Bank of Hawaii Corp (BOH) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Bank of Hawaii Corporation earnings conference call. My name is Josh and I'll be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) I'd now like to turn the presentation over to our host for today's call, the Director of Investor Relations, Cindy Wyrick. You may proceed.

Thank you, Josh, and good morning everyone. Thank you as we review the financial results for Bank of Hawaii fourth quarter of 2009. Joining me this morning is our Chairman and CEO, Al Landon, our President and Chief Banking Officer, Peter Ho, Vice Chairman and Chief Financial Officer, Kent Lucien, and Vice Chairman and Chief Risk Officer Mary Sellers. Comments today will refer to the financial information that was included in our Earnings Release this morning. Before we get started let me remind you today's conference call will contain 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. Good morning, everyone. We're glad you joined us today. Before I start I'd like to make sure we're all clear that this is Bank of Hawaii earnings call.

In January of 2009, we concluded that Bank of Hawaii would not benefit from participating in the US Treasuries capital purchase program and declined to participate. We also decided that given the uncertain economic environment, Bank of Hawaii would focus on soundness as the primary measure of our success until impaired business models and institutions were brought right. Those decisions have worked out pretty well for our bank. As you can see from our earnings announcement, Bank of Hawaii was solidly profitable throughout 2009, albeit at lower levels than in recent years, that's lower levels than in recent years, and our bank remains very sound, and while we've seen some things brought right in our industry, there is still more work to be done to solidify the Financial Services businesses.

Like many financial institutions, Bank of Hawaii encountered more credit and risk issues in 2009 than in recent years and we took action to mitigate the risks and minimize losses. One result of the credit challenges was reduced profitability. Another result of the credit and risk issues in our industry was a flight to quality for deposits. Bank of Hawaii was a beneficiary of a significant deposit growth last year. At the same time there was little customer demand for loans except for low rate conforming mortgages. These events resulted in abundant liquidity and an increased investment portfolio with reduced margins at Bank of Hawaii. We also added to our reserves in capital each an important indication of soundness.

Kent will expand on some of the factors affecting our financial performance and Mary will comment on our credit quality measures. I'll come back and conclude our comments with some observations about our market and banking environment. Then we'll be happy to respond to your comments and questions. Kent, over to you.

Thank you, Al, good morning. Net income for the fourth quarter was $40.5 million or $0.84 per share compared to $36.5 million or $0.76 per share in the third quarter and $39.3 million or $0.82 per share in the fourth quarter of 2008. This quarter we realized $25.7 million in gains from the sale of securities in our investment portfolio and we have also completely liquidated our position in private label mortgage securities. Our return on assets was 1.31% and return on equity was 16.9% for the quarter. Our efficiency was 48% this quarter.

For the full year, net income was $144 million or $3 per share compared to 2008 net income of $192.2 million or $3.99 per share. As mentioned, 2009 net income includes $25.7 million of security gains and by comparison, 2008 results included pre-tax gains of $25.3 million from the redemption of Visa shares and the early buyout of an aircraft lease. Also in 2008, we recognized a $12.9 million reversal of income tax expense due to the settlement of SILO/LILO lease matters with the IRS. Our return on assets in 2009 was 1.22%. Return on equity was 16.42%, and efficiency ratio was 51.46%.

Our net interest margin in the fourth quarter was 3.57% compared to 3.85% in Q3. Our margin is lower due to a greater proportion of investments compared to loans, shorter duration and lower risk within our investment portfolio, and the elimination of private label mortgages from the portfolio. The credit provision in the fourth quarter was $26.8 million compared to $27.5 million last quarter, and included a $1 million add to the allowance for loan losses. Our allowance for loan and lease losses is now $143.7 million or 2.49% of outstanding loan and leases. Non-performing assets decreased slightly to $48.3 million at year-end from $48.5 million in the third quarter. Our credit provision for the full year 2009 was $107.9 million compared to $60.5 million in 2008 and we increased the allowance for loan losses by $20.2 million during the year. Non-interest income for the fourth quarter was $80.8 million, up $24 million from the third quarter and up $26 million from the fourth quarter of 2008, primarily because of the realized gains in the securities portfolio.

