Bank of Hawaii Corp (BOH) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2008 Bank of Hawaii Corporation earnings conference call. My name is Nora, and I will be your coordinator on today's call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Ms. Cindy Wyrick, Executive Vice President and Director of Investor Relations. Please proceed, ma'am.

Thank you, Nora. Hello, everyone, and thank you for joining us this morning as we review Bank of Hawaii's financial results for the third quarter of 2008. With me this morning is our Chairman and CEO, Al Landon; our President and Chief Banking Officer, Peter Ho; our Vice Chairman and Chief Financial Officer, Kent Lucien; and Vice Chairman of Corporate Risk, Mary Sellers. Our comments today will refer to financial information that was included in the earnings announcement earlier 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. And now, I'd like to turn the call over to Al Landon.

Thanks, Cindy, and good morning, everyone. Bank of Hawaii produced good financial results in the third quarter. As Kent will discuss, our results include the accounting impact of accepting the IRS program to resolve tax issues related to our legacy leasing business. We were fortunate to have that tax recovery, which coincided with an increase in credit risk in the third quarter. As a result of the economic slowing and credit market anxiety, we increased our allowance for loan losses and capital ratios. Bank of Hawaii enjoyed good credit availability, and we moved to less expensive short-term funding and reduced our investment portfolio slightly. When we introduced free checking in July, we also combined some demand deposit products to simplify our offerings. This resulted in a change in classifications of deposits on our balance sheet. Kent will comment on our deposit and balance sheet strategies after we highlight some important aspects of our income statement. Kent?

Thank you, Al. Good morning. Net income for the third quarter was $47.4 million or $0.99 per share, compared to $47.8 million or $0.96 per share in the third quarter of 2007. Our net income to average assets was 1.82%. Net income to equity was 24.17%, and our efficiency ratio was 54.05%. For the first nine months of 2008, net income was 152.9 million, or $3.17 per share, up 10.1 million compared to 2007. This quarter's results included an $8.9 million net credit related to the pending resolution of our sale in/lease out leveraged lease matters with the IRS. These are commonly known as SILOs. This net credit reduced our net interest income by $4 million and reduced our tax provision by $12.9 million. We also increased the provision for loan losses above net charge-offs by $13 million.

We increased our provision, primarily due to increased risk in three specific loan exposures, and to general risk from the weakening Hawaii and U.S. mainland economies. Net interest income for the third quarter was down $3.6 million from the second quarter, mainly due to the $4 million charge related to the settlement of the SILO leases just mentioned. This charge affected our net interest margin as well, which was 4.33% for the third quarter compared to 4.41% in the second quarter. The SILO adjustment reduced the margin by 17 basis points; and therefore, excluding this charge, our margin would have been 4.50%. Year to date, net interest income was up 17.4 million compared to the same period in 2007, and our margin increased 23 basis points to 4.30%. Net interest income improved because of lower funding and deposit costs that more than offset lower asset yields. Non-interest income for the third quarter was $57 million, down 3.6 million from the second quarter and down 4.3 million compared to the third quarter of 2007.

Increases in deposit fees were offset by reductions in mortgage banking and insurance income. Mortgage banking income was lower, due to a $2.4 million valuation adjustment for our mortgage servicing rights. Insurance income was down 1.5 million due to the timing of contingent commission income. Non-interest expense was 86.8 million in the third quarter, an increase of 2.9 million from the second quarter, and up 5.3 million from the third quarter of last year. This quarter's expenses included an accrual of 2 million for employee incentives. Year to date, non-interest expense was 264 million, up 20.7 million over last year. However, excluding the significant expense items, as shown on table two of the press release, the increase would have been 8.4 million, or a 3.5% year-over-year increase. This is partially due to higher expenses associated with expanded service, including our new Waikiki branch, and also to higher utility and general operating expenses.

Our efficiency ratio increased to 54.05% this quarter compared to 50.01% last quarter, primarily the result of the reduction in net interest income related to the SILO resolution, and also to the $2 million employee incentive accrual. We increased the provision for credit losses this quarter to 20.4 million compared to 7.2 million last quarter. The provision exceeded net charge-offs of 7.4 million by 13 million. Our effective income tax rate of 11.24% for the third quarter was impacted by the previously discussed credit of 12.9 million related to the SILO tax resolution. Adjusted for the SILO matter, the effective tax rate would have been 32.97% for the third quarter compared to 37.03% last quarter, and 35.68% in the third quarter of 2007. Turning now to the balance sheet, outstanding loans and leases totaled 6.54 billion at the end of the period, an increase of 21 million from the previous quarter, and 60 million lower than last year.

