I'd like to take this opportunity to provide you with the overview of our portfolio, key risks we see and the mitigants and strategies we have in place to address these, given our expectations for 2008. Our total portfolio of $6.6 billion is diversified with $2.4 billion in commercial outstanding and $4.2 billion in consumer outstanding. The commercial portfolio is 44% commercial and industrial loans, 27% permanent mortgage, 20% lease finance and 9% construction. The consumer portfolio is 60% residential first mortgage, 23% home equity, and 17% indirect auto and unsecured personal lines and loans.

Commercial and industrial loans total $1.1 million in outstanding. These C&I loans encompass numerous borrowers and industries. In 2007, we reduced exposure to higher risk segments in this portfolio, exiting a total of $54 million in exposure. As of year end, this portfolio had no 90 days or more past due loans, and very modest nonperforming assets of $600,000. For the full year, net charge-offs totaled $2.1 million, or 19 basis points. We continue to execute our strong portfolio management processes, which require ongoing evaluations of individual borrowers and industry segments. Given very low levels of internally classified assets in our C&I portfolio, we have no specific concerns at this time. These portfolio outstandings total $482 million. The risk component in this portfolio is primarily airline exposure, which we've discussed in detail in the past.

Let me now turn to commercial real estate, an area that has received significant focus recently. Our commercial real estate portfolio includes $635 million in commercial mortgage outstandings and $209 million in construction outstandings. Our commercial mortgage portfolio is diversified across product type and our island markets, and has a significant owner occupant component. Industrial properties, primarily on Oahu, are the largest concentration at $257 million, 58% is owner occupied. Mainland commercial mortgage exposure totals $3.5 million, or less than 1% of total commercial mortgage outstandings. We continue to take a disciplined approach to underwriting commercial mortgage exposure. Our strategy is to lend in small amounts based on cash flow, with real estate values providing secondary protection.

Residential development is the largest component of our construction exposure, with $110 million in outstandings. The majority of this, or $88 million, is in projects with price ranges targeted at local buyers, primarily on Oahu and Maui. Extended permitting and building processes on our island have constrained construction starts, and the increases in inventory levels seen in some markets on the mainland. Housing remains undersupplied in market, with demand constrained by affordability. Second homes and investor markets in Hawaii caused most of the increase in housing production in the past few years and have a higher risk of meaningful price correction. Accordingly, this segment is the one we've been most careful about.

During 2007, we exited $5.5 million in exposure. Currently, we have three loans with outstandings totaling $21 million for projects in the second home segment. These loans were underwritten with conservative loan to values and/or strong guarantor support. Mainland construction outstandings total $10 million, or less than 5% total construction outstandings. The two mainland projects were also conservatively underwritten with strong guarantor support. As of year-end, our commercial real estate portfolio had no loans 90 days or more past due, a modest $112,000 in nonperforming assets, and no net charge-offs.

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

In our residential portfolio, $2.8 million is considered higher risk. These loans have monitoring credit scores less than 660, loan to value ratios greater than 80%, and no mortgage insurance or government guarantee. In our home equity portfolio $27 million or 3% of total portfolio outstandings are considered higher risk. These loans have monitoring credit scores less than 660 and combined loan to value ratios greater than 80%. $800,000 of this exposure is in second homes and investor properties. For the full year, our mortgage portfolio was in a net recovery position of $52,000, and our home equity portfolio had total net charge-offs of $738,000, or eight basis points.

Given our outlook, we'll continue with our current conservative underwriting, tightening at the margin in selective segments if necessary. Indirect auto loans of $443 million unsecured and unpersonal lines and loans of $262 million comprise the balance of our portfolio. As I shared with you earlier, our plans for 2008 call for continued diligence in reducing risk and loss exposure in these assets. As of December 31, 2007, the reserve for loan and lease losses totaled $91 million, unchanged from December 31, 2006, and September 30th, 2007. The ratio of the allowance for loan and lease losses to total loans was 1.38%, up from 1.37% at December 31, 2006, and unchanged from September 30th, 2007.