Full year non-interest income was $9.7 million higher than 2008. In addition to the securities gains, mortgage banking income was $14.8 million higher in 2009 while trust and asset management revenue was down $10.8 million. We also completed the sale of our Triad insurance business in the fourth quarter and realized a $1.5 million gain during the period. Non-interest expense totaled $88.5 million in the fourth quarter and included $6.1 million in compensation accruals. For the year, total non-interest expense is up $3.3 million from 2008. Excluding FDIC insurance, non-interest expense was down $12.6 million for the year or 3.6% lower. Salaries and benefits were down $3.4 million or 1.8% for the year due to fewer employees, lower bonus and incentive awards, and lower share based compensation.

The full year 2009 effective income tax rate was 35.2% compared to 28.7% in 2008. As mentioned, in 2008 we settled certain tax matters related to our SILO/LILO lease portfolio and recognized lower tax expense of $12.9 million. During the fourth quarter 2009, our effective tax rate was high compared to the third quarter due to book tax differences which were recognized with the Triad sale, and also a lower level of low income housing tax credits. We continue to experience good deposit growth in the fourth quarter. Period end deposits increased $160 million over the third quarter, consumer deposits were up $150 million and commercial deposits increased $113 million. Public and other deposits declined by $103 million. For the full year, deposits increased $1.1 billion or 13%.

Our investment portfolio now stands at $5.5 billion. The average duration of the portfolio is 2.9 years. We continue to invest in Treasury securities, Ginnie Maes, and Tips and have been reducing our interest rate risk by lowering our duration. Loan balances declined $172 million in the fourth quarter. Liquidity continues to be strong and at year-end, funds sold were $292 million. Our shareholders equity was $896 million by year-end and tangible common equity to risk weighted assets was 15.45%. Finally, our Board declared a $0.45 per share dividend last Friday, and now, I'd like to turn the call over to Mary Sellers.

Thank you, Kent. Net charge-offs for the fourth quarter were $25.8 million up $3.5 million on a linked quarter basis. The increase is primarily attributable to a $3.8 million increase in net charge-offs in our commercial portfolio. Commercial net charge-offs include a $9.4 million related to a leverage lease for an airline that filed bankruptcy and $4 million in partial charge-offs related to three non-accrual construction loans. Consumer net charge-offs decreased slightly by $239,000.

For the full year net charge-offs were $87.7 million compared with $28 million in 2008. Commercial net charge-offs were $51.2 million an increase of $42.6 million year-over-year and included $13.8 million related to our legacy leverage lease exposure, $9.8 million for construction loans, $10 million related to a large national mall owner with operations in Hawaii, and $6.3 million for credit exits, taken to reduce greater future risk exposure. Consumer net charge-offs totaled $36.5 million, an increase of $17 million year-over-year, and included $6.7 million in residential mortgage loans, $12.4 million in home equity loans, $6.8 million in automobile, and $10.6 million in other consumer loans. Non-performing assets totaled $48.3 million or 84 basis points at the end of the quarter, down slightly from $48.5 million at the end of the third quarter and up $33.4 million from the fourth quarter of 2008.

For the link quarter, commercial non-accrual loans were down $10.7 million due to charge-offs taken and the transfer of a $2.8 million construction loan to foreclose real estate. Non-accrual consumer real estate assets increased $4.6 million. The year-over-year increase in non-performing assets was driven off the $20.1 million increase in consumer, primarily in residential real estate assets, a $10.6 million increase in commercial non-accrual inclusive of $3 million in loans held for sale and a $2.7 million increase in foreclosed real estate. Loans past due more than 90 days and still accruing interest totaled $13.7 million up $1.4 million on a link quarter basis. A $3.8 million increase in consumer loans, largely in residential mortgage and home equity, was offset by a $3 million commercial construction loan which moved to non-accrual and subsequently to loans held for sale given an executed letter of intent for the purchase of the loan.

Credit quality in our portfolio continues to reflect weak economic conditions both nationally and locally. Year-over-year increases in unemployment, coupled with declines in real estate values, particularly in the neighbor island residential market, have increased stress on the consumer mortgage portfolios and residential homebuilding exposures. However, at the end of December, the statewide unemployment rate improved slightly to 7% on a seasonally adjusted basis, compared with 7.2% at the end of September. Residential real estate prices have also continued to hold their value better than many mainland US Markets, particularly on Oahu where the median home price declined held at 7.9% for the year. At the end of the quarter residential mortgage loan out standings totaled $2.2 billion and home equity outstandings totaled $922 million. $19.7 million of these loans are secured by homes outside our market.