Average loans were down somewhat for the quarter, as we continued to reduce our exposure in certain portfolios, such construction, indirect auto and unsecured consumer installment loans. Our construction loan portfolio is now 153.4 million compared to 168.7 million at the end of Q2. Our investment securities portfolio was 2.9 billion at September 30, down 89 million from the second quarter. Our portfolio consists mainly of debt and mortgage-backed securities issued by GSEs. We do not own any subordinated debt, preferred stock or common stock of Fannie Mae or Freddie Mac, and we don't own any subprime or Alt-A securities. Long-term debt was unchanged this quarter, and short-term borrowings increased 202 million. Average deposit balance decreased by 186 million during the quarter due to a reduction in commercial escrow balances, as some large construction projects neared completion, and lower public deposits were due to the timing of bond payments. We also continued to be conservative with respect to to the pricing of time deposits.

Additionally, because we combined some product types when we introduced our free checking product in July, about 255 million of demand deposits were reclassified from non-interest bearing to interest-bearing accounts on our balance sheet. Asset quality remained strong, despite a slowing economy nationally and in Hawaii. Nonperforming assets totaled 5.9 million at the end of the third quarter; down from 6.7 million at the end of June, though up from 4.3 million at the end of last year's third quarter. As a percent of total loans and leases, nonperforming assets are 9 basis points. Our accruing loans and leases past due 90 days and over were 5.4 million or eight basis points. Our allowance for loan and lease losses is now 115.5 million, which represents 1.77% of total loans. We continued our share repurchase program in the third quarter, purchasing 332,000 shares at a total cost of 16.2 million. At quarter end, our leverage ratio was 7.27%, up from 7.01% at June 30.

Our immediate plan is to continue to build capital through earnings over the next few months. Accordingly, we have not repurchased any shares since mid-September. Finally, our Board declared a $0.45 per share dividend last Friday, an increase of $0.01 per share from the previous three quarters. And now, I will turn the call back to Al.

Thank you, Kent. As we indicated in our announcement, the Hawaii economy continues to slow. We provided some specifics on key measures in our announcement this morning. But the Hawaii economy still is relatively better off than many other parts of the U.S. In the last month, we have heard from clients that the slowing in Hawaii has accelerated, and our customers are becoming more cautious. While loan losses increased, our delinquencies have remained at low levels. We expect to see consumer losses at current levels in the next quarter. Commercial losses could increase, depending on the actions of a few borrowers for which we have increased reserves. Because of the lower visitors levels and other economic drivers, we anticipate modest slowing of our business and plan to maintain our conservative posture. Our strategy is to use our resources, low leverage, strong capital generation, and talented personnel to manage our balance sheet and strengthen our delivery system during this slower period. We have good funding capacity and have avoided purchasing deposits, which have not been the least expensive source of marginal funding. We have good loan capacity, although loan demand has decreased. We are considering the various government programs that have been announced. Particularly, we're evaluating the Treasury's capital purchase program, but we've not made a decision whether to participate. We have noticed that some programs are evolutionary, and we plan to reach a conclusion closer to the due date for application. In the meantime, we'll continue to increase our capital ratios. Now we'd be happy to respond to questions.

Are there any questions?

(OPERATOR INSTRUCTIONS). And your first question comes from the line of Brett Rabatin of FTN Midwest.

Hello, everyone.

Good morning, Brett. I didn't think anybody was going to ask a question.

Well, you had good results relative to the environment so everybody is off trying to figure out who is getting the TARP, I guess. Speaking of that, I guess I'm very surprised you guys are -- you're buying stock back here recently. I know you haven't done any. A., as you are evaluating that, is that a function of potential acquisitions? I can't imagine. I'm not sure why you would be too gung-ho to be getting involved in the TARP. And then secondly, just, you are going to grow your capital ratios. Aside from any government involvement, do you have a target now? A new target?

No, we haven't set a specific target. We're going to continue to let the ratios go up as we slow our repurchase. We stopped in the middle of September with repurchase, and I think you did a very nice job of summarizing what we're considering as we look at the capital purchase program. But I'm thinking that there are sort of macro factors that are involved, and we've got watch those, too. From just our bank standpoint, right now we feel pretty comfortable with our capital plan and strategy. And as you know, Hawaii is a pretty concentrated market already, so the likelihood of in-market acquisitions seems to be sort of an outlier to us.

