Bank of Hawaii Corp (BOH) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Bank of Hawaii Corporation earnings conference call. My name is Brandy and I'll be your operator for today. At this time, all lines are on listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions) I would like to turn the call over to your host today, Ms. Cindy Wyrick, Director of Investor Relations. Please proceed, ma'am.

Good morning everyone. Thank you for joining us today, as we review the financial results for the second quarter of 2010. With 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. The comments today will refer to the financial information included in the earnings announcement this morning. Before we get started, let me remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected. And now I would like to turn the call over to Al Landon.

Thanks, Cindy. Good morning, everyone. Appreciate you joining us today. Bank of Hawaii continued out solid earnings performance in the second quarter. Compared to last year, we have more income and higher levels of reserves and capital, which exceeded $1 billion at the end of the quarter. We continue to have abundant liquidity and funding. The amount of credit loss is decreased. Residential first mortgages represent the primary source of demand for prudently underwritten loans. Kent's going to give us some comments on our financial performance and Mary will comment on credit. Kent?

Thank you, Al. Good morning. Net income for the second quarter was $46.6 million, or $0.96 per share compared to $52.7 million, or $1.09 per share in the first quarter, and $31 million, or $0.65 per share in the second quarter of 2009.

This quarter, we realized $15 million in gains from the sale of securities in our investment portfolio compared to $20 million in first quarter. Our return on assets in the second quarter was 1.48% and return on equity was 19.01%. Our efficiency ratio was 49.7% this quarter. Year to date, net income was $99.3 million, or $2.05 per share, an increase from last year of $67 million, or $1.40 per share. Year to date, our return on assets was 1.6% and return on equity was 20.73%. Our efficiency ratio year to date is 47.6% versus 53.8% last year.

Our net interest margin in the second quarter was 3.51% compared to 3.72% in the first quarter. Our lower margin was primarily due to the $2.8 million in interest recoveries from two commercial loans in the first quarter. Year to date, the net interest margin was 3.61%, down from 3.75% last year, due to a lower interest rate environment, our strategy to reduce durations, and the high investment composition of our balance sheet.

The credit provision in the second quarter was $15.9 million compared to $20.7 million in the first quarter, and included net charge-offs of $14.9 million, and a $1 million increase to the allowance. Our allowance for loan and losses at the end of the second quarter was $147.4 million, or 2.7% of outstanding loan and leases. Nonperforming assets was $43.2 million at the end of the second quarter, up $1.6 million from the end of the first quarter.

Included in nonperforming loans are $27.5 million in residential mortgage loans, and this category of MPA's has been growing mainly due to the lengthy legal resolution process. Based on current economic and risk indicators, we believe that further increases to the allowance may not be necessary. Noninterest income for the second quarter was $68.9 million, down $2.9 million from the first quarter, and up $9 million from the second quarter of 2009. The decrease from the prior quarter was primarily due to a $5.1 million decrease in realized gains in the securities portfolio, offset by $1.2 million sale of our interest in a single investor railcar lease.

The second quarter of 2009 included a $2.8 million gain on the sale of our equity interest and a leverage lease involving an air cargo plane, and $900,000 gain on the sale of our retail insurance agency. Year to date, noninterest income was $140.7 million, up $10.5 million from last year. Noninterest expense totaled $85.9 million in the second quarter, up $4.2 million from the first quarter, and down $3.7 million from the second quarter of 2009. The increase from the prior quarter was primarily due to a $3.3 million accrual for officer cash grants for the purchase of company stock. We have made these grants periodically to increase share ownership by business unit leaders and other key officers. The second quarter of 2009 included a $5.7 million FDIC special assessment expense.

Year to date, noninterest expense was $167.6 million, down $9.9 million from last year. The effective income tax rate was 34.4% in the second quarter compared to 31.5% in the first quarter, and 30.2% in the second quarter of 2009. The lower effective tax rate in the first quarter was primarily due to the capital loss benefit on the sale of a low income housing investment. The lower effective tax rate in 2009 was primarily due to the benefit associated with the termination of a leveraged lease transaction.