Throughout 2009, delinquencies and losses in our residential mortgage portfolio were driven by land loans and loans on the neighbor islands, primarily second home and investment properties. As we've discussed previously, the neighbor islands experienced higher unemployment rates and greater real estate value declines than Oahu. In the fourth quarter we continued to see modest increases in higher risk exposures within our consumer real estate assets. At the end of the fourth quarter, our land loan portfolio totaled $37.9 million, down $5.3 million on a link period basis and $16.7 million year-over-year. Neighbor island exposure totals $32.5 million with $32.4 million for second home and investor properties. Neighbor island residential mortgage loans totaled $683 million at the end of the quarter. $13 million of this exposure is considered higher risk, up $4 million on a link quarter basis and $10 million year-over-year. These loans originated after 2004, have monitoring credit scores less than 600 and loan to value ratios greater than 70% based upon origination values. $6 million is for second homes or investor properties.

Oahu residential mortgage loans totaled $1.3 billion at the end of the quarter. $14 million of this exposure is considered higher risk. The $2 million increase from the third quarter and a $10 million increase from Q4 2008. These loans were also originated after 2004 and now have current credit scores less than 600 and loan to value ratios greater than 70% based upon origination values. $5 million is for second home or investor properties. In our home equity portfolio, $23 million is considered higher risk, a $3.7 million increase on a link quarter basis and a $13.2 million increase year-over-year. These loans were also originated after 2004 and now have monitoring scores less than 600 and combined loan to values greater than 70% based upon origination values. $21 million of the high risk exposure is on Oahu.

At the end of the quarter, commercial construction loans totaled $108.4 million with $57.3 million in residential homebuilding exposure. $31.1 million is considered higher risk given sales in these projects have slowed and equity margins have contracted. $9.2 million of the higher risk exposure is for projects outside of Oahu, with $6.3 million of this on non-accrual at the end of the quarter inclusive of $3 million in non-accrual loans held for sale. As we discussed last quarter, the largest higher risk residential homebuilding exposure is $22 million and is for a borrower with diversified real estate operations, including homebuilding on Oahu whose financial performance is constrained by current market conditions, primarily in the other markets they operate in. The borrower and sponsor continue to focus on selling assets to reduce leverage.

Commercial mortgage outstandings were $841 million at the end of the quarter up $64 million on a link quarter basis and $101 million year-over-year, due in large part to the par purchase of $47.5 million in season loans in December. These loans are all to borrowers in our markets. Commercial mortgage out standings include $316 million in owner occupant loans and $525 million in investor loans. The average owner occupied commercial mortgage loan is $1 million with a current weighted average loan to value of 72% and average current debt service coverage of 1.3 times. These loans render it based upon the cash flow of the business given the real estate is utilized in the business operation, with the real estate evaluated as a secondary source of repayment. Investor commercial mortgage loans are under written based upon the economic fundamentals of the property and the overall financial where with all of the borrower. Emphasis is placed on the ratio of cash flow to the loan debt service requirements after considering vacancy, property expenses, and stressing the interest rates. Our average commercial mortgage investor loan is $1.5 million with a current weighted average loan to value of 57% and average debt service coverage of 1.4 times.

In our commercial mortgage portfolio, $16 million in investor loans are considered higher risk, while $13 million of the owner occupied loans are considered higher risk. Of this, only $1.2 million was on non-accrual at year-end. In the fourth quarter, we increased our reserve for loan on lease losses by $1 million to $143.7 million or 2.49% of total loans and leases. The allowance considers assets with higher risk and our legacy aircraft leverage lease exposure which presents greater risk since our equity position in these assets is structurally subordinate to [this debt]. In keeping with our focus on soundness we increased the allowance for loan and lease losses by $20 million in 2009. I'll now turn the call back to Al.

Thanks, Mary. Kent. Wow, you two covered a few numbers this morning. Let me talk just a bit about the economy. Here in Hawaii, observers are telling us the economy is stabilizing. We're seeing forecasts of slowing, slowly recovering visitor arrivals and home sales. Although home prices for many owners in Hawaii have held up relatively well, some are significantly depreciated. Unemployment statistics for Hawaii look better than some other states, but there remains significant underemployment and consumer spending remains at low levels. We also see the serious challenges our political leaders face as they confront governmental budget gaps.