Okay. And I had a ton of questions on credit. Just let me ask one or two. Can you talk a little more about the three specific loan exposures that you alluded to in the comments?

I think Mary is just dying to get that question, Brett.

Hi, Brett. One is a client who develops and manages retail centers that currently have some difficulty refinancing debt maturities given the illiquid capital market. The second is in our legacy leverage lease portfolio, and there we have a conduit that has some structural issues. The actual lessee is quite strong, but the structure itself is problematic. And then we have a construction loan on the mainland, one of our only two, which in total are less than 10 million. The project is complete, but sales have slowed. So all in all, we felt prudent to put some additional reserves against those exposures this quarter.

Okay. And then, Mary, there was a comment in the -- earlier about consumer losses, at least at current levels going forward and maybe higher C&I, depending on the environment. Can you talk some about what you are seeing in the installment portfolio? Has the duration of those loans extended out, and what you are seeing on the indirect auto as well?

We really haven't seen much duration extension. We're pretty aggressive in our collection activities and don't do much in terms of rewrite. In the indirect portfolio, we are starting to see the quality improve somewhat based on our underwriting that we had instituted. We've tightened that. But given the unemployment picture, that's just kind of an uncertainty moving out there.

Okay. And then if I understood it correctly from the comments, the in accretive accruals, are those essentially -- is there going to be a run rate for that going forward, or was the two million kind of a -- more of a one-time deal for this quarter?

We're going see what the fourth quarter looks like. At this point, Brett, we're fairly well accrued up off of what's been for us a pretty good earnings year. And we'll see how the fourth quarter turns out, so we may have some variability in that run -- that part of the run rate. That's probably as much as I want to say right now without making promises to any of our employees who are listening.

Okay. And then just one last quick one. From a core margin perspective, impressive management of the funding costs. The CDs, a little under 2.5% cost for the third quarter. Just given where assets are repricing and where you have now the funding costs, is it going to be difficult to stave off any margin pressure in 4Q, or how are you looking at the margin?

Kent, you want to address that?

Yes, I think the margin is pretty solid. Obviously, in the third quarter, we had good results, and so we have a very similar environment as we approach the fourth quarter. So I would anticipate a very similar kind of number.

Okay, all right. Great. Thanks for all the color.

Sure.

And your next question comes from the line of Andrea Jao of Barclays. Please proceed.

Good morning, everyone.

Hi, Andrea.

I was hoping to get more detail on what's going on with the different deposit categories. I know you spoke earlier about reclassifying some from non-interest bearing to interest bearing demand, but deposits appeared a little weak this quarter. I was hoping to see what you were seeing early into the four quarter, and what you expected for these?

Peter, you want to respond?

Sure. Good morning, Andrea.

Good morning.

Al mentioned the product revisions that we put in place. And really, on that front, what we did was transition 254, $255 million from non-interest bearing to interest bearing. And with the introduction or our free checking products, we wanted to make sure that we were adding value to all of our products. We made a decision to add what I think amounts to three basis points in annual rate to a new product, and that's what's creating that repositioning. You are seeing non-interest bearing. If you were to true it up, you would add back the 254, and that would give you a variance -- instead of minus 285 million, you'd like at more like minus 31 million. On the interest bearing side, that's a recipient of the inverse of that situation, and we have a variance on the balance sheet of 83 million, all right? If you subtract it out -- the product revision -- you'd have a negative number. But in that category, we also had a good amount of municipality activity. So for instance, we had one of the larger counties in the Islands make bond payment just at the end of the quarter.

So basically, our deposits and our government books fell about $72 million there as a result of that transaction. And we had a number of other transactions. Another County had 26 million. The aggregate of those types of transactions is about $116 million. So the true number -- those transactions are going to come and go, plus and minus for us, quarter in and quarter out. But if you trued that up, and true the product revision, interest bearing would be -- call it minus 50ish million on an adjusted basis. On the savings side, you will see a negative movement there of 42 million for the quarter on a linked basis. And there, as we have seen in a number of other quarters, we have a good amount of commercial escrow business and a good amount of movement there.

So we had about $86 million within the quarter of rundowns that we were anticipating. These are large accounts that we had garnered through our commercial escrow area that were now funding out as projects were being developed and nearing completions. So if you true that out, actually, our savings balance is negating out -- the rundown in the commercial escrow balance is -- we're actually up kind in the $40 million range, mostly driven from our consumer side. And then on the time side, you see that balances were pretty flat quarter on quarter, and that's the deposit decision that we've had for awhile now.