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

Thanks, Mary. Very complete report.

As we begin 2008, the Hawaii economy is in pretty good shape, even though there are some signs of slowing. Visitor spending increased slightly in 2007, in spite of a small decrease in arrivals. For 2008, visitor forecasts vary. Some expect small increases while others expect a slight decline in arrivals. Protection of housing units was down in 2007, as it was in 2006.

Housing prices on average have remained unchanged for the last two years. Commercial construction remains strong. The growth of government receipts is expected to slow in 2008. Unemployment remains low, just over 3% as of the end of the year. Inflation, which has exceeded national levels in 2006 and 2007 is expected to be at lower levels in 2008. On balance, we read the indicators to suggest that the Hawaii economy looks pretty solid as we begin 2008.

We carefully watched the economy on the U.S. mainland as well. We know that if it slows appreciably, we can anticipate such weakness will affect us here in Hawaii. We will continue in 2008 to follow the business plan that we announced in 2007. Our plan focuses on our existing markets. We will maintain, excuse me, a balance between growth and discipline. We expect to see additional growth opportunities in 2008, but we will remain disciplined about controlling credit quality and risk. We will also continue our disciplined management of operating expenses, which will increase due to the effects of inflation and higher costs of compliance and risk management.

We expect our quarterly operating costs to run about 83 to $84 million, although the first quarter could be a touch higher due to payroll taxes. We plan to pay for these costs with increased revenue. We expect to maintain our capital levels at 7%. Although there are too many variables to make a prediction on 2008 quarterly returns, we believe that our longer term goals remain viable. Positive operating leverage, earning 1.7% on assets and a return on equity of 25%.

Now we're happy to respond to your questions.

Thank you. (OPERATOR INSTRUCTIONS). Your first question will come from the line of Erika Penala, representing Merrill Lynch. Please proceed.

Good morning.

Good morning.

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

We don't have anything in our plans for that right now, Erika.

Okay. And also could you give us a sense in terms of the pace of buyback activity for '08 and whether or not it would be comparable to the previous year's pace?

Right now it looks comparable.

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

Dan, maybe you want to respond to that?

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

Okay. Thank you for the time.

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

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

Sure. In the nonperforming assets in home equity, it was really just a handful of loans that together had a combined weighted average loan to value of 50%, which brought the total for our NPA balances to a weighted average loan to value of 61%. In terms of our 90 days plus past due, that was primarily in mortgage. Again, it's several loans that are very conservative in terms of loan to value. In fact, we're at a 50% loan to value on those loans.

Okay. And is there any loss content there expected at this point or kind of what are you doing to address the uptick?

We're actually working very aggressively to resolve those and no, we don't expect any loss. In fact, you would have seen that our NPAs in mortgage came down about $0.5 million this quarter.

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

I will make a general comment. Dan, if you want to add anything to it, please do, but the main source of increase is our decision to keep our workforce levels at essentially the same as we have right now and we need to -- with the low unemployment here, we need to make sure that we keep our compensation competitive. We're also focusing on our operating costs related to compliance and risk management, as I said. They've snuck up on us a little bit here in the last couple years as the expectations for compliance particularly, increased and we just made a conscious decision that that risk management activity has served us pretty well over the last couple years, and we're going to keep that momentum. That usually means professional services, costs going out and making sure that we've got our people the right tools, we've got sort of the right level of education going on, and to be honest, we have to defend against competitive desires to hire our people. It seems like every one of them has one or more offers constantly out there, and it's just an increasingly important area I think for us and all banks, but we're particularly sensitive to it, and the last thing I would add is that we don't want to stop spending on our technology and our operations.