Other observers, mostly outside Hawaii, are indicating they see signs of economic strengthening. At Bank of Hawaii we're prepared for recovery, but have generally low expectations for broad based economic expansion in 2010. Accordingly, we begin the year with our plan to continue to manage for the weakened economy. We will continue to seek additional business opportunities and ways to offer value to our customers, and we remain focused on controlling risk and expense. Soundness remains a key to shareholder value. Bank of Hawaii, we're going to continue to be safe, balanced, and prepared. Shall I give a weather forecast before we go to questions or let's go to questions and we'll finish up with the weather forecast.

(Operator Instructions) Our first question comes from the line of Ken Zerbe from Morgan Stanley. Ken, you may proceed.

Thank you. I guess the first thing I want to discuss is just the outlook for net interest margin. Obviously with the sale of the private label mortgages, looks like the yield you were getting on your available for sale securities fell pretty sharply. I guess about 80 basis points on a quarter-over-quarter basis. Going forward, do you have any plans to replace those securities with other higher yielding investments or should we basically be sort of expecting a nim of 350-360 going forward from here?

Well, Ken, first of all, it's unlikely that we would be reinvesting in private label securities at this point.

Impossible.

I just can't see that.

Well maybe not private label, but any other investments or where did you invest the money?

Here is how the portfolio changed between Q3 and Q4. About 2% of the portfolio was in private label securities, about $100 million, and about 86% was in mortgage backed securities and another 11% or so in treasuries. Q4, of course we sold out the private label securities and the treasuries went from 11% to 13% and the mortgage backs we kept at 86% of the portfolio. That's a pretty good composition for us that the mix between mortgage backs, treasuries and Tips, we look at this all the time, but Q4, we were very comfortable with the balance there.

Going forward, you have to use some of your judgment on the level of overall rates. We're anticipating at some point that rates are going to go up, in particular that the long end of the curve is going to shift upward and it may very well may come to pass that mortgage spreads increase, to the extent we're reinvesting at higher rates, it has the prospect of higher margins though I'm not going to predict that. I'm just saying that's a possibility. So that's how I'd answer your question, Ken.

Okay, that makes sense, thank you, and then the other question I had just maybe if you could just give us an update or reminder of where you stand with the leverage of these portfolios and the reserves you have on the remaining balances there?

Yes, we have about $50 million in airline exposure and we're reserving about 47% on that. In addition, we have about $200 million in other leverage lease exposure, about half of that is economically diffused leases.

Okay, great. Thank you very much.

Our next question comes from the line of Aaron Deer from Sandler O'Neill & Partners. You may proceed.

Hi, good morning everyone.

Hi, Aaron.

I guess following up on Ken's question about the mortgage backed securities that were sold to private label. Can you tell us what kind of loss was taken on those securities?

Yes, we realized $11 million loss on those, and so the $25.7 million gain that we reported was a net gain after the $11 million loss.

Okay, and then of the new securities that were added during the quarter, what was the duration on those and then where does the duration on the overall portfolio stand?

The overall portfolio duration is 2.9 years and just an average here, the new securities we added were a little bit less than one year, less than the average, but that's taking into account of the 2.9.

So there's simultaneous stuff going on, but they were about two year duration.

Yes, approximately.

About, I mean there's an interplay of these things and it's hard to give precise numbers on them.

I've got it, but that helps to understand the margin pressure in the quarter as well. So and then Mary, I was wondering if you could give kind of an update on the 30 to 89 days past due, at least kind of where those went directionally in the quarter or the magnitude and kind of what the trends were within the individual portfolios?

On a link quarter basis, we were up about nine basis points and from the first quarter of 2009 to the end of the year we were up about 13 basis points. Residential actually was fairly flat within that. Home equity saw probably the most significant increase, but it's a pretty mixed bag across the portfolio and the remainder of the consumer pieces.

And then I guess as a follow-up to that and then I'll step back. Amongst your high risk category of loans that you mentioned, I think the home equity was the one that was up and the other results showed some improvement and it wasn't up that materially, but is that due to falling FICO scores within the book or is that due to higher drawdowns on the lines or what stands behind that increase?

We really look at declines in FICO scores below a certain threshold and in this case 600,000 coupled with where they are property equity. So we're looking at anything that was greater than 70% at the time of origination.