Andrea, how did you like that? Pretty good analysis from Peter, huh?

It's pretty detailed. I didn't have to say a thing.

I read your mind, Andrea. I would say two things that I would want to add, Andrea. We have been the beneficiary of some international deposits for quite a few years, as a part of our strategy, sort of owing to the uniqueness of the Hawaii location. And as some of our international depositors looked at the economy and particularly the government response to that in the U.S. in the third quarter, I think without regard to which institution they were in, they decided to bring some of those deposits back to their home country. And so that had some impact on us. And then we looked at -- very carefully at what was going on, and our Treasurer spent some time confirming credit availability that was accessible to us. When we looked at the cost of increasing deposit rates in the marketplace, or borrowing wholesale, it helped our margin quite nicely in the third quarter, and we felt confident enough in our lenders that we go ahead and do that.

So we've kept our deposit raising capacity pretty available here. We do see customers drawing down some of their excess liquidity, and we suspect that that's going to continue for awhile; but we think there's plenty of room, should we need the money, to go out to our customers with attractive product offerings. We repositioned at the beginning of the quarter, and while the interests we're paying on our deposits is not a very attractive rate right now, we can change that pretty quickly when time becomes advantageous to do so.

Okay. Thank you. My follow-up question is on the fee income -- is on fee income line items. I was wondering how to think about what was recurring, what was not recurring, to get to a good run rate. So clearly the 2.4 million in mortgage banking, you know, valuation adjustment, don't recur. 3 million --

That depends on the accounting gods, doesn't it? (LAUGHTER).

So is 2.5 to 3 million a good run rate, or do you expect less originations due to continued pressure in the line items?

Kent, you want to respond to that?

Yes. Well, obviously, the MSR item is difficult to predict between the quarters, and the negative item this quarter is -- I just wouldn't anticipate that same result necessarily in the fourth quarter; but, you know, who knows. I mean, the fundamental mortgage business -- it's down for everyone. But you know, we've continued to be fairly solid in that category, and we were pretty solid in the second quarter as well. Pricing in the jumbo mortgage origination has been a little bit unusual here in Hawaii over the last quarter or two, Andrea, in that it's less expensive than it appears to be in many mainland sources. So we're just going to have to watch that, but we decided not to deeply discount and play any larger role than just normal good service and customer relations would bring us there. So -- and then there's a little bit of seasonality in the insurance line that looks like it will come to us in the fourth quarter, when previously it had been in the third quarter.

Okay, thank you so much.

Your next question comes from the line of Erika Penala. Please proceed.

Good morning.

Hi, Erika.

I was just wondering -- my questions are for Mary. If you could share with us what your early stage delinquencies are looking like quarter over quarter?

Actually, both our 30 to 59 day and 60-89 day are flat on a linked quarter basis, although there's a modest move in the consumer piece and a downward drift in C&I. And we're actually down on a year-over-year basis. But we do see some modest increase in the 1 to 29 day, which keeps us cautious.

And you spoke to the specific loan exposures that give you pause. Are there any broad categories that worry you more now -- I mean, broad loan segment categories -- that worry you more now than did it a quarter ago?

Yes.

Everything? (LAUGHTER) Sorry. Gallows humor.

Well, it's not quite that bad, EriKa; but yes, I think -- as we see -- as I've tried to touch on it, our customers are telling that you say visitor arrival expectations here -- up until the holidays, anyway -- are for fewer arrivals, and that just continues further a trend. And so that sort of softens all of the economy. Auto sales continue to be down, and you saw unemployment pick up a little bit in Hawaii, and I think we're all cautious about that. It's still only at 4.5%. I don't mean to make light of "only" -- if you're in that 4.5%, that's no good place to be. But compared to what we hear about a market like California, where I think the number is approaching 8%, we're still relatively well off. So I think that, and our underwriting posture -- I think Mary mentioned the delinquencies look reasonably good right now. But we're a little more cautious, I think.

And on the mortgage side, clearly the demand from the consumer is waning; but you spoke that there were several mainland financial institutions that had come to Hawaii, and now that they have -- no longer exist as they did, do you suspect that you could take advantage and climb back up in the league tables in terms of origination, even if the pie is certainly much smaller?

Yes, eventually, we think that will be the case. So far, this year, there's been an in-market competitor who has been very aggressive in putting those loans on their books -- I haven't seen any third quarter results -- and they have been advantaged to the customers in pricing. And when we looked at it, there just wasn't any money in it at that level for us. And we've been pretty faithful, if it doesn't have something for the shareholder in it, then we're not going to put the risk on the balance sheet. So that's the decision we've made. Hopefully, those prices will adjust here in the marketplace and normalize, and then that will have some upside for us.

