Bank of Hawaii Corp (BOH) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q1 2010 Bank of Hawaii Corporation earnings conference call. My name is Katrina and I'll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Cindy Wyrick, Director of Investor Relations. Please proceed, ma'am.

Thank you Katrina, and good morning everyone. Joining me this morning for the call is our Chairman and CEO Al Landon, President and Chief Banking Officer Peter Ho, Vice Chairman and Chief Financial Officer Kent Lucien, and Vice Chairman and Chief Risk Officer Mary Sellers. The comments this morning will refer to the financial information included in the earnings announcement this morning.

Before we get started, let me remind you that today's 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.

Now I'd like to turn the call over to Al.

Thanks, Cindy. Good morning, everyone. We appreciate you joining us today. Bank of Hawaii started off 2010 with a good quarterly earnings performance. As a result, we've seen improved profitability, increased reserves in capital and abundant liquidity in funding. We slowed the growth of the bank a bit as there has been little demand for prudently underwritten loans.

Kent will comment this morning on our financial performance and Mary will comment on credit. Kent?

Thank you, Al. Good morning. Net income for the first quarter was $52.7 million, or $1.09 per share, compared to $40.5 million or $0.84 per share in the fourth quarter and $36 million or $0.75 per share in the first quarter of 2009. This quarter we realized $20 million in gains from the sale of securities in our investment portfolio, compared to $25.7 million in the fourth quarter. Also included this quarter were $2.8 million in interest recoveries from two commercial loans. The first quarter of 2009 included a $10 million pretax gain related to the disposition of two watercraft leverage leases.

Our return on assets in the first quarter improved to 1.73%. And return on equity was 22.54%. Our efficiency ratio was down to 45.5% this quarter. Our net interest margin in the first quarter was 3.72%, compared to 3.57% in the fourth quarter. Our margin is higher, primarily due to the $2.8 million in interest recoveries this quarter. Excluding the recoveries, the margin was 3.62%, up 5 basis points from the fourth quarter, due to a 10 basis point decrease in the rates paid on our interest bearing deposits. The credit provision in the first quarter was $20.7 million compared to $26.8 million last quarter. And included net charge-offs of $18 million, and a $2.7 million increase to the allowance. Our allowance for loan and lease losses at the end of the first quarter was $146.4 million, or 2.6% of outstanding loan and leases. Non-performing assets decreased to $41.6 million this quarter, down from $48.3 million at year end. Included in non-performing loans are $23.2 million in residential mortgage loans. While we were able to decrease NPAs this quarter, it may be a challenge to further reduce residential mortgage NPAs from these levels in the near term, due to the long-term nature of the resolution process.

Non-interest income for the first quarter was $71.8 million, down $9 million from the fourth quarter and up slightly from the first quarter of 2009. The decrease from the prior quarter was primarily due to a $5.7 million decrease in realized gains in the securities portfolio, a $1.5 million gain from the sale of our Triad insurance business and $1 million gain from the early termination of a leverage lease, both in the fourth quarter, and an $800,000 decrease in mortgage banking income. Included in the service charges on deposit accounts is approximately $6 million in overdraft fees for ATM and debit card transactions. Beginning in the third quarter, federal rules will limit such charges unless a customer consents to receive this service. Non-interest expense totaled $81.7 million in the first quarter, down $6.8 million from the fourth quarter, and down $6.2 million from the first quarter of 2009. The fourth quarter included $6.1 million in compensation accruals, a donation of $1 million to the Bank of Hawaii Charitable Foundation, partially offset by a $1.2 million reversal in the reserve for legal settlements.

The effective income tax rate was 31.5% in the first quarter, compared to 41.3% in the fourth quarter of 2009. And 34% in the first quarter of 2009. This quarter included the expected utilization of capital losses on the sale of a low income housing investment. Our effective tax rate was higher in the fourth quarter of 2009 due to book tax differences which were recognized with the Triad sale, and also a lower level of low income housing tax credits. We continued to experience deposit growth in the first quarter. Period end deposits increased $84 million over year-end, and $281 million from the end of the first quarter of 2009. The increase from year-end was primarily in seasonal public deposits. Our investment portfolio now stands at $5.6 billion. The average duration of the portfolio is 2.72 years. We continue to invest on a conservative basis, primarily in GNMA and Treasury securities and we have unrealized gains of $68 million in the portfolio.