Okay, so it was caused by more loans getting captured by those parameters, not by higher balances within the existing, is that correct?

No, that's correct.

Okay, thank you.

That FICO score was 600.

Oh, yes I'm sorry. Did I?

That was understood, thank you.

Just wanted to see if everyone is awake.

And our next question comes from the line of Craig Siegenthaler from Credit Suisse. Craig, you may proceed.

Thanks and good morning.

Hi, Craig.

First question, and I'm sorry but it's another one on NIM here, but and I know your following response to Ken's question that we have to do our own work with respect to interest rates, but how do you think about really one, the asset mix shift of securities from loans and really two, the lower duration from further reposition within the securities portfolio? Do you think, how do you think these two really could trend over the next quarter based on what you're seeing so far?

Kent do you want to address it?

Yes, the loan number as a function of the economy and demand for loans, we have seen a downward trend throughout 2009. The economy here, as Al had mentioned, is stabilizing, but we'll just have to see what happens to loan balances. On the duration, I think we found a pretty good and comfortable mix in the fourth quarter. That's always subject to reevaluation and change, but we were pretty pleased with our composition in the fourth quarter.

So it kind of sounds like because the economy is still weak there could be a little bit more downward trending in the loan versus kind of security mix and really on the second part, it sounds like in terms of repositioning you are pretty comfortable where you are now, so there shouldn't be additional repositioning in the first quarter.

Well, as I'd mentioned, this was a long term situation, but we do have to respond to the marketplace and things can change within a period. So the quarter is just not over yet, so I hate to predict it or give you too much of a forecast on that, but as I said, the actions that we took in the fourth quarter are pretty consistent with what we're doing right now with the portfolio.

As we look at the long term, we don't expect rates to stay at this level over the long term and so we positioned our portfolio for adaptability, okay? We see a lot of appreciation in our portfolio and that sits in our capital accounts and as rates go up in the future, that's at risk, so maintaining that or capturing that is certainly one of the things that is an objective or consideration as we look at what we're going to do in the upcoming few quarters here. So if we saw opportunities in the portfolio to keep our duration short and to preserve capital, I think it's fair to say we would look at those opportunities.

Thanks, Al and just one more follow-up question on share based comp and cash grants. It ticked up in the fourth quarter. Is this just a seasonal fourth quarter item or that we should expect every fourth quarter in terms of the uptick or does it happen in other quarters?

The way we're looking at equity based compensation is to grant cash to our senior employees with the expectation they will use it to purchase equity. That gives us the efficiency of determining when we take the expense, so we harvested some gains in the fourth quarter that we frankly hadn't anticipated would be there, the year turned out better than we thought and so it was an opportunity to share some of that benefit with our senior managers. We hadn't done that for over a year in most cases. We're going to continue to look at that tool and the flexibility it offers us. We'll just see what the future brings, but right now, we've got sort of a years worth of coverage in equity grants out there for our managers. So hopefully that will take care of everybody's needs in sort of a balanced fashion and continue to give us flexibility when we take those charges.

The other reason we're doing that is it's a pretty efficient use of money. We found ourselves here in the dislocation of the last couple years taking a charge to earnings for an amount greater than the value of the stock that the employees were getting, either restricted stock or other vehicles and we didn't, I didn't like that inefficiency. So this way, people won't get cash and determine when to buy their stock, but generally it will have the same value as the charge to earnings.

Got it, thanks for taking my questions.

Sorry for the long answer, but we're in kind of an outlier position here both in terms of where we are with liquidity and investment portfolio and with what we're doing on equity compensation and so I thought it was maybe helpful to give a little bit of color around that.

And our next question comes from the line of Brett Rabatin from Sterne Agee. Brett, you may proceed.

Good morning, everyone.

Hi, Brett.

Wanted to first ask a question on the asset quality caller guidance that you gave or just discussing the loan portfolio and credit quality in particular. I'm curious, Mary if we exclude a couple of the larger charge-offs this year that related to specific credits, the mall, the leverage style lease this quarter. Is it fair to assume or would you essentially say that 2010, in your prepared comments, looks a lot like 2009 in your best guess judgment in terms of credit trends, provisioning charge-offs et cetera?

Well as a risk person I never like to predict this, but I would say at this point, I don't see some of those large charge-offs occurring, absent other events in the market within our commercial portfolio.