Okay. Thanks for your time.

Sure. Thanks, Erika.

And your next question cups from the line of Terry Maltese of Sandler O'Neill Asset Management.

Hi, guys, my questions were asked and already answered, so thank you.

Hi, Terry.

How are you, Al? Okay, my questions were asked and answered. Thank you.

Yes, we got it.

And your next question comes from the line of Bobby Boland of KBW. Please proceed.

Hi. Good afternoon -- or I guess good morning for you.

Good afternoon.

When I think about you guys and using TARP, and looking at your business model and looking at your capital and everything, I was wondering if you could walk me through maybe what a positive usage for TARP would be for Bank of Hawaii as you guys go through and determine if you will participate or not.

Well, we're still acclimating to the new world of government ownership, so we think that a positive use would be to increase share value. Now, the guidance that comes out says that you should take the money and increase lending, but not had a risk. And we think we've been pretty thoughtful about lending and controlling our risk profile. So initially, just the shareholder economics of this don't seem terribly compelling. On the other hand, we don't have the perspective on the marketplace and the global economy that you get from Washington or New York, and our perspective would be that these programs are created for a reason, and sometimes having a back stop of capital behind you is a good thing to do. We've got good capital generation capability. You can see what we're doing with our share repurchase program; and as we lower that, our capital generation looks pretty strong for us.

So it's a matter of what can we do to lever that money that's consistent with the intent of the program, and value adding for our shareholders while making sure that we are good banking citizens and stay in the right category of regulatory oversight. I don't mean to be too cryptic about that, Bobby, but we're just continuing to weigh it. We talked with our Board about that Friday, and those are some of the factors that we considered. We went ahead and approved some authorization to buy back shares and increased our dividends, just in the event that we go ahead with business as normal; but we'll decide here in the next week or two whether participation is the better part of all of this.

Okay. That was actually very helpful, the way you walked through it.

Okay. Thanks.

Thank you.

And your next question comes from the line of Justin [Moore] of Lord Abbott. Please proceed.

Good morning, guys.

Hi, Justin.

Can you hear me all right?

Yes.

Okay. Staying on that theme, Al, as I'm calculating it -- and correct me if I'm wrong here -- you guys can build about 30 basis points a quarter of tangible equity just taking your run rate and net income less divs? Does that sound about right?

We had been a little bit more conservative. I think about 100 basis points a year. So we're in the same league.

Okay, okay. Fair enough. So just, again, thematically, I presume you would think that's a cheaper way to go, so to speak, and can build capital quickly versus the government alternative, although that's not particularly expensive capital, but you wonder what strings are attached, I guess. Is that fair?

I think yes, that's a good summarization. We just look at our cost of capital, and the government program for us at this stage of the evolution of that program would appear to be somewhere upper 6, low 7 effective rate when you use the accounting that gets applied. And that is fairly cheap versus what we think is a cost of equity, maybe even a cost of debt out there in the marketplace. So the initial teaser rate on that looks pretty good; and internally, we say, gee, if we take 3% now, and we can have an internal generation rate of 1% a year, 3%, three years we've internally refunded that, we say that doesn't seem to be terribly risky. But I did comment that these programs appear to have some evolutionary nature to them.

Yes.

Maybe that's -- maybe that's the concerning part of this. On the other hand, it seems rather fashionable right now to have government ownership. So maybe that's -- maybe that's the better part. You can tell we don't have a clear resolve on this. And we're a little bit old-fashioned. We sort of believe that shareholders should be -- well, I'll stop there. I'll get myself in trouble.

Yes. But it's -- I presume, as part of your evolutionary comment, you couldn't take down the government's capital, and then turn around and keep buying back stock, right?

Well, that's the way it's been announced, and that would sure seem contrary to the intent of the plan. And frankly, if the government announced a plan that would allow banks to do that, we wouldn't participate on principal, I think.

Yes, yes, okay. Just a little more color on the three credit identification. One, you said, was a retail developer that is showing a little signs of stress?

They actually, performance-wise, have been continuing to generate strong cash flow, but they have debt maturities that they're really unable to finance at this point.

Got you. And, sorry, Mary, if you mentioned, are each of these roughly about the same in terms of size to you guys, or -- ?

Two are a little bit larger than the third, but in the same neighborhood.