Year to date, our effective income tax rate was 32.9%, slightly higher than 32.3% last year. Our investment portfolio now stands at $6.1 billion. The average duration of the portfolio is 2.2 years. We continue to invest on a conservative basis, primarily in Jenny Mae's and treasury securities. And we have unrealized gains in the portfolio of $140 million.

Loan balances continue to decline due to low demand and were $5.4 billion at quarter end, down $169 million compared to the first quarter, and with a decrease in nearly every category. Deposits are $9.3 billion at the end of the quarter, down $169 million compared to the end of the first quarter, and up $305 million from the end of the second quarter of 2009. A decrease compared to the end of March was primarily in commercial savings and public deposits. The increase compared to last year was primarily in consumer and commercial savings deposits.

We increased our wholesale funding with government entities by $552 million in the second quarter and a portion of this represents a shift from the deposits to repurchase agreements. Our average cost of the public repurchase agreements is seven basis points. Liquidity continues to be strong and at the end of the second quarter, funds sold were $356 million. Our shareholders equity increased $74 million from the first quarter to $1 billion, and tangible common equity to risk-weighted assets increased to 18.57%.

We paid out $21.7 million in dividends in the second quarter. We also intend to resume our share repurchase program in the third quarter. Our current remaining buyback authority is $85.4 million. We'll implement this program in an orderly and disciplined manner, and I would not anticipate any significant changes to our capital ratios as a result. Our Board declared a $0.45 per share dividend last Friday.

Lastly, couple of comments on recent regulatory matters. We are in the process of contacting our customers to explain their choices under Reg E, and so far, we are finding that many high frequency overdraft customers are electing to opt in. Also, under the newly passed Dodd-Frank Act, debit card interchange fees will be regulated by the Federal Reserve. Currently we receive approximately $6 million per quarter in debit card interchange fees. At this time, it's not possible to estimate the potential impact of the Dodd-Frank Act on our future financial results. And now I would like to turn the call over to Mary Sellers.

Thank you, Kent. Net charge-offs for the second quarter were $14.9 million, down $3.1 million on a linked quarter basis. The decrease was primarily attributable to a $3.9 million decrease in consumer net charge-offs. Home equity net charge-offs decreased $4.6 million and were offset in part by $1.3 million increase in residential mortgage charge-offs.

As you'll recall, home equity charge-offs for the first quarter were impacted in part by a change in our home equity charge-off policy. Commercial net charge-offs for the quarter were $5.2 million, an increase of $829,000 on a linked quarter basis. Second quarter net charge-offs included a $1 million charge-off related to a residential home builder where we elected to reduce our exposure.

Nonperforming assets were $43.2 million, or 79 basis points at the end of the quarter, up $1.6 million from the first quarter. The increase was largely due to a $4.1 million increase in consumer nonaccrual loans, offset by a $2.5 million reduction in commercial nonaccruals. Residential mortgage nonaccruals increased $4.3 million, $2 million of which was for properties on the neighbor island. The decrease in commercial nonaccrual loans included the payoff of two loans totaling $1.7 million and partial charge-offs totaling $2.5 million.

As we previously indicated, we expect the level of nonperforming assets to be impacted in the near term, due to the longer resolution timeframe for residential mortgage assets. Loans past due more than 90 days, and still accruing interest totaled $12.9 million, down $3.1 million from the first quarter. Given the successful restructure of the two commercial loans totaling $4.4 million that were discussed last quarter. Restructured loans not included in nonaccrual loans, or loans past due 90 days or more totaled $13.6 million at the end of the quarter, down from $15.7 million at the end of the first quarter. The decrease was the result of charge-offs of $1 million and the movement of $1.1 million to nonaccrual.

Credit quality in our portfolio continues to reflect a slightly improving economy, but conditions do remain weak, both nationally and locally. In Hawaii, visitor arrivals have improved and spending continues to stabilize. At the end of June, the state seasonally adjusted unemployment rate improved to 6.3%, down from 6.9% at the end of the first quarter. Home sales statewide continue to improve. Prices on Oahu have stabilized, while prices on the neighbor islands continue to lag. Despite the continued stabilization we are seeing in our high risk segments, these conditions continue to place stress on our consumer real estate assets and residential home building exposures.