Okay, and then to circle back around to liquidity for the fifth or whatever time it is. If I look at the average that funds sold versus the end of period, obviously the quarter was more liquid on average than it was at the end of the year and just wanted to ask if the Fed funds whole position if that's something that could be lowered when presumably the Fed's stops buying mortgage back securities after the end of March, if maybe you can deploy some of that liquidity more aggressively or if you're actually just looking for the best opportunities as the year proceeds.

Brett, yes, that's a very good point. We have a lot of liquidity. It's quite frankly more than we really need for the basic business and they should become and is, what's the correct reinvestment point. So to the extent there are opportunities if and when rates move up, probably the funds sold position would tend to go down.

Okay, well nothing more specific on that front. And then just lastly. Just wanted to ask from an interest bearing cost of funds perspective, do you feel like we're essentially approaching the floor here or do you think you'll continue to have some ability to lower your cost of funds and obviously core deposit growth continues to be strong. Will you reduce the borrowing base, et cetera, in the next few quarters?

Well, we're getting to a point where it's hard to lower the funding costs and in particular, if the rate environment changes here and rates go higher, that would become difficult. So I wouldn't expect funding costs to trend much lower.

Okay, and what about the repos on the liability side?

Yes, we have some term on that and so as those mature, we'll look at whether we still need to use that source of funding. It may very well be that we don't, but we'll see.

Okay.

That's contractual, Kent, you're sort of locked into --

Yes, we're locked into term on that.

But it's safe to say you and Dean watch this pretty close. Every opportunity, we've got a marketplace where we've got an obligation to take care of some of our customers and we're going to continue to do that. The rates being where they are right now, it's short-term to think about further cuts because it has to be a fair proposition in value for the customer. So far, safety has been its own reward. As the environment changes, we'll probably see more emphasis on yield and that's kind of behind your comment that it's going to be difficult to lower our costs very much here as we go forward, and at some point in time as rates increase, we'll look at a window to put some more time deposits on. We've been continuing to minimize that for the last couple years, but we've got a lot of funding capacity there and it may be smart as we see longer rates start to go up to put some more time deposits on it, which could have it even an opposite effect.

Okay, great. Thanks for all of the color.

Our next question comes from the line of Erica Penala from UBS. You may proceed.

Good morning, everybody.

Hi, Erica.

My first question surrounds forward strategy. Al, what is your appetite for doing a deal assisted or otherwise for, let's call it a larger institution that could be within your footprint?

Oh, well, thanks, Erica. There are four criteria that we have talked about consistently for several years, you have to find an attractive market and we think Hawaii is that. We have to be able to compete effectively in that market, and we can do pretty well here. Then there has to be a reasonable price of entry and we have to feel comfortable that we can manage it. Those are the four criteria we use for every opportunity in Hawaii or outside. I would say that I would remind everybody that Hawaii is a concentrated market and in general, we couldn't do an acquisition. So it would have to be an unusual circumstance.

But outside of that unusual circumstance, do you think you have the depth you need in Hawaii?

We have good depth in Hawaii. We've got good market share and we've been able to grow deposits through this, but there are some ways I could see that we could benefit our shareholders if we had an even larger presence here in Hawaii.

And has your appetite changed for doing anything in the mainland? Are you still not (Inaudible).

We continue to look at that, Erica, but that's why I went over those four criteria because we really haven't seen anything that says, gosh, there's a compelling reason to change our strategy or our assessment criteria at this point in time. There may become an entry point that is so attractive or a marketplace where our brand works so well that we would respond to that, but generally, it's just pretty difficult to manage from remotely, and we're doing pretty well in our marketplace here. That's probably what we'll continue to focus on.

And one more follow-up question for Mary. Mary, the $1.3 billion in Oahu based residential real estate credits, could you give us a sense on what the delinquency and non-performing loan trends are just isolating that bucket?

Mary you're looking for individual statistics? I don't know if we've got them.

I don't know if I have that with me today. I can get back to you with that particular segment.

Okay, I'll follow-up off line. Thanks for taking my call.

But generally --

It was flat.

Yes, the trends aren't moving significantly in the Oahu market, but the economy is slow so you expect delinquencies to be moving against us a little bit. And I don't think there's anything in Oahu that would suggest it's different than the rest of the market.

Got it. Thank you.