Okay. And the structure of the leverage lease, what is it? Are there capital calls or something on the securitization, or what is it that's making that stressed?

There's a conduit in the middle that has other operations than we've participated in, and so it's drafted money out, and that's the structural problem that we would talk about just kind of generally, Justin.

I got you. Okay. All right. Thanks, guys.

Sure.

And your next question comes from the line of [Brian Sabora] of Stifel Nicolaus. Please proceed.

Hi, good morning.

Hi, Brian.

Just a quick question on the overprovision. You've detailed the three credits. I was wondering if you could break down the 13 million overprovision between those three loans -- maybe not exactly the -- or an aggregate? And then how much you set aside for kind of the general risk in the weakening economy?

No.

Okay, okay. Fair enough.

I hope you don't mind me kidding with you, but --

No.

Thank you, first of all, for the comment, overprovision. We'll leave that as your words, not ours.

Fair enough.

We were fortunate to be able to do that. And while we use a formula to calculate roughly what our exposures are, I wouldn't feel that it's precise enough to give anybody those details. We tend to think of our entire allowance as available to absorb losses in the event that something should come upon us unexpectedly, and that's the primary way we think about it.

Okay. And just a quick question on the margin. You talked about in the second quarter kind of defending the margin. Now we're at a completely different scenario. We thought rates would be going up, not going down. But what's -- you've made your comments on fourth quarter margin, but what's your thoughts as far as defending the margin or maybe doing some strategies to maybe give up some near term expansion or -- for a longer term margin at a higher level, longer term?

Sure. That was part of our deposit pricing decision, actually. And as you observe, the environment has changed, the interest rate forecast has changed, and so our team watches that pretty closely; and when we get a clear signal that it's time to extend liabilities, that's probably what we will do. And we've been a little bit skeptical, both about return and credit on investment, so we just have let the investment side of our balance sheet come in a little bit here over the last quarter. We'll keep an eye on that. We think eventually there will be some clarification there, and there will probably be some asset or particular liability extension opportunities, and we'll pursue them when we think it's the right time.

Great, thank you very much.

Sure.

And your next question comes from the line of [Sarin Ryobu] of BlackRock Financial. Please proceed.

Hi, how are you?

We're fine, thanks.

Quick question. And I guess -- I'm not sure if I'm going to be able to get a full answer, but with regard to those three loans that were put on the special watch, can you give a bit of better color on how much do the current reserve -- how much does it cover the loan? So basically is it -- probably not 100% but how much overprovided those loans are? And then any detail on how big those loans are? And then on construction loans, it's one of the two. What's your overall exposure to this retail development, both in Hawaii as well as a percentage of total loans?

I have banned Mary from saying anything more about them. (LAUGHTER).

Okay.

We think we're adequately reserved, given where we stand right now. And none of these loans are of such a size that they stand out in the valuation of the Company or our financial performance going forward. So they're all manageable. We are a loss-averse company, so any loss would be disappointing to us. But right now we think, based on what we see, we've been pretty conservative but prudent in providing reserve for these overall. And we'll see how the credit market goes. If credit loosens up, the one company should be able to refinance just fine. They're a solid company with a great reputation. But we're just going to have to see what the fourth quarter brings us.

Okay. And then another one -- another quick one. On the conduit, is that off your balance sheet, or --

Oh, it's somebody else's conduit. We just bought into it; and as we watched what was going on here, in the credit markets, closer examination tells us that it's not a direct flow from the ultimate lessor of the property to us as the financier. So we've got some items our team is going to have to work on over the course of the next six months.

You're not the back stop, right? If that conduit gets in trouble you're not liable to go in and start providing financial support, are you?

No, no, no, no. This is a purchase deal.

I understand, okay.

It's -- I'm afraid you may be looking at this as more complicated than it is.

Okay.

A sales person came to Hawaii and enticed our leasing people to invest in this lease.

Oh, okay.

When things looked good, we were told this is a great structure; and now there's a little bit of stress in the economy, and it's not such a great structure.

Okay. And then last question, on the margin. You mentioned that the jumbo rates of Hawaii are still below those in Maryland, and then you also said that there had been an in-market competitor that's been very aggressive on pricing. Is that the main reason? And I was wondering if you could -- who that bank is, if you can name it -- if you can.

We can't. We're don't -- we're trying to describe the market, not the other banks. And I'm sure there's a broad range of prices or rates on jumbo loans around the country. But we just look at some of the published rate sheets from some of the larger mortgage lenders on the mainland and see a disparity between what they're quoting and what appears on the rate sheets of the banks in Hawaii. And so when we look at our own pricing and profitability for those loans, we ask if we want to put on assets with residential real estate credit risks at that yield, and our calculations say not right for us.