At the end of the first quarter, our land loan portfolio totaled $30.3 million, down $3.3 million on a linked quarter basis, and $17.6 million year-over-year. Neighbor island exposure totaled $25.6 million, with $22 million for second home and investor properties.

In our residential mortgage and home equity portfolios, we consider loans originated after 2004 with current credit monitoring scores less than 600 and loan to value ratios greater than 70% to be of higher risk. At the end of the quarter, $21 million, or 1% of our residential mortgage portfolio was considered higher risk. This is a $1 million decrease from the previous quarter. $9 million of the higher risk is for loans on the neighbor islands, with $4 million for second homes and investors. In our home equity portfolio, $25.1 million, or 3% of outstandings are considered higher risk. This is a $460,000 increase on a linked quarter basis. $13.9 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 $88.8 million, with $41.4 million in residential home building exposure. $19 million is considered higher risk, down $10.5 million from the prior quarter. As a result of the previously mentioned credit exit. $5.9 million of the higher risk exposure at quarter end is for projects outside Oahu with $3.3 million on nonaccrual.

In the second quarter, we increased our allowance for loan and lease losses by $1 million to $147.4 million, or 2.7% of total loans. The allowance considers these assets with higher risk and our legacy aircraft leverage lease exposure. As Kent indicated, we believe further increases in our reserve may not be necessary given that the Hawaii economy continues to show signs of gradual improvement and our portfolio risk indicators are moving in a similar direction. I'll now turn the call back to Al.

Thanks, Mary. She indicated the major economic majors in Hawaii continue to suggest that the overall economy is stable. As we indicated last quarter, visitor arrivals and home sales continue to show slow improvement. Recent unemployment claims in Hawaii are reducing, although statistics show jobs and personal income levels remain largely unchanged.

Based on these economic and other risk indicators, we believe our capital and reserve levels are adequate and as Kent said, we're planning to re-start our share repurchase program. We're pleased that the initial legislative phase of the regulatory reform process has been concluded. We believe that some aspects of the regulation development phase could produce positive outcomes.

However, it's too early to estimate the overall financial impact of the resulting changes. We think that Bank of Hawaii, with our strong financial position, will be best able to adapt to the new regulations and increase our lending when demand returns. You probably noticed our management transition process has proceeded smoothly and Peter will be succeeding me as CEO this week. Kent will also take on some new responsibilities as technology and operations report to him. And given that our compliance team reports to Mary, she will probably get some additional work as well.

The net impact of my retirement and these changes will be to lower the cost of management. In light of the challenging revenue trends. Peter tells me that he expects no major changes in management duties or in the bank strategy. Peter and I have worked together now for 10 years. I can assure you that the leadership and management of Bank of Hawaii is in good hands. Now, we would like to respond to your questions.

(Operator Instructions) And your first question comes from Ken Zerbe of Morgan Stanley. Please proceed.

Great, thanks, yes, Ken Zerbe. Maybe if you can comment on security sales. Obviously this has been a big part of earnings recently and, good for book value, I suppose, or actually, no, it wouldn't be. With the gains flowing through the income statement, what's your expectation about further security sales and sort of harvesting those gains in the portfolio?

Yes, Ken, that's a good question. It's probably -- will probably not take the level of gains that you've seen in the past going forward. We've really positioned the portfolio the way we want. We've locked down the capital that we wanted, so I just wouldn't expect the same level in the future. Now, that could change, depending on the environment and other circumstances, but that's how I see it right now.

Okay. That's fine. And then the government-related repos, you said just over $500 million, what was the duration on that?

Well, those are overnight.

They are overnight, okay. So you're not necessarily extending the duration of your liabilities at all, okay. And the reason for doing those?

We do this mainly to accommodate customers. So it's really customer-driven as opposed to us seeking it out.