Loan balances continue to decline and were $5.6 billion at quarter end, down $150 million compared to year-end with a decrease in every category. Liquidity continues to be strong and at the end of the first quarter funds sold were $269 million. Our shareholders equity increased to $43 million from year-end to $939 million, and tangible common equity to risk weighted assets increased to 16.75%. We paid out $21.6 million in dividends. We are approaching a point of capital sufficiency and we will be evaluating our capital management plans, including possible share repurchases. Our Board declared a $0.45 per share dividend last Thursday.

And now, I'd like to turn the call over to Mary Sellers.

Thank you, Kent. As Kent shared with you, net charge-offs for the first quarter were $18 million, down $7.8 million on a linked quarter basis. The decrease was primarily due to an $11.9 million decrease in net charge-offs in our commercial portfolio. As you'll recall, commercial net charge-offs in the fourth quarter of 2009 included $9.4 million for a leverage lease to an airline that filed bankruptcy. Consumer net charge-offs increased this quarter by $4.1 million. $3.9 million of the increase was in home equity. Approximately $2 million was due to a change in our home equity charge-off policy which includes the full balance charge-off when the customer becomes over 90 days past due and the bank does not hold the first mortgage.

Non-performing assets totaled $41.6 million, or 74 basis points at the end of the quarter, down $6.7 million on a linked quarter basis. The decrease was largely due to the payoff of a $3 million commercial loan reflected in loans held for sale at the end of 2009. Commercial non-accrual loans were down $4.2 million due to the payoff of a $900,000 commercial loan, and partial charge-offs totaling $2.7 million for one construction loan and two commercial loans. Consumer non-accrual loans increased $462,000, given a $3.3 million increase in residential mortgage loans due to five loans secured by property on the neighbor islands. This was offset by a $2.3 million decrease in home equity driven in part by the change in our charge-off policy. Loans past due more than 90 days and still accruing interest totaled $16 million, up $2.3 million on a linked quarter basis. A $3.6 million increase in commercial loans was offset by a $1.3 million decrease in consumer loans. The increase in commercial included two credits that are in the process of being refinanced. Both borrowers continue to pay interest and are expected to return to current status.

Credit quality in our portfolio reflects stabilizing but weak economic conditions, both locally and nationally. While these conditions continue to place stress on our consumer real estate assets, and residential home building exposures, we did see some stabilization this quarter. In the first quarter of 2010, delinquencies and losses in our residential mortgage portfolio continued to be driven off land loans and loans in the neighbor islands, primarily second home and investor properties. At the end of the quarter, our land loan portfolio totaled $34 million, down $4.4 million on a linked quarter basis and $17.1 million year-over-year. Neighbor island exposure totaled $28 million, with $25 million for second home and investor properties.

In our residential mortgage and home equity portfolios, we consider higher risk loans to be those originated after 2004, with current credit monitoring scores less than 600, and loan to value ratios greater than 70%. At the end of the quarter, $22 million or 1% of the residential mortgage portfolio was considered higher risk. This is a $1 million decrease on a linked quarter basis, but a $9 million increase year-over-year. $10 million of the higher risk exposure is for loans on the neighbor islands, with $4 million for second home or investor properties. At the end of the quarter, $25 million or 3% of home equity outstandings was considered higher risk. This is a $3.5 million decrease on a linked quarter basis and a $5.2 million increase year-over-year. $1.3 million of the linked quarter decrease in higher risk exposure was related to the charge-off policy change. $13 million of the higher risk exposure is in second position behind another financial institution's first mortgage.

At the end of the quarter, commercial construction loans totaled $104.3 million, with $53.7 million in residential home building exposure. $29.5 million is considered higher risk, down from $32 million in the fourth quarter, largely given the payoff of the non-accrual construction loan previously discussed. $6.1 million of the higher risk exposure at quarter end is for projects on the neighbor islands, with $3.3 million of this on non-accruals at the end of the quarter. In the first quarter, we increased our reserve for loan and lease losses by $2.7 million, to $146.4 million or 2.61% of total loans and leases. The allowance considers assets with higher risk and our legacy aircraft leverage lease exposure. This quarter we were able to sell our equity position in one of these leverage leases without incurring a loss. Reserves supporting this leverage lease were reallocated to support higher risk exposures. While asset quality measures improved and the level of higher risk exposures within our consumer real estate portfolios moderated this quarter, we remain cautious, given the fragile nature of the economy and the likelihood of a prolonged recovery period. Low job creation will continue to affect the level of unemployment. High rates of foreclosures and protracted resolution periods also extend the time of elevated losses on residential real estate. Accordingly, these factors and the potential impact they have on our loan portfolio have been considered in our reserve.