We know that we need to continuously improve our delivery mechanisms. So things like image where we've got some opportunity in front of us, we're going to keep the the momentum going there, even though I recognize in the business there are quite a few pressures to slow those expenses. As far as where we're going to cover those costs, we've had good luck raising our noninterest income as you can tell over the last couple years. We've got some new product offerings coming out, particularly our Investment Services Group, as we open up our product architect there, and then as Dan mentioned, the recent rate reductions are going to give us a little bit of margin upside throughout the 2008 year. So that's generally what I would say as we look at it. Dan, would there be anything you'd want to add to that?

No. I think Al covered it very well. I think we're -- very well. I think we have isolated all of our expense growth and we think we've covered it.

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

Peter?

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

Okay. That's helpful. Thanks a lot.

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

Hey, good morning, everyone.

Good morning.

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

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

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

We've not disclosed classification totals anywhere in the future and so I think it's probably not something we want to start this morning. We just don't have that complete array, but, Mary, can you give us a little bit of color about what's in there?

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

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

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

So special mention and what not would obviously just --

That doesn't apply across the residential businesses.

Okay. Maybe we can follow up offline after that about that. I'm just curious, Mary, you indicated you would increase the credit underwriting again on the indirect portfolio, and so I'm just curious if what you're seeing in terms of the economy is the consumer is a little bit slower, or if you're just being a little cautious on the California effect, so to speak, or kind of what your thoughts are on the conservatism as it relates to tightening things a little more.

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

And I think the focus of our tightening, Mary, is going to be more particularly around the indirect auto --

Yes.

And maybe to a lesser extent some of the unsecured or lesser secured credits, kind of personal line type of credits. I would say that the borrowers in those segments in general tend to have lower credit scores and one thing we have seen here in the islands for the last couple years is a softening of automobile sales, and so if that happens, naturally, dealers are challenged to qualify more buyers and I think that's an area where we have need to be a little bit more conservative than we've been.

We've tightened a couple times and I think as we begin 2008, I would say a little bit more tightening there, just hard to price for those kinds of risks. That part of our portfolio really doesn't have too much of what you would call a related economy or I think your term was California effect. That's basically an in market phenomenon and something we just have to control here locally. Peter, is does that sound right to you?

I think so, yeah.

Okay. That's good color. Great, thank you.

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

Good afternoon, everyone.

Hi, Andrea.

Hi. I was hoping Peter could talk about his outlook on loan growth and the the drivers.

Sure. I think Mary touched on it during her discussion. We're pretty cautious at this point given a lot of the color around what's going on in the economy, primarily on the national front. We are seeing some improvement in the competitive landscape, though, I would say. Down the credit structuring side, we're beginning to see structures fall in a little bit more conservatively. So that should help us as we're out there in the marketplace competing, because we're generally on the more conservative end. Pricing-wise, things continue to be pretty tightly priced. There's a bit of a bifurcation taking place in the market we see. Higher risk assets are beginning to widen on the spread side, but the lower risk assets continue to be pretty tightly priced and that's generally where we tend to play. So that's what we're seeing on the competitive end, Andrea.

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

Okay. So it sounds like loan growth should be muted, but your pricing is much better. Is that -- would you agree? Am I misinterpreting something?

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

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

Your call, Mary.

Well, I suspect that we generally see some seasonality in the fourth quarter and first quarter in our consumer net charge-offs. So I would expect the first quarter to round similar to what we've seen in the fourth quarter.

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

It kind of comes down in second and third and then it goes back up.

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

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

Very scientific answer, Dan. We don't have any intent to lengthen our duration right now.

Fair enough. Thank you so much.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Frederick Cannon, representing KBW. Please proceed.

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

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

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

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

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

All right. Thanks. And any update on what's going on over in Guam in terms of the military spending? Is that still a go?

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

Great, thanks. Thanks for the update.

Thanks, Fred.

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

I'd like to thank everyone for joining us today. As always, if you have additional questions or need clarification on any of the topics discussed today please feel free to contact me, and note that I have a new telephone number, which is 808-694-8430. Thanks, everyone, and have a great day.

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