Okay. No, that makes sense. That's helpful. And then just the last one on compensation, I guess should we be expecting, if we looked at the core compensation run rate, I guess went from $44 million to $47 million, but you had the $3 million of cash grants, going forward, excluding any additional grants, should we be expecting more of that $44 million range?

Yes, I would say that's a pretty -- pretty solid number.

Okay, all right. Thank you much.

Ken, this is Al. We do our annual salary adjustment for our staff the 1st of April. And we were able to give an increase pretty broadly across the board. So we've sort of got that accomplished at this point and there will probably be some adjustments here with the transition, but I think that's sort of in the range of where we should be able to go in the future.

But the -- sorry. So you're saying the annual increases were in April. So that would imply that you won't necessarily go back down again? I'm just--?

No, we've got that taken care of. So you shouldn't look for more increases. Factor out the cash for equity and you've got your run rate.

Okay, great. Thank you.

And the next question comes from Brett Rabatin with Sterne Agee. Please proceed.

Good morning.

Hi, Brett.

Wanted to first ask on the guidance regarding the capital ratios, if I understood you correctly, it sounds like you're saying that you'll maintain capital at these present levels and use the share buyback to manage it that way. Is that your -- is that essentially what you're getting?

I wasn't trying to say it that way. I was trying to just give you a level of -- of the pacing of the repurchases and that that pacing by itself shouldn't have any direct impact on the capital ratios. But we're not doing it the other way around. We're not trying to guide to a particular ratio and adjusting the share repurchases. It's the other way around.

Okay, and then secondly, wanted to ask on asset growth generation, you've got two competitors that are being fairly aggressive with loan, individual loan segments -- the HELOCs, the mortgages, and so I'm curious to hear what your prospects are, how you're going to manage the balance sheet which is the lack of loan growth currently.

Yes, Brett, this is Peter. The -- I think one of the -- the industry is challenged obviously on loan growth. And I think our portfolio in particular has been challenged, given that we're so on the commercial side, so historically have been so C&I weighted. And then on the consumer side, historically have been so residential mortgage weighted. So I think what we see out there is certainly a slowing of the rate of loan decline.

If you look at the spots where we have lost volumes, C&I is right up there. And really the challenge there is twofold, right? One, it's just an overall reduction in overall activity in the marketplace and, two, I think it's a move for a lot of our clients towards just a stronger liquidity position, so our utilizations are pretty low. I would anticipate that a lot of that utilization level has been achieved at this point. So I'm hoping, we're hoping that we see a slowing in declines in C&I.

The other big area of decline for us has been residential mortgage. And there, much of that decline has been driven by a -- reductions in interest rates, which were obviously pushing people out to refinance. Probably one of the better investments out there right now is coming out of nonconforming product and jumping into conforming product at historically low rates. We've chosen to be pretty, I think, conservative in our wholesale decision there. I think we continue to think that there is certainly some interesting components to exactly -- to the rate structure and mortgages right now. So we're going to be cautious. So I would anticipate that we may continue to see volume challenges there.

The other area, and you alluded to it, that I think we may have some opportunity in is in home equity. And there, we've been reasonably conservative in our approach to marketing the product there. You know our real estate statistics. We're looking at what seems to be a bottoming, at least here in Oahu from a value standpoint. We think there's opportunity there. And frankly, I think there's opportunity for us to promote the product a little bit more.

Okay. That's good color. With all that said, is this -- are you able to deploy any of the liquidity into either security -- I guess I'm looking for some help with your thoughts on how you're going to manage the asset side to keep margin pressure from continuing to occur.

Yes, we are desirous of bringing down the liquidity position a little bit. Obviously there is a challenge in this environment to going out too far on the yield curve. But to the extent opportunities present themselves relative to yield, our desire is to deploy the funds.

Okay, great. Thanks for the color.

And the next question comes from Aaron Deer with Sandler O'Neill & Partners, please proceed.

Hi, good morning, everyone.

Hi.