I'll now turn the call back to Al.

Thanks, Mary. Little bit about the economy. The major economic measures in Hawaii, as we've indicated in the announcement, show signs of stability, and there are even some positive indicators, including visitor arrivals and home sales. However, the most important indicators, jobs and personal income, remain unchanged. There are still major economic challenges ahead for us, including government budget adjustments, and continuing consumer anxieties. This week there's a lot of attention focused on regulatory reform. The progress of achieving regulatory reform has been disappointing, and important issues remain unresolved. We believe that regulatory reform is critical for our industry, and we support legislation and initiatives that will curb the excesses and the deficiencies that led to the financial crisis. Given the economic and regulatory scenario, we plan to continue our focus on soundness and deposit growth. Bank of Hawaii remains in solid shape.

We'd be happy to respond to your questions.

Thank you. (Operator Instructions). And our first question will come from the line of Ken Zerbe from Morgan Stanley. Please proceed.

Thanks. Ken Zerbe. I was hoping you could provide just a little more detail on how you're positioning the securities portfolio. With the $20 million of gains that you took, what exactly are you taking the money out of, the specific types of securities and what are you putting it into? Thanks.

Ken, yes, the portfolio, what we've been doing from an overall point of view is trying to maintain a relatively constant duration. And so at the end of the first quarter, the duration was 2.72 years. At the end of the year, it was 2.71 years, so very stable measure there. What we've been doing most recently is selling fixed rate securities and purchasing variable rate securities. So, for example, we've been acquiring floating rate GNMA securities, rather than fixed rate securities. So right now the variable rate, which includes Fed funds, TIPs, and floating rate securities, is 22% of the portfolio. It was about 17% at the end of the year. So that's what we've been doing.

At this point, are you guys, in the very near term, do you think you're asset or liability sensitive?

I think we're asset sensitive.

Okay, great. Thank you.

And our next question will come from the line of Craig Siegenthaler. Please proceed.

Thanks and good morning to you all out in Hawaii. Just a follow-up really on Ken's question, and I'm specifically talking about the held for sale portfolio there. How do you believe you are positioned for higher rates? I know you just told us the duration, but given the large size of this portfolio relatively, and the negative effects of the MBS, have you thought about the impact that you could see to the tangible common equity ratios and tangible book values through a variety of higher rate cycles? And also, do you have the percentage of the held for sale book that is now in a variable security versus what's fixed?

Craig, we don't think about that scenario you described more often than hourly. It's on our mind quite a bit. I will tell you that. Kent, do you have the variable ratio that Craig asked about?

Yes, as I mentioned in Ken's question, it's 22% right now variable, as opposed to 17% at the end of the year. So we have been shifting to a more variable composition of the portfolio. We do think about the risk associated with changes in interest rates. You're right, the portfolio is large. We measure that risk as best we can relative to duration and so we are attempting to manage that issue by ensuring that our duration is relatively low. So we think that the 2.7 years is relatively low.

One problem may be as rates rise the duration's going to extend just due to the convection of that portfolio. I'm wondering, first, have you thought about increasing your held to maturity side of the portfolio which is a little more defensive on the OCI part? And also was the variable number you quoted, the 22%, was that just of the available for sale or is that the entire securities portfolio?

It's the entire portfolio.

The thing I would add to this, Craig, is that we think about the size of the portfolio as well as the composition. And we think about that relative to our funding base and interest rate environments. As interest rates go up, we think it's going to have an impact on our funding base. The money will have greater value in some other investments. And so we want the flexibility to be able to reduce our portfolio holdings, if that situation occurs. So on the one hand we've got extension risk. On the other hand, we need to be able to gain liquidity pretty quickly. We're big believers that the interest rates are going to go up and that they will probably move substantially when that happens. And we want a portfolio that will, on the one hand, protect us, on the other hand be easily salable, so that we can adjust to our funding levels and see the increase in the margin that comes with that. So we're pretty conscious of extension risk in all of this. We're in a unique position here, in that we can harvest some capital that will otherwise go away on us. We've got an appreciated portfolio. We're benefiting nicely from the subsidy implicit in low rates and we want to lock some of that up for the shareholders.