Great. Thank you.

Sure.

And your next question comes from the line of John [Flanagan]. Please proceed.

Al, I'm very shocked at the degree of decline in August arrivals. I wonder if you have seen it that soft in recent years, and are there any hotels or resort properties that are kind of extended in this environment that could be problems for you guys?

Yes, John, it seemed to fall off pretty significantly; and anecdotally, depending on who we talk with, we see extension of that at least up until the holiday season. When we talk with our resort customers, who are in most cases deposit customers, we see a broad range of information from those who have been running in the 90s on occupancy percentage, down to those that I think are bearing the brunt of this. That's the color I would provide. Peter, you get a chance to touch base with people in the marketplace, too. What are you hearing? Anything in addition to that for John?

No, I think that's the right color on the topic. One of the other pieces that we're seeing is that the larger operators -- the operators with rewards programs -- are faring a good amount better than some of the smaller independents that have cropped up over the past several years. So in our client base, we tend to be banking the larger hotel companies -- the more named companies, if you will. We're not seeing quite as much of downside that may be in the marketplace.

Also, could I ask Cindy if Nordstrom's has opened? And how it looks?

Yes, John, it is -- and I've been very patriotic in supporting them.

Have you? That hasn't helped the stock.

Cindy is doing as much as we will let her do. We're happy to have them here in town, but they get caught, I'm sure, just like everybody else when arrivals slow down, makes everybody a little less confident.

Their timing doesn't look fabulous. Thanks a lot.

I suspect they're a long-term investor in this. I can appreciate how their team must feel right now; because as you observe, arrivals have slowed down, and that's got to be hurting their business. But long term, it's a nice facility, and we're optimistic it's going to do well for the folks at Nordstrom and for us here in Hawaii, too.

Good. Thanks a lot.

Going to come out and see us, John?

Oh, I'm trying to, but if the market goes another 200 points, I may have to forget it.

If the goes another 200 points room rates will be even cheaper. It's probably a better time come.

That depends where I'd be staying.

We'll get ourselves in trouble here.

I don't want one of those little dinky motels.

Okay. We got you.

Thanks a lot.

Thanks.

And your next question comes from the line of Aaron Deer of Sandler O'Neill. Please proceed.

Hi. Good morning, everyone.

Hi, Aaron.

Most of my questions were answered, but maybe just a couple. With regulators having recently completed their annual "Snicker" view, I was wondering if you could give us an update on the performance of that portfolio, and what is that down to at this point?

We're down to about -- let me just double-check my quote. We're down to about 440 million in outstandings. We've actually been down over the past two years versus the industry total that's been climbing at double-digit rates. And the quality of our portfolio is well below that that was disclosed within the national market.

Well, better than better.

I'm sorry, that's what I mean.

Make sure everybody understands our directional sense.

Yes.

Okay, very good. And then trust and asset management fees were down some. How reflective is that of what's been going on in market values, at least up through the end of the quarter, and what do are you expecting in that business for the fourth quarter?

The -- there's some seasonality in Q3, so $500,000 variance from Q2 on tax services, first of all. So that gives you -- call it an $800,000 Delta on linked basis, and our sense is the majority of that is mark decline. We did have some assets just roll off out of the firm. But most of it is market decline, and for the fourth quarter, I think we'd anticipate to see -- see the trend in trust fee revenue trend out of the overall market.

Okay. Great. Thank you all.

Thanks.

And your next question comes from the line of Lisa Walker of BlackRock Financial. Please proceed.

I just had a follow-up on your comment on the evolutionary nature of the TARP, the capital injection. And is that the -- you don't know what the final outcome as far as what the requirement -- or what the -- what it will look like to the participants, or -- I just wonder what -- and I'm wondering if you think it would be more positive or negative, or you just don't -- or it's just uncertain as what you're talking about when you say evolutionary.

I think it's just uncertain to us -- you know, there's just several ways to look at it. Let's just say that insurance companies get invited in, and that changes the mix and intent of this a little bit. I will try to, I think, keep it as we're thinking about it. The original intent was to help credit availability. We feel we have sufficient resources to meet the credit needs in the marketplace. Then there was a lot of talk about, well, this is the right thing to do, and it should be a back stop, a (inaudible) in capital resources, and we would think most banks should participate. It doesn't -- it isn't clear to us yet that that's exactly the case. And so we're just going to watch, try to get as much insight as we can. As I said before, our motivation for participating would be what's in the best interest of our shareholders long term. And so we have to find a way to add value, and we only want to do that if we can participate to the intent of the program. I mean, it's government money, right? And that seems to me the responsible thing to do.