I guess following up on Brett's line of questioning, the -- I'm curious if you read the decline or the outflows in commercial deposits as any indication that maybe some of your, some of your business customers are using some of their own liquidity to invest in their businesses? And if that might be any early indication that loan growth might be around the corner?

Yes, not likely. And the reason why I say that is most of the -- well, just about half of the decline in savings outstandings in the commercial segment this quarter came from a single transaction. And we've been fortunate to have a very large custody account for a real estate transaction that's been on the books for a while. And that transaction is winding down and they are successfully selling out the project. And that's really what drove about half of the volume decline. So consumer deposits -- or commercial deposits were actually reasonably flat for the quarter. We're still up 10% year on year. So I don't see that as an indication of loan growth around the corner.

Okay, and then I guess also with respect to the margin outlook, given the liquidity position and the securities that you're putting on and the securities that you sold, what -- how much more margin pressure might we expect here in the back half of the year?

Well, it's going to be highly dependent on the rate environment, but to the extent that the yield curve either stays flat or goes down, it will apply some pressure on margin.

Okay. Can you quantitate that in any sense?

It's so fact-specific that I hesitate to give you any particular direction. But unless the yield curve begins to sharpen up here, it could very well be that we see some further compression, not unlike what we saw in the second quarter.

Okay. I'll step back. Thank you.

That's on the rate side. We still have some levers on the volume side, so when we contrast net income to net interest margin, we have a few more tools we can use to maintain net interest income in spite of the pressure on the margin. Is that a reasonable summary?

Yes, that's right. Obviously the margin's a mathematical calculation that we've been able to generate a positive margin, albeit at a lower level, but generating positive income just because of higher volume.

So even with some of the mix change you've seen maybe this kind of $104 million, $105 million in NII's, probably sustainable level?

Well, I'm not going to give you a prediction on that.

Okay. Very good. Thanks for the help.

We would hope that's right. It's a pretty sensitive environment out there, Aaron.

I understand. Great. Thanks for the help. I appreciate it.

And the next question comes from Erica Penala with UBS. Please proceed.

Good morning.

Hi, Erica.

I was -- I apologize if I missed this during the prepared remarks, but I was wondering if you could give us a little bit more detail on the types of securities that you're selling and what you're replacing them with? And also, if you could give us an idea of the average yield of the securities that are rolling off and being sold versus the average reinvestment yield?

Yes, we -- we have sold really a combination of things, Erica. We've sold some of the Fannie Mae securities. We've been generally investing in shorter term Ginnie Mae CMO's. So the reinvestment yield has been lower and I can't cite the exact number compared to the rolloff rate. Just to give you an idea here, the fourth quarter, so this is going back a little bit, the average yield of that portfolio was 3.11%. Second quarter, or right now, it's 3.01%. So between those, the trade there, we lost 10 basis points.

And how much duration -- how much have you shortened your duration over that time period?

Yes, the duration went down half a year. So it had been 2.7 at the end of 2009. And now it's 2.2. Now, that's a function of not only what we have done, but the interest rate environment itself, as rates come down, the duration by itself will come down a little bit as well.

And could you give us a sense just to follow up on the previous question, what levers you're looking to pull on the mix side in order to keep NII growing or stable in the midst of a difficult interest rate environment.

Well, I mean, the only real two levers that we have available to us are the amount of liquidity. And so redeploying that into investments will increase interest income. The other method would be to extend durations. And we're quite frankly reluctant to do that in this environment, because the yield for that just in our opinion isn't worth it but things could change and as I mentioned, as opportunities present themselves, we would look to increase yield when the market provides it, if it does.

Okay. My last question is regarding Reg E. I was wondering if you could remind us what your revenues at risk is and give us a little more sense on what the opt in percentage is at this time and how that would translate into revenues retained potentially for the second half of the year?

Erica, it's just over $6 million a quarter is the, what's at risk revenuewise with Reg E. And we have had good success in really two categories of people, or of customers that we're looking at. People opening accounts, and then people that we've reached out to because of their practices in terms of using the product. So we've got different conversion rates there. The conversion rate for the broader population of people just opening accounts and choosing to opt in upon opening of the account is running in the 20%-plus range, I'll call it. And those are very early statistics. And then in terms of people that we're reaching out to who are existing account holders, we're getting better than a 50% conversion rate there. So we're encouraged by result -- the early results of the program and we'll see how this progresses.