And if I can just ask one follow-up question. Where do you think we are, roughly, in the home equity loss cycle here? And the reason I'm asking is we would probably be a little bit further along than we thought except it seems like there's additional pressure continually coming from Washington to charge down these credits which could help restructuring some of the efforts in the first liens. Could you just provide some commentary there on where you think we are in the cycle?

Mary, you want to add a little bit there?

Sure. I think home equity, as a residential real estate asset, gets caught in the prolonged judicial process to resolve these assets. So I think it will be prolonged as we see in our residential mortgage assets.

But seeing a time line on that depends on variables out there. What we're prepared for, Craig, is the possibility that it could go on longer than people would desire, but we just don't have a guide there so we're trying to do a prudent job of reserving and charging off. As Mary mentioned, we accelerated one of our charge-off policies this quarter, just because of the probability of recovering on a second when we're behind somebody else's first. Anything you want to add to that?

No.

Great. Thanks for taking my questions.

Our next question will come from the line of Brett Rabatin from Sterne Agee. Please proceed.

Good morning. Sterne Agee. Congratulations to both Peter and Al. First, just one housekeeping issue. The benefit from the low income housing investment, is that something that you expect to continue or is that more of a one quarter event?

You're referring to the effective tax rate?

Correct.

That was a one-time item in the first quarter.

Okay. And then I primarily wanted to discuss the reserve, and the commentary about the stabilization of the economy is great and there's definitely some trends that suggest that. On the other side, you mentioned the under-employment being somewhat of an issue and that being difficult to go away in a rapid fashion. The reserve continues to grow, particularly vis-a-vis both nonperformers as well as the loan portfolio. I know it may be early to say that there could be reserve releases, but is there, Mary, any possibility you might feel comfortable saying that the reserve has been built to levels that suggest the economy, basically the reserve's built and you're not going to have additional building going on in the relative levels?

Brett, you're struggling as much with that question as we are.

I'm sorry. Rambling.

We said all along, we favor reserves. And so we're going to do our best to be prepared for what may come our way. Clearly, when you see some stability start to develop in the economy here, and the reserve levels we've got, you have to think about just what you are, what time do you stop the build. I'm not sure we're there yet, but we are thinking more about it than we would have been a couple quarters ago. We'll try to do our best to let you know when we get to a point where we should be at that level. You can see, the growth has been modest and we've got some portfolio improvement initiatives we've been making that allow us repositioning of some of the reserve allocations. Those are signs of a point in the cycle where you start thinking about the question you asked, but we don't have an answer there other than to say that we think reserves are good resource to have. It's another form of capital that protects all of us and that's the way we look at it. Peter, you're nodding your head. Anything you want to add to that?

I think that's right, and I think as we work down the checklist of what we see in the economy, we're starting to see operating trends trending up. That's a positive. We're still seeing as secondary statistics unemployment and under-employment a little sticky. And I think the third piece that we're looking to see the impact of is what happens to the marketplace as this economic situation trends on longer than what we've been used to in prior cycles. So yes, I would say that we're still in a reasonably cautious mode, but there's certainly signs of optimism.

Okay. And then just last question, is there anything in the loan pipeline that suggests you guys will be producing loan growth at some point this year or is it fair to assume that the loan portfolio continues to have a little atrophy?

I think it's a mixed bag, Brett. The commercial segment I think lost $38 million in the quarter. I would say that half of that, a little under half of that were loans that we effectively pushed out, so performing loans that we felt less than comfortable with and were able to get placed someplace else. So I think the commercial portfolio is approaching stability. We've got a nice pipeline in the C&I category. We're beginning to see interest and activity from some of our larger real estate clients in the marketplace, which is something different from what we experienced last year.