Our next question comes from the line of Bobby Bohlen from KBW. Bobby, you may proceed.

Thanks for taking my question, and I think I heard this rate. There was some commercial real estate loans that were purchased in December; is that correct?

Correct.

Was that I'm assuming some type of a portfolio that was purchased. Were those full relationships or is that something we can maybe expect the deposit side of that relationship to still come over saying it was pretty late in the quarter?

Bobby, this is Peter. Those were predominantly commercial mortgages. So there is some relationship opportunity attached to that, but basically we're looking at more for the asset to purchase.

Okay so there wasn't a full kind of deposit relationship coming with those when you purchased it?

There was -- let me say that the structure of this transaction did not include encompassing the deposits as well.

Okay, the rest of my questions have been asked so thank you.

And our next question comes from the line of Brian Zabora from Stifel Nicolaus. Brian, you may proceed.

Thanks. You did a quick question on the gain on sale from the insurance subsidiary. Did that run through other fee income?

Yes.

So is the insurance revenues in the quarter about $2.3 million a decent run rate going forward?

Yes.

Okay, and were there any expenses tied to that subsidiary that you recognized in the fourth quarter that might go away going forward or is the fourth quarter number excluding a insurance expense from that unit that you sold?

Yes, about $3.5 million direct per year expense wise.

Okay, so was that in the fourth quarter at all or was that already exited?

It was a bit noisy in the fourth quarter because we had some transition costs built into that.

Okay, all right, thank you very much.

And our next question comes from the line of Joe Gladue B Riley. Joe, you may proceed.

Yes, hi. Just a question about the provision reserve levels in provisioning and of course you added I guess just a little bit to the reserve this quarter, about $1 million. What are your thoughts on going forward? Do you think you're getting close to a time where you can stop any excess provisioning or just what are your thoughts going forward?

Wouldn't that be nice? I don't think it's a time where we can make that call yet. We've been pretty consistent over the quarters of saying that we think reserves are advantageous in the economy right now and it's a little bit difficult because we disclose one number, the aggregate, but within that number then there are allocations to various components of our portfolio and we do a pretty comprehensive exercise each quarter. We certainly look for the day when we can stop growing that reserve and reserve coverage, but we're going to have to continue to monitor. I think it's, well, I think that's just where I'll stop. Just too early for us to make a prediction, Joe, as to whether and when we'll be able to stop growing the reserve coverage.

Okay, fair enough, thank you.

You want to add to that Mary?

No, I agree. Look at it each quarter and see where we are and what directionally we think we need to do.

Okay.

And our next question comes from the line of Al Savastano from Macquarie. Al you may proceed.

Good morning everyone how are you?

Hi, Al we're fine.

Good to hear. Can you just give us a little more color on the CRE loan purchase, what was the balance and what kind of yields are you getting on those and would you do that again?

Sure. The balance is $47.5 million. That was 27 loans, portfolio is highly granular, average loan size was $1.7 million, median was $1.4 million. From a risk standpoint, the loans that we've on boarded pretty much fit straight into the sweet spot of our portfolio, our existing portfolio, and each of these credits was individually under written, so there's no blind pool within that portfolio. So to answer your second question, I think if we had the opportunity to take a look at a similar transaction is such we do that.

Peter two things, geography on the loans?

Geography is all void. You also asked about yield and tenor, that's six and six.

So 6% yield and six year effective life?

Yes.

All Hawaii based loans.

Correct.

Great, thank you. And just on the margin, can you give us an idea of what it was either in December or at the end of the quarter?

This is overall net interest margin?

Yes, I mean just kind of want to get a starting point for 2010.

So I'm sorry, your question, what was it for the single month of the quarter or, the average was 357.

What it was for December or at the end of the quarter.

After we got the security sales done.

Yes, it's very similar to the average for the quarter.

Perfect, thank you.

At this time we are showing no further questions available. Cindy Wyrick, you may proceed.

Cindy, can I do a weather forecast?

Absolutely.

Supposed to be a high of 80 every day this week, the fog is clearing out and that means the trade winds will be back. The airline prices are reasonable, hotels have plenty of room, so this would be a great time for anybody to come visit Hawaii. Now, Cindy?

I'd like to thank all of you for joining us today and for your interest in Bank of Hawaii and definitely come visit. Take care and have a great day folks.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.