Okay. Thank you for taking my call.

And the next question comes from Craig Siegenthaler with Credit Suisse, please proceed.

Thanks. Most of my questions are already asked but just trying to summarize some of your thoughts here on the securities portfolio, and it sounds like forward balance sheet decisions are really going to be a function here of the yield curve so I'm wondering if we expect to see a flattening or yield curve here, should we actually expect to see additional earning asset growth really with the help of additional wholesale fundings in the third and the fourth quarter?

It's possible, but as I mentioned, a certain portion of the wholesale funding and here I'm talking about the public repos, it's really an accommodation for our customers. And so there's a seasonal aspect to it. And I, I'm just not able to give you too much direction on whether that could increase, for example, as we go forward. It's possible. But it's going to be, depending on other people's choices as opposed to our choice.

Can you actually explain that a little bit in terms of how that wholesale funding works with your clients?

Okay. Yes. I mean, this is -- in some ways, it's a trade-off with deposits, and so public entities here in the, in the state really want a form of secure deposit. And the way we do that is through a repurchase agreement and it has a term of one day. So that's the basic structure. The volumes are dependent to a large degree on what those entities are doing with their own either liquidity position or debt repayments or tax sources. So there's a lot of variables in their equation, which makes the wholesale funding on the public side a little bit choppy and somewhat difficult to predict.

So I imagine the growth is a little stronger in the second, third and fourth quarter than the first quarter on a seasonal basis due to taxes. And if you could maybe comment whether that's true or not, but you also said about 7 basis points of cost, right?

Yes, that's what I said.

All right, great, then. Thanks for taking my questions.

You're welcome.

And the next question comes from Bobby Bohlen with KBW. Please proceed. Bobby, your line is open.

Hello?

Bobby, this is Al. Are you out there?

Yes. Can you hear me?

Yes. What's on your mind?

Sorry about that. One clarification on one of the comments you made. On the $6 million for the interchange, is that a net or a gross number? I assume there's some costs associated with that.

It's gross. It's revenue.

It's revenue?

Yes.

What would be an associated cost level, if you would have that?

Well, the $6 million actually, Bobby, that we were referring to was the Reg E. So that's overdraft revenue generated from electronic transactions. It just frankly so happens that the at-risk interchange revenue is about the same number. And so the other part of your question was?

Costs associated with that business.

Yes. It is a gross number. So it is before expenses. But I don't think we've provided that number.

Okay. Thats the only question I had. Thank you.

And the next question comes from David King with RBC Capital Markets. Please proceed.

Thanks, good morning, guys.

Good morning.

Good morning.

I guess following up on Craig's question a bit, that repo borrowing that we've been talking about, has that increased at all subsequent to quarter end? I understand it's customer-driven, but I'm just trying to get a sense of how we should think about it for this quarter at all.

Yes, and, well, as a matter of fact, it has. But I would really discourage you from counting on that. As a trend, as I have tried to describe it is a bit choppy. It's difficult for us to predict, so I think it's going to be also difficult for you to count on as a trend by itself.

Okay. So then something, I guess something I'm trying to understand is, you had a big increase, or I guess a big net addition in securities, but it sounds like this repo is really short duration. I mean, it's overnight. So how much of that securities increase was attributable to this, if at all?

A little bit. But most of it has been, has ended up in funds sold. So that's why, to some degree we have such a large funds sold position, which likewise is overnight.

So should we expect more in the way of net securities additions at this point? I mean, I understand you're buying the Ginnie Mae's and from the short-term treasury stuff but on a net basis is that securities line going to continue to move higher, would you think?

Yes, it's hard to say for sure. It is possible, but to a certain degree, it's going to depend on loan balances and other factors.

Okay. Thank you. I'll step back.

And the next question comes from Joe Gladue with B. Riley. Please proceed.