The consumer book, though, is going to continue to be challenging and the residential real estate segment, which accounted for more than a third of our loan reductions over the past year, is going to be challenged as long as we are struggling to figure out what the right interest rate environment is for that product. On the consumer side, we've had a good amount of rundown and a lot of that is really demand-driven. We had a pretty good sized auto book and auto sales here have dropped to the $30,000 plus range from a peak of $70,000 a couple years ago. So I think it's a mixed bag. I think commercial is going to stabilize out for us, but I think there's probably potentially some more opportunities for reductions in our consumer and resi book.

Okay. Thank you.

And our next question will come from the line of Joe Gladue from B. Riley. Please proceed.

Good morning. Let me first just ask a net interest margin question. You did have a pretty good reduction in cost of deposits from fourth quarter to first quarter. Is there any of that left that we could expect to see?

Kent, the question I think in there, Joe, is can we expect to see deposit costs coming down?

Yes.

Yes, it's possible. I don't want to give you a forecast, but in this period we saw some of the CD costs come down as people rolled over previous CDs. And so it's possible that that could continue. But I think that the levels are going to be very modest.

If we get any improvement on the cost of funding side, it's going to be a decreasing rate of improvement for sure. We're just approaching that point in the interest rate cycle where further reductions won't help too much on most of our deposit products, and we've got a very low level of timed deposits right now.

Okay. And I've got just one other quick question. You said you did sell one of the aircraft leases. Wondering if you could remind me how many of those are left and any possibility you could be selling any of the ones you still have left?

We have $40 million in exposure left and that includes six airline leases, four of which are leverage leased and we continue to look for opportunities to reduce exposure in that legacy business as it is presented to us.

Joe, if you know anybody that would like a piece of that rock, give us a call.

All right. Thank you. That's all I had.

Our next question will come from the line of Aaron Deer from Sandler O'Neill & Partners. Please proceed.

Hi, good morning everyone. First, a credit question. Mary, can you maybe give some details on your activity in terms of restructured residential mortgages, in terms of volume, and then what you're seeing in terms of redefault rates on that.

Right now, we have about $9 million in restructured residential mortgage loans, and at this point we're really early into that in total and haven't seen too much in terms of redefault. We're really trying to work closely with our borrowers to keep them in their homes and that's on our portfolio owned portfolio.

Right. And then a couple of questions on your fee businesses. First, with the insurance, I was surprised to see that insurance revenues are still pretty low. I know you guys had sold the Triad business but I thought that we would see a little bit better on the revenue front. What should we look for going forward in that business line?

Kent, do you want to -- ?

Actually, we sold two of our businesses last year. And so, that took a big chunk out of the base there. Now, I think the result here in the quarter is pretty typical.

It is? Okay. And then similarly, on the mortgage banking business, I know that's down from where it's been in the past but still running pretty strong, I guess. Is this because some of the big national players are now gone from that market or what's your outlook for that business?

Peter, do you want to touch on that?

The reduction in the linked quarter really reflects lower production quarter versus quarter, and if you look at year on year, you see a pretty significant reduction there. That really reflects the fact that Q1 last year we had what I call a mini boomlet in refies. So that's very much volume driven. The dynamics of our gains really haven't changed much. It's just the volume through-put into that business.

Competition levels have affected us a little bit but I think it's more demand here in the islands that affected the year-over-year and quarter over quarter. I think most of the more innovative competitors were already gone about a year ago or had substantially wound down their creative financing opportunities. So that leaves a little bit bigger share for us of a little bit more responsible market, is what I would say, and we don't have exactly the map on that. Usually what happens at this point in the cycle, though, is you get some innovators coming back into the business and we would expect to see that probably sometime later this year. Until somebody does something with Fannie and Freddie, we're going to continue to see this silliness, as I would call it, go on, where you get government subsidized losses being pushed out through commissioned brokers. That's enough of my commentary, I'm sorry.

Thanks. That's helpful. And Al, congrats on your decision and Peter too, congratulations on your appointment to the CEO role for later this year.

And our next question will come from the line of Erika Penala from UBS. Please proceed.

Good morning, everybody. My first question is a follow-up to Ken's question. When you noted you were asset sensitive, when you run your models what kind of deposit pass-through do you assume in the event of short-term rates rising?

Deposit pass-throughs?

How much of the Fed tightening do you assume you're going to pass on to your customers when you say that you're asset sensitive?