And is your thought that they -- it will limit your ability to be flexible in actions that you want to take currently?

Well, you know, our capital management program includes a share repurchase, and we've been able to maintain annual dividend increases here, and that program has worked pretty well for us and for our shareholders, and you are limited in both of those if you participate in the TARP. Plus, it makes the government, when you weigh in the warrants, if you take the maximum, in our case, approaching 25% shareholder. The initial intent is that they're not an active shareholder, and they're not going to participate in the management. That's the initial intent. So we're just cautious about it. You got any insight for us?

Well, I'd be interested in your view on -- like the names that we've seen that have come out today, it doesn't seem the same as what we saw in the first round. And some of the names -- I know Secretary Paulson had said he's looking at strong banks, which I think that's why we're talking; but then I think the list I saw today doesn't imply that that's exclusively what they're looking at.

Well, I can't comment on that. We just want to make sure if we do anything, people say, "well, there's another strong bank that -- they got some additional capital".

Right. Thank you.

Thanks.

Your next question comes from the line of Andrea Jao from Barclays. Please proceed.

Hello again.

Andrea, you're back.

I know. Couple of follow-up questions. First, how do we think about the tax rate for full year '08, given that, you know, there have been some significant nonrecurring items this quarter, and I think also in the first quarter, right? So what does that imply for how much more taxes you need to recognize in the fourth quarter? And then how do you think of the tax rate '09?

Yes. Obviously, the first and third quarters were unusual. Perhaps the second quarter would be more representative of a typical period without so much of these special items. So that might be one way to look at it. And as to 2009, I don't really have any other comments, other than again, maybe the second quarter is the best indicator.

Okay. Then my follow-up question is, I was hoping could you share with us your outlook for the interest rate environment and the economy, both for the remainder of '08 and into '09? And then given that -- those assumptions, do you think your balance sheet will continue to shrink even through 2009?

Andrea, I want to help you, but I don't know that we've got any great insight into anything. I'll tell you, we're prepared for whatever reasonably may come along, with the expectation that it might not even be reasonable in what comes along. The conventional wisdom is short rates get reduced here in the near term. I think we would probably follow that conventional wisdom. And then, there's just a lot of forces at work out there. We're going to have an election, and you brought up tax policy. We're not in favor of tax increases for banks, by the way. And we'll have to see -- there's just too many factors for us to say. I will tell you we will allow our balance sheet to move in either direction depending on what we think will be best for the long term and what's in balance with the demands in our marketplace. We're not going to force lending, and we're not going to back away from opportunities to put good loans on the books.

Okay. Thank you.

Sure. Thanks, Andrea. And your next question comes from the line of Justin Moore of Lord Abbott. Please proceed.

Sorry to lengthen this call. One question I forgot was on the bonuses on the two million. Al, back in the first quarter, I think it was, with the Visa winnings -- or the MasterCard there, rather -- you had set some aside. Was the business tracking better than you guys had budgeted out at that time requiring the additional 2 million, or what's the little extra umph there?

Yes, back in the first quarter, we had a different interest rate scenario; and looked like we were going to get a disproportionate share of our annual earnings in the first quarter. And so that's why we accrued up there. And now we're looking at what the economy and performance looks like into next year, and so we just got ourselves accrued up here at the end of the third quarter, not knowing what comes our way.

Got you, okay.

We've been pretty conservative in terms of how we manage the Company; and when we get a little bit of positive news on the income side, why, we try to share that with our employees when we can, or at least indicate that's our intent.

Yes. Fair enough. Thank you, guys.

Yes.

And your next question is a follow-up question from Bobby Bowlin of KBW.

Just quickly, deposit insurance assessments, what are you seeing in those -- in terms of that?

Kent?

It's going to go up. It's going to be a more expensive item for us going forward. I mean, they're talking about perhaps a doubling of the assessment.

Okay, so that could be pretty significant to the other expenses line?

Well, it's going to be important to us.

That was it. Thank you.

Thanks.

You have no further questions. I would now like to turn the presentation back over to management for closing remarks.

This is Cindy, and we'd like to thank everyone for joining us today and for your interest in the Bank of Hawaii. As always, if you have additional questions or need further clarification, please feel free to contact me, 808-694-8430. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.