Good morning. I just have one question left. Could you give us an idea of where 30 day to 90 day delinquencies ended up in the quarter, what the direction in that category was?

Sure. For a total consumer portfolio we were down 11 basis points on a linked quarter basis and 10 basis points year-over-year. And our consumer real estate assets that drove a big piece of that were down 28 basis points on a linked quarter basis and 19 year-over-year.

Okay. That's it. Thank you.

And the next question comes from Al Savastano with MacQuarie. Please proceed.

Good morning, how are you?

We're fine, Al. How are you doing?

I'm doing great, thanks. On your securities portfolio, could you give us an idea of where your repricing list lies in terms of where your new purchase is today relative to the yield on the portfolio?

Well, as I mentioned previously, year to date we're down about 10 basis points in yield. So I'm not sure I could extrapolate for the rest of the year on that same trend. But, obviously rates are low. If they continue at this level, yields could go down a little bit.

So is it similar to the positive repricing, then, where probably most of it's been wrung out?

I think that's a fair assumption. We're approaching a level where it's getting tougher and tougher to get meaningful value out of out deposit pricing.

Okay, thank you.

And the next question comes from Brian Zabora with Stifel Nicolaus. Please proceed.

Thanks. Just a quick question on home equity net charge-offs in the quarter, they're pretty low compared to certainly the last couple of quarters. Did it affect, the change in your policy, kind of pulled office forward in the first quarter and this level might be unsustainable?

The differential in the first quarter that was related to our policy change was only $2 million.

Okay. So you think this level might be sustainable, depending on I guess overall macro trends?

I think it's going to vary a little bit in terms of seasonality and a little bit of how the mix flows through from neighbor islands to Oahu. Last year, neighbor islands were about 74% of our total net charge-offs in home equity. They are down to about 47% at this point.

Okay. That's all I had. Thank you.

Thanks.

(Operator Instructions) And the next question comes from David King with RBC Capital Markets. Please proceed.

Yes, thanks. Just one quick follow-up. I noticed the comment on the release and you said on the call, reserves nearing a peak here. I guess what's the thought at all on timing and/or pace of any reductions going forward? And I guess another way of asking it is, where do you see that ultimately settling out or what are you comfortable with?

Well, I think it's really a function of what we see in terms of risk in our portfolio quarter to quarter. So we'll just need to really continue to visit that on a go-forward basis and see what's appropriate.

Fair enough. Thanks.

At this time, there are no further questions in queue.

Well, I think that just about ends my last earnings report with Bank of Hawaii. Before we conclude, I want to let you know that I plan to adjust some of my equity holdings. As you might expect, we'll do some stock sales and some option exercises. But please know that I plan to remain a shareholder, because I have great confidence in Bank of Hawaii. I want to thank our directors and bank team and customers for all the support. It's been a pleasure to work with all of you. Peter, congratulations on succeeding to a great job. Would you like to add anything to close our call this morning?

I would, Al, thanks. Let me first add the obvious, and that is that Al has done a terrific, terrific job in the six years as CEO with our Company, and 10 years in total with the organization. He leaves behind a tremendous legacy of achievement. Thankfully for the rest of us, I think the biggest part of that legacy is the state in which he'll leave the Company. We've got a great management team, rich in talent and stability, got a great capital position, and we feel that our brand is as strong as ever.

From a strategic standpoint, those that appreciate our strategy, I think will be pleased to understand that we have no changes in mind, as Al alluded to earlier. We will continue to be a shareholder-focused Company. We will continue to focus on the geographic markets that we have for several years now. Capital management will continue to be a highlight of our activities. We'll continue to polish the brand, invest in the brand, and perhaps most importantly, we'll continue what we like to think of as a thoughtful approach to risk management. So I think, Al, thank you for your guidance and support and all that you've been to the Company for a decade now and I think we're well positioned for the future.

I would 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 clarification on any of the topics we discussed today, please feel free to contact me. Have a great day.

Ladies and gentlemen, thank you for joining today's conference. That concludes the presentation. You may now disconnect, and have a great day.