You've got the two of us here in the room uncertain. I will tell you that it varies by deposit product and I just don't know what we run through in the models. Clearly, it's a fraction and we lag it a little bit, but at this point I think the public would expect to see a meaningful increase as soon as the Fed would tip its hand. And as I said before, we expect when the rates start moving, they'll probably move quicker than people might anticipate. But Erika, I don't have the details of what we do in our model assumptions, probably run various scenarios of this because there's no real answer and it's territory we haven't seen here for a while. Kent or Peter, you want to add anything to that?

Yes. I think as we look forward, it's tough to put that to formula right now because part of that's going to be a function of what kind of loan demand we have going forward, hopefully in a rising environment. The other piece of that will be exactly what the competitive landscape will be deposit-wise as we move forward, as well, in a rising rate environment.

Yes, there's as much volume as there is rate implicit in how we manage that. As I said earlier, what we do with securities portfolio and how we focus on retention of what I'll call larger blocks of deposit money than are in our deposit base. What we do know is that there's continuing value in most of our consumer deposit relationships and we're going to concentrate on maintaining and growing those, because that deposit base is a pretty important advantage for us.

Okay. And to follow up on the question on loan modification, Mary, what does the pipeline look like in terms of potential homeowners that you're looking to help keep in their home? Do you expect this $9 million number to continue to rise in a similar pace over the year?

Erika, yes, I think we will see continued stress in our residential real estate portfolio. While we've seen high risk exposure moderated, it's still well above historical levels, so I think we will be continuing to work with our clients to keep them in their homes.

And one last question. You mentioned what your exposure was, the NSF exposure was as a percentage of your deposit service charges. What are you assuming the impact from Reg E will be for the back half of the year?

We're assuming it will be more than it was in the first half, Erika.

Right. But do you have a range that you could give us?

Yes, but we're not going to tell you. We don't have enough certainty right now. I shouldn't be kidding with you about that. We've got bounds that we look at and what we want to do right now is get communication out to our customers about the change that's coming. We know that a number of customers depend on that service and we want to allow them the opportunity to stay with it while we look at what the marketplace would expect as a reasonable adjustment from us. But the way the regulation sets up, as I say, is binary, it's either yes or no to the service, and we think there's probably some middle ground in there, so we'll be working on an approach that will address that middle ground. And it's just too early for us to make a call. We wanted to dimension for you the exposure we have but I don't think we can give you a meaningful number of impact until we get closer to the time and see it. If we get to that point, I think Kent will let you know what we're thinking but right now it's just a little too early.

Okay. Thanks, everybody.

And our next question will come from the line of Brian Zabora from Stifel Nicholas. Please proceed.

Thanks. Good morning. Just one question on capital. When we look at you're still building the reserves, is it safe to say that you won't deploy capital, either share repurchases or maybe increasing the dividend, until that stops?

They probably correlate a little bit, but I don't know that I would say it's that linear. So we might see reserve building go on a little bit longer than capital retention.

Is there a ratio that you're focused on more, when you talk about capital adequacy?

We look a lot at risk adjusted.

We've been looking at tangible common to risk weighted and so that's the number I usually quote, which was the 16.75%.

Okay. And lastly, on the credit side, do you have any data on early stage delinquencies?

I sure do. In our consumer book our early stage delinquencies were 109 basis points at the end of the first quarter, and that's down from 138 basis points at the end of the fourth quarter, and flat to the first quarter of 2009.

Thank you very much.

And our next question will come from the line of Bobby Bohlen from KBW. Please proceed.

Thank you. I don't know if I missed it but could you give the notional amount of securities that was sold in the quarter? And then whether most of it was sold in a gain position or was there a mix in there?

Bobby, I can't quote that number, but I can tell you most of the securities were a gain.

Okay. And then a third follow-up on the restructured loans. I was wondering if you could give, because a lot of companies out there, a lot of banks are doing restructured loans in many different ways, I was wondering if you could give an overview of what the restructuring entails and who it's being offered to?

At this point, we've primarily been offering forbearance arrangements to our clients, but we are considering a number of other alternatives. And really just working through the impact on our customer base and equity issues around doing that.

Is the forbearance a short time period?

We've been extending them, actually, as long as the borrowers are continuing to work with us on making some level of payments.

Okay.

And our next question will come from the line of Al Savastano from Macquarie. Please proceed.

Sorry about that, can you guys hear me now?

Yes, we can.

It helps when you take the phone off mute. Can you talk to me about the factors for the stock buyback, what has to happen for you guys to consider doing that again?

I think we need to feel comfortable with the stability in the economy. We'll want to see what our state leaders come up with here as budget resolution. Then we always keep our regulators informed and so we want to make sure that they're comfortable. I don't want to put words in their mouth. We want to make sure that they won't be uncomfortable when we start that back up. We'll also take a look at what's going on with interest rate and what that might do to asset levels. As I mentioned, we could see some deposits move to other investment arrangements when rates start going up and that will obviously affect asset levels and our ratios. So those are some of the factors. Kent?

No, I think you covered it.

Our earnings stream certainly is a consideration in the math of all of that. We've been pretty consistent in what we've seen in earnings stream, so that's an important element but not necessarily a big variable, I guess is what I'd say.

Is it fair to conclude that if you brought it up now, that you expect those factors to happen this year?

We're optimistic on lots of fronts and yes, I think you read that right.

Okay. And then last question. Both, congrats to you, Al and Peter, on your news there. Any timing on the change? And Peter, will you be giving the weather forecast in Hawaii too?

It's been pretty successful, so yes.

We don't have any details on the change, other than I'm planning to be here for the July earnings announcement, so that's what I would say, what I would say for right now.

Great. Thank you.

Like everything else, we try to get this accomplished in a workmanlike fashion with low risk and everybody understands what's going on. We're off to a good start here internally and we'll keep working on that the next few weeks.

(Operator Instructions). And our next question will come from the line of David King from RBC Capital Markets. Please proceed.

Thanks. Good morning, everyone. A lot of my questions have been answered. First off, given you're starting to see some stabilization in the C&I book at this point, with the demand you are seeing what kind of spreads are you able to book on that business? I'd assume it's pretty attractive but has the competition picked up on that as well at all?

Yes, the spreads are more attractive than what we saw pre crisis. The other element in this rate environment is establishing floors, which is, I would say, becoming increasingly accepted into the marketplace. So yes, in general, we're seeing constructive movement in spreads on the C&I front.

That's encouraging. And then on comp, that was down quite a bit this quarter, I think in part because of the large bonus accrual last quarter. But how should we think about the sustainable run rate going forward with that line item? Where we are now? Are put back into more bonus accruals, higher rate?

We think it benefits shareholders as well as the employees when we can make those bonus accruals and we've been pretty prudent about it in terms of timing and relating it to performance. So I would say in the first quarter you would have seen a reasonably steady base level. I don't think we had anything unusual in there, other than there's a little bit of surtax, a little bit of a higher payroll tax rate in the first quarter or two of the year. And then we'll just see if we can continue to earn and reward our employees, that would be an important part of this. I've got to get Peter locked up with some equity awards here to make sure that we're demonstrating follow-through to his commitment to be CEO. So we'll see some increase from that. It's an opportunity to remind everybody that it's a competitive market out there and we've got some talented managers, and so part of what's going on here is making sure that we get that talent locked up for the long-term and an important part of that is some equity compensation. So factor some of that into the run rate here later in the year, I think is what I'd say, David.

Okay. That's helpful. Thank you.

Peter is smiling and nodding his head. Well, okay, if that's what we have to do.

And there are no questions at this time. I'll now turn the call back to Cindy Wyrick for closing remarks.

Before we do Cindy's, I want to mention two things before we wrap up. For those of you who follow these things, I hope to do a little bit of tax positioning and may use some Bank of Hawaii shares I own to exercise some stock options that expire next year. I know it's an unusual situation, but we're blessed with still having some options that are in the money and so an opportunity for some tax planning there. The net effect of that will be that I'll increase my shareholdings.

And then I want to close by reporting that the weather was especially nice throughout the spring break season this year. Our volcano remains reasonably well-behaved and the resorts will be happy to book travel reservations for the summer. Hope you'll come and see us. Cindy?

I'd like to thank everyone for joining us today and for your continued interest in the Bank of Hawaii. As always, if you have any questions or need further clarification on any of the topics we discussed today, please feel free to contact me. Have a great day, everyone.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.